Aare Terra, Inc. produces two batteries. high capacity and low capacity Management would like to know the optimal sales mix based on the following data: Raw materials consist of casings and lithium ion cells. Lithium-ion cells cost $50 each. There are 30 cells in the HighCap battery and only 12 in the LowCap. The casings for the LowCap cost $500 each, and the casings for the HighCap cost $800 each It takes 25 hours of Direct labor to assemble a HighCap and 20 hours to assemble a LowCap. The standard labor rate is $40 per hour. The main constraint on production is the size of the facility, which is 8,000 square feet, of which 6,000 is dedicated to HighCap production and 2,000 to LowCap. The company prefers to manufacture HighCap because it is used in Tesles and other high-profile cars. Fixed costs are currently as follows: Fixed costs per month Sales Salary Selling, General, and Administrative Production facility rent Total $12.000 $90,000 $10,000 $112,000 The company currently sells 50 HighCap batteries per month and 100 Low Cap. HighCap sell for $8,000 each, and LowCap sell for $4,000. 1. Create a current contribution margin income statement with allocated fixed costs. Allocate Sales Salary and SG&A using units sold, and Production Facility Rent using square footage. HighCap LowCap Total Production facility Square feet Allocation rate HighCap LowCap Total Current Sales Volume Allocation rate HighCap LowCap Variable Costs per unit Casings Lithium-Ion cells Labor per assembled battery High Cap Lowen Total Fixed costs per month Sales Salary Selling, General, and Administrative Production facility rent allocated based on units sold allocated based on units sold allocated based on square footage Rare Terra, Inc. Product Mix CVP Analysis (month) HighCap LowCap Total Sales Variable costs Contribution Margin Fixed costs Operating income 2. How many units of HighCap could the company produce if it shifted all production space to that product line? a. Current production Space square feet Current production units Production space per unit b. Total production space square feet Production space per unit Total capacity units 3. How many units of LowCap could the company produce if it shifted all production space to that product line? a. Current production space square feet Current production units Production space per unit b. Total production space square feet Production space per unit Total capacity units 4. Calculate the contribution margin per unit for the constraint (production facility space): HighCap LowCap Units produced Square feet of space Units produced per SF Contribution margin/unit Contribution margin/SF Capacity Total CM at Capacity 5. Create a contribution margin income statement for Rare Terra, Inc. if it shifts all of its production to LowCap, assuming there is enough market demand to absorb the extra production: Rare Terra, Inc. Product Mix CVP Analysis (month) Units 0 400 HighCap LowCap Total Sales Variable costs Contribution Margin Fixed costs Operating income
