Question

Marty’s Mask produces a variety of masks used in industrial and healthcare settings as well as plastic masks used in costumes. Due to the current pandemic, Marty is going to produce only masks that are useful in a healthcare setting and will focus on three models – N95, disposable surgical and plastic shields (simple retooling and changing of the material allows the plastic masks machines to make the shields). Marty is limited by the number of machine hours available and has a higher demand for the masks than can currently be met. Current production capabilities are limited by the 200,000 machine hours per week. Following is information for each of these products:

	N95	Surgical	Plastic
Selling price per item	$10.00	$8.00	$15.00
Variable production cost per item	3.12	1.40	2.30
Fixed production cost per item*	2.75	5.00	6.40
Machine hours per item	1.75	1.25	2.00
Current Weekly Orders	50,000	75,000	20,000

*20% of the fixed costs are unavoidable regardless of how many of each unit is produced

A. In order to maximize the company’s total contribution margin, in what sequence should Marty fill orders?

B. How many of each should Marty produce?

C. What are three other possible criteria/issues Marty should consider besides maximizing contribution margin when evaluating the order in which to produce the masks?

Part II

Question 2:

Wood World manufactures many wooden products. One of its popular product lines is the wooden crate line. It currently produces 100,000 crates monthly and this production volume represents 80% of capacity. These crates are sold in their unfinished form (no paint or stain) and are used by individuals and businesses in various ways. College students often stack them to make shelves and storage areas. Wood World is considering adding paint, various stains and even decoupage to 25% of the crates and selling them as their “designer crate line.” A single unfinished crate consists of $7 in direct materials, $12 in direct labor, $3 in variable manufacturing overhead $5 in fixed manufacturing overhead and sells for $40. The designer crate line would add the following: $4 in direct materials, $8 in direct labor, and $2 in variable manufacturing overhead and $1 in additional fixed costs. Market studies indicate a designer crate can be sold for $55.

A. Should Wood World sell all the crates in the unfinished form or should it process them further into designer crates? Why? (be sure to back up your explanation with numbers)

B. Would your answer change if Wood World was operating at capacity? Why or why not?

C. What are three non-quantitative issues Wood World should consider in making this decision?

Part II

Question 3:

Louis Luggage produces many different types and sizes of luggage. Their best seller, the Weekend Warrior, sells for $140. Louis has been asked by Macrosoft, Inc. to produce 2,000 of the Weekend Warrior with a specially designed fingerprint security lock and with the Macrosoft company logo. These will be given to Macrosoft employees who must travel frequently for work. Macrosoft has offered to pay $120 per suitcase. Louis’ costs related to the Weekend Warrior consist of variable costs per unit of $50 and fixed costs per unit of $35 of which $9 are unavoidable. In addition, Louis will encounter additional variable costs of $10 per unit for the security lock component and $4,000 as a one-time fixed cost for the Macrosoft label.

A. What is the operating income generated by the special order?

B. Should the special order be accepted? Why or why not?

C. What are three other considerations that Louis, or any company, should think about when choosing whether to accept a special order?

Part II

Question 4:

Cassie’s Clowns produces clown costumes and other party favors and supplies and has three divisions – Funny, Scary and Sad. Based on the latest information presented to the CEO by the controller, a discussion has ensued as to the fate of the Scary division. The division is operating at a loss. The manager of the Scary Division, Vam Pire, argues that his division is profitable and that the company will be worse off it they close the Scary Division. Here is the latest information for Cassie’s Clowns:

	Funny	Scary	Sad	Total
Sales	$850,000	$693,000	$480,000	$2,023,000
Variable Prod.costs	290,000	340,000	115,000	745,000
Fixed Prod. costs	86,000	120,000	25,000	231,000
Variable S&A costs	102,000	165,000	37,000	304,000
Fixed S & A costs	58,000	94,000	42,000	194,000

Of the fixed S&A costs, 15% represent common costs that have been allocated equally to each product line. In addition, 25% of Scary’s fixed production costs are unavoidable as these are fixed costs associated with facilities and equipment shared by all three divisions.

A. Is Vam Pire correct – should the Scary Division be kept or eliminated? Why or why not?

B. What would be total corporate income if Scary Division is eliminated currently?

C. What are two areas Cassie and in particular Scary’s management should look at to improve Scary’s bottom line?

D. What are three qualitative things that Cassie should consider when deciding if a division is eliminated?

Part II

Question 5:

Ace Acting Co. is a professional actor training group that trains stage actors and is headquartered in Los Angeles. The CEO of the company, Allen Ace, is considering expanding and opening an office in New York City but he just received an interesting business opportunity in the San Francisco area to partner with a movie production company located there. Mr. Ace knows he can only accept one of these opportunities at the current time. He has already purchased his non-refundable ticket to New York for $525 however the ticket can be exchanged for a voucher for a future trip. To ensure that he was able to stay in the appropriate location within each city, he has already made hotel reservations. These reservations are cancelable except for a 5% cancellation fee. The hotel in New York is $650 total for the two nights and the San Francisco hotel is $500 for the length of the stay. If he goes to New York, Mr. Ace plans to purchase a ticket to see Hamilton on Broadway at a cost of $400. He will also incur taxi fees of $100 and expects to spend $200 for meals in New York and $300 in San Francisco. Since he would be able to drive from Los Angeles to San Francisco, he would get reimbursed $250 for mileage. Mr. Ace will pay for all costs and will be reimbursed by his company for business expenses.

Required:

A. What are the relevant costs of each trip?

B. What are the incremental costs (and what is the total incremental cost)?

C. Without considering qualitative factors (thus use numbers to analyze), which alternative should Allen choose? Why?

D. What are three qualitative factors that Allen might consider?

E. Why is it important to use relevant costs and revenues when evaluating decisions?

Answer 1

1.

This question is related to limiting factor. The limiting factor here is 200,000 labor hours and the number of weekly orders beyond production cannot be increased.. Avoidable fixed costs are relevant, hence, they are useful in the decision making unlike unavoidable fixed costs.

A.

Statement of ranking

	N95	Surgical	Plastic
Selling price per unit	10	8	15
Less: Variable cost	3.12	1.4	2.3
Variable production cost (80%)	2.2	4	5.12
Contribution per unit	4.68	2.6	7.58
Machine hours per unit	1.75	1.25	2
Contribution per machine hour	2.67428	2.08	3.79
Rank/Sequence	II	III	I

This means that units should be produced in order of ranking as:

B.

Statement of optimal production

Particulars	Details (Units X machine hours)	Labor hours (200,000)
Plastic	20,000 *2	40,000
	Balance hours	160,000
N95	50,000 * 1.75	87,500
	Balance hours	72500
Surgical	1.25 X 58000* *72500/1.25	72,500

Hence, N95 = 50,000 orders

Surgical = 58,000 orders

Plastic = 20,000 orders

C.

The three possible factors Marty should consider besides maximizing contribution margin when evaluating the order in which to produce the masks are as follows:

a. Marty shall consider finding if bottleneck activity exist in producing any of the products.

b. Marty shall consider outsourcing the production to outside suppliers and check if the purchase cost is lower than production costs.

c. Marty shall consider labor hours and simple contribution per unit to see which order the units to be produced.