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Musical Co. manufactures three types of musical instruments, Doh Rae, and Mee. The budgeted information for one unit of musical instrument for 2021 is below.
Musical Co. manufactures three types of musical instruments, Doh Rae, and Mee. The budgeted information for one unit of musical instrument for 2021 is below. Doh 3,500 Rae 4,000 Mee 2,500 Estimated annual demand (in units) Other information (per unit) Sales price Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Fixed selling and admin expenses Machine time required $340 90 75 $200 70 30 40 35 10 1 hour 55 $480 100 60 70 150 40 2 hours 60 20 2.5 hours Required (Treat each of the following situations independently) (a) (5 marks) Musical Co. received an offer from a supplier to make 3,500 units of Doh at a price of $150 per unit. Musical Co. will pack the product from the supplier at a labour cost of $6 per unit. The facilities that will be freed-up can be used to make 1,000 units of another instrument (Fah) which has a unit contribution margin of $80. Should Musical Co. accept the offer? Using incremental analysis, show the amount that it will gain or lose from this new offer. (b) (8 marks) Musical operates in a competitive market. The maximum number of instruments that Musical can sell each year is the estimated annual demand given in the table above. Assume that the company has only 14,000 machine hours available to manufacture the three products. Recommend to management the products that should be manufactured in order to maximize the company's net income. What is the total contribution margin that the company will make based on your recommended choice of products? Will your recommendation change if the company has 20.000 machine hours? Explain
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