Rodeo has two main customers: Trent Corporation and Julie Corporation. The data
ID: 2473714 • Letter: R
Question
Rodeo has two main customers: Trent Corporation and Julie Corporation. The data for each customer for January are: Trent Corporation Julie Corporation Revenues $210,000 $140,000 Total Variable costs $350,000 84,000 85,000 Contribution margin 169,000 126,000 55,000 Fixed costs ( allocated) 181,000 102,000 68,000 Operating income 170,000 $24,000 $13,000 Machine $11,000hours required 3,000 hours 1,000 hours 4,000 hours Julie Corporation indicates that it wants Rodeo to do an additional $140,000 worth of printing jobs during February. These jobs are identical to the existing business Rodeo did for Julie in January in terms of variable costs and machine-hours required. Rodeo anticipates that the business from Trent Corporation February will be the same as that in January. Rodeo can choose to accept as much of the Trent and Julie business for February as its capacity allows. Assume that total machine-hours and fixed costs for February will be the same as in January. What action should Rodeo take to maximize its operating income? Show your calculations. What other factors should Rodeo consider before making a decision?
Explanation / Answer
The printing job is identical with Julie. Therefore, for $140000 revenue from printing job, machine hours required = $140000/140 = 1000 hours.
As the contribution per machine hour for Julie as well as the printing job (as it is identical with the job from Julie) is more than that from the Trent Corporation, 1000 hours will be used for the printing job. And the rest 3000-1000 = 2000 hours will be used for trent corporation.
Total contribution from the revised mix of the three jobs
= contribution from Trent corporation + contribution from printing job + contribution from printing job = $42/hour x 2000 hours + $55/hour x 1000 hours + $55/hour x 1000 hours = $84000 + $55000+ $55000 = $194000
The other factors to be considered are:
a) the opportunity cost of loosing the contribution of $42 x 1000 = $42000 from the loss of revenue from the Trent Corporation
b) The reduction of the volume of job for Trent corporation may have a negative impact on the future revenue earnings from the Trent corporation. The management of the Trent Corporation may decide to discontinue their order in future because of the decisison of taking the printing job at the cost of the job from Trent Corporation
Trent Corporation Julie Corporation Total Revenues (a) $ 2,10,000 $ 1,40,000 $ 3,50,000 Variable costs (b) $ 84,000 $ 85,000 $ 1,69,000 Contribution (c) $ 1,26,000 $ 55,000 $ 1,81,000 Fixed Costs (d) $ 1,02,000 $ 68,000 $ 1,70,000 Operating Income (e) $ 24,000 $ -13,000 $ 11,000 Machine hours required (f) 1000 4000 5000 Contribution Margin ratio 0.6 0.4 Contribution per machine hour (c/f) $ 126 $ 13.75 Revenue/machine hour (a/f) $ 210 $ 35Related Questions
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