PROBLEM 14-46 (25 MINUTES)

1.
Fo
od
Blender Processor
Unit cost if purchased from an outside supplier .......................................
$60
$114
Incremental unit cost if manufactured:
Direct material ..........................................................................................
$18
$ 33
Direct labor ...............................................................................................
12
27
Variable overhead
$48 $30 per hour fixed ......................................................................
18
$96 (2)($30 per hour fixed) ................................................................
36
Total ......................................................................................................
$48
$ 96
Unit cost savings if manufactured .............................................................
$12
$ 18
Machine hours required per unit ................................................................
1
2
Cost savings per machine hour if manufactured
$12 1 hour .............................................................................................
$12
$18 2 hours ............................................................................................
$ 9
Therefore, each machine hour devoted to the production of blenders saves the
company more than a machine hour devoted to food processor production.
Machine hours available .....................................................................................
Machine hours needed to manufacture 20,000 blenders .................................

50,000
20,000

Remaining machine hours .................................................................................

30,000

Number of food processors to be produced (30,000 2) ................................

15,000

Conclusion: Manufacture
Manufacture
Purchase

20,000 blenders
15,000 food processors
13,000 food processors

PROBLEM 14-46 (CONTINUED)

2.

If the companys management team is able to reduce the direct material cost per
food processor to $18 ($15 less than previously assumed), then the cost savings
from manufacturing a food processor are $33 per unit ($18 savings computed in
requirement (1) plus $15 reduction in material cost):
Foo
New unit cost savings if manufactured ..........................................
Machine hours required per unit ....................................................
Cost savings per machine hour if manufactured
$12 1 hour .................................................................................
$33 2 hours ................................................................................

d
Blender Processor
$12.00
$33.00
1 MH 2 MH
$12.00
$16.50

Therefore, devote all 50,000 hours to the production of 25,000 food processors.
Conclusion:

Manufacture: 25,000 food processors

Purchase: 3,000 food processors and 20,000 blenders

3. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: 10E - BUILD A SPREADSHEET 14-46.XLS

PROBLEM 14-47 (25 MINUTES)

1.

2.

3.

Incremental unit cost if purchased:

Purchase price .........................................................................................
Material handling .....................................................................................
Total ..........................................................................................................

$ 45,000
9,000
$ 54,000

Incremental unit cost if manufactured:

Direct material ..........................................................................................
Material handling .....................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead ($36,000 1/3) .................................
Total ..........................................................................................................
Increase in unit cost if purchased ($54,000 $39,600) .............................

$ 3,000
600
24,000
12,000
$ 39,600
$ 14,400

Increase in monthly cost of acquiring part RM67 if purchased

(10 $14,400, as computed above) ..........................................................
Less: rental revenue from idle space .........................................................
Increase in monthly cost .............................................................................

$144,000
75,000
$ 69,000

Contribution forgone by not manufacturing alternative product .............

Less: Savings in the cost of acquiring RM67
(10 $14,400 as computed in requirement 1) .........................................
Net cost of using limited capacity to produce part RM67 .........................

$156,000
144,000
$ 12,000

PROBLEM 14-49 (25 MINUTES)

1.

Per-unit contribution margins:

Standard
Selling price..
Less: Variable costs:
Direct material
Direct labor..
Variable manufacturing overhead
Sales commission
$375 x 10%; $495 x 10%.
Total unit variable cost.
Unit contribution margin

Enhanced

$375.00
$42.00
22.50
36.00

$495.00
$67.50
30.00
48.00

37.50

49.50
138.00
$237.00

195.00
$300.00

2.

The following costs are not relevant to the decision:

Development costssunk
Fixed manufacturing overheadwill be incurred regardless of which product is
selected
Sales salariesidentical for both products
Market studysunk

3.

Martinez, Inc. expects to sell 10,000 Standard units (40,000 units x 25%) or 8,000
Enhanced units (40,000 units x 20%). On the basis of this sales forecast, the
company would be advised to select the Standard model.
Standard
Total contribution margin:
10,000 units x $237; 8,000 units x $300. $2,370,000
Less: Marketing and advertising
195,000
Income... $2,175,000

4.

Enhanced
$2,400,000
300,000
$2,100,000

The quantitative difference between the profitability of Standard and Enhanced is

relatively small, which may prompt the firm to look at other factors before a final
decision is made. These factors include:
-

Competitive products in the marketplace

Data validity
Growth potential of the Standard and Enhanced models
Production feasibility
Effects, if any, on existing product sales
Break-even points