Chapter 8 Relevant Costs and Short-Term Decision Mak EXTENDING YOUR KNOW Business Decision Case Marvin Corporation manufactures both an automatic and a manual household dehumidifier. Because of limited demand for several years production has been at 80% festimated capacity, which is thought to be limited by the number of machine hours available. At urrent operation levels, a profit analysis for each product line shows the following: Per-unit Data Automatic Manual Sales price Production costs $350 Direct material. $65 35 68 50 $32 Variable manufacturing overhead Fixed manufacturing overhead Variable operating expenses Fixed operating expenses Total cost Operating income $218 52 30 $ 91 Management wants to make use of the company's current excess capacity by increasing production. Each unit of the automatic model requires 2.5 machine hour per unit. hours; the manual model requires 1 machine Required Present answers for the following questions in each independent situation a. Assume that sufficient units of either product can be sold at current prices to utilize existing capacity fully and that fixed costs will not be affected 1. To which product should the excess capacity be devoted if the decision basis is maximi zation of contribution margin per unit of product? 2. Prepare an analysis showing which product line should be emphasized if the firm's net income is the decision basis What general decision guideline applies in this situation? Suppose the excess capacity represents 10,000 machine hours, which can be u 4.000 aut0atic units or 10,000 market available for these extra units is a foreign market in which the sales reduced by 20% and in which no more than 6,000 units of either model can be sold costs will remain the same except that the sales commission of 10% (included in th operating expenses) will be avoided. Prepare an analysis showing which product should be emphasized and the effect on the firm's net income Assume that the excess capacity can be used as indicated in requirement (b) and that the firm's market research department believes that the production available from using the ex cess capacity exclusively on either model can be sold in the domestic market at regular price 3. b. manual units or any proportionate combination. The only prices must be . All he variable C. sting $225,000 is undertaken for the automatic model or $235,000 paign should for the manual model. Prepare an analysis indicating for which product the cam be undertaken. Business Decision Case Hall Manufacturing Corporation makes a new high-tech adhesive in a bottles die product, which currently sells for $20 per gallon. Market single process that blends and demand for but management is not satisfied with the product's seeming t has allocated a $60,000 fund for a program of product troller's office and marketing staff has sought your advice