Question

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

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