ABC is a toy manufacturer. It manufactures both toy components and finished toys
ID: 451362 • Letter: A
Question
ABC is a toy manufacturer. It manufactures both toy components and finished toys. For a specific type of toys, the manufacturer can sell the components to an assembly company for $12 per set, or assemble the toys itself. The finished toys can be sold for $17 each. ABC has a total capacity of 500,000 hours, which could be used for both producing toy components and assembling. One capacity hour can be used to produce 30 sets of toy components or to assemble 15 units of toys. All the related costs for the manufacturing and assembling are listed below. No other costs and tax are considered. The manufacturing overhead cost is fixed and allocated to the units produced based on their production time. We assume that the demand is high enough so that the manufacturing capacity is always utilized fully.
The direct materials, direct labor and manufacturing overhead for each set of toy components are $4.60, $3.00 and $1.00, respectively.
The additional direct materials, direct labor and manufacturing overhead for each unit of assembly are $1.20, $0.50 and $2.00, respectively.
(1) The ABC executives decide to assemble the toys themselves instead of selling the components. With the expected sale price of $17 per unit, is this a good decision?
(2) What is the lowest price for the completely assembled (finished) toys that will be acceptable for the executives’ decision?
(3) The manufacturing overhead cost in (1) and (2) is a fixed cost allocated to each unit. Suppose that 50% of that fixed overhead cost is variable. Please reevaluate your answers in (1) and (2).
Explanation / Answer
The given information is analyzied as follows:
(1) The ABC executives decide to assemble the toys themselves instead of selling the components. With the expected sale price of $17 per unit, is this a good decision?
Based on the above table the decision is good because per unit profit is more in case of selling complete toy as compared to component but there is catch with respect to the number of units produced and sold. Further the manufacturing overheads cost is fixed and allocated to the units based on their production time.
Without considering the fixed manufacturing overheads, the comparison of two options ia as follows:
Now from the above table, it is better to go for sales of components as the surplus generated by it is more.
(2) What is the lowest price for the completely assembled (finished) toys that will be acceptable for the executives’ decision?
In order to have same level of surplus as shown above the price is $18.10 calculated as Revenue/number of units
(3) The manufacturing overhead cost in (1) and (2) is a fixed cost allocated to each unit. Suppose that 50% of that fixed overhead cost is variable. Please reevaluate your answers in (1) and (2).
Total overhead costs in case of components is $15,000,000 @$1 but in case of complete toy it comes out as 22,500,000 @ $3 ?
Products Component Complete Capacity/hour 30 15 Material cost 4.6 5.8 Labor cost 3 3.5 Manuf.Overhead 1 3 Total per unit 8.6 12.3 Sales price/unit 12 17 Profit per unit $ 3.4 4.7 Total capacity hours available 500,000