CATEGORY EXISTING MACHINE

ORIGINAL COST $80,000.00

Annual operating costs $50,000.00
Remaining useful life 5
Salvage value $5,000.00
salvage value of current machine $40,000.00
Repair costs $20,000.00

KEY ASSUMPTIONS
Ignore time value of money

Cost of coninuing

operating costs $250,000.00

repair cost $20,000.00
less salvage value at the end -$5,000.00

TOTAL COST $265,000.00

As total cost of new machine is lower choose new machine

 NEWMACHINE

$120,000.00
$30,000.00
5
$10,000.00

COST OF CHANGE OVER

Cost of new mahcine $120,000.00

operating cost $150,000.00
less salvage value at end -$10,000.00
less salvage value of old
machine now -$40,000.00
TOTAL COST $220,000.00
 cost sheet for G37 FOR INHOUSE PRODUCTION

Annual production 20,000

Direct material $55.00

Direct labor $30.00
Variable overhead $25.00
Fixed overhead (allocated per
unit) $15.00
TOTAL COSTS $125.00

if OUT SOURCED

Price to be paid per unit $120.00

Saving in fixed cost $113,000.00

savings in variable costs $110.00

Savings in fixed overhead $113,000.00

For 20,000 units

price paid $2,400,000.00

savings due to variable costs $2,200,000.00

savings due to fixed overheads $113,000.00

Net cost/ savings $87,000.00

As price paid is more than cost saved, do not outsource

Alternate working:

Annual production 20,000

Direct material $55.00

Direct labor $30.00
Variable overhead $25.00
Fixed overhead (allocated per unit) $15.00
TOTAL COSTS $125.00

Total fixed overhead incurred $300,000.00

SE PRODUCTION

units

total variable costs 110

ot outsource
Production units 30,000 cases
Surplus capacity 15,000 cases

COST PER TOTAL

COST ITEM CASE COSTS
Variable production
costs $16.00 $480,000.00

fixed production costs $8.00 $240,000.00

Variable selling costs $5.00 $150,000.00

Fixed S&A costs $3.00 $90,000.00
TOTAL COSTS $32.00 $960,000.00

SELLING PRICE $44.80 MARK UP OF 40% OVER FULL CO

NEW ORDER
Purchase price $40.00
Additional shipping $3.00
relevant variable costs
Variable production
costs $16.00

Variable selling costs $5.00

Total variable costs $24.00

Incremental profit per

case $16.00
OF 40% OVER FULL COST
SP $900.00
vc $800.00
CM $100.00

FIXED COSTS $300,000.00

$33.33

BREAKEVEN VOLUME 3,000 $250,000.00

$50,000.00
NEW ORDER $300,000.00
VC $800.00
FC $300,000.00

SP FOR EXISTING
CUSTOMERS $900.00

CONTRIBUTION FROM
CURRENT CUSTOMERS $250,000.00
CONTRIBUTION FROM
NEW ORDER (X-800)*1500
$33.33
MIN. FLOOR PRICE $833.33

CROSS CHECK
 There can be multiple ways of doing this problem, but the final ans

manufacturing capacity 60,000

sales units 36,000
Sale price ₹ 10.00

Sales ₹ 360,000.00
variable costs ₹ 198,000.00
Contribution margin ₹ 162,000.00
Fixed costs ₹ 99,000.00
Operating income ₹ 63,000.00

New export order for 30,000 units at ₹ 9 per rotator

a. IF WE ACCEPT THE ORDER

Assumption: Existing order is NOT an all or none order(s) and new

No additional shift
existing order
Units 30,000
Sale price per unit ₹ 10.00
Sales ₹ 300,000.00
Variable costs ₹ 165,000.00
Contirbution margin ₹ 135,000.00
Fixed costs
Operating income

Other considerations: I will leave to the class.

b. EXTRA SHIFT
New capacity 75,000
existing order
Units 36,000
Sale price per unit ₹ 10.00
Sales ₹ 360,000.00
Variable costs ₹ 198,000.00
Contirbution margin ₹ 162,000.00
Fixed costs
Operating income

Increased income is higher.

