Question

Hayley Company makes a semi-finished car parts for the automobile industry that has a unit contribution margin of $125 to Miramax. A major customer, Sophie Car Parts, has been purchasing 50 units per month from Hayley for many years, but has indicated that it would prefer to purchase them already machined to its specifications. Sophie has offered to pay an additional $25 per unit for the finished units. To meet those specifications, Hayley would have to rent additional equipment at a cost of $1,000 per month and incur labor and other direct costs of $2 per unit. Calculate advantage or disadvantage of further processing for Hayley.

Answer 1

Hayley Company has a net advantage of $150 per month by processing car parts to Sophie Car Parts' specifications, considering the additional revenue of $25 per unit for 50 units offset by the costs of $1,000 for equipment rental and $100 for variable costs.

Step-by-step explanation:

To calculate the advantage or disadvantage of further processing for Hayley Company, we need to analyze the additional revenues and costs associated with machining car parts to Sophie Car Parts' specifications. Currently, Hayley has a unit contribution margin of $125 for the semi-finished parts it sells to Miramax. If Hayley chooses to machine the parts, Sophie Car Parts will pay an additional $25 per unit.

Now let's consider the costs. Hayley would incur fixed costs of $1,000 per month for additional equipment rental and variable costs of $2 per unit for labor and other direct costs. As Sophie is purchasing 50 units per month, the total variable costs would amount to 50 units * $2/unit = $100.

To calculate the net advantage (or disadvantage), we'll subtract the additional total costs from the additional revenue:

Additional Revenue = 50 units * $25/unit = $1,250
Additional Cost = $1,000 (equipment rental) + (50 units * $2/unit) (additional costs) = $1,100
Net Advantage = Additional Revenue - Additional Cost = $1,250 - $1,100 = $150

The additional processing has a net advantage of $150 per month for Hayley.