general administration and corporate offi ce costs

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Unformatted text preview: ration, Pendleton would require 20,000 hours on the regular machine result ing in contribut ion margin of $35 ´ 20,000 = $700,000. Pendleton now has 45,000 hours available on the regular machine to produce R3 or HP6. R3 Total contribution margin fro m selling only R3 or only HP6 R3: $25 ´ 45,000; HP6: $30 ´ 45,000 Less Lease costs of high­precisio n machine to produce and sell HP 6 Net relevant benefit HP6 $1,125,000 - $1,125,000 $1,350,000 300,000 $1,050,000 Pendleton should use all the 45,000 hours of available capacit y to produce 45,000 units of R3. Thus, the product mix that maximizes operating inco me is 20,000 unit s of S3, 45,000 units of R3, and zero units of HP6. This optimal mix results in a contribut ion margin o f $1,825,000 ($700,000 fro m S3 and $1,125,000 fro m R3). Relative to requirement 2, operating income increases by $325,000 ($1,825,000 minus $1,500,000 calculated in requirement 2). Hence, Pendleton should accept the Carter Corporation business and supply 20,000 unit s of S3. 11­23 11­34 (35–40 min.) Dropping a product line, selling more units. 1. The incremental revenue losses and incremental savings in cost by discont inuing the Tables product line fo llows: Difference: Incremental (Loss in Revenues) and Savings in Costs from Dropping Tables Line Revenues Direct materials and direct manufacturing labor Depreciat ion on equipment Marketing and distribut ion General administration Corporate office costs Total costs Operating inco me ( loss) $(500,000) 300,000 0 70,000 0 0 370,000 $(130,000) Dropping the Tables product line results in revenue losses of $500,000 and cost savings of $370,000. Hence, Grossman Corporation’s operating inco me will be $130,000 lower if it drops the Tables line. Note that, by dropping the Tables product line, Home Furnishings will save none o f the depreciat ion on equipment, general administration costs, and corporate office costs, but it will save variable manufacturing costs and all market ing and distribut ion costs on the Tables product line....
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