This is an introductory "assignment" for an accounting class that starts Monday. I do not turn it in and it is not graded, this is just to familiarize myself with accounting. I was hoping someone could answer the questions just so I can make sure I am on the right track. Thank you!!

Joshua Chicarelli recently accepted a position as the controller of California Corporation, a company that produces three distinct types of computers. Contribution margin information on the computers is presented in table 1, as seen below. In addition, table 2 below details the annual information for each computer. California Corporation is currently having financial difficulty and is trying to determine how to better position themselves in the industry. Using the capacity information below, and the cost information presented in table 1, answer Joshua Chicarelli's questions related to decisions to be made at California Company (NOTE: the questions are listed at the end of the document).

TABLE 1:

	Effective Computer	Gaming Computer	Budget Computer
Sales Price (per computer)	2,100	2,500	525
Variable MFG cost per unit
Direct Materials	325	500	100
Direct Labor	600	700	125
Variable overhead	200	250	75
Total Variable MFG cost per unit	1,125	1,450	300
Contribution margin per unit	975	1,050	225

Table 2:

	Executive Computer	Gaming Computer	Budget Computer
Revenue from sales for the year	10,500,000	5,000,000	3,675,000
Variable costs
Direct Materials	1,625,000	1,000,000	700,000
Direct Labor	3,000,000	1,400,000	875,000
Variable Overhead	1,000,000	500,000	525,000
Total Variable MFG cost per unit	5,625,000	2,900,000	2,100,000
Contribution margin on the year	4,875,000	2,100,000	1,575,000
Product related fixed cost (annual)	2,500,000	1,000,000	580,000
Product Profitability	2,375,000	1,100,000	800,000
Administrative fixed costs allocated	700,000	1,250,000	(75,000)
Profitability after administrative fixed costs	1,675,000	(150,000)	(75,000)

ADMINISTRATIVE FIXED COSTS ALLOCATED: These costs represent costs that are not related to the computers at all. They are administrative costs of running the business (period costs). Regardless of production or sales, these costs will be incurred at this level, no matter what. They are allocated to each computer utilizing a system derived by the former controller. Discontinuing any of these computers will not impact the administrative fixed costs.

CAPACITY INFORMATION:

Currently, California Corporation has the capacity to make (NOTE: adjusting the capacity of one computer does not impact the capacity for any other computer, they are each independent of each other):

5,000 Executive Computers

2,000 Gaming Computers

7,000 Budget Computers

QUESTIONS:

1. Since the gaming computer and the budget computer are both showing a loss after allocating fixed administrative costs, should they stop producing those two products? Why?

2. California Corporation has the option to adjust capacity for each computer. Given the following information, determine whether California Corporation should make these adjustments. PLEASE NOTE, EACH OF THESE OPTIONS IS INDEPENDENT OF THE OTHER TWO, MEANING THAT YOU SHOULD EVALUATE THE EXECUTIVE COMPUTER OPTION ASSUMING THAT GAMING AND BUDGET COMPUTERS ARE AS STATED IN THE ORIGINAL PROBLEM. THEN EVALUATE THE GAMING COMPUTER ASSUMING THAT EXECUTIVE AND BUDGET COMPUTERS ARE AS STATED IN THE ORIGINAL PROBLEM, ETC.:

Executive Computer: California Corporation is able to increase its capacity to produce executive computers, but it would need to purchase additional equipment. If they do so, they would be able to produce and sell an additional 500 executive computers per year. This would increase product related fixed costs by $450,000.

Gaming Computer: California Corporation is able to reduce their cost to produce gaming computers if they use a lower level processor. If they do this, their direct materials per computer would be reduced to $300 per computer. However, they would only produce and sell 1,200 computers due to the perceived reduction in quality. All fixed costs would stay the same in this scenario.

Budget Computer: California Corporation is able to increase their capacity to produce budget computers by purchasing a new machine. If they do this, they will be able to produce and sell an additional 1,000 budget computers. This would increase their product related fixed costs by $150,000.