Colt Company owns a machine that can produce two specialized products. Production time for Product TLX is two units per hour and for Product MTV is five units per hour. The machine’s capacity is 2,750hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 4,700 units of Product TLX and 2,500 units of Product MTV. Selling prices and variable costs per unit to produce the products follow. Determine (1) the company’s most profitable sales mix and (2) the contribution margin that results from that sales mix.
$s per unit Product TLX Product MTV
Selling price per unit . $15.00 $9.50
Variable costs per unit 4.80 5.50
The contribution margin results from that sales mix are $55,940.
The sales mix means the situation where the company produces more than one type of product
Selling Price Per Unit
Less: Variable Cost Per Unit
Contribution Per Unit
Maximum Product to Manufacture
Units Manufactured Per Hour
No. of Units Manufactured
The most profitable sales mix is to manufacture 4,700 units of TLX and 2,000 units of product MTV.
Sale Price Per Unit
Variable Cost Per Unit
Contribution Cost Per Unit
Marinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is
Available regarding its canoe segment. Should management discontinue the manufacturing of canoes? Support your decision.
Income Statement—Canoe Segment
Sales . $2,000,000
Direct materials . $450,000
Direct labor 500,000
Variable overhead . 300,000
Variable selling and administrative 200,000
Total variable costs 1,450,000
Contribution margin 550,000
Direct . 375,000
Indirect . 300,000
Total fixed costs . 675,000
Net income . $ (125,000)
Gilberto Company currently manufactures 65,000 units per year of one of its crucial parts. Variable costs are $1.95 per unit, fixed costs related to making this part are $75,000 per year, and allocated fixed costs are $62,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.25 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.
Bert Asiago, a salesperson for Convertco, received an order from a potential new customer for
50,000 units of Convertco’s single product at a price $25 below its regular selling price of $65. Asiago knows
that Convertco has the capacity to produce this order without affecting regular sales. He has spoken to
controller, Bia Morgan, who has informed Asiago that at the $40 selling price, Convertco will
not be covering its variable costs of $42 for the product, and she recommends the order not be accepted.
Asiago knows that variable costs include his sales commission of $4 per unit. If he accepts a $2 per unit
commission, the sale will produce a contribution margin of zero. Asiago is eager to get the new customer
because he believes that this could lead to the new customer becoming a regular customer.
1. Determine the contribution margin per unit on the order as determined by the controller.
2. Determine the contribution margin per unit on the order as determined by Asiago if he takes the lower
3. Do you recommend Convertco accept the special order? What factors must management consider?
Label each of the following statements as either true (“T”) or false (“F”).
1. Relevant costs are also known as unavoidable costs.
2. Incremental costs are also known as differential costs.
3. An out-of-pocket cost requires a current and/or future outlay of cash.
4. An opportunity cost is the potential benefit that is lost by taking a specific action when two
or more alternative choices are available.
5. A sunk cost will change with a future course of action.
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