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Sell-or-Process-Further Decision Humbolt Electric manufactures electronic subcomponents that can be sold at the end of Process 1 or processed further, in Process 2, and then
Sell-or-Process-Further Decision Humbolt Electric manufactures electronic subcomponents | ||
that can be sold at the end of Process 1 or processed further, in Process 2, and then sold. Currently, | ||
the entire output of Process 1 can be sold at a price of $2 per unit. The output of Process 2 has in | ||
the past sold for $5.50 per unit; however, the selling price of this output has recently dropped to | ||
$5.10 (on average). | ||
On the basis of an analysis of the preceding cost and selling price information, as well as an | ||
analysis of market trend data, the VP of marketing has suggested that output from Process 2 should | ||
be curtailed whenever the price of its output falls below $4.50 per unit. The VP of manufacturing | ||
has indicated that the total available capacity is interchangeable between the two processes. | ||
(That is, fixed manufacturing costs are largely independent of decisions regarding short-term product | ||
mix.) He recommends that, based on current prices, all sales should be from Process 2 output. | ||
His analysis follows: | ||
Output of Process 1 | Output of Process 2 | |
Selling price per unit $2.00 $5.10 | $ 2,00 | $ 5,10 |
Unit costs: | ||
Direct materials (DM) 1.00 1.50 | $ 1,00 | $ 1,50 |
Direct labor (DL) 0.20 0.40 | $ 0,20 | $ 0,40 |
Manufacturing overhead 0.60 1.20 | $ 0,60 | $ 1,20 |
Transferred-in variable costs from | ||
Process 1 (DM + DL) N/A 1.20 | N/A | $ 1,20 |
Operating profit $0.20 $0.80 | $ 0,20 | $ 0,80 |
Direct materials (DM) and direct labor (DL) are variable costs. All manufacturing overhead costs | ||
are fixed and are allocated to units produced based on hours of capacity used. | ||
Total hours of capacity available are 600,000. The products are produced in batches of 60 units. | ||
Each batch of output from Process 1 requires 1 hour of processing; each batch of output from | ||
Process 2 requires 2 additional hours of processing. | ||
Required | ||
1. Develop a schematic diagram of the two-stage production process. Include in your diagram relevant | ||
revenue (selling price per unit) as well as relevant costs (per unit of output). | ||
2. Assume that the per-unit selling price for output from Process 2 for the coming year is expected to be | ||
$5.10. (a) What is the contribution margin per hour for output from Process 1 (rounded to 2 decimal | ||
places)? (b) What is the contribution margin per hour for output from Process 2 (rounded to 2 decimal | ||
places)? (c) What is the implication of this information if the goal of the company is to maximize shortterm | ||
operating income? | ||
3. What is the lowest acceptable selling price per unit (to 2 decimal places) for the output from Process 2 | ||
to make this output (in total) as profitable (in total) as the output from Process 1? | ||
4. Suppose that 50% of the manufacturing overhead costs are variable. (a) What is the revised contribution | ||
margin per hour (rounded to 2 decimal places) for output from Process 1? (b) What is the revised | ||
contribution margin per hour (to 2 decimal places) for output from Process 2? (c) Does your answer to | ||
requirement 2 change, based on these revised calculations? | ||
5. Sensitivity analysis: (a) Calculate the contribution margin per processing hour (to 2 decimal places) | ||
for both Process 1 output and Process 2 output under each of the following assumptions regarding the | ||
percentage of variable overhead costs: 0%, 25%, 50%, and 100%. Perform these calculations for Process | ||
2 output both for a selling price of $5.10 per unit and a selling price of $5.50 per unit. (b) What general | ||
conclusion can you draw on the basis of this sensitivity analysis? |
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