Description ; Peoria; Moline ; Selling price - $150.00 ; $150.00 ; Variable manufacturing cost...

Question:

Description Peoria Moline
Selling price $150.00 $150.00
Variable manufacturing cost per unit $72.00 $88.00
Fixed manufacturing cost per unit 30.00 15.00
Variable marketing and distribution cost per unit 14.00 14.00
Fixed marketing and distribution cost per unit 19.00 14.50
Total cost per unit 135.00 131.50
Operating income per unit $15.00 $18.50
Production rate per day 400 units 320 units
Normal annual capacity usage 240 days 240 days
Maximum annual capacity 300 days 300 days

1. Calculate the operating income that would result from the production manager's plan to produce 96,000 units at each plant.

HINT:

(a. First compute the number of units for each plant's normal annual volume and determine if the manager's plan requires either plant to work overtime.

b. Then compute the total contribution margin for each plant, including the contribution margin for normal annual volume and any additional contribution margin from overtime volume.

c. Then subtract total fixed costs from total contribution margin to determine operating income for each plant and for both plants. )

2. Determine how the production of 192,000 units should be allocated between the Peoria and Moline plants to maximize operating income for Portal Corporation. Show your calculations.

HINT:

(a. To maximize operating income for the company, you need to maximize total contribution margin. So you want to produce as many units as possible at the plant with the higher contribution margin per unit and the remaining units at the other plant, but only as long at each plant is operating at volume in excess of its breakeven point. Using this allocation of 192,000 units between the two plants, recompute the total contribution margin, deduct total fixed costs, and recompute total operating income. Is your result better?)

3. Write a memo from the Production Manager to the Chief Operating Officer explaining your recommended plan for production, how this plan differs from the original plan, and why your recommended plan increases operating income over the original plan.

Discuss the concepts of per unit cost and per unit operating income versus contribution margin per unit and total contribution margin, and how they would affect decision making in this case.

Contribution margin:

The contribution margin is the amount above the variable cost included in the selling price. It is obtained by deducting variable costs from the sales value.

Answer and Explanation:

Requirement 1 & 2:

1. Income Statement for 96,000 units
Description Peoria Moline
Selling price $150.00 $150.00
Less: variable Costs
Variable manufacturing cost per unit $72.00 $88.00
Variable marketing and distribution cost per unit 14 -$86.00 14 -$102.00
Per Unit Contribution Margin $64.00 $48.00
Total Contribution Margin (a x 96,000) $6,144,000.00 $4,608,000.00
Less: Fixed Costs (30+19)*400*240 and (15+14.5)*320*240 -$4,704,000.00 -$2,265,600.00
Net Profit $1,440,000.00 $2,342,400.00
Maximun Production Units 120,000 96,000
Breakeven Point 73,500 47,200
2. Computation for required poduction units
Units 120,000 76,000


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