Chapter 14, Problem 52P

1.

To determine

Calculate Company M’s incremental profit or loss from manufacturing the capes and hand bags in conjunction with the dresses.

Explanation of Solution

Incremental Analysis: Incremental analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

Compute incremental profit:

Figure (1)

Therefore, the incremental profit is $7,585.

Working notes:

(1)Calculate the increase in sale of dress:

$\begin{array}{c}\text{Increase}\text{in}\text{sale}\text{of}\text{dress}\text{=}\left[\text{Existing}\text{number}\text{of}\text{dresses+}\left(\begin{array}{l}\text{Existing}\text{number}\text{of}\text{dresses}\text{×}\\ \text{percentage}\text{of}\text{increase}\end{array}\right)\right]\\ \text{=}\text{1,250}\text{dresses}\text{+}\left(\text{1,250}\text{dresses×}\text{20\%}\right)\\ \text{=}\text{1,250}\text{dresses}\text{+}\text{250}\text{dresses}\\ \text{=}\text{1,500}\text{dresses}\end{array}$

(2)Calculate incremental contribution margin for dress:

$\begin{array}{c}\begin{array}{l}\text{Incremental}\text{contribution}\\ \text{margin}\text{for}\text{dress}\end{array}\}\text{=}\left[\begin{array}{l}\text{Selling}\text{price}\text{per}\text{unit}-\text{Unit}\text{cost}\text{to}\text{complete}\\ \text{(exclusive}\text{of}\text{material}\text{costs}\text{and}\text{cutting}\text{operations)}\end{array}\right]\\ \text{=}\text{\$200}-\text{\$80}\\ \text{=\$120}\end{array}$

(3)Calculate incremental contribution margin for capes:

$\begin{array}{c}\begin{array}{l}\text{Incremental}\text{contribution}\\ \text{margin}\text{for}\text{capes}\end{array}\}\text{=}\left[\begin{array}{l}\text{Selling}\text{price}\text{per}\text{unit}-\text{Unit}\text{cost}\text{to}\text{complete}\\ \text{(exclusive}\text{of}\text{material}\text{costs}\text{and}\text{cutting}\text{operations)}\end{array}\right]\\ \text{=}\text{\$27}\text{.50}-\text{\$19}\text{.50}\\ \text{=\$8}\end{array}$

(4) Calculate incremental contribution margin for handbag:

$\begin{array}{c}\begin{array}{l}\text{Incremental}\text{contribution}\\ \text{margin}\text{for}\text{handbag}\end{array}\}\text{=}\left[\begin{array}{l}\text{Selling}\text{price}\text{per}\text{unit}-\text{Unit}\text{cost}\text{to}\text{complete}\\ \text{(exclusive}\text{of}\text{material}\text{costs}\text{and}\text{cutting}\text{operations)}\end{array}\right]\\ \text{=}\text{\$9}\text{.50}-\text{\$6}\text{.50}\\ \text{=\$3}\end{array}$

(5)Calculate additional cutting cost:

$\begin{array}{c}\text{Additional}\text{cutting}\text{cost}\text{=}\left(\begin{array}{l}\text{Increase}\text{in}\text{sale}\text{of}\text{dress}\text{×}\text{Percentage}\text{of}\text{total}\\ \text{excluding}\text{dress}\text{×}\text{increase}\text{in}\text{cutting}\text{costs}\end{array}\right)\\ \text{=}\text{1,500}\text{dresses}\text{×}\text{91}\text{\%}\text{×}\text{\$9}\\ \text{=}\text{1,365}\text{dresses}\text{×}\text{\$9}\\ \text{=}\text{\$12,285}\end{array}$

Note: $\text{91}\text{\%=}\text{70}\text{\%+}\text{6\%+15\%}$

(6)Calculate additional material cost:

$\begin{array}{c}\text{Additional}\text{material}\text{cost}\text{=}\text{Additional}\text{dresses}\text{×}\text{Material}\text{cost}\text{for}\text{each}\text{dress}\\ \text{=}\text{250}\text{dresses}\text{×}\text{\$50}\\ \text{=\$12,500}\end{array}$

(7)Calculate lost remnant sales:

$\begin{array}{c}\text{Lost}\text{remnant}\text{sales}\text{=}\left[\left(\begin{array}{l}\text{Expected}\text{sales}\text{of}\text{dress}\text{by}\text{company}-\\ \text{Expected}\text{sale}\text{of}\text{dress}\text{by}\text{retailers}\end{array}\right)\text{×}\text{sales}\text{price}\text{of}\text{remnants}\right]\\ \text{=}\left(\text{1,250}\text{dresses}-\text{135}\text{dresses}\right)\text{×}\text{\$5}\\ \text{=}\text{1,115}\text{×}\text{\$5}\\ \text{=\$5,575}\end{array}$

Note: 135dresses =$(1,500(1)\times 9\%)$

(8)Calculate incremental cutting cost for extra dresses:

$\begin{array}{c}\begin{array}{l}\text{Incremental}\text{cutting}\\ \text{cost}\text{for}\text{extra}\text{costs}\end{array}\}\text{=}\left[\begin{array}{l}\text{Increase}\text{on}\text{sales}\text{of}\text{dress}\text{×}\text{Cost}\text{of}\text{cutting}\text{the}\text{dress}\\ \text{(}\text{cape}\text{and}\text{handbag}\text{not}\text{manufctured)}\end{array}\right]\\ \text{=}\text{250}\text{dresses}\text{×}\text{\$20}\\ \text{=\$5,000}\end{array}$

2.

To determine

Identify the qualitative factors that affect the company’s management in its decision to manufacture caps and handbags to match dresses.

Explanation of Solution

Qualitative factors that influence the management team of the company for the decision of manufacture matching capes and handbags include the following:

• Accurateness of forecasted increase in dress sales.
• Rivalry from other manufacturers of women’s apparel.
• Accurateness of forecasted product mix.
• Image of a company manufacturing dress in competition with a more extensive supplier of women’s apparel.
• To check if there is enough capacity (facilities, labor, storage, etc.).