Solomon Corporation makes and sells state-of-the-art electronics products. One o

Question

Solomon Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company's chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment's operating activities. The relevant range for the production and sale of the calculators is between 32,000 and 72,000 units per year Revenue (34,000 units $9) Unit-level variable costs $306,000 Materials cost (34,000 x $2) Labor cost (34,000 x $1) Manufacturing overhead (34,000 x s0.20) Shipping and handlipg (34,000 x $0.28) sales commissions (14,000 x $1) (68,000) (34,000) (6,800) 9,520) Contribution margin Pixed expenses 34,000) 153,680 Advertising costs Salary of production supervisor Allocated company wide facility-level expenses (29,000) (66,000) (83,000 s (24,320) Net loss Required a. A large discount store has approached the owner of Solomon about buying 7000 calculators. It would replace The Math Machine's label with its own logo to avoid affecting Solomon's existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $5.60 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Solomon accept the special order? b-1. Solomon has an opportunity to buy the 34,000 calculators it currently makes from a relilable competing manufacturer for $4.80 each. The product meets Solomon's quality standards. Solomon could continue to use its own logo, advertising program, and sales force to distribute the products. Should Solomon buy the calculators or continue to make them? b-2. Calculate the total cost for Solomon to make and buy the 34,000 calculators b-3. Should Solomon buy the calculators or continue to make them, If the volume of sales were increased to 72,000 units? c. Because the calculator division is currently operating at a loss, should it be eliminated from the company's operations? Support your answer with appropriate computations. Specifically, by what amount would the segment's elmination lincrease or decrease

Explanation / Answer

Requirement a Total Relevent Variable costs Material 2 Labor 1 Overhead 0.2 Shipping & handlings 0.28 Total relevent costs 3.48 Relevent Revenue 5.6 Contribution 2.12 Total contribution 14840 Based on quantative factor, Solomon should accept the order from Discount Store However It should not do only on quantative factor, because there will be competition from Discount store for its owned branded(Logo) calculators. Requirement B-1 Since Relevent cost of buying the calculators is less than making them, We recommend the Solomon to buy them. The calculation of the decision is in Requirement B-2 Requirement B-2 Units 34000 Make Buy Per units Relevent Cost Material 68000 2 Labor 34000 1 Overhead 6800 0.2 Salary of production manager 66000 Cost of Buying 163200 4.8 Total Relevent costs 174800 163200 Requirement B-3 If sales increased to 72000 units, Solomon should make them which can be evidenced from below calculations. Units 72000 Make Buy Per units Relevent Cost Material 144000 2 Labor 72000 1 Overhead 14400 0.2 Salary of production manager 66000 Cost of Buying 345600 4.8 Total Relevent costs 296400 345600 Requirement C If segment is closed, its profitability would decrease by 58680 Allocated Company wide facility -level expenses 83000 Less : Net Loss 24320 Profit would decrease by 58680

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