To maximize operating inco me broadway should first

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Unformatted text preview: Rhode Island Store (1) Revenues Cost of goods sold Lease rent Labor costs Depr eciation of equipment Utilities (electricity, heating) Corporate overhea d costs Total costs Effect on operating income (loss) $(860,000) 660,000 75,000 42,000 0 46,000 44,000 867,000 $ 7,000 Incre mental Revenues and (Incremental Costs) of Opening New Store Like Rhode Island Store (2) $ 860,000 (660,000) (75,000) (42,000) (22,000) (46,000) (4,000) (849,000) $ 11,000 11­12 11­26 (20 min.) Choosing customers. If Broadway accepts the addit io nal business from Kelly, it would take an addit io nal 500 machine­hours. If Broadway accepts all o f Kelly’s and Taylor’s business for February, it would require 2,500 machine­hours (1,500 hours for Taylor and 1,000 hours for Kelly). Broadway has only 2,000 hours of machine capacit y. It must, therefore, choose how much o f the Taylor or Kelly business to accept. To maximize operating inco me, Broadway should maximize contribut ion margin per unit of the constrained resource. (Fixed costs will remain unchanged at $100,000 regardless o f the business Broadway chooses to accept in February, and is, therefore, irrelevant.) The contribut ion margin per unit of the constrained resource for each customer in January is: Taylor Corporation $78,000 = $52 1,500 Kelly Corporation $32, 000 = $64 500 Contribut ion margin per machine­hour Since the $80,000 of addit ional Kelly business in February is identical to jobs done in January, it will also have a contribut ion margin of $64 per machine­hour, which is greater than the contribut ion margin o f $52 per machine­hour fro m Taylor. To maximize operating inco me, Broadway should first allocate all the capacit y needed to take the Kelly Corporation business (1,000 machine­hours) and then allocate the remaining 1,000 (2,000 – 1,000) machine­hours to Taylor. Taylor Corporation $52 ´ 1,000 $52,000 Kelly Corporation $64 ´ 1,000 $64,000 Total Contribut ion margin per machine­hour Machine­hours to be worked Contribut ion margin Fixed costs Operating inco me $116,000 100,000 $ 16,000 11­13 11­27 (30–40 min.) Relevance of equipment costs. 1a. Statements of Cash Receipts and Disbursements Keep Each Year 2, 3, 4 $150,000 (110,000) (15,000) Year 1 Receipts from operations: Revenues Deduct disbursements: Other operating costs Operation of machine Purchase of “old” machine Purchase of “new...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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