MA CH14 HW1

Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products.

Blender

Electric Mixer

  Direct material

$

6

$

11

  Direct labor

4

9

  Manufacturing overhead @ $16 per machine hour

16

32

  Cost if purchased from an outside supplier

20

38

  Annual demand (units)

20,000

28,000

     Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $10. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1.

If 50,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased? (Leave no cells blank – be certain to enter “0” wherever required.)

Blenders

Electric Mixer

  Manufacture

[removed]   

[removed]    

  Purchase

[removed]   

[removed]    

2.

With all other things constant, if management is able to reduce the direct material for an electric mixer to $6 per unit, how many units of each product should be manufactured? Purchased? (Leave no cells blank – be certain to enter “0” wherever required.)

Blenders

Electric Mixer

  Manufacture

[removed]   

[removed]    

  Purchase

[removed]   

[removed]    

Jupiter Corporation manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires to market a skateboard similar to one of Jupiter’s and has offered to purchase 11,000 units if the order can be completed in three months. The cost data for Jupiter’s model no. 43 skateboard follow.

  Direct material

$

8.20

  Direct labor: .25 hour at $9.00

2.25

  Total manufacturing overhead:
      .5 hour at $20

10.00

       Total

$

20.45

Additional data:

•

The normal selling price of model no. 43 is $26.50; however, Venus has offered Jupiter only $15.75 because of the large quantity it is willing to purchase.

•

Venus requires a modification of the design that will allow a $2.10 reduction in direct-material cost.

•

Jupiter’s production supervisor notes that the company will incur $3,700 in additional setup costs and will have to purchase a $2,400 special device to manufacture these units. The device will be discarded once the special order is completed.

•

Total manufacturing overhead costs are applied to production at the rate of $20 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5,000 per month).

•

Jupiter will allocate $1,800 of existing fixed administrative costs to the order as “. . . part of the cost of doing business.”

Required:

1-a.

Calculate the net contribution. (Do not round your intermediate calculations. Omit the “$” sign in your response.)

  Net contribution

$ [removed] 

1-b.

Should the order be accepted from a financial point of view (i.e., is it profitable)?

Worksheet

Learning Objective: 14-04 Identify relevant costs and benefits, giving proper treatment to sunk costs, opportunity costs, and unit costs.

Difficulty: Medium

Learning Objective: 14-05 Prepare analyses of various special decisions, properly identifying the relevant costs and benefits.

2-a.

Assume that Jupiter’s current production activity consumes 70 percent of planned machine-hour activity, estimate the available hours.

  Available hours

[removed] 

2-b.

Can the company accept the order and meet Venus’ deadline?

Worksheet

Learning Objective: 14-04 Identify relevant costs and benefits, giving proper treatment to sunk costs, opportunity costs, and unit costs.

Difficulty: Medium

Learning Objective: 14-05 Prepare analyses of various special decisions, properly identifying the relevant costs and benefits.

3.

What options might Jupiter consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm? (You may select more than one answer. Click the box with a check mark for the correct answer and click to empty the box for the wrong answer.)