he Pennsylvania Engine Company manufactures the identical small engine at two Pennsylvania plants, an older plant in Pottsville and a new plant in Harrisburg. Information for each of the plants for t
Situation:
The Pennsylvania Engine Company manufactures the identical small engine at two Pennsylvania
plants, an older plant in Pottsville and a new plant in Harrisburg. Information for each of the
plants for the current year is summarized below:
Pottsville Harrisburg
Selling price per engine $155.00 $155.00
Variable
Fixed manufacturing cost per engine 15.00 30.00
Variable marketing & distribution cost per engine 16.00 15.00
Fixed marketing & distribution cost per engine 13.00 16.00
Normal annual capacity (in engines) 76,800 96,000
Annual capacity with Overtime (in engines) 99,200 124,000
The above fixed and variable costs per engine are calculated based upon each plant operating at
the normal annual capacity. Annual fixed costs at each plant remain constant as activity levels
change and can only be eliminated through the complete shutdown of the plant. When the
Pottsville plant operates above normal annual capacity, overtime costs increases the variable
manufacturing cost by $5.00 and variable marketing & distribution cost by $2.00 for each
additional engine produced. When the Harrisburg plant operates above normal annual capacity,
overtime costs increases the variable manufacturing cost by $7.00 and variable marketing &
distribution cost by $4.00 for each additional engine produced.
Required:
a. Calculate the contribution margin per engine at normal capacity and on overtime for the
Pottsville and Harrisburg plants, individually.
b. Calculate total annual fixed costs for the Pottsville and Harrisburg plants, individually;
then calculate the annual breakeven point in engines for each plant.
c. The Pennsylvania Engine Company is currently under contract to produce and sell
155,000 engines this year. How should the production be allocated between the
Pottsville and Harrisburg plants to maximize the operating income of Pennsylvania
Engine Company? Calculate Pennsylvania Engine Company’s total operating income for
the year under your proposed production allocation.
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