Adding a Product Line Sportway Corporation 1 Tackle boxes Skateboards Selling price $86.00 Selling price $45.00 Cost per box: Costs per skateboard: Molded plastic $8.00 Molded plastic $5.50 Hinges, latches, handle $9.00 Wheels, hardware $7.00 Direct labor ($15.00 per hour) $18.75 Direct labor ($15.00 per hour) $7.50 Manufacturing overhead $12.50 Manufacturing overhead $5.00 Selling and administrative cost $17.00 $65.25 Selling and administrative cost $9.00 $34.00 Profit per box $20.75 Profit per skateboard $11.00 Company can manufacture and sell 8,000 tackle boxes Company expects to sell 17,500 skateboards at $45.00 Maple Products can provide 9,000 tackle boxes at $68.00 per box Selling and administrative costs for tackle boxes - $10.00 per unit Direct labor hours (skateboards) 0.5 Variable overhead 2.5 $50,000 of manufacturing overhead allocated to the Plastics Dept. $6.00 fixed overhead cost per unit included in selling and administrative costs for both products Direct labor hours (tackle boxes) 1.25 Capacity of labor hours 10000 Overhead per direct labor hour $10.00 Total overhead $100,000.00 Total variable overhead $50,000.00 Total variable overhead/hour $5.00 Variable overhead per box $6.25 Tackle Tackle Boxes Boxes Skateboards Purchased Manufactured manufactured Selling price $86.00 $86.00 $45.00 Less: Material $(68.00) $(17.00) $(12.50) Direct labor $(18.75) $(7.50) Manufacturing overhead $(6.25) $(2.50) Selling and administrative cost $(4.00) $(11.00) $(3.00) Contribution margin $14.00 $33.00 $19.50 Direct labor hours/unit $1.25 $0.50 Contribution/hr. $26.40 $39.00 Sportways scarce resource is direct labor hours. In order to maximize direct labor hours, the company should: purchase 9,000 tackle boxes produce 1,000 tackle boxes produce 17,500 skateboards 2 Direct labor hours for 17,500 skateboards and 1,000 tackle boxes instead of manufacturing 8,000 tackle boxes: Optimal use of Sportway's direct labor hours: Unit Total Direct Labor (DLH) Total Balance of Contribution Contribution Hour per Unit DLH DLH Quantity Total Hours 10,000 Skateboards 17,500 0.5 8,750 1,250 $19.50 $341,250 Make Boxes 1,000 1.25 1,250 $33.00 $33,000 Buy Boxes 9,000 - - - $14.00 $126,000 Total Contribution $500,250 Less: Contribution from manufacturing 8,000 boxes (8,000 x $33.00) $(264,000) Contribution Margin Improvement Strategy $236,250
