CVP Analysis under Uncertainty: Wing Manufacturing Corporation produces a chemical compound, product X, which deteriorates and must be discarded if it is not sold by the end of the month during which it is produced. The total variable cost of the manufactured compound, product X. is $50 per unit, and its selling price is $80 per unit. Wing can purchase the same compound from a competing company at $80 per unit plus $10 transportation peri unit. Management estimates that failure to fill orders would result in the loss of 80 percent of customers placing orders for the compound. Wing has manufactured and sold product X for the past 20 months. Demand for the product has been irregular, with no consistent sales trend. During this period, monthly sales have been as follows:

To produce product X. Wing uses a primary ingredient. K-1. which it purchases for $24 per unit of compound. There is a 70 percent chance that the supplier of K-1 may be unable to deliver the ingredient for an indefinite period. A substitute ingre- dient, K-2, is available at $36 per unit of compound, but a firm purchase contract for either material must be made now for production next month. If an order was placed for K-1, but it was unavailable. then management would have to purchase product X from a competitor and sell it at a loss. (Otherwise, it would permanently lose important customers.) Assume that 9.000 units are to be manufactured and all sales orders are to be filled.

Required:

a. Compute the monthly contribution margin from sales of 8,000; 9,000; and 10,000 units if the substitute ingredient, K-2. is ordered. What is the expected contribu- tion if K-2 is ordered?

b. Prepare a schedule computing the expected monthly contribution margin if the primary ingredient, K-l, is ordered, given the chance of nondelivery. For this requirement, assume that the expected average monthly contribution margin from manufacturing is $130,000 using K-l and the expected average monthly loss from purchasing product X from the competitor is $45,000.

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Units Sold per Month Probabilities 8,000 .25 9,000 .60 10,000 .15