Question

EKY8-1 BUSINESS DECISION CASE. Marvin Corporation manufactures both an automatic and a manual household dehumidifier. Because of limited demand, for several years production has been at 80% of estimated capacity, which is thought to be limited by the number of machine hours available. At current operations levels, a profit analysis for each product line shows the following:

Per-unit Data

Automatic Manual

Sales price $350 $150

Production Costs:

Direct material $65 $32

Direct labor 35 25

Variable manufacuring overhead 68 16

Fixed manufacturing overhead 50 $218 18 $91

Variable operating expenses 52 21

Fixed operating expenses 30 13

Total cost $300 $125

Operating income $50 $25

Management wants to make use of the company's current excess capacity by increasing production. Each unit of the automatic model requires 2.5 machine hours; the manual model requires 1 machine hour per unit.

REQUIRED

a. Assume that sufficient units of either product can be sold at current prices to utilize exisiting capacity fully and that fixed costs will not be affected.

1. To which product should the excess capacity be devoted if the decision basis is maximization of contribution margin per unit of product?

2. Prepare an analysis showing which product line should be emphasized if the firm's net income is the decision basis.

3. What general decision guideline applies in this situation?

b. Suppose the excess capacity represents 10,000 machine hours, which can be used to makes 4,000 automatic units or 10,000 manual units or any proportionate combination. The only market available for these extra units is a foreign market in which the sales price must be reduced by 20% and in which no more than 6,000 units of either model can be sold. All costs will remain the same excpet that the sales commission of 10% (included in the variable operating expense) will be avoided. Prepare an analysis showing which product should be emphasized and the effect on the firm's net income.

c. Assume that the excess capacity can be used as indicated in requirement (b) and that the firm's market research department believes that the production available from using the excess capacity exclusively on either model can be sold in the domestic market at regular prices if a promotion campaign costing $225,000 is undertaken for the automatic model or $235,000 for the manual model. Prepare an analysis indicating for which product the campaign should be undertaken.

Answer 1

		Automatic	Manual
1.	Sales Price	350	150
	Less: Variable Cost
	-Direct Material	65	32
	-Direct Labor	35	25
	-Variable OVH	68	16
	-Variable Op Exp	52	21
	Contribution Margin	130	56
		52	56
	Answer is Automatic
2.	Contribution Margin	130	56
	Less: Fixed Cost
	-Fixed OVH	50	18
	-Fixed OP Expe	30	13
	Net Income	50	25
	Answer is Automatic
3.	Higher the cont/net income, utilise excess capacity
b.		Automatich	Manual		Automatich	Manual
	Sales Price 20% reduction	280	120
	Less: Variable Cost
	-Direct Material	65	32
	-Direct Labor	35	25
	-Variable OVH	68	16
	-Variable Op Exp (10% sale comm avoided)	17	6
	52-35 and 21-15
	Contribution Margin	95	41
	Less: Fixed Cost
	-Fixed OVH	50	18
	-Fixed OP Expe	30	13
	Net Income	15	10
	Machine Hour needed	2.5	1
	Cont Margin per machine hour	38	41
	Since Cont margin per machine hour for manual is high, we should first product maxmum MANUAL
	To be produced-Manual	6000
	Machine hour used 6000*1	6000
	Balance Machine hour 10000-60000	4000
	Automatic need machin hour per unit	2.5
	Automatci to be produced 4000/2.5	1600
		per unit			Total
	Net Income	Automatich	Manual
	Unit				1600	6000
	Sales Price	280	120		448000	720000
	Less: Variable Cost
	-Direct Material	65	32		104000	192000
	-Direct Labor	35	25		56000	150000
	-Variable OVH	68	16		108800	96000
	-Variable Op Exp (10% sale comm avoided)	17	6		27200	36000
	52-35 and 21-15
	Contribution Margin	95	41		152000	246000
	Less: Fixed Cost
	-Fixed OVH	50	18		0	0
	-Fixed OP Expe	30	13		0	0
	Net Income	15	10		152000	246000
	Net income will increase by 152000+246000=398000