(a) Compute the profitability index for each model and rank the order of priorit

Question

(a)

Compute the profitability index for each model and rank the order of priority for the models to be produced.

Profitability index

PS1 $_______

PS2 $_______

PS3 $________

Sheffield Co. manufactures three different models of colour plasma screens: PS1, PS2, and PS3. Data on the three models is presented below:
PS1 PS2 PS3 Selling price $350 $490 $510 Unit variable cost $218 $298 $358 Annual production units 5,210 2,900 4,200 Machine-hours per unit 6 12 8 Avoidable fixed costs, if product line is eliminated $50,200 $37,700 $54,400
Sheffield’s production capacity is 89,448 machine-hours per year.

Chiyo Co. has offered to purchase 4,800 units of a simpler version of PS3 for $460. Sheffield estimates that this version of the PS3 would result in variable costs of $311 per unit to manufacture and 7 machine hours per unit, but an additional fixed cost of $64,800 for a new assembly machine. The order has to be either taken in full or rejected totally. If Sheffield takes the special order, it will not produce and sell PS3 to compete with Chiyo.

Explanation / Answer

PS1 PS2 PS3 Selling price 350 $490 $510 Unit variable cost 218 $298 $358 Contribution 132 192 152 Machine-hours per unit 6 12 8 Contribution Per Machine Hr=Contribution/Machine-hours per unit 22 16 19 Profitability index 1 3 2 Profitability index PS1 1 PS2 3 PS3 2

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