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Agenda Today – Session 9

Go over assigned problems Answer questions Take quiz

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Problem Background

California Instrument Company consists of two divisions:

◈Semiconductor division▶Super-chip

▶Okay-chip

◈Process-control division▶Process-control unit

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Cost Information

OK-Chip Super-ChipVariable mfg. cost: Material 1$ 2$ Labor: 2.0 hrs. @ $14 28 0.5 hrs. @ $14 7

8$ 30$

Total fixed mfg. cost 400,000$

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Requirement 1

Calculate the contribution margin per hour from producing and selling each OK-Chip and each Super-Chip. If no transfers are to be made to the Process-Control Division, how many OK-Chips and Super-Chips should the Semiconductor Division produce and sell?

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Requirement 1, Part A

OK-Chip Super-Chip

Sales price 12.00$ 60.00$ Variable cost (slide 2) 8.00 30.00 Contribution margin 4.00$ 30.00$ Labor hours (slide 2) 0.50 2.00 Cont. margin per hour 8.00$ 15.00$

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Requirement 1, Part B

OptimalProductionQuantity

DL HoursRequired

Super-Chipsa 15,000 30,000

OK-Chipsb 40,000 20,000 Total 55,000 50,000

a15,000 units (maximum) @ 2 hours per unit = 30,000 hrs.b20,000 hrs. available/0.5 hour per unit = 40,000 units

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Requirement 2

The Process-Control Division expects to sell 5,000 unit this year. From the viewpoint of California Instruments as a whole, should 5,000 Super-Chips be transferred to the Process-Control Division instead of purchasing circuit boards?

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Requirement 2 – Cost

CircuitBoard Method

Super-ChipMethod

Variable cost: Direct materials for chip 2.00$ Purchase of circuit board 60.00$

Labor for Super-Chipa 28.00 Labor for control unit 50.00 60.00 Total variable cost 110.00$ 90.00$ Opportunity cost of lost

sales of OK-Chipsb 16.00 Total cost 110.00$ 106.00$

a2 hours of DL @ $14/hr.b2 OK-Chips per labor hr. @ $8 each

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Requirement 2 – CM

CircuitBoard

Method

Super-Chip

MethodSale price 132.00$ 132.00$ Variable cost (slide 8) 110.00 90.00 Contribution margin 22.00$ 42.00$

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Semiconductor Division: 15,000 Super-Chips @ $30 of CM each 450,000$ 40,000 OK-Chips @ $4 of CM each 160,000 Process-Control Division: 5,000 control units @ $22 of CM each 110,000 Total Company 720,000$

Alternative View of the OptionsCircuitboard Method

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Semiconductor Division: 15,000 Super-Chips @ $30 of CM each 450,000$ 20,000 OK-Chips @ $4 of CM each 80,000 Process-Control Division: 5,000 control units @ $42 of CM each 210,000 Total Company 740,000$

Alternative View of the OptionsSuper-Chip Method

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Requirement 3

Variable Cost per UnitDirect Material $60.00Direct Labor $50.00

Total Variable Cost $110.00

Direct Labor Cost of Transfer $60.00

Maximum Transfer Price $50.00

Incremental costs $30.00CM/2hrs for Okay-chip (opportunity cost) $16.00

Minimum Transfer price $46.00

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Requirement 4

Contribution Margin effect of three options:CM/hr

Make Super-chips to sell $15Make Okay-chips to sell $8

Make Super-chips to transfer($60-$40)/2hr +$10

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Requirement 4

Optimal product mix for CIC:

Make 15,000 Super-chips to sellMake 10,000 Super-chips to transfer

Make 0 Okay-chipsBuy 2,000 circuit boards

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Requirement 4

Transfer price:

$46 to $50 on 10,000 Super-chips or less

$60 for each additional Super-chip

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Any Questions?

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Session 3

William F. BentzJanuary 22 , 2002

Fisher College of Business

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Problem Requirements

A study has shown that a single super-chip can be substituted to replacethe circuit board in the process control unit. Using the super-chipwould require 1 extra labor hour per control unit for a total of 6 hours.

Required:1. Calculate the contribution margin per hour of selling super-chip andokay-chip. If no transfers were made to the process-control division,how many super-chips and okay-chips should the semiconductor divisionsell?

2. The process control division expects to sell 5,000 control units this year.From the viewpoint of the firm as a whole, should 5,000 super-chips be transferredto the process control division to replace circuit boards?

3. If demand for the control unit is certain to be 5,000 units, but its price

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Product Cost Characteristics

Semiconductor DivisionCost Characteristics Super Chip Okay ChipDirect Materials $2.00 $1.00Direct Manufacturing Labor

(2 Hours * $14; .5 Hours * $14) $28.00 $7.00OverheadOrders 15,000 at $60.00 Unlimited at $12.00

Process Control DivisionCost CharacteristicsDirect MaterialsDirect Manufacturing Labor

(5 Hours * $10.00)OverheadOrders

$80,000.00Market Price $132.00

$400,000

Process Control UnitCircuit Board $60.00

$50.00