Question

1. Relevant costs – sell or process further: Waterfall, Inc. produces and sells wooden entertainment centers for customers. It sells an unassembled entertainment center for $120. The manufacturing costs for these unassembled entertainment centers are listed below:

               Direct materials = $22 per unit

               Direct labor          = $17 per unit

               Variable MOH      =   $9 per unit

               Fixed MOH           =   $5 per unit

Waterfall, Inc. is considering assembling the entertainment centers for customers, and selling the assembled version for $140. Assembly the entertainment centers would result in additional direct materials of $1.25 per unit, additional direct labor of $13 per unit, and additional variable MOH of $2.50 per unit. Assume there would be no change in fixed MOH.

Should Waterfall, Inc. continue to sell the unassembled entertainment centers, or should it assemble them for customers? Briefly explain your answer using relevant benefit/cost analysis and show the financial advantage (disadvantage) of assembling the entertainment centers.

2. Keep or Drop a product line: TortoiseCoast, Ltd. produces gaming headsets for customers. These gaming headsets come in two models: standard and premium. The standard line is profitable, but the premium line is operating at a loss as shown below:

	Standard	Premium	Total
Sales revenue	$600,000	$350,000	$950,000
Variable manufacturing costs	$100,000	$120,000	$220,000
Variable S&A costs	$25,000	$38,000	$63,000
Contribution margin	$475,000	$192,000	$667,000
Fixed MOH	$95,000	$120,000	$215,000
Fixed S&A	$60,000	$90,000	$150,000
Net Income/(Loss)	$320,000	($18,000)	$302,000

If the premium line is discontinued, the $120,000 in Fixed MOH allocated to the premium line will not be eliminated, it will just be re-allocated to the standard line. The company could eliminate a sales position from the premium line, resulting in a reduction in fixed S&A expenses of $60,000 (however $30,000 of the premium line’s S&A expenses will remain).

Should TortoiseCoast, Ltd. keep the premium line, or should it eliminate the premium line? Briefly explain your answer using relevant benefit/cost analysis and show the financial advantage (disadvantage) of eliminating the premium line.

Answer 1

Company should continue to sell the unassembled entertainment centers(UAEC), because it requires less cost(44.16%) And yields more profit (55.83%) when compared to other option ie.. Assembled entertainment Centers (AEC )