The Raleigh Corporation manufactures fling cabinets in two operations: machining

Question

The Raleigh Corporation manufactures fling cabinets in two operations: machining and finishing. Hprovides the following information: EEE(Click the icon to view the department information.) Each cabinet sells for $115 and has direct material costs of $85 incurred at the start of the machining operation. Raleigh has no other variabile costs. Raleigh can sell whatever output: t produces. The following requirements refler only to the preceding data. There is no connection between the requirements Read the requirements Data Table s. The annual cost of these jigs and tools is $30,000.Should Requirement 1. Raleigh is considering using some modern Raleigh acquire these tools? Show your calculations Producing 1,650 more units will generate contributio Machining Finishing 220,000 units 200,000 units 200,000 unts 200.000 units Annual capacity Select the formula, then enter the amounts to caloulate the f Annual production Fixed operating costs (excluding direct $2.400,000 $1,800,000 12 per unit $9 per unit Fixed operating costs per unt produoed $2,400,000/200,000,$1,800,000/200,000) Shoukd Raleigh acquire these tools? The Theretore, Raleigh Requirement 2. The production manager of the Machining Department has Print Done n throughput contribution margin is mplement the new desi submited a proposal to do faster setups that would increase the arnual capacity of the Machining Cepartment by 9,500 units and wouid cost $26,000 per year. Should Raleigh implement the charge? Show your calculations furtherincrease contrbution (throughput) margin. Raleigh implement the change to increase production Increasing its capacity Choose from any list or enter any number in the input fields and then continue to the next question

Explanation / Answer

All answers have been presented considering that there is no connection between any of the requirements, as stated in the question.

1. Contribution per unit = Selling price - variable cost per unit

= 115 - 85 = $30 per unit

Additional Contribution from 1,650 units = $30 x 1650 units

= $49,500

Additional Profit per year = Additional Contribution - Additional Fixed Cost

= 49,500 - (30,000 + 9 x 1650) = $4,650

Since the use of the modern tools and jigs would result in an additional annual profit of $4,650, Raleigh would benefit from acquiring such tools.

2. Although the faster setups would increase the annual capacity of the machining department by 9,500 units, such capacity would be utilized as the finishing department is already operating at full capacity. Therefore Raleigh would not benefit from implementing such a change.

3. Additional Contribution from 9,000 units = $30 x 9,000 units = $270,000

Additional Fixed Cost = $27 x 9,000 units = $243,000.

Additional Profit = $27,000

Since the use of the outside contractor would result in an additional annual profit of $27,000, Raleigh would benefit from accepting the offer.

4. Raleigh cannot allocate machining of 5,600 units to Hasking Corporation from the existing annual production of 200,000 units as the machining cost of $2,400,000 is a fixed cost for the annual capacity of 220,000 units. Further, the machining of 5,600 units over and above the existing annual production would also not be possible as the finishing department is already operating at full capacity of 200,000 units.

5. Variable cost of production of 2,600 units = 2,600 units x $85 = $221,000

Although Raleigh has already incurred $221,000 on the production of the 2,600 units, the same represents sunk cost, as do the associated fixed machining and finishing cost. The relevant cost in this case would be the contribution foregone due to production of defective items. However, the machining department has a capacity of 220,000 while the budgeted annual production is only 200,000 units. Therefore, Raleigh will not incur any opportunity cost in the form of loss of contribution as the machining department has the spare capacity to process another 2,600 units before transferring the same to the finishing department.

6. Production of defective units at the finishing department will lead to loss of contribution as it does not have any spare capacity and is a bottleneck operation. Therefore, loss of contribution on 2,600 units of (2,600 x $30) $78,000 would be the relevant opportunity cost to Raleigh.

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