Reference no: EM131765526
Exercise 1 - Thorne Company manufactures and sells three products. Relevant per unit data concerning each product are given below.
Product A B C
Selling price $9 $ 12 $14
Variable costs and expenses $3 $9.50 $12
Machine hours to produce 2 1 2
Instructions:
(a) Compute the contribution margin per unit of the limited resources (machine hours) for each product.
(b) Assuming 1,500 additional machine hours are available, which product should be manufactured:
(c) Prepare an analysis showing the total contribution margin if the additional hours are (1) divided equally among the products, and (2) allocated entirely to the product identified in (b) above.
Exercise 2 - An investment banker is analyzing two companies that specialize in the production and sale of candied apples. Old -Fashion apples uses a labor-intensive approach, and Mech-Apple uses a mechanized system. CVP income statements for the two companies are shown below.
Old-Fashion
Apples Mech-Apples
Sales $400,000 $400,000
Variable costs 320,000 160,000
Contribution margin 80,000 240,000
Fixed costs 20,000 180,000
Net incomes $ 60,000 $ 60,000
The investment baker is interested in acquiring one of these companies. However, she is concerned about the impact that each company's cost structure might have on its profitability.
Instructions:
(a) Calculate each company's degree of operating leverage. Determine which company's cost structure makes it more sensitive to changes in sales volume.
(b) Determine the effect on each company's net income if sales decrease by 10% and if sales increase by 5%. Do not prepare income statements.
(c) Which company should the investment banker acquire? Discuss.