Question

Barsisa manufactures two units, phones and chargers for which the following information is available:

Costs per unit	phones	chargers
Direct materials	$   450	$   550
Direct labor	600	750
Variable overhead	750	900
Fixed overhead	600	750
Total cost per unit	$2,400	$2,950
Price	$3,000	$3,900
Units sold	400	200

                                                                                                                                                                                                                                                                                               

The average wage rate is $20 per hour. The plant has a capacity of 21,000 direct labor hours, but current production uses only 19,500 direct labor hours.

Required:

1. A new customer has offered to buy 40 units of chargers if the price is lowered to $3,000 per unit. How many direct labor hours are required to produce 40 units of chargers? How much will the profit increase (or decrease) if Barsisa accepts this proposal? All other prices will remain the same.

2. Suppose that the customer has instead offered to buy 60 units of chargers at $3,000 per unit. How much will the profits change if the order is accepted? Assume that the company cannot increase its production capacity to meet the extra demand.

3. Answer the question in requirement (2), assuming instead that the plant can work overtime. Direct labor costs for the overtime production increase to $30 per hour, i.e., variable overhead cost for overtime production are 50% more than for normal production.

Answer 1

Initial workings,

I.a.Calculation of No .of hours required for Labour hours required for each unit of Charger= Labour cost per unit/ Cost per hour

=$750/$20 per hour

=37.5 hours

b. Calculation of No .of hours required for Labour hours required for each unit of Phone= Labour cost per unit/ Cost per hour

=$600/$20 per hour

=30 hours

II.Calculation of total Available hours= total hours- used hours

=21000-19500

=1500 Labour Hours

III.Calculation of contribution per unit of Charger

Particulars	Phone	Charger
a. Selling price p.u	3000	3900
b. Direct material	450	550
c. Direct Labour	600	750
d. Variable Over heads	750	900
e. Contribution per unit (a-b-c-d)	1200	1700
f. No. Of labor hours per unit	30	37.5
g. Demand in units	400	200
h. Total contribution( e*g)	480000	180000
i. Total fixed cost	240000 (600*400units)	150000 (750*200 units)
j. Total profit (h-i)	240000	30000
h. Contribution per hour (e÷f)	$40	$45.333

1. Hours required b to produce 40 units of charger

= 40 units* 37.5 hrs per unit ( from above calculation I)

=1500 hrs.

Contribution per unit of charger, if sale price is $3000/- is 800 per unit

With the excess 1500 hrs, we can produce entire order of 40 units of charges. So, that it will increased the profit by $800 per unit* 40 units leads to total increase in profit by $32000/-

Note: Fixed cost per unit is allocated cost, so increase in production does not leads to increase in fixed cost.hence not considered

2. Calculation of contribution per hour = 800/37.5= 21.33

If the company receive the order of 60 units, it has only excess Labour hours per 40 units ,for producing remaining 20 units we need fore go the production of phone.

Let us first identify the No.of hrs required for 20 units of charges =20 units *37.5 hrs per units

=750hrs

No.of units of phones to be foregived= 750 hrs/30 units=25 units

Calculation of loss= (contribution per hrs of charger- contribution per hrs of phone)* no.of hrs required for 20 units of charger

=(40-21.333)*750 hrs

=$14000 loss

3. calculation of increase in profit from above situation if overtime of labour is available:

Over time Labour cost= 30 per unit

Increased labour cost per unit of charger, if company uses over time Labour= ( over time Labour cost- actual labour cost) * No.of hours required for unit of charger

=(30-20)*37.5 hrs

=$375 per unit

Increased variable Over head cost per unit of charger,if company uses over time Labour= variable overhead cost* 50%=$900*50%

=$450 per unit

Therefore, Revised contribution per unit of charger=$1700-$375-$450

=$875

Increase in profit for 20 units =$875 per unit*20 units=$17500 and increase in profit for 40 units is $32000

Total increase in profit= $49500/-