Question

Campbell Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company’s chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment’s operating activities. The relevant range for the production and sale of the calculators is between 35,000 and 68,000 units per year.

Revenue (37,000 units × $9.00)	$	333,000
Unit-level variable costs
Materials cost (37,000 × $2.00)		(74,000	)
Labor cost (37,000 × $1.00)		(37,000	)
Manufacturing overhead (37,000 × $0.70)		(25,900	)
Shipping and handling (37,000 × $0.34)		(12,580	)
Sales commissions (37,000 × $1.00)		(37,000	)
Contribution margin		146,520
Fixed expenses
Advertising costs		(24,000	)
Salary of production supervisor		(64,000	)
Allocated company-wide facility-level expenses		(77,000	)
Net loss	$	(18,480	)

Required

1. a. A large discount store has approached the owner of Campbell about buying 6,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Campbell’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $5.00 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Campbell accept the special order?

2. b-1. Campbell has an opportunity to buy the 35,000 calculators it currently makes from a reliable competing manufacturer for $5.50 each. The product meets Campbell’s quality standards. Campbell could continue to use its own logo, advertising program, and sales force to distribute the products. Calculate the total cost for Campbell to make and buy the 35,000 calculators.

3. b-2. Should Campbell buy the calculators or continue to make them?

4. b-3. Should Campbell buy the calculators or continue to make them, if the volume of sales were increased to 68,000 units?

5. c. Because the calculator division is currently operating at a loss, should it be eliminated from the company’s operations? Support your answer with appropriate computations. Specifically, by what amount would the segment’s elimination increase or decrease profitability?

Answer 1

Revenue	$      333,000	37,000*$ 9
Variable costs
Manufacturing costs
Materials	$         74,000	37,000*$ 2
Labor cost	$         37,000	37,000*$ 1
Manufacturing OH	$         25,900
Selling costs
Shipping & handling	$         12,580
Sales commissions	$         37,000	37,000*$ 1
Total Variable costs	$      186,480
Product specific fixed costs
Advertising costs	$         24,000
Salary of supervisor	$         64,000
Allocated fixed costs
Allocated company costs	$         77,000
a) Special order considerations
Quantity	6,000
S.P	$                   5
V.cost per unit	$             4.04	($ 186,480 - $ 37,000)/37000
Contribution per unit	$             0.96
*Quantity	6,000
Contribution earned	$           5,760
Yes Campbell accept the special order as total contribution earned comes positive
b-1)
Variable manufacturing cost per unit	$             3.70	2+1+0.70
*Quantity	35,000
Total variable costs	$      129,500
Add: Product specific fixed costs		This is considerd in decision making as if company decides to buy calculator company would not require services of supervisor but however advertising costs shall still be part of organisation's costs
Salary of supervisor	$         64,000
Total make cost for the company	$      193,500
Total buy cost for the company	$      192,500	35,000*$ 5.50
Net saving on buying	$           1,000
b-2)
Company should buy calculator as they save $ 1,000 on buying calculator from outside
b-3)
Variable manufacturing cost per unit	$             3.70	2+1+0.70
*Quantity	68,000
Total variable costs	$      251,600
Add: Product specific fixed costs		This is considerd in decision making as if company decides to buy calculator company would not require services of supervisor but however advertising costs shall still be part of organisation's costs
Salary of supervisor	$         64,000
Total make cost for the company	$      315,600
Total buy cost for the company	$      374,000	68,000*$ 5.50
Net saving on making	$         58,400
Company should make calculator as they save $ 58,400 on making calculator.
c)
Please refer to 1st section where distinction in costs have been made
Total revenue	$      333,000
Less:
Total variable costs	$     (186,480)
Product specific fixed costs	$       (88,000)
Allocated fixed costs	$                 -	Any allocated fixed costs is not taken in decision making as irrespective of decision this costs is to be incurred and shall at no means reduce it so this is an irrelevant cost for decision making
Net product profit	$         58,520
No the division is not operating at loss
However an allocation of fixed costs makes us see that division is operating at Loss
Division should not be eliminated from the company
If division is eliminated
Company's profitability would decrease by $ 58,520

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