Question

Outdoor Luggage, Inc., makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below. Ski Guard Golf Guard Fishing Guard Selling price per unit $ 250 $ 320 $ 350 Variable cost per unit $ 110 $ 210 $ 155 Plastic injection molding machine processing time required to produce one unit 14 minutes 13 minutes 20 minutes Pounds of plastic pellets per unit 9 pounds 10 pounds 14 pounds Required: 1. If we assume that the total time available on the plastic injection molding machine is the constraint in the production process, how much contribution margin per minute of the constrained resource is earned by each product? 2. Which product offers the most profitable use of the plastic injection molding machine? 3. If we assume that a severe shortage of plastic pellets has required the company to cut back its production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product? 4. Which product offers the most profitable use of the plastic pellets? 5. Which product has the largest contribution margin per unit? Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows: Thalassines Kataskeves, S.A. Income Statement—Bilge Pump For the Quarter Ended March 31 Sales $ 480,000 Variable expenses: Variable manufacturing expenses $ 124,000 Sales commissions 46,000 Shipping 19,000 Total variable expenses 189,000 Contribution margin 291,000 Fixed expenses: Advertising (for the bilge pump product line) 29,000 Depreciation of equipment (no resale value) 104,000 General factory overhead 45,000 * Salary of product-line manager 123,000 Insurance on inventories 6,000 Purchasing department 48,000 † Total fixed expenses 355,000 Net operating loss $ (64,000 ) *Common costs allocated on the basis of machine-hours. †Common costs allocated on the basis of sales dollars. Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company’s total general factory overhead or total Purchasing Department expenses. Required: What is the financial advantage (disadvantage) of discontinuing the bilge pump product line?

Answer 1

Amount$ Question No Sl.No Particulars Ski Guard Golf Fishing a Selling Price 250 320 350 Less b Variable Cost 110 210 155 c Contribution 140 110 195 d Machine Time Per Unit ( in min) 14 13 20 e Plastic Per Unit (in pounds) 9 10 14 Q1) f Contribution Margin per minute (c/d) 10 8.46154 9.75 g Ranking Based on (f) I III II Q2) Ski Guard offers the most profitable use of the plastic injection molding machine ( refer g ) Q3) h Contribution Margin per Plastic Pound (c/e) 15.5556 11 13.9286 i Ranking Based on (h) I III II Q4) Ski Guard offers the most profitable use of the plastic pellets ( refer i) Note: First 4 subparts of the Question were solved, as per norms