Question
QWERT is a company that manufactures 3 products: M, NY and FY. The company is divided in 3 profit centers, each producing one product. Until
QWERT is a company that manufactures 3 products: M, NY and FY. The company is divided in 3 profit centers, each producing one product. Until now, each division has to satisfy, firstly, the internal demand before it can satisfy the demand from the external market. The selling price for internal or external demand is the same.
Two units of PRODUCT M are needed to produce one unit of PRODUCT NY and one unit of PRODUCT NY is needed to produce one unit of PRODUCT FY.
NOTE. PRODUCT FY is made using PRODUCT NY & PRODUCT F.
- The expected Profit & Loss Account for next year is as follow:
Table A | PRODUCT M | PRODUCT NY | PRODUCT FY |
Sales | 400.000 | 200.000 | 350.000 |
Direct materials | |||
Gross PRODUCT M | 200.000 | - | - |
PRODUCT M | - | 100.000 | - |
PRODUCT NY | - | - | 200.000 |
PRODUCT F | - | - | 20.000 |
Other variable costs | 150.000 | 20.000 | 80.000 |
Contribution margin | 50.000 | 80.000 | 50.000 |
Fixed costs | 30.000 | 20.000 | 10.000 |
EBT | 20.000 | 60.000 | 40.000 |
- Other information:
Table B | PRODUCT M | PRODUCT NY | PRODUCT FY |
External Demand (units) | 300.000 | 100.000 | 50.000 |
Internal Demand (units) | 100.000 | 50.000 | 0 |
Installed capacity (units) | 500.000 | 50.000 | 100.000 |
Used capacity | 80% | 100% | 50% |
Market selling price per unit | 1 | 4 | 7 |
Number of machine hours used per unit produced | 1 | 3 | 2 |
However, due to the damage of a machine (used to produce all the 3 products), the capacity of production will have to be reduced to 200.000 Machine hours.
- Which product mix will maximize the profit for the company as a whole? What is the expected contribution margin?
Imagine now that the company could repair/fix the machine on time of the production for next year, and the installed capacity available is the one mentioned in Table B.
The PRODUCT NY division receives a special order for a new client that is willing to pay 50.500 for it. This order requires 20.000 units of PRODUCT M and 23.000 of other variable costs. If the division accepts this special order, it will reduce the production of PRODUCT NY in 5.000 units.
Thinking the Company as a whole, do you think it should accept this special order? Show your supporting calculations.
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Horngrens Financial And Managerial Accounting
Authors: Tracie Miller Nobles, Brenda Mattison, Ella Mae Matsumura
6th Edition
0134486838, 978-0134486833
