Question

Outdoor Luggage, Inc., makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below.

	Ski Guard			Golf Guard			Fishing Guard
Selling price per unit	$	240		$	370		$	225
Variable cost per unit	$	100		$	255		$	105
Plastic injection molding machine processing time required to produce one unit	7 minutes			5 minutes			7 minutes
Pounds of plastic pellets per unit	15 pounds			7 pounds			10 pounds

Required:

1. If we assume that the total time available on the plastic injection molding machine is the constraint in the production process, how much contribution margin per minute of the constrained resource is earned by each product?

2. Which product offers the most profitable use of the plastic injection molding machine?

3. If we assume that a severe shortage of plastic pellets has required the company to cut back its production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product?

4. Which product offers the most profitable use of the plastic pellets?

5. Which product has the largest contribution margin per unit?

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $345,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	19.00	per pound		12,800	pounds
B	$	13.00	per pound		20,000	pounds
C	$	25.00	per gallon		4,000	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs		Selling Price
A	$	68,500	$	24.00	per pound
B	$	98,250	$	19.00	per pound
C	$	41,600	$	33.00	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Kristen Lu purchased a used automobile for $20,250 at the beginning of last year and incurred the following operating costs:

Depreciation ($20,250 ÷ 5 years)	$	4,050
Insurance	$	2,100
Garage rent	$	1,100
Automobile tax and license	$	550
Variable operating cost	$	0.09	per mile

The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that, at her current rate of usage, the car will have zero resale value in five years, so the annual straight-line depreciation is $4,050. The car is kept in a garage for a monthly fee.

Required:

1. Kristen drove the car 26,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.)

2. Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-country trip for two weeks during spring break. What costs above are relevant in this decision? Assume that there is no decrease in the resale value of the car due to its use. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

Answer 1

1)				ski	Golf	fishing
				Guard	Gurard	Guard
	Selling price per unit			240	370	225
	Variable cost per unit			100	255	105
	contribution margin			140	115	120
	machine processing min			7	5	7
	Contribution margin per min			20.00	23.00	17.14
2)	Golf guard
3)				ski	Golf	fishing
				Guard	Gurard	Guard
	Selling price per unit			240	370	225
	Variable cost per unit			100	255	105
	contribution margin			140	115	120
	pounds per unit			15	7	10
	Contribution margin per pound			9.33	16.43	12.00
4)	Golf guard
5)	ski guard has largest contribution

Req 1
					A	B	C
	Selling price after further processing				24	19	33
	selling price at split off point				19	13	25
	incremental price				5	6	8
	qty				12,800	20,000	4,000
	incremental revenue				64000	120000	32000
	incremental cost				68,500	98,250	41,600
	financial advantage(disadvantage)				-4,500	21,750	-9,600	answer
Req 2					A	B	C
	Sell at split off				yes	no	yes
	sell after processing further				no	yes	no

	Depreciation			4,050
	Insurance			2,100
	Garage rent			1,100
	Automobile tax and license			550
	total cost			7,800
1)	fixed cost per mile (7800/26000)				0.3
	Variable operating cost per mile				0.09
	Average cost per mile				0.39
2)	Variable operating costing			Relevant
	Depreciation			irrelevant
	Automobile tax			irrelevant
	license costs			irrelevant
	insurance costs			irrelevant