Question

Walton Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company’s chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment’s operating activities. The relevant range for the production and sale of the calculators is between 34,000 and 72,000 units per year.

Revenue (45,000 units × $11.00)	$	495,000
Unit-level variable costs
Materials cost (45,000 × $3.00)		(135,000	)
Labor cost (45,000 × $2.00)		(90,000	)
Manufacturing overhead (45,000 × $0.30)		(13,500	)
Shipping and handling (45,000 × $0.25)		(11,250	)
Sales commissions (45,000 × $2.00)		(90,000	)
Contribution margin		155,250
Fixed expenses
Advertising costs		(31,000	)
Salary of production supervisor		(67,000	)
Allocated company-wide facility-level expenses		(83,000	)
Net loss	$	(25,750	)

Required

a. A large discount store has approached the owner of Walton about buying 7,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Walton’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $5.80 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Walton accept the special order?

b-1. Walton has an opportunity to buy the 45,000 calculators it currently makes from a reliable competing manufacturer for $6.50 each. The product meets Walton’s quality standards. Walton could continue to use its own logo, advertising program, and sales force to distribute the products. Calculate the total cost for Walton to make and buy the 45,000 calculators.

b-2. Should Walton buy the calculators or continue to make them?

b-3. Should Walton buy the calculators or continue to make them, if the volume of sales were increased to 72,000 units?

c. Because the calculator division is currently operating at a loss, should it be eliminated from the company’s operations? Specifically, by what amount would the segment’s elimination increase or decrease profitability?

Complete this question by entering your answers in the tabs below.

• Required A
• Required B1
• Required B2
• Required B3
• Required C

A large discount store has approached the owner of Walton about buying 7,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Walton’s existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $5.80 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Walton accept the special order? (Negative amounts should be indicated by a minus sign.)

Answer 1

Please refer the following image for the solution: