# CMA Study Group

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## 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
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
 A. Produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed. B. Purchase all units as needed. C. Produce 25,000 electric mixers and purchase all other units as needed. 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)]. D. Produce 20,000 blenders and purchase all other units as needed.

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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