Question

Part 2 contains 3 Decision making recommendations that are independent of each other worth 2 pts. Each for a total of 6 pts.  Covers material in Module 17

Decision Making  #1-Special Order

Snider, Inc., which has excess capacity, received a special order for 2,000 units at a price of $15 per unit which it could produce with the excess capacity.

Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year sales of 10,000 units follows.

Sales

$200,000

Less: cost of goods sold

150,000

Gross Margin

$50,000

Cost of goods sold includes $25,000 of fixed manufacturing cost.

Required:

If the special order is accepted, calculate how much the  company's gross margin will change.  Make sure you show your work and explain if you would

accept or not accept this special order and why?

Recommendation:

Decision Making #2-Sell or Process Further Joint Product Decision

Lido manufactures A and B from a joint process cost = $70,000. Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an

additional cost of $12,000 and then sold for $24. Ten thousand pounds of B can be sold at split-off for $14 per pound or processed further at an additional cost of $20,000 and later sold for $17.

Required:

Which products should be processed further or not? Why?  Give the dollar impact to income for each product based on your recommendation.

Recommendation:

Decision making #3-Use of Limited Resources-Singe Constraint

Bush Manufacturing has the following labor hours available for producing M and N:

25,000

Total Direct labor hours available

Consider the following information:

M

N

Required Labor per unit in hours

2

3

Maximum demand in units

8,000

7,000

Contribution Margin per unit

8

9

Required:

What is the optimal product mix(how many M and N should be produced)?  Explain your answer and show computations.

Answer 1

Solution 1:

Variable cost of goods sold = $150,000 - $25,000 = $125,000

Variable manufacturing cost per unit = $125,000 / 10000 = $12.50 per unit

Selling price for special order = $15 per unit

Profit per unit of special order = $15 - $12.50 = $2.50 per unit

Special order quantity = 2000 units

Profit from special order = 2000 * $2.50 = $5,000

If special order is accepted then company's Gross margin will increase by $5,000, therefore special order should be accepted.

Solution 2:

Financial advantage (disadvantage) to determine which product to be sold at split off and which is to be further processed - LIDO
Particulars	Product A	Product B
Selling price after further processing	$24.00	$17.00
Selling price at split off point	$20.00	$14.00
Increment revenue per pound	$4.00	$3.00
Total output (In pound)	5000	10000
Total Incremental Revenue	$20,000.00	$30,000.00
Further processing cost	$12,000.00	$20,000.00
Financial advantage (disadvantage) of further processing	$8,000.00	$10,000.00
Recommendation	Process Further	Process Further

Solution 3:

Particulars	Product M	Product N
Contribution margin per unit	$8.00	$9.00
Labor hour per unit	2	3
Contribution margin per labor hour	$4.00	$3.00

Particulars	Product M	Product N	Total
Maximum nos of units to be sold	8000	7000
Hours required to produce maximum units	16000	21000	37000

For most profitable sales mix	Product M	Product N	Total
Hours dedicated to the production of each product	16000	9000
Units produce for most profitable sales mix	8000	3000
Contribution margin per unit	$8.00	$9.00
Total contribution margin	$64,000.00	$27,000.00	$91,000.00