Pharoah, Inc., is a leading manufacturer of sporting equipment. The company is i

Question

Pharoah, Inc., is a leading manufacturer of sporting equipment. The company is in the process of evaluating the best use of its Plastics Division, which is currently manufacturing molded fishing tackle boxes. The company manufactures and sells 8,000 tackle boxes annually, making full use of its available capacity. The selling prices and costs of the tackle boxes are as follows:

aAllocated to products based on expected production volume.
bPer unit variable selling and administrative costs are the same for all products.

Managers believe they could sell 12,000 tackle boxes if the company had sufficient manufacturing capacity. Rod-N-Reel has offered to supply 9,000 tackle boxes per year at a price of $69.24 per box, including delivery to Pharoah’s facility. Cedric Smith, Pharoah’s product manager, believes the company could make better use of its plastics department by manufacturing skateboards. A marketing report indicates that 17,500 skateboards could be sold at a price of $49.15 each. Variable costs to make the boards would be $24.68 per board.

Pharoah has three options:

Compare the company’s operating income under the three options. (Round price per box to 2 decimal places, e.g. 12.25 and all other answers to 0 decimal places, e.g. 125. Do not leave any answer field blank. Enter 0 for amounts.)

Selling price per box $87.83 Costs per box   Direct materials $17.99   Direct labor 18.91   Variable manufacturing overhead 7.16   Fixed manufacturing overheada 5.11   Variable selling & administrativeb 10.20   Fixed selling & administrativea 7.14     Total cost per box 66.51 Profit per box $21.32

Explanation / Answer

Solution:

Variable production cost per unit of tackle box = $17.99 + $18.91 + $7.16 = $44.06

Fixed manufacturing overhead = 8000*$5.11 = $40,880

Fixed selling and administrative expenses = 8000*$7.14 = $57,120

Comparison of Net operating income - Pharoah, Inc. Particulars Make and sell 8,000 tackle boxes Make 8,000 tackle boxes, buy 4,000 additional tackle boxes, and sell 12,000 tackle boxes Make and sell 17,500 skateboards, and buy and sell 9,000 tackle boxes. Details Amount Details Amount Details Amount Sales 8000*$87.83 $702,640.00 12000*$87.83 $1,053,960.00 17500*$49.15 + 9000*$87.83 $1,650,595.00 Variable Cost: Production cost 8000*$44.06 $352,480.00 8000*$44.06 $352,480.00 17500*$24.68 $431,900.00 Purchase cost $0.00 4000*$69.24 $276,960.00 9000*$69.24 $623,160.00 Varaible selling and administrative expenses 8000*$10.20 $81,600.00 12000*$10.20 $122,400.00 26500*$10.20 $270,300.00 Contribution $268,560.00 $302,120.00 $325,235.00 Fixed Cost: Fixed Manufacturing overhead $40,880.00 $40,880.00 $40,880.00 Fixed Selling and Administrative expenses $57,120.00 $57,120.00 $57,120.00 Net Operating Income $170,560.00 $204,120.00 $227,235.00

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