Elsinore Electronics is a decentralized organization that evaluates divisional m

Question

Elsinore Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment; Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 90,000 units per year. These units require 3 direct labor-hours each.

If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 78,000 of these units per year.

If Mobile does not obtain 78,000 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile’s audio system. The units can be sold to the outside market for $202 each.

Home estimates that its total costs are $1,000,000 for fixed costs, $14.40 per direct labor-hour, and $7.20 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year.

Required:

Determine the following:

a. Total contribution margin to Home if it sells 90,000 units outside. (Do not round intermediate calculations.)

b. Total contribution margin to Home if it sells 78,000 units to Mobile. (Do not round intermediate calculations.)

(c) & (d). The costs to be considered in determining the optimal company policy for sales by Home.

The annual contributions and costs for Home and Mobile under the optimal policy.

Home Mobile Company Sales by home to outside sales by home to movile sales by mobile to outside total sales cost of materials, etc in home Cost of labor in Home Costs of units transfered to mobile cots of units purchased from outside by mobile conversion cost in mobile

Explanation / Answer

a)

Labor costs 375,000 hrs. @ $14.40

Total Contribution Margin:

b)

c) and d)

$13,169,250

If Home sells 90,000 units to outside Outside sales revenue 90,000 @ $72 $6,480,000 Less material and out-of-pocket costs for outside sales (90,000 @ $7.20) $648,000 which is: $5,832,000 Leftover DLH [375,000 – (90,000 × 3)] ÷ 4 = 26250. 26250 units transferred @ $ 81 $2,126,250 Less material and out-of-pocket costs for units transferred (26250 @ $7.20) $189,000 which is: $1,937,250 This so far totals to: $7,769,250

Labor costs 375,000 hrs. @ $14.40

Total Contribution Margin:

$5,400,000

b)

If Home sells 78,000 units to Mobile Units transferred 78,000 @ $81 $6,156,000 $6,318,000 Less material and out-of-pocket costs for units transferred (78,000 @ $7.20) $561,600 which is: $5,756,400 Leftover DLH [375,000 (78,000 × 4)] ÷ 3 = 21000 units sold outside × $72 $1,512,000 Less material and out-of-pocket costs for outside sales (21000 @ $7.20) $151,200 which is: $1,360,800 This so far totals to: $7,117,200 Labor costs 375,000 hrs. @ $14.40 $5,400,000 Contribution margin $1,717,200

c) and d)

Home Mobile   Company Sales by Home to outside $ 6,480,000 $    6,480,000 Sales by Home to Mobile $ 2,126,250 $    2,126,250 Sales by Mobile to outside $ 15,756,000 $ 15,756,000 Total sales $ 8,606,250 $ 15,756,000 $ 24,362,250 Cost of materials, etc. in Home $     833,400 $        833,400 Cost of labor in Home $5,400,000 $5,400,000 Cost of units transferred to Mobile $2,126,250 $2,126,250 Cost of units purchased from outside by Mobile $4,347,000 $4,347,000 Conversion cost in Mobile $2,808,000 $2,808,000 Contribution $ 2,372,850 $    6,474,750 $    8,847,600

$13,169,250

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