Question

Zalamah, the production manager for Sun & Sand, had requested to have lunch with the company president. Zalamah wanted to put forward his suggestion to add a new product line. As they finished lunch, Rejal, the company president, did think seriously about the proposal. I think you are correct regarding the increasing demand for Roller Skates. What I’m not sure about is whether the Roller Skates line will be better for us than our Lucky boxes. Those have been our famous catchy brand for many years.

Zalamah responded with his regular say. We’ll run a few numbers on this Roller Skates idea that I think will demonstrate the line’s potential.”

Sun & Sand is a wholesale distributor supplying a wide range of moderately priced sports equipment to large chain stores. About 60 percent of Sun & Sand’s products are purchased from other companies while the remainder of the products are manufactured by Sun & Sand. The company has a, department that is currently manufacturing molded Lucky boxes. Sun & Sand is able to manufacture and sell 12,000 Lucky boxes annually, making full use of its direct-labor capacity at available work stations. The selling price and costs associated with Sun & Sand’s Lucky boxes are as follows:

Selling price per box					$	107.00
Costs per box:
Molded plastic	$	17.00
Hinges, latches, handle		12.00
Direct labor ($19.00 per hour)		22.80
Manufacturing overhead		13.80
Selling and administrative cost		16.00				81.60
Profit per box					$	25.40

Because Sun & Sand’s sales manager believes the firm could sell 18,000 Lucky boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the Lucky boxes for distribution. Majed Products, a steady supplier of quality products, would be able to provide up to 14,450 Lucky boxes per year at a price of $85.00 per box delivered to Sun & Sand’s facility.

Zalamah, Sun & Sand’s production manager, has come to the conclusion that the company could make better use of its Plastics Department by manufacturing Roller Skates. Zalamah has a market study that indicates an expanding market for Roller Skates and a need for additional suppliers. Zalamah believes that Sun & Sand could expect to sell 19,100 Roller Skates annually at a price of $66 per Roller Skates.

After his lunch with the company president, Zalamah worked out the following estimates with the assistant controller.

Selling price per Roller Skates					$	66.00
Costs per Roller Skates:
Molded plastic	$	12.10
Wheels, hardware		10.00
Direct labor ($19.00 per hour)		11.40
Manufacturing overhead		6.50
Selling and administrative cost		8.00				48.00
Profit per Roller Skates					$	18.00

In the Plastics Department, Sun & Sand uses direct-labor hours as the application base for manufacturing overhead. Included in the manufacturing overhead for the current year is $108,000 of factory wide, fixed manufacturing overhead that has been allocated to the Plastics Department. For each unit of product that Sun & Sand sells, regardless of whether the product has been purchased or is manufactured by Sun & Sand, there is an allocated $4 fixed overhead cost per unit for distribution that is included in the selling and administrative cost for all products. Total selling and administrative costs for the purchased Lucky boxes would be $10 per unit.

Required:
In order to maximize the company’s profitability, prepare an analysis that will show which product or products Sun & Sand should manufacture or purchase.

1-a. Calculate the unit contribution margin and the contribution per hour for each of the following options: (a) Lucky boxes purchased, (b) Lucky boxes manufactured, and (c) Roller Skates manufactured.
1-b. In order to maximize the best use of Sun & Sand’s scarce resources, how many Roller Skates and Lucky boxes should be manufactured, and how many Lucky boxes should be purchased?
2. Calculate the improvement in Sun & Sand’s total contribution margin if it adopts the optimal strategy rather than continuing with the status quo.

Answer 1