Other considerations: I will leave to the class.

g this problem, but the final answer will be the same.

unit VC ₹ 5.50

₹ 9 per rotator

an all or none order(s) and new order is an all or none order

export order Total

30,000 60,000
₹ 9.00
₹ 270,000.00 ₹ 570,000.00
₹ 165,000.00 ₹ 330,000.00
₹ 105,000.00 ₹ 240,000.00
₹ 99,000.00
₹ 141,000.00

ve to the class.

export order Total

30,000 66,000
₹ 9.00
₹ 270,000.00 ₹ 630,000.00
₹ 165,000.00 ₹ 363,000.00
 ₹ 105,000.00 ₹ 267,000.00
₹ 124,000.00
₹ 143,000.00

ve to the class.
This is a roblem which combines theory of constraints and the concept of produc su

maximum floor space 250

Unit here sq.ft and nos. do not matter

ice cream Juices

Selling price per unit sq.ft package ₹ 12.00 ₹ 13.00

VC per unit sq.ft package ₹ 8.00 ₹ 10.00
Minimum sq. ft sq.ft package 24 24
maximum sq.ft sq.ft package 100 100

Logic: Maximize total contribution margin, subject to constraints

iteration
Contribution margin $4.00 $3.00
Space allotted 1 100 100
2 100 100
3 100 24
4 100 26

Total contribution $400.00 $78.00

e concept of produc sustaining/ facility sustaining costs

sq ft

Frozen Frozen
dinner vegetables

₹ 24.00 ₹ 9.00
₹ 20.50 ₹ 7.00
24 24
100 100

o constraints
total excess
$3.50 $2.00
100 100 400 -150
100 24 324 -74
100 24 248 2
100 24 250 0

$350.00 $48.00 $876.00

sl. No item value classification
a Units produced and sold 50,000
b Sale price per unit $70.00
c Carpenter labor to make shelves $600,000.00 DL
d Wood to make shelves $450,000.00 DM
e Sales staff salaries $80,000.00 OH
f Office and show room rental $150,000.00 OH
Depreciation on carpentry
g equipment $50,000.00 OH
h Advertising $200,000.00 OH
Sales commission based on
i number of units sold $180,000.00 OH
Misc. fixed manufacturing
j overhead $150,000.00 OH
Rent for building where
k shelves are made $300,000.00 OH
Misc. variable manufacturing
l cost $350,000.00 OH
Depreciation for office
m equipment $10,000.00 OH

Minimum profit expected $500,000.00

Sale price $70.00

VC $31.60
fixed costs $940,000.00
Min. profit expected $500,000.00
Total cost to be covered $1,440,000.00
Break even point 37,500
 variable/ fixed

variable -unit level

variable -unit level
FIXED PRODUCT SUSTAINING
FIXED FACILITIES SUSTAINING

FIXED PRODUCT SUSTAINING

FIXED PRODUCT SUSTAINING

variable -unit level

FIXED PRODUCT SUSTAINING

FIXED PRODUCT SUSTAINING

variable -unit level

FIXED FACILITIES SUSTAINING

 Cost category Johnson and co.
selling price per ride $30.00
Variable cost per ride $24.00
Contribution margin per ride $6.00
Fixed costs per year $300,000.00

Break even point for each co. 50,000

More profitable cost structure

More riskier cost structure

Smith co.
$30.00
$15.00
$15.00
$1,500,000.00

100,000
Annual production 100,000

category old machine

Acquisition cost $300,000.00

Remaining life 4
Salvage value now $100,000.00
Salvage value at the
end of 4 years $4,000.00

Annual operating cost $140,000.00

defect rate 5%
Rework costs $1.00

Total costs and savings if new machine is bought

Acquisition cost
less: salvage cost of
old machine
less: salvage value
after 4 years
savings in annual
operating cost (140,000-80,000)*4
reduction in rework
costs (5%-2.5%) * 100,000 * 4 * $ 1

Net cost

do not acquire new machine

units

new machine

$360,000.00

$6,000.00

$80,000.00
2.50%
$1.00

$360,000.00

-$100,000.00

-$6,000.00

-$240,000.00

-$10,000.00

$4,000.00
 charges per sku $1,200.00
budgeted sales 1,600

PROJECTED INCOME STATEMENT

Sales $1,920,000.00
Less: variable costs $1,184,000.00
Contribution margin $736,000.00
lessfixed costs $300,000.00
Operating income $436,000.00

A Break even point 652 653

B Margin of Safety $1,136,400.00

C expected operating income $500,000.00

Add: fixed cost $300,000.00
Total expected contribution margin $800,000.00

CM per unit $460.00

Total expected sales in units 1,739.13
1,740.00
D Increased sales $2,220,000.00
new variable cost $1,369,000.00
New contribution margin $851,000.00
new fixed cost $375,000.00
new operating income $476,000.00
PER SKU
SP $1,200.00
VC per SKU $740.00
CM $460.00
current batch size 2,000
new batch size 2,300
Average contribution margin ₹ 60.00

Additional benefit of larger batch size

units
units