The Oahu Company manufactures electronic subcomponents that can be sold directly or can be processed further into “plug-in” assemblies for a variety of intricate electronic equipment. The entire output of subcomponents can be sold at a market price of $2.20 per unit. The plug-in assemblies have been generating a sales price of $5.30 for three years, but the price has recently fallen to $5.10 on assorted orders.

Janet Oh, the vice president of marketing, has analyzed the markets and the costs. She thinks that production of plug-in assemblies should be dropped whenever the price falls below $4.70 per unit. However, at the current price of

$5.10, the total available capacity should currently be devoted to producing plugin assemblies. She has cited the data below.

Direct materials and direct labour costs are variable. The total overhead is fixed; it is allocated to units produced by predicting the total overhead for the coming year and dividing this total by the total hours of capacity available.
The total hours available are 600,000. It takes one hour to make 60 subcomponents and two hours of additional processing and testing to make 60 plugin assemblies.

1. If the price of plug-in assemblies for the coming year is going to -be $5.30, should sales of subcomponents be dropped and all facilities devoted to the production of plug-in assembles? Show computations.
2. Prepare a report for the vice president of marketing to show the lowest possible price for plug-in assembles that would be acceptable.
3. Suppose 40 percent of the manufacturing overhead is variable with respect to processing and testing time for the plug-in assemblies.
Repeat requirements 1 and 2. Do your answers change? If so, how?

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OAHU AUDIO COMPANY PRODUCT PROFITABILITY DATA SUBCOMPONENTS Selling price, after deducting relevant selling costs $2.20 Direct material $1.10 Direct labour 0.30 Manufacturing overhead 0.60 Cost per unit 2.00 Operating profit $0.20 PLUG-IN ASSEMBLIES Selling price, after deducting relevant selling costs Transferred-in variable cost for subcomponents Additional direct materials $5.30 $1.40 1.45 Direct labour Manufacturing overhead Cost per unit 0.45 1.20 4.50 $0.80 Operating profit *For additional processing to make and test plug-in assemblies.