Question

Art-Sea Corp is a local company which produces Nova Scotia paintings. Each painting is 2 feet high by 3 feet wide. Art-Sea hires artists, and purchases all materials for the artists, including paints, framing, brushes, easels etc.    In 2019, its first year of operations, the company manufactured 200 unique paintings. Manufacturing costs for all paintings for the year are:

               Direct Materials                                             $20,000                             

               Direct Labour                                                 $90,000                            

               Variable Manufacturing Overhead          $15,000               

               Fixed Manufacturing Overhead               $25,000                             

Because of the popularity of these paintings with visiting tourists, all paintings produced were sold immediately after going on the market. Art-Sea marks up paintings by 100% of cost.

1. Determine the manufacturing cost per painting, by filling in the following table.

                             

Direct Materials per painting
Direct Labour per painting
Variable MOH per painting
Total Variable Manufacturing Cost per painting
Fixed MOH per painting
Total manufacturing cost per painting

B. What is the selling price of each painting?

C. Art-Sea Corp would save $30 direct materials per painting and $5,000 total variable MOH per year (assuming all production levels and financial data remain the same as 2019 data above) if the company outsources framing.   The cost to outsource framing would be $12,500 per year, plus $500 insurance. Should Art-Sea outsource framing? Explain by showing your math, and by writing one sentence.

D. If Art-Sea proceeds with outsourcing, there would be available production capacity to produce another product: two-inch square mini-painting, unframed on canvas. Manufacturing costs for this mini-painting would be:

               Direct Materials                                             $1,500                 

               Direct Labour                                                 $6,000                

Variable Manufacturing Overhead          $500

The mini-paintings are also very popular. Art-Sea would produce 250 mini-paintings per year, and all would be expected to sell immediately, for $75 each. No additional fixed MOH would be incurred.

Should Art-Sea proceed with outsourced framing of the large painting, if the additional mini-painting product is produced and sold? In your answer, clearly show your calculation to arrive at incremental increase or decrease to CM, contribution margin.

Answer 1

Answer A & B

	Total	Per Unit
Direct Material	20000	100
Direct Labour	90000	450
Variable Manufacturing Overhead	15000	75
Fixed Manufacturing Overhead	25000	125
Total Manufacturing Cost		750
Markup @ 100%		750
Selling Price per unit		1500

Answer C

Additional Cost of Oursourcing (A)
Cost to outsource framing	12500
Insurance	500
	13000
Saving from Outsourcing (B)
Direct Material Cost	6000
Variable Mfg Overhead	5000
	11000
Net Loss from Outsourcing	2000

Thus the company should not proceed with outsourcing of large paintings becasue the same will lead to decrease in gain by $2000

Answer D

Continuing on the above position, use of additional production capacity will results in some gain. The same is worked out as follows:

Sales	18750
Direct Material	-1500
Direct Labour	-6000
Variable MOH	-500
Net Gain from Mini Painting	10750

Net Increase in Contribution Margin from outsourcing = 10750- 2000 = $8750

Thus the company should proceed with outsourcing of large paintings.