The Gant Company

AND

Excalibur

The Gant Company produces three items in its manufacturing plant. The plant has a total capacity of 9,600 minutes per month for production. The following information is provided for the products:

Products

X Y Z

Direct material $16 $10 $14

Direct labor (all variable) 15 14 15

Variable overhead 2 3 4

Fixed overhead 20 23 30

Unit cost $53 $50 $63

Minutes required per unit 5 4 6

Selling price per unit $70 $65 $80

Variable selling expense per unit $5 $4 $2

Monthly demand in units 2,200 1,000 800

Required:

1. How many minutes would be required to meet the demand for all three products?

2. How many units of each product should Gant produce to maximize profit? Show your calculations!

Excalibur

Excalibur received an order for a piece of special machinery from Rex Company. Just as Excalibur completed the machine, Rex Company declared bankruptcy, defaulted on the order, and forfeited the 10% deposit paid on the selling price of $217,500.

Excalibur's manufacturing manager identified the costs already incurred in the production of the special machinery for Rex Company as follows:

Direct materials $49,800

Direct labor 64,200

MOH applied:

Variable 32,100 Fix 16,050 48,150

Fixed S&A 16,215

Total $178,365

Another company, Kaytell Corporation, will buy the special machinery if it is reworked to Kaytell's specifications. Excalibur offered to sell the reworked machinery to Kaytell as a special order for $205,200. Kaytell agreed to pay the price when it takes delivery in two months. The additional identifiable costs to rework the machinery to Kaytell's specifications are as follows:

Direct materials $18,600

Direct labor 12,600 $31,200

A second alternative available to Excalibur's management is to convert the special machinery tothe standard model, which sells for $187,500. The additional identifiable costs for this conversion are as follows:

Direct materials $8,550

Direct labor 9,900

$18,450

A third alternative for Excalibur is to sell the machine as is for a price of $156,000. However, the potential buyer of the unmodified machine does not want it for 60 days. This buyer has offered a $21,000 down payment, with the remainder due upon delivery.

The following additional information is available regarding Excalibur's operations.

The allocation rates for MOH and fixed S&A costs are:

Manufacturing costs:

Variable 50% of direct-labor cost

Fixed 25% of direct-labor cost

Fixed S&A 10% to the total of direct-material, direct-labor and MOH costs

The sales commission rate on salaries of standard models is 2%, while the rate on special orders is 3%.

normal credit terms for sales of standard models are 2/10, net/30. This means that a customer reveices a 2% discount if payment is made within 10 days, and payment is due no later than 30 days after billing. Most customers take the 2% discount. Credit terms for a special order are negotiated with the customer.

Normal time required for rework is one month.

Required:

1. Determine the dollar contribution each of the three alternatives will add to Excalibur's before-tax profit.

2. If Kaytell makes Excalibur a counteroffer, what is the lowest price Excalibur should accept for reworked machinery from Kaytell? Explain your answer.

3. Discuss the influence fixed manufacturing-overhead cost should have on the sales price quoted Excalibur for special orders.