Question

QUESTION 2 (30 points)

Art-Sea Corp is a local company which produces Nova Scotia paintings.

QUESTION 2 (30 points) Art-Sea Corp is a local company which produces Nova Scotia paintings. Each painting is 2 feet high by 3 feet wide. Art-Sea hires artists, and purchases all materials for the artists, including paints, framing, brushes, easels etc. In 2019, its first year of operations, the company manufactured 200 unique paintings. Manufacturing costs for all paintings for the year are: Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead $20,000 $90,000 $15,000 $25,000 Because of the popularity of these paintings with visiting tourists, all paintings produced were sold immediately after going on the market. Art-Sea marks up paintings by 100% of cost. A. Determine the manufacturing cost per painting, by filling in the following table. Direct Materials per painting Direct Labour per painting Variable MOH per painting Total Variable Manufacturing Cost per painting Fixed MOH per painting Total manufacturing cost per painting B. What is the selling price of each painting? C. Art-Sea Corp would save $30 direct materials per painting and $5,000 total variable MOH per year (assuming all production levels and financial data remain the same as 2019 data above) if the company outsources framing. The cost to outsource framing would be $12,500 per year, plus $500 insurance. Should Art-Sea outsource framing? Explain by showing your math, and by writing one sentence. D. If Art-Sea proceeds with outsourcing, there would be available production capacity to produce another product: two-inch square mini-painting, unframed on canvas. Manufacturing costs for this mini-painting would be: Direct Materials Direct Labour Variable Manufacturing Overhead $1,500 $6,000 $500 The mini-paintings are also very popular. Art-Sea would produce 250 mini-paintings per year, and all would be expected to sell immediately, for $75 each. No additional fixed MOH would be incurred. Should Art-Sea proceed with outsourced framing of the large painting, if the additional mini- painting product is produced and sold? In your answer, clearly show your calculation to arrive at incremental increase or decrease to CM, contribution margin.

Answer 1

Answer with working is given below

A. Manufacturing cost per painting Direct Materials per painting Direct labor per painting Variable MOH per painting Total Variable Manufacturing cost per painting Fixed MOH per painting Total Manufacturing cost per painting $100 $450 $75 $625 $750 B. Selling price Total Manufacturing cost Add: Mark up 100% on cost Selling price of each painting $750 $750 $1,500 c. Evaluation of Make Vs Buy Number of paints Direct Materials Direct labor Variable MOH Fixed MOH Outsourcing costs In-house Outsourcing Operation 200 200 $20,000 $14,000 $90,000 $90,000 $15,000 $10,000 $25,000 $25,000 $13,000 Total Cost $150,000 $152,000 Art-Sea Corp should not outsource the framing since in-house is cheaper D. Evaluation of Make Vs Buy Outsourcing Number of paints Direct Materials Direct labor Variable MOH Fixed MOH Outsourcing costs In-house Operation 200 $20,000 $90,000 $15,000 $25,000 200 $14,000 $90,000 $10,000 $25,000 $13,000 $150,000 $152,000 Total Cost Less: Incremental contribution of Mini Paintings - As per WN below Net Total Costs $10,750 $141,250 $150,000 Since Outsourcing costs is cheaper Art-Sea should go ahead with outsourcing $18,750 Calculation of Incremental contribution Sales Less: Costs Direct Material Direct Labor Variable Manufacturing Overheads Total Costs Net Contribution $1,500 $6,000 $500 $8,000 $10,750