CMA Study Group

help in understanding the answer CMA part 2 CVP

  • 1.  help in understanding the answer CMA part 2 CVP

    Posted 8 days ago


    Fact Pattern:  Geary Manufacturing has assembled the data appearing in the next column pertaining to two products. Past experience has shown that the unavoidable fixed manufacturing overhead included in the cost per machine hour averages $10. Geary has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. Total machine capacity is 50,000 hours.
    Electric
    Blender
    Mixer
    Direct materials
    $ 6
    $11
    Direct labor
    4
    9
    Manufacturing overhead
    at $16 per hour
    16
    32
    Cost if purchased from an
    outside supplier
    20
    38
    Annual demand (units)
    20,000
    28,000
     
    Question: 43 With all other things constant, if Geary Manufacturing is able to reduce the direct materials for an electric mixer to $6 per unit, the company should
    Answer (C) is correct.
    Reducing unit direct materials cost for mixers from $11 to $6 decreases unit variable cost to $27 ($6 DM + $9 DL + $12 VOH) and increases the cost savings of making a mixer from $6 to $11, or $5.50 per hour ($11 ÷ 2 hours per unit). Given a cost savings per hour for blenders of $4, the company can minimize total variable cost by making 25,000 mixers (50,000 hours capacity ÷ 2). Total variable cost will be $1,189,000 [(25,000 mixers × $27) + (3,000 mixers × $38) + (20,000 blenders × $20)].


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    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
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  • 2.  RE: help in understanding the answer CMA part 2 CVP

    Posted 8 days ago
    Hi Tabya,

    The problem is regarding make the product internally or buy it from the supplier.
    In make or buy decision fixed cost is not considered.
    Manufacturing overhead includes fixed and variable costs.
                                       Blender                                 Electric mixer
    Hrs                             1 hr      = (16/16)                    2hrs  = (32/16)
    Manufacturing FC       10*1    =  10$                        10*2  = 20$              [fixed manufacturing overhead included in the cost per machine hour averages $10]
    Manufacturing VC       16-10 =   6 $                           32-20 =12$
    Relevant cost              6+4+6 = 16$                             6+9+12= 27$

    Contribution per
    machine hour              20-16/1 =4$                            38-27/2 = 5.5$
    In comparison with the supplier's cost, the firm is better off making the products
    Since the mixer provides a higher contribution per machine hour, the firm should produce more of the mixer and outsource the remaining products.

    Options A , B & D  is incorrect because it has a high variable cost



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    Sanjana
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  • 3.  RE: help in understanding the answer CMA part 2 CVP

    Posted 7 days ago
    So basically you have to derive the contribution per machine hour for both the products and check which one is greater as it will result in increased operating profit and then utilise whole machine hours to produce the product with higher contribution per machine hour.

    Am I right?

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    Ashvin Kulkarni
    Accountant
    Pune
    India
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  • 4.  RE: help in understanding the answer CMA part 2 CVP

    Posted 7 days ago
    Hi Ashvin,

    Yes, you're right.
    When there is a time constraint, knowing contribution per machine hour is vital.
    As it helps in deciding which product to produce more to maximize profits.

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    Sanjana
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  • 5.  RE: help in understanding the answer CMA part 2 CVP

    Posted 7 days ago
    There's a channel on YouTube that could help you in answering the questions
    " Nobles for CMA " it's an Arabic content

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    Abdelfattah Abdalla Hussein Mohamed Elhadari
    None
    Minya-Elqamah
    Egypt
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