Question

QUESTION 4

1. Olympic Printers operates a printing press with a monthly capacity of 4,000 machine-hours. Olympic has two main customers: Caesar Corporation and Julius Corporation.

   Data on each customer for January are:

                                      Caesar Corp.            Julius Corp.

   Revenues    $210,000            $140,000  

   Variable costs    87,000          89,000

   Contribution margin           123,000                51,000

   Fixed costs (allocated)                 108,000                61,000

   Operating income                $ 15,000           ($10,000)

   Machine-hours required hours 3,000 hours            1,000 hours

   Julius Corporation (Julius) indicates that it wants Olympic to do an additional $140,000 worth of printing jobs during February. These jobs are identical to the existing business Olympic did for Julius in January in terms of variable costs and machine-hours required. Olympic anticipates that the business from Caesar Corporation (Caesar) in February will be the same as that in January. Olympic can choose to accept as much of the Caesar and Julius business for February as its capacity allows. Assume that total machine-hours and fixed costs for February will be the same as in January.

   Which of the following statement is correct?

   	a.	Olympic should not take an additional job from Julius because it will generate an additional $10,000 operating loss.
   	b.	The contribution margin per a unit of constrained resource for Caesar is $5,000.
   	c.	The contribution margin per a unit of constrained resource for Caesar is $5 lower than that for Julius.
   	d.	If Olympic takes an additional job from Julius, the cost of giving up Caesar business is $41,000.
   	e.	Both a and b are correct.

Answer 1

d.If olympic takes an additional job from Julius, the cost of giving up Caesar business is $41,000.

First let us know the amount of contribution per unit of constrained resource, i.e contribution per machine hour, since machine hours are the constrained resource here.

for Julius corp, contribution per machine hour = contribution / number of machine hours

=>$51,000 / 1000 hours

=>$51.

for caesar corp contribution per machine hour = $123,000 / 3000 hours

=>$41.

so accepting of additional work form Julius will result in working 1000 hours less on Caesar corp, so the cost of giving up will be the contribution for 1000 hours from caesar corp

i.e = $41 * 1000 hours

=>$41,000.