Reference no: EM132853324
Question - DEC produces the same power generators in two plants, a newly renovated plant in ABC and an older, less automated plan in XYZ. The following data are available for the two plants:
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Description
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ABC
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XYZ
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Selling price
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$150.00
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$150.00
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Variable manufacturing cost per unit
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$72.00
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$88.00
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Fixed manufacturing cost per unit
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$30.00
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$15.00
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Variable marketing cost per unit
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$14.00
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$14.00
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Fixed marketing costs per unit
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$19.00
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$14.50
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Operating income per unit
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$15.00
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$18.50
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Production rate per day
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400 units
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350 units
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Normal annual capacity usage
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250 days
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250 days
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Maximum annual capacity
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320 days
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320 days
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All unit fixed costs are calculated on a normal year of 250 working days. When the number of working days exceeds 250, variable manufacturing costs increase by $3.00 per unit in ABC and $8.00 per unit in XYZ.
DEC is expected to produce and sell 224,000 generators during the coming year. Wanting to maximize the higher profit of XYZ, DEC's production manager has decided to manufacture 112,000 units of each plant. This plan results in XYZ operating at capacity (350 units per day 320 days) and ABC operating its normal volume (400 units per day over the relevant number of days). The company's tax rate is 40%.
REQUIRED -
1. If DEC wishes to make net income of $120,000 operating within normal capacity in each division, how many units must be produced?
2. Calculate the operating income that would result from the division production manager's plan to produce 112,000 units at each plant.
3. Assuming contribution margins per unit are within normal capacity levels in each plant, at what level of volume will the company be indifferent about where to locate its production facility?