Concept explainers
Santana Rev has found that Business Solution’s line of computer desks and chairs has become popular, and she is Ending it hard to keep up with demand. She knows that she cannot fill all of her orders for both items, so she decides she must determine the optimal sales mix given the resources she has available. Information about the desks and chairs follows.
Desks
Chairs
Selling price per unit......................... 11,125 $375
Variable costs per unit....................... 500 200
Contribution margin per unit.................. $ 625 $175
Direct labor hours per unit ................... 5hours 4hours
Expected demand for next quarter............. 175 desks 50 chairs
Santana has determined that she only has 1,015 direct labor hours available for the next quarter and wants to optimize her contribution margin given the limited number of direct labor hours available.
Required
Determine the optimal sales mix and the contribution margin the business will earn at that sales mix. Page 986
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Fundamental Accounting Principles
- Salem Electronics currently produces two products: a programmable calculator and a tape recorder. A recent marketing study indicated that consumers would react favorably to a radio with the Salem brand name. Owner Kenneth Booth was interested in the possibility. Before any commitment was made, however, Kenneth wanted to know what the incremental fixed costs would be and how many radios must be sold to cover these costs. In response, Betty Johnson, the marketing manager, gathered data for the current products to help in projecting overhead costs for the new product. The overhead costs based on 30,000 direct labor hours follow. (The high-low method using direct labor hours as the independent variable was used to determine the fixed and variable costs.) All depreciation. The following activity data were also gathered: Betty was told that a plantwide overhead rate was used to assign overhead costs based on direct labor hours. She was also informed by engineering that if 20,000 radios were produced and sold (her projection based on her marketing study), they would have the same activity data as the recorders (use the same direct labor hours, machine hours, setups, and so on). Engineering also provided the following additional estimates for the proposed product line: Upon receiving these estimates, Betty did some quick calculations and became quite excited. With a selling price of 26 and just 18,000 of additional fixed costs, only 4,500 units had to be sold to break even. Since Betty was confident that 20,000 units could be sold, she was prepared to strongly recommend the new product line. Required: 1. Reproduce Bettys break-even calculation using conventional cost assignments. How much additional profit would be expected under this scenario, assuming that 20,000 radios are sold? 2. Use an activity-based costing approach, and calculate the break-even point and the incremental profit that would be earned on sales of 20,000 units. 3. Explain why the CVP analysis done in Requirement 2 is more accurate than the analysis done in Requirement 1. What recommendation would you make?arrow_forwardKen Yalters, the COO of FreshSkin, asked his cost management team for a product line profitability analysis for his firm's two products - Askin and Bskin. The two products are skin care products that require a large amount of research and development and advertising. He received the report below. Ken concluded that Askin was the more profitable product, and that perhaps cost-cutting measures should be applied to the Bskin product. Askin Bskin Total Sales $ 4,011,000 $ 2,605,500 $ 6,616,500 Cost of goods sold (2,605,500 ) (2,111,000 ) (4,716,500 ) Gross profit $ 1,405,500 $ 494,500 $ 1,900,000 Research and development (1,181,000 ) Selling expenses (135,500 ) Profit before taxes $ 583,500 Seventy-five percent of the research and development and selling expenses were traceable to Askin.Profit before taxes for the Bskin product, per life-cycle income statements, is:arrow_forwardA company is providing its product to the consumer through the wholesalers. The managing director of the company thinks that if the company starts selling through retailers or to the consumers directly, it can increase its sales, charge higher prices and make more profit. On the basis of the following information and consider variable cost is rial 2.50 per unit and fixed cost is rial 50000. (a) Advise the managing director whether the company should change its channel of distribution or not (with calculation and Justification). (b) Provide suggestions and recommendations on the basis of analysis.arrow_forward
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