So pendleton should add 15000 hours to the regular

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Unformatted text preview: 2 3 2 2 9 $ 6 $12,000 Purchase Rosebo $20 14 Total 4 18 $ 2 $4,000 $16,000 As calculated in requirement 1, Wolverine’s contribut ion margin fro m cont inuing to manufacture 2,000 units of Rosebo is $18,000. Accepting the Miami Co mpany and Buckeye offer will cost Wolverine $2,000 ($16,000 – $18,000). Hence, Wo lverine should refuse the Miami Co mpany and Buckeye Corporation’s o ffers. 3. The minimum price would be $9, the sum o f the incremental costs as computed in requirement 2. This fo llows because, if Wo lverine has surplus capacit y, the opportunit y cost = $0. For the short­run decisio n o f whether to accept Orangebo’s o ffer, fixed costs of Wo lverine are irrelevant. Only the incremental costs need to be covered for it to be worthwhile for Wo lverine to accept the Orangebo offer. 11­21 11­33 (30–40 min.) Product mix, relevant costs. 1. Selling price Variable manufacturing cost per unit Variable marketing cost 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 Total contribution margin fro m selling only R3 or only HP6 R3: $25 ´ 50,000; HP6: $30 ´ 50,000 Less Lease costs of high­precisio n machine to produce and sell HP6 Net relevant benefit R3 $100 60 15 75 $ 25 $25 = $25 1 HP6 $150 100 35 135 $ 15 $15 = $30 0. 5 $1,250,000 - $1,250,000 $1,500,000 300,000 $1,200,000 Even though HP6 has the higher contribut ion margin per unit of the constrained resource, the fact that Pendleton must incur addit io nal costs of $300,000 to achieve this higher contribut ion margin means that Pendleton is better off using its ent ire 50,000­hour capacit y on the regular machine to produce and sell 50,000 unit s (50,000 hours ¸ 1 hour per unit) o f R3. The addit io nal contribution fro m selling HP6 rather than R3 is $250,000 ($1,500,000 - $1,250,000), which is not enough to cover the addit ional costs of leasing the high­precisio n machine. Note that, because all other overhead costs are fixed and cannot be changed, they are irrelevant for the decisio n. 2. If capac...
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