Question

Elsinore Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment; Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 87,000 units per year. These units require 3 direct labor-hours each.

If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 75,000 of these units per year.

If Mobile does not obtain 75,000 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile's audio system. The units can be sold to the outside market for $202 each.

Home estimates that its total costs are $1,040,000 for fixed costs, $14.40 per direct labor-hour, and $7.20 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year.

Required:

Determine the following:

a. Total contribution margin to Home if it sells 87,000 units outside. (Do not round intermediate calculations.)

b. Total contribution margin to Home if it sells 75,000 units to Mobile. (Do not round intermediate calculations.)

(c) & (d). The costs to be considered in determining the optimal company policy for sales by Home.

The annual contributions and costs for Home and Mobile under the optimal policy.

Home Mobile Company

Sales by Home to Outside

Sales by Home to Mobile

Sales by Mobile to Outside

Total Sales

Cost of Materials ect in Home

Cost of labor In Home

Cost of Units Xfered to Mobile

Cost of units purchased from outside by mobile

conversion cost in mobile

contribution

Answer 1

a)	Contribution - Home sells 87000 units outside
	Sale Price p.u.		72.00
	Less:	Variable cost p.u.	7.20
		Direct labour p.u. (14.40 per hour * 3 hr)	43.20
	Contribution p.u.		21.60
	Total no. Of units sold outside		87000
	Total contribution		1879200.00	(Contribution p.u. * no. Of units)
b)	Contribution - Home sells 75000 units to Mobile
	Sale Price p.u.		81.00
	Less:	Variable cost p.u.	7.20
		Direct labour p.u. (14.40 per hour * 4 hr)	57.60	(1 additional labor hr)
	Contribution p.u.		16.20
	Total no. Of units sold outside		75000
	Total contribution		1215000.00
c)	Optimal Company Policy
	(A)	Limiting Factor - Labour hours	375000	hrs
	(B)	Variale cost per labour hour	14.40	$
	(C)	Contribution from sale to outsiders	1879200.00	$
	(D)	Total labour hours required (3*87000)	261000	hrs
	(E)	Contribution per labour hour (D/C)	7.20	$
	(F)	Contribution from sale to Mobile unit	1215000.00	$
	(G)	Total labour hours required (4*75000)	300000	hrs
	(H)	Contribution per labour hour (G/F)	4.05	$
		Increase in contribution of Mobile dept due to internal transfer (84-81)
			3.00	$
		Decrease in contribution for 1 additional direct labour hour diverted to internal transfer (7.2-4.05)
			3.15	$
		Contribution loss	0.15	$
	If internal requirement of mobile department is fulfilled first, there will be a contribution loss of $ 0.15 per labour hour to the company for each unit sold to mobile department
	Therefore, the company should firstly fulfill market demand and alloted remaining labour hours to production for internal transfer to Mobile department
d)	Values under optimal Policy, i.e., option II above
	(A)	Sales by Home to Outside	87000 * 72	6264000.00
	(B)	Sales by Home to Mobile	28500 * 81	2308500.00
	(C)	Sales by Mobile to Outside	75000 * 202	15150000.00
	(D)	Total Sales	(A+B+C)	23722500.00
	(E)	Cost of material in Home	(87000+28500)*7.20	831600.00
	(F)	Cost of labour in Home	375000 * 14.40	5400000.00	(fully utilised)
	(G)	Cost of units transferred to Mobile (labour + material)	28500*(57.60+7.20)	1846800.00
	(H)	Cost of units purchased from outside by mobile	46500 * 84	3906000.00
	(I)	Conversion cost in Mobile	75000 * 36	2700000.00
	(J)	Total cost	(E+F+H+I)	12837600.00
	(K)	Total contribution		10884900.00