Question

Dakota Security Systems (DSS) is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Residential Division and Commercial Division both sell security and monitoring equipment. Residential sells primarily to home owners and apartment management companies. Commercial focuses on small to medium-sized businesses. Residential sells a particular alarm to the outside market for $234 per unit. The outside market can absorb up to 45,850 units per year. These units require 3 direct labor-hours each.

If Residential modifies the units with an additional 0.75 hour of labor time, it can sell them to Commercial for $261 per unit. Commercial will accept up to 39,300 of these units per year.
If Commercial does not obtain 39,300 units from Residential, it purchases them for $270 each from the outside. Commercial incurs $126 of additional labor and other out-of-pocket costs to convert the alarm (either from Residential or outside) into one that fits in an existing Commercial Division system. The units can be sold to the outside market for $630 each.
Residential estimates that its total costs are $1,491,000 for fixed costs, $32.00 per direct labor-hour, and $21.60 per alarm for materials and other variable costs besides direct labor. Its capacity is limited to 205,500 direct labor-hours per year.
Required:
Determine the following:
a. Total contribution margin to Residential if it sells 45,850 units outside.
b. Total contribution margin to Residential if it sells 39,300 units to Commercial.
c. and d. The costs to be considered in determining the optimal company policy for sales by Residential.
The annual contributions and costs for Residential and Commercial under the optimal policy.

Answer 1

To calculate the total contribution margin to Residential, we need to calculate the revenue and subtract the variable costs. The revenue is found by multiplying the selling price per unit by the number of units sold. The variable costs include direct labor costs, material and other variable costs, and additional labor and other costs incurred by Commercial.

Step-by-step explanation:

a. To determine the total contribution margin to Residential if it sells 45,850 units outside, we need to calculate the total revenue and subtract the total variable costs. The revenue can be found by multiplying the selling price per unit ($234) by the number of units sold (45,850). The variable costs include the direct labor costs and the material and other variable costs besides direct labor. The direct labor costs can be calculated by multiplying the number of units (45,850) by the direct labor-hours required per unit (3) and the direct labor cost per hour ($32). The material and other variable costs besides direct labor can be calculated by multiplying the number of units (45,850) by the material and other variable cost per unit ($21.60). Subtracting the variable costs from the revenue will give us the total contribution margin.

b. To determine the total contribution margin to Residential if it sells 39,300 units to Commercial, we need to calculate the total revenue and subtract the total variable costs. The revenue can be found by multiplying the selling price per unit ($261) by the number of units sold (39,300). The variable costs include the direct labor costs, the material and other variable costs, and the additional labor and other out-of-pocket costs incurred by Commercial for conversion.

The direct labor costs can be calculated by multiplying the number of units (39,300) by the direct labor-hours required per unit (3) and the direct labor cost per hour ($32). The material and other variable costs can be calculated by multiplying the number of units (39,300) by the material and other variable cost per unit ($21.60). The additional labor and other out-of-pocket costs incurred by Commercial can be calculated by multiplying the number of units (39,300) by the additional cost per unit ($126). Subtracting the variable costs from the revenue will give us the total contribution margin.