Question

Colt Company owns a machine that can produce two specialized products. Production time for Product TLX is three units per hour and for Product MTV is five units per hour. The machine’s capacity is 2,200 hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 3,740 units of Product TLX and 5,165 units of Product MTV. Selling prices and variable costs per unit to produce the products follow.

$ per unit	Product TLX				Product MTV
Selling price per unit		$	11.50			$	6.90
Variable costs per unit			3.45				4.14

1.Determine the company's most profitable sales mix and the contribution margin that results from that sales mix. (Round per unit contribution margins to 2 decimal places.)

Suresh Co. expects its five departments to yield the following income for next year.

	Dept. M				Dept. N					Dept. O				Dept. P					Dept. T					Total
Sales		$	64,000			$	36,000				$	57,000			$	43,000				$	29,000			$	229,000
Expenses
Avoidable			10,300				37,000					22,700				14,500					38,700				123,200
Unavoidable			52,200				13,200					4,300				30,000					10,500				110,200
Total expenses			62,500				50,200					27,000				44,500					49,200				233,400
Net income (loss)		$	1,500			$	(14,200	)			$	30,000			$	(1,500	)			$	(20,200	)		$	(4,400	)

Recompute and prepare the departmental income statements (including a combined total column) for the company under each of the following separate scenarios.

(1b) Management eliminates departments with expected net losses.

(2c) Management eliminates departments with sales dollars that are less than avoidable expenses.

Answer 1

1.

	Product TLX	Product MTV
Selling price per unit	11.50	6.90
Variable costs per unit	3.45	4.14
Contribution per unit	8.05	2.76
Max product to manufacture	3,740.00	5,165.00
Available hours	2,200.00
Units Manufactured per hour	3.00	5.00
No. of units manufactured	3,740.00	4,766.67
Total Contribution	30,107.00	13,156.01	43,263.01

1b.

	DEPARTMENTS WITH EXPECTED NET LOSSES ELIMINATED
	Dept M	Dept N	Dept O	Dept P	Dept T	Total
Sales	64,000.00		57,000.00			121,000.00
Expenses:
Avoidable	10,300.00		22,700.00			33,000.00
Unavoidable	52,200.00	13,200.00	4,300.00	30,000.00	10,500.00	110,200.00
Total Expenses	62,500.00	13,200.00	27,000.00	30,000.00	10,500.00	143,200.00
Net Income (loss)	1,500.00	- 13,200.00	30,000.00	- 30,000.00	- 10,500.00	-   22,200.00

2c.

	DEPARTMENTS WITH LESS SALES THAN AVOIDABLE EXPENSES ELIMINATED
	Dept M	Dept N	Dept O	Dept P	Dept T	Total
Sales	64,000.00		57,000.00	43,000.00		164,000.00
Expenses:
Avoidable	10,300.00		22,700.00	14,500.00		47,500.00
Unavoidable	52,200.00	13,200.00	4,300.00	30,000.00	10,500.00	110,200.00
Total Expenses	62,500.00	13,200.00	27,000.00	44,500.00	10,500.00	157,700.00
Net Income (loss)	1,500.00	- 13,200.00	30,000.00	-   1,500.00	- 10,500.00	6,300.00