Limar, Inc. manufactures three different motors AX, BX, and CX. Data on the motors is presented
Question:
Limar, Inc. manufactures three different motors – AX, BX, and CX. Data on the motors is presented below:
| Budget Information: | AX | BX | CX |
| Inventory units, January 1, 2022 | 2,000 | 2,200 | 2,400 |
| Production units in 2022 | 3,600 | 3,400 | 3,000 |
| Units sold in 2022 | 3,300 | 3,000 | 3,600 |
| Production units in 2023 | 4,500 | 3,200 | 3,400 |
| Estimated Inventory units, December 31, 2023 | 2,300 | 1,600 | 2,000 |
Cost and Production Information:
| Selling price | $620 | $560 | $450 |
| Unit variable cost | $360 | $200 | $240 |
| Machine-hours per unit | 8 | 9 | 7 |
| Avoidable fixed costs, if product line is not produced | $240,000 | $278,000 | $255,000 |
Limar’s production capacity is 80,200 machine-hours per year.
Limar is currently facing a business decision in 2023:
KoCo, the Korean subsidiary of Limar, currently purchases 6,000 units of a simpler version (AX-N) of AX, from its local supplier at $560 each. If Limar was to make AX-N, the company estimates that AX-N would result in variable costs of $320 per unit and will require only 6 machine hours per unit to manufacture. Furthermore, Limar will invest in a new stamping machine solely for the production of AX-N for a fixed cost of $480,000. If Limar produces 6,000 units for KoCo, it will not produce and sell AX to compete with KoCo.
a)
| Calculate the following items: | AX | BX | CX |
| The budgeted Sale units for each model for 2023. | units | units | units |
| The contribution margin per unit for each model. | $ | $ | $ |
| The profitability index for each model. (Round to 1 decimal point.) | $ | $ | $ |
| Ranking the order of priority for production. | |||
| Calculate the total production hours required for the 3 models. | Hours | ||
| For which model should production be reduced and by how many units? | |||
The number of units should be reduced. | |||
b) Calculate the sale breakeven in units, if Limar decides to make AX-N. Then calculate the profitability index for AX and AX-N
c) Given the machine hour constraint, answer the following questions:
| Number of hours required for AX: | hours |
| Number of hours required for Special Order (AX-N): | hours |
| Impact on BX (enter an absolute number for positive, and a bracket number for negative): | hours |
| Impact on CX (enter an absolute number for positive, and a bracket number for negative): | hours |
d) Limar is considering taking the special order. Please answering the following questions:
| What is the benefit from the sale of AX-N? | $ |
| What is the cost from not selling AX? | $ |
| What is the Opportunity Cost from other products? | $ |
| What is the minimum transfer price per unit of AX-N? | $ |
e) If Limar pays a higher tax rate than KoCo, to reduce overall taxes, what should the transfer price be? (e.g. low, medium, high)
