Question

Elsinore Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment; Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 89,000 units per year. These units require 3 direct labor-hours each.

If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 77,000 of these units per year.

If Mobile does not obtain 77,000 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile’s audio system. The units can be sold to the outside market for $202 each.

Home estimates that its total costs are $1,010,000 for fixed costs, $14.40 per direct labor-hour, and $7.20 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year.

Required:

Determine the following:

a. Total contribution margin to Home if it sells 89,000 units outside.

b. Total contribution margin to Home if it sells 77,000 units to Mobile.

(c) & (d). The costs to be considered in determining the optimal company policy for sales by Home.

The annual contributions and costs for Home and Mobile under the optimal policy

Answer 1

Solution:

Part A
Particulars	Amount	Amount
Outside Sales Revenue 89,000 @ $72	64,08,000
Less: Material and Out-of-pocket Costs for Outside Sales (89,000 @ $ 7.20)	6,40,800	57,67,200
Leftover DLH (375000 -(89000*3))/4=27,000 Units. 27,000 Units Transferred @ $ 81	21,87,000
Less: Material and Out-of-pocket Costs for Transferred Units (27,000 @ $ 7.20)	1,94,400	19,92,600
		77,59,800
Less:Labour Cost (375000 hrs @ $ 14.40)		54,00,000
Total Contribution Margin		23,59,800

Part B
Particulars	Amount	Amount
Units Transferred 77,000 @ $ 81	62,37,000
Less: Material and Out-of-pocket Costs for Outside Sales (77,000 @ $ 7.20)	5,54,400	56,82,600
Leftover DLH (375000 -(77000*4))/3=22,333 Units. 22,333 Units Transferred @ $ 72	16,08,000
Less: Material and Out-of-pocket Costs for Transferred Units (22,333 @ $ 7.20)	1,60,798	14,47,202
		71,29,802
Less:Labour Cost (375000 hrs @ $ 14.40)		54,00,000
Total Contribution Margin		17,29,802

Part C & Part D
Particulars	Home	Mobile	Company
Sales by Home to Out Side (89,000* $ 72)	64,08,000	-	64,08,000
Sales by Home to Mobile (27,000* $81)	21,87,000	-	21,87,000
Sales By Mobile to Outside (77,000 * $ 202)	-	1,56,31,000	1,56,31,000
Total Sales	85,95,000	1,56,31,000	2,42,26,000
Cost of Materials,etc.In Home(116,000 Units * $ 7.20 )	8,35,200	-	8,35,200
Cost of Labour in Home	54,00,000	-	54,00,000
Cost of Units Transferred to Mobile	-	21,87,000	21,87,000
Cost of Units Purchased From Out Side By Mobile (77,000 - 27,000)*84	-	42,00,000	42,00,000
Coversion Cost in Mobile (77,000 * $ 36)	-	27,72,000	27,72,000
Contribution	23,59,800	64,72,000	88,31,800

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