Question

Cora Corporation produces refrigerator units. The company’s normal production and sales volume of Standard units is...

Cora Corporation produces refrigerator units. The company’s normal production and sales volume of Standard units is 3,000 units per month, and units sell for $870 each. The costs of manufacturing and marketing a Standard model are as follows:

  Variable manufacturing cost per unit $ 240
  Variable marketing cost per unit 40
  Fixed product cost 300,000
  Fixed period cost 240,000

The company is considering diversifying the product line to include two additional models, Economy and Deluxe, which would sell for $730 and $870 per unit, respectively. The costs of manufacturing these new models are as follows:

Economy Deluxe
  Variable manufacturing cost 42 % below Standard $ 495
  Variable marketing cost 5 % above Standard Twice Standard

Total fixed product and period costs are expected to remain unchanged. Cora expects to sell 1,200 units of the Economy model and 950 units of Deluxe model per month. The company cannot expand its production capacity beyond its current level of 3,000 units.

Required:
1.

If Standard Model is the only product ,what would the Operating income be?

2-a.

Suppose that a supplier is willing to supply 850 units of the Standard model at a price of $240 per unit. Also assume that the company can sell all that it can produce of the remaining two models. Should the offer of the supplier be accepted?

Yes
No
2-b. Which of the model should produced?
Standard Model
Economy Model
Delux Model

Homework Answers

Answer #1

1.Operating Income = Revenue – costs

= (870-240-40)*3,000 – 300,000-240,000

= $1,230,000

2-a.

Calculation of contribution margin from other two models

Economy

Deluxe

Selling price per unit

730

870

Variable manufacturing cost

139.2

495

Variable marketing cost

42

80

Contribution Margin per unit

548.8

295

Hence, freed capacity will be used to produce Economy Model

Benefit from supplier’s offer = 548.8*850 – (240-240)*850

= $466,480

Yes, should be accepted

2-b. Economy Model

since contribution margin per unit is higher

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