Q25-5SE - Horngren'S Financial And Managerial Accounting

Question

StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to \(115,000 per period. Sales prices and variable costs are as follows:

                                                                                    Regular                     Large

Sales price per unit                                               \)8.00                          $10.40

Variable cost per unit                                           3.50                            4.40    

Requirements 

1. Which product should StoreAll emphasize? Why? 

2. To maximize profits, how many of each size bin should StoreAll produce? 

3. Given this product mix, what will the company’s operating income be?

Step-by-Step Solution

Answer

Answer

The company should emphasize the regular bins because of their high contribution margin than large bins. 

Step-by-Step Solution Step 1: Meaning of Production

The process of converting or transforming the raw materials into finished goods is termed production. This process includes direct material, labor, machinery, and other overheads. 

Step 2: Determination of product should be emphasized

Particulars	Regular	Large
Selling price per unit	$8	$10.40
Less: Variable cost per unit	$3.50	$4.40
Contribution margin per unit	$4.50	$6
Unit per machine hours	17	10
Contribution per machine hour	76.50	60

Comment: The company should emphasize regular bins because the per hour contribution of regular bins is more than the per hour contribution of large bins. 

Step 3: Bins production for profit maximization

• Contribution if regular bins are produced:

$\begin{array}{c}\mathbf{\text{Contribution}}\left(\text{Regular bins}\right)\mathbf{=}\mathbf{\text{Total machine hours}}\mathbf{\times }\mathbf{\text{Contribution per machine hour}}\\ \mathbf{=}\mathbf{3}\mathbf{,}\mathbf{300}\mathbf{\times }\mathbf{76}\mathbf{.50}\\ \mathbf{=}\mathbf{\$}\mathbf{252}\mathbf{,}\mathbf{450}\end{array}$

• Contribution if large bins are produced: 

$\begin{array}{c}\mathbf{\text{Contribution}}\mathbf{\left(}\mathbf{\text{Large bins}}\mathbf{\right)}\mathbf{=}\mathbf{\text{Total machine hours}}\mathbf{\times }\mathbf{\text{Contribution per machine hour}}\\ \mathbf{=}\mathbf{3}\mathbf{,}\mathbf{300}\mathbf{\times }\mathbf{60}\\ \mathbf{=}\mathbf{\$}\mathbf{198}\mathbf{,}\mathbf{000}\end{array}$

As the demand for the bins is high in the market, the company can produce any number of bins, but the production of regular bins is preferable due to its high contribution margin.

Step 4: Computation of operating income

Based on production mix, i.e. 100%, the operating income would be:

Particulars	Amounts ($)
Contribution (3300*76.50)	252,450
Less: Fixed cost	(115,000)
Operating Income	$137,450