ABC Inc. manufactures connectors for the electrical industry. The firm is not at full capacity in their manufacturing plant. They are currently manufacturing 500,000 connectors per year which is 80% of the plants for capacity. The firm has been offered a contract that will bring the plant to full capacity. The contract will require a quantity discount of 15% off the sale price of the connectors that are purchased under the contract. Assume that the contract is for one full year. To make a decision to accept or reject the offer the CEO of ABC Inc. has asked the cost accounting department provide her with a contribution margin (variable cost) Income statement for the last fiscal year which is below: ABC Inc. Contribution Income Statement for last fiscal year Prce/Cost Units per Unit Total Sales: 500,000 $ 15.00 $ 7,500,000 Less: Variable Costs Raw Matl 500,000 $ 3.00 $ 1,500,000 Drect Lab 500,000 $ 6.00 $ 3,000,000 Var. MFO 500,000 $ 0.50 $ 250,000 Var. Sellir 500,000 $ 0.20 $ 100,000 Var. G&A 500,000 $ 0.30 $ 150,000 Total Variable Cost $ 5,000,000 Contribution Margin $ 2,500,000 Fixed Cost: Fixed MFOH $ 1,000,000 Fixed Selling Cost 200,000 Fixed G&A 150,000 Total Fixed Cost $ 1,350,000 Profit (Loss) $ 1,150,000 Require: Using Contribution Margin analysis, determine if ABC Inc. sould accept the contract. MANAGERIAL ACCOUNTING Required contribution margin problem 2. MegCo Inc. manufactures 3 different product lines of model ships, the HMS Compass Rose, the U-345, and the U.S. Fitzgerald. All three product lines use the same manufacturing process using automated injection molding machines to mold the components of the models. Each of the product lines is managed by a product line manager who is responsible for both the sales and the manufacturing of the models. The manufacturing plant is at full capacity an does not have the space to expanded the production capacity of any of the three product lines. Currenly the Contribution Margin for the HMS Compass Rose is 49%, the U-345 is 39% and the U.S. Fitzgerald Is 17%. Much of the companies business is in the UK and the two largest selling models are the HMS Compass Rose and the U-345. The product line manager of the HMS Compass Rose has been approached by a large distributer of ship models in the UK that want to offer a 1 year contract to the company to buy additional models of the HMS Compass Rose. If accepted, the contract will increase the sale and production of the HMS Compass Rose by 20% a year. Currently the Contribution Margin for the HMS Compass Rose is 49%, the U-345 is 39% and the U.S. Fitzgerald is 22% Since the manufacturing plant is at full capacity and cannot be expanded, the Compass Rose Product Line manager has asked the Controller of the company to provide to her with a Contribution Margin Income Statement for the company by product line and in total for the corporation. The Controller has provided her with a Contribution Margin income statement based on last years results. The current year is expereancing the same kind of results as last year Compass Rose U-345 Fitzgerald Corp Total SALES 3,500,000 $ 2,000,000 $ 1,800,000 $ 7.300.000 VAR COST 1,800,000 $ 1,220,000 $ 1.250.000 $ 4.270.000 CONTRIBUTION MARGIN S 1,700,000 $ 780.000 $ 550.000 $ 3,030,000 ALLOCATABLE FIXED COST 49% 39% 31% RENT 500,000 $ 450,000 $ 350,000 $ 1,300,000 MANAGERS SALARIES 350,000 $ 250,000 $ 150,000 $ 750,000 TOTAL FIXED PROD LN COST 850,000 $ 700,000 $ 500,000 $ 2,050.000 PROFIT BY PRODUCT LINE 850,000 $ 80,000 $ 50,000 $ 980,000 CORPORATE FIXED COST $ 526,000 CORPORATE PROFIT $ 454,000 Utilizing the information above, the Product Line manager has suggested to the CEO, that she be allowed to accept the contract. She has calculate that she could increase her production capacity by taking over all of the manufacturing capacity currently being used to produce the Fitzgerald product line and 10% of the U-345 product line. She would eliminate the the management of the line and save the company $150,000 a year. She reminded the CEO that the Fitzgerald product line is losing money. Even taking over the Fitzgerald production capacity she would need more capacity to increase her total production by 20%. To get to the total capacity she would need the additional 10% of the U-345 manufacturing capacity. She would not reduce the management of the line. You have been hired as a consulting CFO to the company. The CEO has asked you to review the proposals and make a recommendation using the information the Controller has provided as to whether or not the company should accept the Compass Rose product line proposal. Required: Produce a new Contribution Margin Income Statement incorporating the proposal of the Compass Rose's Product Line manager. The fixed corporate cost cannot be eliminated