15and16_DiscussionQuestions2

# 15and16_DiscussionQu - ACCY 302(Chen Classes 15 16 Fall 2009 Elizah Corporation Elizah Corporation manufactures only one product Its budget for the

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Fall 2009 Elizah Corporation Elizah Corporation manufactures only one product. Its budget for the following year is: Elizah Corporation Budgeted Income Statement For the Year Ended December 31, 2000 Sales (270,000 units of LX7 @ \$67/unit) \$18,090,000 Variable costs and expenses: Direct material (LX material, 6 lbs./unit @ \$1.25/lb.) \$2,025,000 Direct labor (8 hours/unit @ \$4.45/hour) 9,612,000 Manufacturing overhead (30% of direct labor cost) 2,883,600 Marketing and admin. expense (\$1.22/unit) 329,400 14,850,000 Contribution margin \$3,240,000 Fixed expenses 1,049,000 Income before taxes \$2,191,000 Elizah has received an additional order for 25,000 units of LX7 at a sales price of \$59 per unit. Required: 1) Assume that Elizah’s production capacity is 270,000 units of LX7, Elizah is operating at full capacity when it receives the additional order, and market demand is 270,000 units excluding the additional order. a) What is the binding constraint faced by Elizah in considering whether or not to accept the special order? b) How much should Elizah produce? c) Suppose that if Elizah accepts the order, it will incur an additional \$91,000 of fixed expenses. If the only criterion in this decision is the effect on income, should the order be accepted? Support your conclusion by showing the change in income. Consider that there are two possibilities for what the fixed costs might be. .. \$91,000 buys additional capacity, or \$91,000 is additional fixed costs of production. 2) Instead assume that Elizah’s production capacity is 300,000 units and market demand is 270,000 units excluding the additional order. a) What is the binding constraint faced by Elizah in considering whether or not to accept the special order? b)

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## This note was uploaded on 11/08/2011 for the course ACCY 302 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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15and16_DiscussionQu - ACCY 302(Chen Classes 15 16 Fall 2009 Elizah Corporation Elizah Corporation manufactures only one product Its budget for the

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