Question

Which of the following statement is correct as it relates to a company that sells multiple products?

		CVP analysis cannot be used
		Contribution margin is based on sales mix
		CVP analysis is much easier to use
		The break-even point remains the same even if sales mix changes

Way Out There Golf Balls, Inc. produces two types of golf balls: the pro model and tour model. The golf balls are sold to retailers in cartons containing 360 balls (30 boxes containing 4 sleeves per box, with each sleeve holding 3 balls). Both models are made with the same machines. It takes 15 minutes of machine time to produce 360 pro model golf balls, whereas it takes 30 minutes to produce the same number of tour model balls. The difference in production time results mainly from the different materials used in construction. If the total machine time available is 110 hours per month and the demand for each model of golf ball is 108,000 per month how many of each model should be produced to maximize profit? The relevant data concerning the two models are as follow:

Description	Pro Model	Tour Model
Sales Price (per carton)	$500	$590
Less: Direct Materials	200	265
Direct Labor	50	50
Variable Overhead	50	75
Contribution Margin	$200	$200
Required Machine Time	¼ hour	½ hour

   

	a.	300 Cartons of Pro Model & 75 Cartons of Tour Model
	b.	305 Cartons of Pro Model & 70 Cartons of Tour Model
	c.	375 Cartons of Pro Model & 70 Cartons of Tour Model
	d.	300 Cartons of Pro Model & 70 Cartons of Tour Model

How are fixed manufacturing overhead costs moved from one year to another under absorption costing?

		to work-in-process
		to finished goods
		to cost of goods sold
		to variable costs

Answer 1

Which of the following statement is correct as it relates to a company that sells multiple products?
Answer is b. Contribution margin is based on sales mix
Weighted Contribution margin for sales mix is determined for CVP analysis.

	Pro Model	Tour Model
Contribution Margin per carton	$   200.00	$            200.00
Required Machine Time (Hours)	0.25	0.5
Contribution Margin per machine hour	$   800.00	$            400.00

Since Contribution margin per machine hour for Pro model is highest, first pro model will be produced.
Maximum Demand = 108000 / 360 = 300 cartons

	Pro Model	Tour Model
Required Machine Time (Hours)	0.25	0.5
For Maximum Demand	75	150

75 hours will be used for Pro model and remaining 35 hours i.e. (110-75) will be used for Tour Model in which 70 cartons will be produced i.e. 35/0.5 = 70

Answer is d. 300 Cartons of Pro Model & 70 Cartons of Tour Model

How are fixed manufacturing overhead costs moved from one year to another under absorption costing?
Answer is b. to finished goods.

Under absorption costing, fixed manufacturing overhead is part of product cost, which is carried forward in finished goods inventory for unsold units.