Chapter 11, Problem 36P

1.

To determine

Calculate the relevant manufacturing cost per fan.

Explanation of Solution

Calculate the relevant manufacturing cost per fan as follows:

Particulars	Amount ($)
Electric motor	$6.00
Other parts	$8.00
Direct labor	$15.00
Variable manufacturing overhead (1)	$5.00
Relevant manufacturing cost per unit	$ 34.00

Table (1)

Working note (1):

Calculate the variable manufacturing overhead cost per unit.

$\begin{array}{c}\begin{array}{l}\text{Variable manufacturing}\\ \text{ overhead cost per unit}\end{array}\}=\left(\begin{array}{l}\text{Total overhead cost per unit}-\\ \left(\frac{\text{Total fixed cost}}{\text{Production fans}}\right)\end{array}\right)\\ =\left(\$15\text{ per unit}-\frac{\$100,000}{10,000\text{ units}}\right)\\ =\$15\text{ per unit}-\$10\text{ per unit}\\ \text{=\$5 per unit}\end{array}$

2.

To determine

Calculate the number of units that company should manufacture and purchase and calculate the contribution margin under optimum plan.

Explanation of Solution

Calculate the number of units that company should manufacture and purchase and calculate the contribution margin under optimum plan as follows:

Particulars	Units
Fans produced internally (current capacity)	15,000
Less: Fans purchased from external supplier $\left(20,000-15,000\right)$	5,000
Total sales volume (units)	20,000

Table (1)

Total contribution margin under optimum plan.

$\begin{array}{c}\begin{array}{l}\text{Total }\\ \text{contribution }\\ \text{margin}\end{array}\}\text{ =}\left[\begin{array}{l}\left(\begin{array}{l}\text{Current capacity×}\\ \text{Contribution margin per unit (2) }\end{array}\right)\text{+}\\ \left(\begin{array}{l}\text{Fans purchased from external supplier}\times \\ \text{Contribution margin per unit }\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(15,000\text{ unit }\times \$24\right)+\\ \left(5,000\text{ units}\times \text{\$12}\right)\end{array}\right]\\ =\$360,000+60,000\\ =\$420,000\end{array}$

Working note (2):

Calculate contribution margin per unit for current capacity (15,000 units).

$\begin{array}{c}\begin{array}{l}\text{Contribution }\\ \text{margin per unit}\end{array}\}\text{=}\left(\begin{array}{l}\text{Selling price per unit}-\\ \text{Relevant cost per unit}-\\ \text{Variable cost per unit}\end{array}\right)\\ =\$72-\$34-\$12\\ =\$24\end{array}$

3.

To determine

Calculate the total contribution margin from manufacturing and selling the marine pumps and state whether company should manufacture the pumps or not.

Explanation of Solution

Calculate the total contribution margin from manufacturing and selling the marine pumps and state whether company should manufacture the pumps or not as follows:

Particulars	Amount ($)
Selling price per unit	$ 60.00
Less: Variable cost per unit
Electric motor	$ 5.50
Other parts	$ 7.00
Direct labor @$15 per unit	$ 7.50
Manufacturing overhead (3)	$ 5.00
Selling and administrative costs (4)	$ 17.60
Contribution margin per unit	$ 17.40

Table (1)

$\begin{array}{c}\text{Contribution margin = }\left(\begin{array}{l}\text{Normal production}\times \\ \text{Contribution margin per unit}\end{array}\right)\\ =25,000\text{ units}\times \text{\$17}\text{.40 per unit}\\ \text{=\$435,000}\end{array}$

In this case, total contribution margin from making pumps is more than the total contribution margin for making fans. Hence, company should produce the pumps.

Working note (3):

Calculate the variable overhead cost per marine pump.

$\begin{array}{c}\begin{array}{l}\text{Variable overhead}\\ \text{cost per marine pump}\end{array}\}=\frac{\left(\begin{array}{l}\text{Total overheade cost}-\\ \text{Fixed overhead}\end{array}\right)}{\text{Production capacity}}\\ =\frac{\$225,000-\$100,000}{25,000\text{ units}}\\ =\$5\text{ per unit}\end{array}$

Note: Total variable overhead cost is $225,000$\left(25,000\text{ pumps}\times \text{\$9 per unit}\right)$

Working note (4):

Calculate the variable selling/administrative cost per marine pump.

$\begin{array}{c}\begin{array}{l}\text{Variable selling/administrative}\\ \text{cost per marine pump}\end{array}\}=\frac{\left(\begin{array}{l}\text{Total sellingadministrative cost}-\\ \text{Fixed portion}\end{array}\right)}{\text{Production capacity}}\\ =\frac{\$500,000-\$60,000}{25,000\text{ units}}\\ =\$17.60\text{per unit}\end{array}$

Note: Total variable overhead cost is $500,000$\left(25,000\text{ pumps}\times \text{\$20 per unit}\right)$

4.

To determine

State the strategic factors that are related to company M’s decisions.

Explanation of Solution

State the strategic factors that are related to company M’s decisions as follows:

• New market and customer benefits for other product line.
• Critical success factors related pumps and fans.
• Market research of pump sales.
• Positive and negative image for pump sales.