1)Treadlight produces two types of exercise treadmills: regular and deluxe. The
ID: 2420619 • Letter: 1
Question
1)Treadlight produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that TreadLight could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models is as follows:
Sale Price: Deluxe per unit ($1,010), Regular per unit ($560)
Costs:
Direct materials: deluxe per unit ($320), Regular per unit ($90)
direct labor: deluxe per unit ($82), regular per unit ($184)
variable manufacturing overhead: deluxe per unit ($240), regular per unit ($80)
fixed manufacturing overhead *: deluxe per unit ($126), regular per unit ($42)
variable operating expenses: deluxe per unit ($117) , regular per unit ($69)
total cost: deluxe per unit ($885), regular per unit ($465)
operating income: deluxe per unit ($125), regular per unit ($95)
*allocated on the basis of machine hours
a. what is the constraint?
b. Which model should Treadlight produce? (Hint: TreadLight can produce either 1 deluxe treadmill or 3 regular treadmills per machine hour.)
c. Should Treadlight produce both models? If so, compute the mix that will maximize operating income.
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2) Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct materials: $ 10.00
direct labor: $1.50
variable overhead: $1.00
fixed overhead:$6.50
manufacturing product cost:$19.00
Another company has offered to sell Cool Systems the switch for $9.50 per unit. If Cool Systems buys the switch from the outside supplier, the manufacturing facilities that will be idled cannot be used for any other purpose, yet none of the fixed costs are avoidable.
1. prepare an outsourcing analysis to determine if Cool Systems should make or buy the switch.
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3) Naturalmaid processes organic milk into plain yogurt. Naturalmaid sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of $880, yields 900 gallons of plain yogurt. Naturalmaid sells the one-gallon tubs for $6 each, and spends $0.16 for each plastic tub. Naturalmaid has recently begun to reconsider its strategy. Naturalmaid wonders if it would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores. Naturalmaid could further process each batch of plain yogurt into 19200 individual portions (3/4 cup each) of fruited yogurt. A recent market analysis indicates that demand for the product exists. Naturalmaid would sell each individual portion for $0.54. Packaging would cost $0.07 per portion, and fruit would cost $0.10 per portion. Fixed costs would not change.
a)Should naturalmaid continue to sell only the gallon- size plain yogurt (sell as is) , or convert the plain yogurt into individual- size portions of fruited yogurt (process further)? why ?
calculate the net benefit per batch under each alternative. (For accounts with a $0 balance, make sure to enter $0 in the appropriate column.)
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4) Members of the board of directors of Safety Step have received the following operating income data for the year ended May 31,2012 :
Safety Step
income statement
For the year ended May 31, 2012
Sales Revenue: Product line industrial systems ($350000), product line household systems ($360,000), total ($710,000)
cost of goods sold:
variable: product line industrial systems (34000), product line household systems (47,000), total (81,000)
fixed: product line industrial systems (230,000), product line household systems (69,000), total (299,000)
total cost of goods sold: product line industrial systems ($264000), product line household systems(116,000), total (380000)
gross profit: product line industrial systems ($86,000), product line household systems (244,000), total (330,000)
marketing and administrative expenses:
variable: product line industrial systems (69,000), product line household systems (76,000), total (145000)
fixed: product line industrial systems (41000), product line household systems (24,000), total (65,000)
total marketing administrative exp.: product line industrial systems (110,000), product line household systems (100,000),Total ($210,000)
operating income (loss): product line industrial systems (-$24,000), product line household systems ($144,000), total $120,000
Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $81,000 and decrease fixed marketing and administrative expenses by $14,000.
1. prepare an incremental analysis to show whether Safety Step should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Safety Step's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line . Compare the difference between the two alternatives' income numbers to your answer to requirement 1.
