CMA Study Group

148) Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units of Product B. Lark’s staff developed the following information with regard to meeting this contract.

                                     Product A             Product B        Total

       Selling Price                 $75                    $125

       Variable costs              $30                    $48

       Fixed overhead                                                     $1,600,000

       Machine hours required   3                       5

       Machine hours available                                         160,000

       Cost if outsourced           $45                  $60

Lark’s operations manager has identified the following alternatives. Which alternative should be recommended to Lark’s management?

a. Make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.

b. Make 25,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.

c. Make 20,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.

d. Rent additional capacity of 30,000 machine hours which will increase fixed costs by $150,000.

here we have to maximize our contibution margin .... then the highest contribution will be chosen .

1- 30,000 units of A = 30,000*3H=90000H 

     REMAINING 70,000 H/5=14,000 UNITS OF B 

      CONT. Margin= 30,000*45+14,000*77 - (6,000*60)

                            = 2428000- 360,000 =2,068,000

 2- 25,000*3h=75000h  = 25000*45+17000*77-(3000*60+5000*45)= 1,125000+1,309000-(180,000+225000)

                                           =2,434,000-405,000=2,029,000

3-20000*3=60000h for A =20,000*45+20,000*77-(10,000*45)

                                              = 900,000+1,540,000= 450,000 = 1,990,000

then the best answer is A

then 

Dear Mr.Farouk

as i know that company should to maximize CM per unit of the resource i mean machine hours so

CM of A is 45

45/3=15

CM of B is 77

77/5 hours per unit =15.4

so co should produce  20,000 of B then remaining from A

is it right or wrong? can you please explain this point to me?

Regards

this a type of quation that need to be calculated for each alternative as we have two option either we purchase the product or manufacture it  so the answer will be  as follows

for alternative a making 30000 unit of a need 30000*3= 90000 hour so the remaing hours will be 160000- 90000=70000

so we can manufacture from produc B= 70000/5= 14000 and outsource the remaining so total contribution will be calculated as follows = 30000* (75 - 30) + 14000*(125-48)+ 6000*(125-60) =2818000

for alternative b making 25000 of product A need =25000* 3=75000 so the remaing hour = 160000-75000=85000

so we can manufacture from product b = 85000/5=17000 so we have to puchase or outsource 5000 unit of  A and 3000 unit of product B so the contribution margine will be = 25000* (75-30) + 5000(75-45) + 17000* (125-48) + 3000*(125-60) = 2779000

for alternative c making 20000 unit of a need 20000*3= 60000 hour so the remaing hours will be 160000- 60000=100000

so we can manufacture from produc B= 100000/5= 20000and outsource only 10000 for product A so total contribution will be calculated as follows = 20000* (75 - 30) + 10000*(75-45)+ 20000*(125-48) = 2740000

for alternative renting additional capacity means that we manufacture all unit of product A and product B as the total needed hour = 30000*3+ 20000*5=190000 the available 160000 so we need to rent 30000 machine hour so

the contribution margen = 30000*(75-30)+20000*(125-48) - 150000= 2740000

 

If you need any further explanation please do not hesitate to ask

hello,can you please explain the solution again?

------------------------------
Nawal Tisekar
Accountant
Kharghar MH
India
------------------------------

Original Message:
Sent: 12-19-2010 12:10 PM
From: Ehab Mansour Yusuf
Subject: Re: Part 3 q

If you need any further explanation please do not hesitate to ask