Question

Cora Corporation produces refrigerator units. The company’s normal production and sales volume of Standard units is 5,500 units per month, and units sell for $970 each. The costs of manufacturing and marketing a Standard model are as follows:

Variable manufacturing cost per unit	$	340
Variable marketing cost per unit		90
Fixed product cost		550,000
Fixed period cost		440,000

The company is considering diversifying the product line to include two additional models, Economy and Deluxe, which would sell for $830 and $970 per unit, respectively. The costs of manufacturing these new models are as follows:

	Economy			Deluxe
Variable manufacturing cost		41	% below Standard	$	595
Variable marketing cost		5	% above Standard		Twice Standard

Total fixed product and period costs are expected to remain unchanged. Cora expects to sell 2,200 units of the Economy model and 1,950 units of Deluxe model per month. The company cannot expand its production capacity beyond its current level of 5,500 units.

Required:

1.	If Standard Model is the only product ,what would the Operating income be?

2-a.	Suppose that a supplier is willing to supply 1,350 units of the Standard model at a price of $340 per unit. Also assume that the company can sell all that it can produce of the remaining two models. Should the offer of the supplier be accepted?
	Yes No

2-b.	Which of the model should produced?
	Standard Model Economy Model Delux Model

Answer 1

1.Operating income statement if only standard model is produced and sold

Particulars	Amount
Sales revenue(5500 units*$ 970/unit)	$53,35,000
Less: Variable Manufacturing Cost( 5500units*$340/unit)	($18,70,000)
Less: Variable Marketing Cost(5500units*$90/unit)	($ 4,95,000)
Total Contribution	$ 29,70,000
Less: Fixed Period Cost	($ 4,40,000)
Net Operating Income	$ 25,30,000

2.a YES: The company should accept the supplier’s offer as it will lead to an additional contribution of $90 per unit($ 430-$340). Therefore total additional contribution as a result of accepting the supplier’s offer is $ 1,21,500($ 90 * 1350 units).

2.b Decision: The standard model should be produced.

Reasons: If only standard model is produced to its full plant capacity then the company earns the highest net operating income of $ 25,30,000

Suppose the company produces Economy and Deluxe , then Total Contribution from these two would be $ 15,57,030(as per working note below) and Standard model has a contribution of $ 850500(since it is favourable to buy the standard model for 1350 units)

Therefore Total Contribution from all the three products together are=$ 24,07,530(which is less than $25,30,000)

Therefore it is profitable to produce only Standard Model for its entire plant capacity.

Working Note: Contribution from each of the models

Particulars	Standard model	Economy model	Deluxe model
Sales Revenue	$ 53,35,000 (5500units*$970/unit)	$ 18,26,000 ( 2200units*$830/unit)	$ 18,91,500 (1950units*970/unit)
Less: Variable manufacturing Cost	($18,70,000) (5500units*$340/unit)	($ 4,41,320) (2200units*$200.6/unit)	($11,60,250) (1950units*$595/unit
Less: Variable Marketing Cost	($ 4,95,000) (5500units*$90/unit)	($ 2,07,900) (2200 units*$94.5/unit)	($ 3,51,000) (1950units*$ 180/unit)
Total Contribution	$ 29,70,000	$ 11,76,780+$ 3,80,250= $ 15,57,030