StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to $115,000 per period. Sales prices and variable costs are as follows:
Sales price per unit $8.00 $10.40
Variable cost per unit 3.50 4.40
1. Which product should StoreAll emphasize? Why?
2. To maximize profits, how many of each size bin should StoreAll produce?
3. Given this product mix, what will the company’s operating income be?
The company should emphasize the regular bins because of their high contribution margin than large bins.
The process of converting or transforming the raw materials into finished goods is termed production. This process includes direct material, labor, machinery, and other overheads.
Selling price per unit
Less: Variable cost per unit
Contribution margin per unit
Unit per machine hours
Contribution per machine hour
Comment: The company should emphasize regular bins because the per hour contribution of regular bins is more than the per hour contribution of large bins.
As the demand for the bins is high in the market, the company can produce any number of bins, but the production of regular bins is preferable due to its high contribution margin.
Based on production mix, i.e. 100%, the operating income would be:
Less: Fixed cost
Newtown Sunglasses sell for about $154 per pair. Suppose that the company incurs the following average costs per pair:
Direct materials $39
Direct labor 15
Variable manufacturing overhead 6
Variable selling expenses 3
Fixed manufacturing overhead 20*
Total cost $83
* $2,050,000 Total fixed manufacturing overhead / 102,500 Pairs of sunglasses
Newtown has enough idle capacity to accept a one-time-only special order from Water Shades for 17,000 pairs of sunglasses at $80 per pair. Newtown will not incur any variable selling expenses for the order.
1. How would accepting the order affect Newtown’s operating income? In addition to the special order’s effect on profits, what other (longer-term qualitative) factors should Newtown’s managers consider in deciding whether to accept the order?
2. Newtown’s marketing manager, Peter Kyler, argues against accepting the special order because the offer price of $80 is less than Newtown’s $83 cost to make the sunglasses. Kyler asks you, as one of Newtown’s staff accountants, to explain whether his analysis is correct. What would you say?
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