Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells t
ID: 2422069 • Letter: H
Question
Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, included memory, and included hard drive capacity. The following information is available:
The average wage rate is $20 per hour. Variable overhead varies with the quantity of direct labor hours. The plant has a capacity of 20,000 direct labor-hours, but current production uses only 10,400 direct labor-hours.
A nationwide discount chain has offered to buy 2,500 Lightning 2.0 computers and 2,500 Lightning 2.4 computers if the price is lowered to $200 and $250, respectively, per unit.
If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the additional computers?
How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? Prices on regular sales will remain the same.
Suppose that the nationwide discount chain has offered instead to buy 3,500 each of the two models at $200 and $250, respectively. This customer will purchase the 3,500 units of each model only in an all-or-nothing deal. That is, Hi-Speed Electronics must provide all 3,500 units of each model or none. Hi-Speed's management has decided to fill the entire special order for both models. In view of its capacity constraints, Hi-Speed will reduce sales to regular customers as needed to fill the special order. How much will the profits change if the order is accepted? Assume that the company cannot increase its production capacity to meet the extra demand.
Answer the question in requirement (b), assuming instead that the plant can work overtime. Direct labor costs for the overtime production increase to $30.00 per hour. Variable overhead costs for overtime production are $5 per hour more than for normal production.
Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, included memory, and included hard drive capacity. The following information is available:
Explanation / Answer
Answer a.1. Lightning 2.0 Lightning 2.4 Direct Labor per unit $32 $40 Wage arte per hour $20 $20 Hours required to produce 1 Unit 1.6 2 Special Order in Units 2500 2500 Hrs required for Special Order 4000 5000 Total Hrs Reuired 9000 Answer a.2. Statement of Incremental Net Income if order is Accepted Particulars Lightning 2.0 Lightning 2.4 Total Sales in Units 2500 2500 SP per Unit $200 $250 Total Sales in $ $500,000 $625,000 $1,125,000 Less: Variable Costs Direct Material 185000 210000 $395,000 Direct labour 80000 100000 $180,000 Variable Overhead 37500 50000 $87,500 Total Variable Costs 302500 360000 $662,500 Incremental Profit $197,500 $265,000 $462,500 The Profit of the Company will increase by $462,500 if the order is accepted. Note: Fixed Cost will not increase, since the company has idle capacity to produce the Special Order Answer b. Lightning 2.0 Lightning 2.4 Direct Labor per unit $32 $40 Wage arte per hour $20 $20 Hours required to produce 1 Unit 1.6 2 Special Order in Units 3500 3500 Hrs required for Special Order 5600 7000 Total Hrs Reuired 12600 The company has a Idle capacity of = 20000 Hrs - 10400 Hrs = 9600 Hrs So, the Compant has to reduce his Normal Production to manufacture the Special Order Lightning 2.0 Lightning 2.4 SP Per Unit 220 390 Less: Variable Costs Direct Material 74 84 Direct labour 32 40 Variable Overhead 15 20 Total Variable Costs 121 144 Contribution Per Unit 99 246 Labour Hr required per Unit 1.60 2 Contribution per Labour Hr 61.88 123.00 The Company should produce first Lighting 2.4 as it is giving more Contribution per Labour Hour and the Balance Labour Hr left to produce Lighting 2.0 Hours Required to Produce Lighiting 2.4 - 2000 Units = 2000 Units X 2 Hrs = 4000 Hrs Hrs Left to Produce Lighting 2.0 = 9600 Hrs - 4000 Hrs = 5600 Hrs No. Of Units Produce of Lighting 2.0 = 5600 Hrs / 1.60 hrs = 3500 Units Calculation of Incremental profit If Special order is Accepted Particulars Amount Sales- Special order Lighting 2.0 - 3500 Units X $200 700,000 Lighting 2.4 - 3500 Units X $250 875,000 1,575,000 Variable Costs Direct Material Lighting 2.0 - 3500 Units X $74 259,000 Lighting 2.4 - 3500 Units X $84 294,000 (553,000) Direct labour Lighting 2.0 - 3500 Units X $32 112,000 Lighting 2.4 - 3500 Units X $40 140,000 (252,000) Variable Overhead Lighting 2.0 - 3500 Units X $15 52,500 Lighting 2.4 - 3500 Units X $20 70,000 (122,500) Less: Loss of Contribution due Loss of Sales of Lightining 2.0 Lighting 2.0 - 500 Units X $99 (49,500) Incremental Profit / (Loss) 598,000 Answer c. Calculation of Incremental profit If Special order is Accepted Particulars Amount Sales- Special order Lighting 2.0 - 3500 Units X $200 700000 Lighting 2.4 - 3500 Units X $250 875000 1,575,000 Variable Costs Direct Material Lighting 2.0 - 3500 Units X $74 259000 Lighting 2.4 - 3500 Units X $84 294000 (553,000) Direct labour Lighting 2.0 - 3500 Units X $32 112000 Lighting 2.4 - 3500 Units X $40 140000 (252,000) Variable Overhead Lighting 2.0 - 3500 Units X $15 52500 Lighting 2.4 - 3500 Units X $20 70000 (122,500) Less: Extra Varible Cost incurred for extra 500 Hrs Required' Labour - 500 Hrs X $10 5000 Variable Overhead - 500 Hrs X $5 2,500 (7,500) Incremental Profit / (Loss) 640,000