Suppose that the capacity of the regular machines has been increased to 65,000 hours. Gormley has been approached by Clark Corporation to supply 20,000 units of another cutting tool, V2, for $240 per unit. Gormley must either accept the order for all 20,000 units or reject it totally. V2 is exactly like A6 except that its variable manufacturing cost is $130 per unit. (It takes 1 hour to produce one unit of V2 on the regular machine, and variable marketing cost equals $20 per unit.) What product mix should Gormley choose to maximize operating income? Show your calculations. Gormley Precision Tools makes cuttingtools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high-precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both theregular machine and a high-precision machine. The following information is available:A6EX4$ 180Selling priceVariable manufacturing cost per unitVariable marketing cost per unitBudgeted total fixed overhead costsHours required to produce one unit on the regular machine2802$1101902060$700,000$1,100,0001.00.5Additional information includes the following:a. Gormley faces a capacity constraint on the regular machine of 50,000 hours per year.b. The capacity of the high-precision machine is not a constraint.c. Of the $1,100,000 budgeted fixed overhead costs of EX4, $600,000 are lease payments for the high-precision machine. This cost is charged entirely to EX4 because Gormley uses the machine exclusivelyto produce EX4. The company can cancel the lease agreement for the high-precision machine at anytime without penalties.d. All other overhead costs are fixed and cannot be changed.

Answered: Gormley Precision Tools makes cutting…

FINANCIAL ACCOUNTING

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ISBN:9781259964947

Author:Libby

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Chapter1: Financial Statements And Business Decisions

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Suppose that the capacity of the regular machines has been increased to 65,000 hours. Gormley has been approached by Clark Corporation to supply 20,000 units of another cutting tool, V2, for $240 per unit. Gormley must either accept the order for all 20,000 units or reject it totally. V2 is exactly like A6 except that its variable manufacturing cost is $130 per unit. (It takes 1 hour to produce one unit of V2 on the regular machine, and variable marketing cost equals $20 per unit.) What product mix should Gormley choose to maximize operating income? Show your calculations.

Gormley Precision Tools makes cutting
tools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high-
precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the
regular machine and a high-precision machine. The following information is available:
A6
EX4
$ 180
Selling price
Variable manufacturing cost per unit
Variable marketing cost per unit
Budgeted total fixed overhead costs
Hours required to produce one unit on the regular machine
280
2$
110
190
20
60
$700,000
$1,100,000
1.0
0.5
Additional information includes the following:
a. Gormley faces a capacity constraint on the regular machine of 50,000 hours per year.
b. The capacity of the high-precision machine is not a constraint.
c. Of the $1,100,000 budgeted fixed overhead costs of EX4, $600,000 are lease payments for the high-
precision machine. This cost is charged entirely to EX4 because Gormley uses the machine exclusively
to produce EX4. The company can cancel the lease agreement for the high-precision machine at any
time without penalties.
d. All other overhead costs are fixed and cannot be changed.

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