Question

Omnisport manufactures and sells sports equipment. It currently produces and sells 5,000 pairs (units) of in-line skates each year, operating at maximum machine capacity. Omnisport’s market research has revealed that it could sell 8,000 pairs of in-line skates annually. Calcott Inc., a nearby supplier, has offered to supply up to 6,000 pairs of in-line skates at a price of $75 per pair. However, Jack Petrone, Omnisport’s product manager, has noticed the current snowboarding craze and believes that Omnisport could sell up to 12,000 pairs (units) of snowboard bindings annually. Omnisport’s management accountant summarizes the available data:

	Manufactured Inline Skates	Snowboard Bindings	Purchased inline skates
Selling price	$98	$60	$98
Cost per unit
Purchase cost	-	-	$75
Direct material	20	20	-
Variable machine operationg cost ($16/machine hr)	24	8	-
Variable and fixed manufacturing overhead (allocation base: machine hours)	18	6	-
Variable marketing and administrative cost	9	8	4

• Fixed manufacturing overhead costs of $30,000 are not affected by the product-mix decision.

• Fixed manufacturing overhead costs are allocated to products based on a machine- hour rate, which is calculated by dividing total fixed manufacturing overhead costs of $30,000 by machine-hour capacity.

• Fixed marketing and administrative costs of $60,000 are not affected by the product- mix decision.

1. How many machine-hours does each pair of manufactured in-line skates need? Each pair of snowboard bindings? If Omnisport produces only 12,000 pairs of snowboard bindings, what would be the cost of unused manufacturing capacity?

2. Calculate the variable manufacturing overhead rate per machine-hour.

3. Calculate the contribution margin per unit for manufactured in-line skates, snowboard

   bindings, and purchased in-line skates.

4. Use Solver to determine the quantity of each product that Omnisport should

   manufacture and sell or purchased and sell to maximize operating income. What is the maximum operating income Omnisport can earn?

Answer 1

Number of Hours Available for Machine
Particulars	Inline Skates	Snow Boards Bindings
Variable Machine Operating cost (a) ($)	24	8
Per Maching Hour cost ($) (b)	16	16
Hence, Hours required c =(a)/(b)	1.5	0.5
Number of Hours Available
Maximum capacity of Producing Inline skates annually is 5000 units
Hence Number of Hours available is Units Produced (5000)*Hours required for Inline skates (1.5) = 7500 HRS
Calculation of Unused Hours in case company produces only 12000 units of Snowboard Binding is as below
Particulars	Hrs
a) Hours Available (as per above)	7500 HRS
b) Hours reqd per Unit (as per c above)	0.5 HRS
c) Total units to be produced	12000 units
d) Total Hours reqd (b*c)	6000
e) Unused Hours (a-d)	1500