3. What have you learned from the comparison in requirement 2?
Explanation / Answer
Answer 1. Calculation of Opearating Profit per unit Deluxe Regular Sale Price 1,010 560 Less: Variable Costs Direct Material 320 90 Direct Labor 82 184 Variable Manufacturing Overhead 240 80 Variable Opearting expenses 117 69 Total Variable Costs 759 423 Contribtuion per unit 251 137 Contribution Margin ratio 24.85% 24.46% Less: Fixed Cost Fixed Manufacturing Overhead 126 42 Operating Profit 125 95 Answer 1. a. The constraint is Available Machine hours in this question. Answer 1. b. Here, the main constraint is Limited Machine hours to produce the treadmills. The regular model need 1 hours compared to 3 hours 0f Deluxe Model required to produce. So, there is also no sales constarints the company should produce maximum numbers of regular Model. Answer 1. c. The Company should produce only regular model to maximize its operating proft. The company should take also take other factors into consideration like: 1. Dependent on only one Model 2. Company reputation or goodwill. 3. The company can sold how much units of regular model? 4. Future sales of regular model. Answer 2. Calculation of Incremental profit Particulars Amount Purchase Cost per switch from Supplier ($9.50) Saving of Cost: Direct Material $10 Direct Labor $1.50 Variable Overhead $1 Total Incremental profit $3.00 The company should buy the switch from supplier as it will increase its profit by $3 per switch Note: Fixed Overhead has not been taken into account, since there will be no change in overhead whether the company manufactures or purchase the switch. Answer 3. Calculation of profit under Different Alternative per batch Plain Yogurt Fruited Yogurt Sales - $6 X 900 Gallons $5,400 -$.54 X 19200 Portions $10,368 Less: Cost Processing Charges $880 $880 Tub Charges =$0.16 X 900 $144 $0 Packaging Cost - ($0.07 x 19200 portions) $1,344 Fruit Cost - ($0.10 X 19200 portions) $1,920 Total Costs $1,024 $4,144 Net Income $4,376 $6,224 Answer a. The company should processed the yogurt into Fruited yogurt as it will increase their profit $1848 per batch Answer 4. Statement of Profit Product Line Industrial System Product Line household System Total Sales revenue 350,000 360,000 710,000 Less: Variable Costs Cost of Goods sold 34,000 47,000 81,000 Marketing & Adm. Services 69,000 76,000 145,000 Total Variable Costs 103,000 123,000 226,000 Contribution 247,000 237,000 484,000 Less: Fixed Costs Cost of Goods sold 230,000 69,000 299,000 Marketing & Adm. Services 41,000 24,000 65,000 Total Fixed Costs 271,000 93,000 364,000 Profit / (Loss) (24,000) 144,000 120,000 Statement of Incremental Analysis to stop production the Industrial System Particulars Amount Saving of Fixed Costs Cost of Goods Sold 81,000 Marketing & Adm. Services 14,000 Loss of Contribution of Product Line Industrial System (247,000) Incremental profit / (Loss) (152,000) The company shoul not drop the product line as it will decrease its profit by $152000. Answer 2. Statement of Profit Product Line Industrial System Product Line household System Total Sales revenue 350,000 360,000 710,000 Less: Variable Costs Cost of Goods sold 34,000 47,000 81,000 Marketing & Adm. Services 69,000 76,000 145,000 Total Variable Costs 103,000 123,000 226,000 Contribution 247,000 237,000 484,000 Less: Fixed Costs Cost of Goods sold 230,000 69,000 299,000 Marketing & Adm. Services 41,000 24,000 65,000 Total Fixed Costs 271,000 93,000 364,000 Profit / (Loss) (24,000) 144,000 120,000 Statement of Profit witout Producing Industrial System Product Line household System Sales revenue 360,000 Less: Variable Costs Cost of Goods sold 47,000 Marketing & Adm. Services 76,000 Total Variable Costs 123,000 Contribution 237,000 Less: Fixed Costs Cost of Goods sold 218,000 Marketing & Adm. Services 51,000 Total Fixed Costs 269,000 Profit / (Loss) (32,000) Comparision between Profits Earned Total Profits Earned when both product produced 120,000 Total Profit (Loss) Earned when Household system produced (32,000) Incremental Loss due to Stop Production of industrial Line (152,000) Answer 3. The company should not stop production of industrial product as it will increase the loss by $152000
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