Part 1 - Add/Drop Product Line Decisions - 10 points Oliver Perry LLC Budgeted Segment Income Total Product A Product B Product C Sales Revenue $ 100,000 $ 20,000 $ 30,000 $ 50,000 Less: Variable Costs $ 52,000 $12,000 $ 18,000 $ 22,000 Contribution Margin $ 48,000 $ 8,000 $ 12,000 28,000 Less: Fixed Costs: Direct Fixed Costs $ 13,000 $ 1,000 $ 6,000 $ 6,000 Common Fixed Costs $ 30,000 $ 6,000 $ 9,000 $ 15,000 Total Fixed Costs $ 43,000 $ 7,000 $ 15,000 $ 21,000 Operating Income $ 5,000 $ 1,000 $ (3,000) $ 7,000 Management of the firm is considering dropping Product B thinking that by avoiding a $3,000 loss, the firm will increase income to $8,000. However, included in the fixed costs is a $30,000 common fixed cost that will remain regardless of which products are produced and sold. The cost has been allocated to the three product lines on the basis of Sales Revenues (20% to Product A, 30% to Product B and 50% to Product C). The remaining fixed costs are direct fixed costs for each product line. These direct fixed costs will go away if the firm drops a product line. 1. By how much will total income increase or decrease if Product B is dropped? Provide an analysis to support your answer 2. The firm, as is reported above, is operating at capacity. However, by producing all three products Perry is unable to meet the demand for Product C. Assume if product B is dropped the firm can increase production and sales of Product C by 30%. By how much will total income increase or decrease if Product B is dropped and production and sales of Product C increases by 30? Provide an analysis to support your answer. Part 2 - Make/Buy Decision The Winston Company has a need for 1,000 units per month of part 204. Based on production of 1,000 units, the accountants have provided the following cost per unit: 200 Direct Materials $300 Supervision and Labor Variable overhead 100 Fixed overhead 150 Total cost $750 The Galway Company has offered to produce the parts for $675/unit (a total cost of $675,000 per month). The fixed factory overhead assigned to part 204 includes an allocation of common fixed costs totaling $100,000. The total common fixed costs will not change if Winston ceases to produce part 204 and purchase it from Galway. All other costs are attributable to part 204 and will not be incurred if Winston ceases to produce part 204 and purchase it from Galway. Part 3 - Constrained Resource Example: Suppose McFeely & Rogers LLC has the following data concerning their three products: McFeely & Rogers LLC Production and Demand Data Product A Product B Froduct C Selling Price/unit $ 100.00 $ 150.00 $ 260.00 Variable Costs/unit $ 60.00 $ 75.00 $ 170.00 Unit Contribution Margins 40.00 $ 75.00 $ 90.00 Direct labor hours/unit Maximum demand Required hours 2 hours 200 units 400 hours 3 hours 75 units 225 hours 6 hours 50 units 300 hours The firm can sell at most the number of units given by the maximum demand. As is shown, each unit of A, for example, requires two hours. To produce the 200 units demanded would require 400 hours To produce all three products to demand would require 925 direct labor hours (400 hours for A, 225 hours for Band 300 hours for C). Suppose the firm has available only 745 hours, how much of each product should be produced? What is the total contribution margin earned
