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Unformatted text preview: it y o f the regular machines is increased by 15,000 machine­hours to 65,000 machine­hours (50,000 originally + 15,000 new), the net relevant benefit fro m producing R3 and HP6 is as fo llows: R3 HP6 Total contribution margin fro m selling only R3 or only HP6 R3: $25 ´ 65,000; HP6: $30 ´ 65,000 Less Lease costs of high­precisio n machine that would be incurred if HP6 is produced and sold Less Cost of increasing capacit y by 15,000 hours on regular machine Net relevant benefit $1,625,000 $1,950,000 300,000 150,000 $1,475,000 150,000 $1,500,000 11­22 Invest ing in the addit ional capacit y increases Pendleton’s operating inco me by $250,000 ($1,500,000 calculated in requirement 2 minus $1,250,000 calculated in requirement 1), so Pendleton should add 15,000 hours to the regular machine. Wit h the extra capacit y available to it, Pendleton should use its ent ire capacit y to produce HP6. Using all 65,000 hours of capacit y to produce HP6 rather than to produce R3 generates addit ional contribut ion margin of $325,000 ($1,950,000 - $1,625,000) which is more than the additional cost of $300,000 to lease the high­ precisio n machine. Pendleton should therefore produce and sell 130,000 units o f HP6 (65,000 hours ¸ 0.5 hours per unit of HP6) and zero units of R3. 3. R3 Selling price Variable manufacturing costs per unit Variable marketing costs per unit Total variable costs per unit Contribut ion margin per unit Contributi n margin per hour of the o constraine resource (the regular machine) d $100 60 15 75 $ 25 HP6 $150 100 35 135 $ 15 S3 $120 70 15 85 $ 35 $25 $15 $35 = $25 = $30 = $35 1 0. 5 1 The first step is to compare the operating profits that Pendleton could earn if it accepted the Carter Corporation o ffer for 20,000 units wit h the operating profits Pendleton is current ly earning. S3 has the highest contribut ion margin per hour on the regular machine and requires no addit ional investment such as leasing a high­precision machine. To produce the 20,000 units o f S3 requested by Carter Corpo...
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