EKY8-1

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%

of estimated capacity, which is thought to be limited by the number of machine hours available. At

current operation levels, a profit analysis for each product line shows the following:

Per-unit Data

Automatic Manual

Sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350 $150

Production costs:

Direct material. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $65 $32

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 25

Variable manufacturing overhead. . . . . . . . . . . . . . . . . . . 68 16

Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . 50

$218 18 $ 91

Variable operating expenses . . . . . . . . . . . . . . . . . . . . . . . . 52 21

Fixed operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 30

13

Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300 $125

Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50 $ 25

Management wants to make use of the companys current excess capacity by increasing production.

Each unit of the automatic model requires 2.5 machine hours; the manual model requires 1 machine

hour per unit.

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 firms net

income is the decision basis.

3. What general decision guideline applies in this situation?

b. Suppose the excess capacity represents 10,000 machine hours, which can be used to make

4,000 automatic units or 10,000 manual units or any proportionate combination. The only

market available for these extra units is a foreign market in which the sales prices must be

reduced by 20% and in which no more than 6,000 units of either model can be sold. All

costs will remain the same except that the sales commission of 10% (included in the variable

operating expenses) will be avoided. Prepare an analysis showing which product should be

emphasized and the effect on the firms net income.

c. Assume that the excess capacity can be used as indicated in requirement (b) and that the

firms 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 prices

if a promotion campaign costing $225,000 is undertaken for the automatic model or $235,000

for the manual model. Prepare an analysis indicating for which product the campaign should

be undertaken.

EKY8-1. 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% of estimated capacity, which is thought to be limited by the number of machine hours available. At current operation levels, a profit analysis for each product line shows the following: Per-unit Data Automatic Manual Sales price Production costs $350 $150 $65 35 68 $32 25 Direct material.. Variable manufacturing o $218 52 30 $300 $ 50 $ 91 21 Variable operating expenses Fixed operating expenses $125 $ 25 ncome. 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 hours; the manual model requires 1 machine hour per unit. 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? Prepare an analysis showing which product line should be emphasized if the firm's net income is the decision basis 2. 3. What general decision guideline applies in this situation? Suppose the excess capacity represents 10,000 machine hours, which can be used to make 4,000 automatic units or 10,000 manual units or any proportionate combination. The only 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. All costs will remain the same except that the sales commission of 10% (included in the variable 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 prices if a promotion campaign costing $225,000 is undertaken for the automatic model or $235,000 for the manual model. Prepare an analysis indicating for which product the campaign should b. prices must be c