Product Profitability and Mix - Calculating Variable Overhead

question 9

Essay

Product Profitability and Mix - Calculating Variable Overhead
Sportway Inc. is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Sportway's products are purchased from other companies and the remainder are manufactured by Sportway. The company has a plastics department that is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available workstations. Presented below are the selling price and costs associated with Sportway's tackle boxes. Because Sportway believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68 per box delivered to Sportway's facility.
Bart Johnson, Sportway's product manager, has suggested that the company could make better use of its plastics department by manufacturing skateboards. To support his position, Johnson has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes that Sportway could expect to sell 17,500 skateboards annually at $45 per skateboard. Johnson's estimate of the costs to manufacture the skateboards follows. In the plastics department, Sportway uses direct labor hours as the application base for manufacturing overhead. Included in manufacturing overhead for the current year is $50,000 of factorywide, fixed manufacturing overhead that has been allocated to the plastics department. For each product that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, a portion of the selling and administrative cost is fixed at $6 per unit. Total selling and administrative costs for the purchased tackle boxes would be $10 per unit.
Required:
Prepare an analysis based on the data presented that will show which product or products Sportway Inc. should manufacture and/or purchase to maximize the company's profitability. Show the associated financial impact. Support your answer with appropriate calculations.

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Definitions:

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