Catawba: Variable Cost and Differential Cost Approach

Is the company correct in its finding of not manufacturing timeworn model compressors on Sundays? Why? leaven your calculations. Decision making should be based on change of relevant items ONLY. The companys calculation is WRONG, as it takes into concern of irrelevant bushel price. By double-counting depreciation, other Mfg. overheads, SG&A in Sundays cost it distorts the P&L sheet. To correctly show cost structure for decision making, there are two different approaches, yet each should endeavour same conclusion. Approach 1 Differential Cost ApproachAs suggested in case, by producing 4 unites on Sunday, total depreciation, total Mfg. overhead and SG&A lead not change. Thus, we should scarcely look into accounts that will change out of producing activities on Sunday. Table below shows the result of Contribution Margin computation. As illustrated in the table, producing on Sunday will bring $ 2,600 contribution margin per unit and thus company should manufacture. Approach 2 Co mprehensive Income Approach. Based on P&L sheet we can calculate total amend cost for one calendar week manufacturing Depreciation=$ 497? 4= $11,928 Mfg. Overhead=$177? 24=$4,248 Sales=$1,519? 20+$1,769? 4=$ 37,456 G&A=$ 607? 20+$ 707? 4= $14,968 Then we construct weekly income statement of two scenarios As suggested in table, by producing in Sunday, company can crystallise $ 10,400 profit either week, same as by using Differential Cost Approach. union Increasing Profit=Contribution Margin? unit=$ 2,600? 4=$ 10,400 work out Marge McPhee decides to manufacture 10 light weight compressors each week during weekdays for 8 weeks only and sell them at a price of $8,000.Compared to only producing standard compressors, do you nutriment this decision? Why? Show your calculations to support your argument. We use differential cost approach to make decision. Since factory is producing at full-capacity and company cannot force the 3rd shift, nor recruit more travail, the direct labor hou r is the constrain factor. Light compressor requires 62. 5 DLH and standard compressor requires 100 DLH, in other words, produce 1 light compressor can produce 62. 5/100=0. 25 standard compressor and 10 light compressors = 6. 25 standard compressors. Based on information, we can construct the comparison table betwixt two scenarios. As illustrated by table, producing 10 light compressors instead of 6. 25 standard compressors for ONLT 8 weeks will generate $ 182,000 more contribution margin. However, to realize this amount of margin Catawba need to invest $ 218,000 on additional jigs, sensors and downy wares. Thus, company should NOT produce light compressor.