Advanced Micro Processors
Advanced Micro Processors (AMP) has designed a new dual-core microprocessor, dubbed DUALxl. DUALxl microprocessors are produced on silicon wafers with 100 chips per wafer. Once fabricated, the wafer is cut into individual microprocessors (also called “chips”). Then each chip is mounted on a base encased in a protective epoxy coating and tested. Because of slight impurities in the silicon and other compounds used in producing the wafers, as well as small perturbations in the manufacturing equipment, 60 microprocessors meet the rigorous testing and can be sold as a DUALxl microprocessor. Thirty microprocessors have small defects that prevent them from being sold as DUALxl chips. But these microprocessors can be sold as MAXV microprocessors. Of the 100 chips, 10 are of no commercial value and are scrapped.
Two hundred wafers are produced in each batch that costs $270,000. Each batch of 20,000 chips yields 12,000 DUALxl’s and 6,000 MAXV’s, and 2,000 chips are scrapped. The $270,000 batch cost is entirely variable. That is, producing one additional batch generates an “out-of-pocket” cash outflow of $270,000.
The following table summarizes AMP’s operations for the current year:
| DUALxl | MAXV |
Chip fabrication cost per unit * | $ 15 | $ 15 |
Variable selling and distribution costs per unit | $ 55 | $ 8 |
Fixed selling and distribution costs per unit † | $ 6 | $ 4 |
Quantity (chips) per batch | 12,000 | 6,000 |
Actual number of batches this year | 6 | 6 |
Actual quantity produced this year | 72,000 | 36,000 |
Selling price | $ 120 | $ 25 |
Budgeted batches per year | 5 | 5 |
Budgeted units this year | 60,000 | 30,000 |
Fixed selling and distribution costs | $360,000 | $120,000 |
Units sold | 69,000 | 31,000 |
*Calculated as $270,000 ÷ (12,000 DUALxl chips + 6,000 MAXV chips).
†Based on expected number of DUALxl chips of 60,000 and expected number of MAXV chips of 30,000.
AMP sells the DUALxl chips for $120 and the MAXV chips for $25. The DUALxl and MAXV microprocessors are sold through separate selling and distribution channels that are separate organizations.
Actual fixed selling and distribution costs were the same as budgeted total fixed selling and distribution costs ($360,000 and $120,000); the actual chip fabrication cost was the same as budgeted chip fabrication cost ($270,000); and the actual variable selling costs were the same as the budgeted amounts ($55 and $8). There were no beginning inventories of DUALxl or MAXV microprocessors.
Required:
a. Prepare individual income statements for DUALxl and MAXV microprocessors for the current year.
b. What are the inventory balances of DUALxl and MAXV microprocessors on AMP’s balance sheet at the end of the current year?
c. Analyze the relative profitability of the DUALxl and MAXV microprocessors based on their respective income statements prepared in part (a). What advice would you offer management?
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