Old Exam Question: Marginull Ltd
Marginull Ltd produces engine components for automobiles. In 2018 they sold #10,000
units at $500 each. Two customers represent 95% (45% and 50%) of the demand and
this has been the situation for the past three years. Demand for 2019 is expected to be
similar to 2018. Production capacity is #12,000 per year, limited by factory space.
Additional factory space, adjacent to the current location, is available at exactly the same
rate for an additional #12,000 units of capacity. Financial records reported from 2018:
Revenue
$5,000,000
Factory Lease
(1,200,000)
Direct Labor
(700,000)
Direct Material
(400,000)
Factory Manager Salary
(200,000)
Equipment (lease) *
(800,000)
Gross Margin
1,700,000
Gross margin = 34%
Office Administration **
(500,000)
Sales Commission
(340,000)
Advertising
(60,000)
Net Income
$800,000
Return on Sales
= 16%
*The equipment lease
is a units of production based lease
agreement. The
equipment is capable of producing #18,000 units per year.
** Office administration includes amortization of a trademark at $43,000 per year.
a)
The CEO stated: ”these financial statements with sub-totals are cosmetic, the only
number that counts is the bottom-line”. Thoughtfully respond, specific to
Marginull
’s situation.
b)
Build a cost model for management decision purposes for Marginull.
c)
A special order has been received for the first 6 months of 2019 for a total of
#5,000 units at a price of $700 per unit. These engine components are for a
special hybrid car that
Marginull
has never produced in the past. It will require
20% more labor per unit and there will be no sales commission.
Analyze
this order
with respect to Marginull’s options. What should Marginull do?
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