Thornton Modems has excess production capacity and is considering the possibilit
ID: 2336585 • Letter: T
Question
Thornton Modems has excess production capacity and is considering the possibility of making and selling paging equipment. The following estimates are based on a production and sales volume of 2,700 pagers:
Unit-level manufacturing costs are expected to be $37. Sales commissions will be established at $2.7 per unit. The current facility-level costs, including depreciation on manufacturing equipment ($77,000), rent on the manufacturing facility ($67,000), depreciation on the administrative equipment ($17,100), and other fixed administrative expenses ($80,450), will not be affected by the production of the pagers. The chief accountant has decided to allocate the facility-level costs to the existing product (modems) and to the new product (pagers) on the basis of the number of units of product made (i.e., 6,700 modems and 2,700 pagers).
Required
a. Determine the per-unit cost of making and selling 2,700 pagers. (Do not round intermediate calculations. Round your answer to 3 decimal places.)
b. Assuming the pagers could be sold at a price of $51 each, should Thornton make the pagers?
Explanation / Answer
a.
a. Facilitity level costs proposed to be allocated to the pager line = 2,700 / ( 6,700 + 2,700) * $ ( 77,000 + 67,000 + 17,100 + 80,450 ) = $ 69,381.38
Facility cost per unit of pager = $ 69,381.38 / 2,700 = $ 25.697
Cost per unit of pager = $ 37 + $ 2.70 + $ 25.70 = $ 65.397
b. At a selling price of $ 51 per unit, the pager line will result in an operating loss, but the profit for the company as a whole will increase if it decides to manufacture the pagers.
Contribution margin per unit of pager = $ 51 - $ ( 37 + 2.70) = $ 11.30.
Total contribution margin from the pager line = 2,700 x $ 11.30 = $ 30,510.
The net operating income for the company would increase by $ 30,510 if the pagers are added to its product portfolio.
Hence Thornton should make the pagers.
a. Cost per Unit $ 65.397 b. Should Thornton make the pagers? Yes.Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.