Question 5: (22 points) Part A: The Trek Bicycle Corporation manufactures bicycles and has three product lines: Model A, Model B, and Model C. Data on sales and expenses are as follows: Model A Model B Model C 1,000 units 2,000 units 1,000 units Sales $100,000 $400,000 $100,000 Less: Variable manufacturing and selling 50,000 350,000 75,000 expense Contribution margin 50,000 50,000 25,000 Less: Fixed expenses Depreciation of special equipment 10,000 10,000 10,000 Salaries of product-line managers 4,000 15,000 5,000 General factory overhead* 10,000 5,000 10,000 General administrative expense* 5,000 5,000 10,000 Total fixed expenses 29,000 35,000 35,000 Net operating income $21,000 $15,000 S(10,000) ^ All equipment has no resale value. * General factory overhead and general administrative expense are common fixed costs allocated based on direct labor hours. Required: (a) Due to fluctuations in market demand, managers estimate that the sales of Model A would significantly decrease in the future. Managers are thinking about discontinuing the production of Model A. At what levels of future sales of Model A would managers be indifferent between keeping and dropping this product line? Show computations and explain your answers. (5 points) 7 8/10 (b) As the reported income of Model C is negative, managers are thinking about dropping Model C and replacing it with a new product line, Model D. Managers estimate that they can sell 2,000 units of Model D at a price of $150 each. The existing special equipment of Model C would be used to manufacture Model D. The variable manufacturing and selling expense of Model D would be $136 per unit. The company would need to hire a new product-line manager for Model D and the estimated salary of the new manager would be $9,000. The addition of Model D would not involve extra general factory overhead or general administrative expense. Would you recommend that managers replace Model C with Model D2 Show computations and explain your answers. (6 points) (c) Besides the revenues and costs that are mentioned in (b), what other factors do you think managers should consider before making the decision to open a new product line? Explain. Please limit your answers to 300 words. (5 points) Part B: The Modern Electronics Company sells electronic devices. Currently the company sells a single model, Device 1. The selling price is $100 each. Managers estimate that the market demand for Device 1 is 5,000 units each year, but production is constrained by the capacity of a special machine. A total of 2,000 hours is available annually on the machine. The production of each unit of Device 1 requires 0.5 hours of machine time. Managers are considering the following options. First, the company can purchase additional units of Device 1 from an outside supplier. The supplier can provide up to 5,000 units of Device 1 per year at a price of $85 per unit. The company can resell the units to customers after proper relabelling. Second, the company can use the special machine to manufacture another model, Device 2, which would require 1 hour of machine time per unit. Managers forecast that they can sell 10,000 units of Device 2 each year at a price of $200 per unit. Device 2 Data on variable costs of the two devices are as follows: Device 1 Variable costs per unit Direct materials $50 Direct labor 20 Manufacturing overhead 10 Selling and administrative expense 10 $150 30 5 5 In addition to the variable costs above, the annual fixed manufacturing overhead is $20,000 and the annual fixed selling and administrative expense is $5,000. Required: What would you recommend to managers as to how many units of Device 1 (if any) should the company purchase from the outside supplier and how many units of Device 1 and Device 2 (if any) should the company manufacture? What is the income that would result from this plan? Show computations and explain your answers. (6 points) 8 Question 5: (22 points) Part A: The Trek Bicycle Corporation manufactures bicycles and has three product lines: Model A, Model B, and Model C. Data on sales and expenses are as follows: Model A Model B Model C 1,000 units 2,000 units 1,000 units Sales $100,000 $400,000 $100,000 Less: Variable manufacturing and selling 50,000 350,000 75,000 expense Contribution margin 50,000 50,000 25,000 Less: Fixed expenses Depreciation of special equipment 10,000 10,000 10,000 Salaries of product-line managers 4,000 15,000 5,000 General factory overhead* 10,000 5,000 10,000 General administrative expense* 5,000 5,000 10,000 Total fixed expenses 29,000 35,000 35,000 Net operating income $21,000 $15,000 S(10,000) ^ All equipment has no resale value. * General factory overhead and general administrative expense are common fixed costs allocated based on direct labor hours. Required: (a) Due to fluctuations in market demand, managers estimate that the sales of Model A would significantly decrease in the future. Managers are thinking about discontinuing the production of Model A. At what levels of future sales of Model A would managers be indifferent between keeping and dropping this product line? Show computations and explain your answers. (5 points) 7 8/10 (b) As the reported income of Model C is negative, managers are thinking about dropping Model C and replacing it with a new product line, Model D. Managers estimate that they can sell 2,000 units of Model D at a price of $150 each. The existing special equipment of Model C would be used to manufacture Model D. The variable manufacturing and selling expense of Model D would be $136 per unit. The company would need to hire a new product-line manager for Model D and the estimated salary of the new manager would be $9,000. The addition of Model D would not involve extra general factory overhead or general administrative expense. Would you recommend that managers replace Model C with Model D2 Show computations and explain your answers. (6 points) (c) Besides the revenues and costs that are mentioned in (b), what other factors do you think managers should consider before making the decision to open a new product line? Explain. Please limit your answers to 300 words. (5 points) Part B: The Modern Electronics Company sells electronic devices. Currently the company sells a single model, Device 1. The selling price is $100 each. Managers estimate that the market demand for Device 1 is 5,000 units each year, but production is constrained by the capacity of a special machine. A total of 2,000 hours is available annually on the machine. The production of each unit of Device 1 requires 0.5 hours of machine time. Managers are considering the following options. First, the company can purchase additional units of Device 1 from an outside supplier. The supplier can provide up to 5,000 units of Device 1 per year at a price of $85 per unit. The company can resell the units to customers after proper relabelling. Second, the company can use the special machine to manufacture another model, Device 2, which would require 1 hour of machine time per unit. Managers forecast that they can sell 10,000 units of Device 2 each year at a price of $200 per unit. Device 2 Data on variable costs of the two devices are as follows: Device 1 Variable costs per unit Direct materials $50 Direct labor 20 Manufacturing overhead 10 Selling and administrative expense 10 $150 30 5 5 In addition to the variable costs above, the annual fixed manufacturing overhead is $20,000 and the annual fixed selling and administrative expense is $5,000. Required: What would you recommend to managers as to how many units of Device 1 (if any) should the company purchase from the outside supplier and how many units of Device 1 and Device 2 (if any) should the company manufacture? What is the income that would result from this plan? Show computations and explain your answers. (6 points) 8
