Solution #1
Because the company pays fixed 40 hours per week for all employees, the direct labour is fixed cost and thus it should not be included in the comparison for margin. This means the margin as calculated
by the accounting team has potentially wrong data in determining which one to consider producing. The resource constraint appears to be the weilding machine
and we can use that information to determine which one one to produce.
Solution #2
Contribution Margin per unit
Saling price per unit $154.00 $154.00
Variable expense
Direct Materials $120.00 $44.50
Var Manufacturing overhead $0.00 $1.05
Selling and Admin cost $0.85 $0.85
Total $120.85 $46.40
Contribution Margin $33.15 $107.60
Solution #3
Given wielding time is thekey resource constraint for both mountan bike frame and the XSX drums. margin per weilding time to determine if we should go for producing mountain bikes or nor not. Contribution Marigin from current 2500 XSX drums is 2500 * $107.60 = $269000.00 Now we need to determine the net contribution margin if we add mountain bike and buy, But first we need to find out if we should produce mountain bikes.
To do this we need to determine contribution margin per weilding time because that is the constrained resource Given 2000 hours of weilding time available per year.
Mountain bikes XSX Drums
Contribution margin as in Solution #2 $46.50 $107.60
Given weilding hours per unit 0.20 0.80
CM per Constrained resource per hour
The above CM per weilding hours indicate, mountain bikes are the best margin in using the automated weilding machine. So, the company should produce mountain bikes…
Given they want to produce 3500 mountain bikes per year, we need to use the weilding machine for that first as it's more cost effective But given we have 2000 hours per year, so we can use the remainig 1300 hours for XSX drums.
Now to calculate improvement to NET income, we can use the above numbers.
Purchased XSX
drums
Manufatured XSX
drums
46.50/0.20 = $232.50107.60/0.80 = $134.50
3500 mountain bikes will use only 3500 * .02 = 700 hours of machine so, for 1300 hours, we can produce 1300 /0.8 = 1625 XSX drums
Contribution margin for Mountain bikes 3500 * $46.50 = Contribution margin for XSX drums 1625 * $107.60 = Contribution margin for purchased drums 1375 * $33.15 = TOTAL Contribution Margin
As calculated contribution margin in current production is =
Increase in net income will be =
Solution #4
Redoing #2 and considering labor as a variable cost Contribution Margin per unit
Saling price per unit $154.00 $154.00
Variable expense
Direct Materials $120.00 $44.50
Direct Labor $0.00 $4.50
Var Manufacturing overhead $0.00 $1.05
Selling and Admin cost $0.85 $0.85
Total $120.85 $50.90
Contribution Margin $33.15 $103.10
Redoing #3 and considering labor as a variable cost
To determine contribution margin per weilding hour if labor is variable
XSX drums 103.10 /.80 = $128.87 per hour Mountain bike 24.00/.20 = $120.00 per hour
Now, the contribution margin per weiling hours suggest, we should not produce mountain bikes. Thus we need to continue producing only XSX drums.
so, to meet the 3000 demand, we need to buy 500 from the external partner. Contribution margin for XSX drums 2500 * $103.10 = Contribution margin for purchased drums 500 * $33.15 = TOTAL Contribution Margin
As calculated contribution margin in current production is =
Increase in net income will be =
Solution #5
Purchased XSX
drums
Manufatured XSX
drums
Direct labour in this case should be considered as fixed. This is because even if the company does not produce
mountain bikes, they will continue to pay 40 hours per week salary to the labor force and thus the labor is not variable. But we need to make sure that the labor hours are available for producing 3500 mountian bikes.
Since we need 22.50 labor hours for one unit of mountain bike We need 22.50 /$18 per hour = 1.25 hours for one bike
so total 3500 bikes will need 3500 * 1.25 hours = 4375 hours of labor In the current case, we have 2500 XSX drums which requires
$4.50 direct labor / 18.00 per hour = 0.25 hour per XSX drum So, 2500 drums will be 2500 * 0.25 = 625 hours.
so, in reality we will need more labor than what we have today.
Because the company pays fixed 40 hours per week for all employees, the direct labour is fixed cost and thus it should not be included in the comparison for margin. This means the margin as calculated
by the accounting team has potentially wrong data in determining which one to consider producing.
$65.00 $17.50 $0.60 $0.40 $18.50 $46.50
Given wielding time is thekey resource constraint for both mountan bike frame and the XSX drums. margin per weilding time to determine if we should go for producing mountain bikes or nor not. Contribution Marigin from current 2500 XSX drums is 2500 * $107.60 = $269000.00 Now we need to determine the net contribution margin if we add mountain bike and buy,
To do this we need to determine contribution margin per weilding time because that is the constrained resource
The above CM per weilding hours indicate, mountain bikes are the best margin in using the automated weilding machine.
Given they want to produce 3500 mountain bikes per year, we need to use the weilding machine for that first as it's more cost effective But given we have 2000 hours per year, so we can use the remainig 1300 hours for XSX drums.
Now to calculate improvement to NET income, we can use the above numbers.
Manufactured
mountain bike
frames
107.60/0.80 = $134.50
$162,750.00 $174,850.00 $45,581.25 $383,181.25 $269,000.00
$114,181.25
$65.00 $17.50 $22.50 $0.60 $0.40 $41.00 $24.00Now, the contribution margin per weiling hours suggest, we should not produce mountain bikes.
$257,750.00 $16,575.00 $274,325.00 $257,750.00
$16,575.00
Manufactured
mountain bike
frames
Direct labour in this case should be considered as fixed. This is because even if the company does not produce
mountain bikes, they will continue to pay 40 hours per week salary to the labor force and thus the labor is not variable. But we need to make sure that the labor hours are available for producing 3500 mountian bikes.