CASE 14-62

Bo Vonderweidt, the production manager for Sportway Corporation, had requested to

have lunch with the company president. Vonderweidt wanted to put forward his
suggestion to add a new product line. As they finished lunch, Meg Thomas, the
company president, said, Ill give your proposal some serious thought, Bo. I think
youre right about the increasing demand for skateboards. What Im not sure about is
whether the skateboard line will be better for us than our tackle boxes. Those have
been our bread and butter the past few years.
Vonderweidt responded with, Let me get together with one of the controllers
people. Well run a few numbers on this skateboard idea that I think will demonstrate
the lines potential.
Sportway is a wholesale distributor supplying a wide range of moderately priced
sports equipment to large chain stores. About 60 percent of Sportways products are
purchased from other companies while the remainder of the products is 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 work stations.
The selling price and costs associated with Sportways tackle boxes are as follows:
Selling price per box

$86.00

Costs per box:

Molded plastic .

$ 8.00

Hinges, latches, handle .

9.00

Direct labor ($15.00 per hour) ..

18.75

Manufacturing overhead

12.50

Selling and administrative cost .

17.00

Profit per box ..

65.52
$20.75

Because Sportways sales manager believes the firm 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 $68.00 per box delivered to Sportways facility.
Bo Vonderweidt, Sportways production manager, has come to the conclusion
that the company could make better use of its Plastics Department by manufacturing
skateboards. Vonderweidt has a market study that indicates an expanding market for
skateboards and a need for additional suppliers. Vonderweidt believes that Sportway
could expect to sell 17,500 skateboards annually at a price of $45.00 per skateboard.
After his lunch with the company president, Vonderweidt worked out the following
estimates with the assistant controller.
Selling price per skateboard ..

$45.00

Costs per skateboard:

Molded plastic ..

$5.50

Wheels, hardware

7.00

Direct labor ($15.00 per hour)

7.50

Manufacturing overhead .

5.00

Selling and administrative cost ..

9.00

Profit per skateboard ...

34.00
$11.00

In the Plastics Department, Sportway uses direct-labor hours as the application

base for manufacturing overhead. Included in the manufacturing overhead for the
current year is $50,000 of factory wide, fixed manufacturing overhead that has been
allocated to the Plastics Department. For each unit of product that Sportway sells.
regardless of whether the product has been purchased or is manufactured by Sportway,
there is an allocated $6.00 fixed overhead cost per unit lot distribution that is included in
the selling and administrative cost for all products. Total selling and administrative costs
for the purchased tackle boxes would be $10.00 per unit.
Required:
In order to maximize the companys profitability, prepare an analysis that will show
which product or products Sportway Corporation should manufacture or purchase.

1. First determine which of Sportways options makes the best use of its scarce
resources. How many skateboards and tackle boxes should be manufactured? How
many tackle boxes should be purchased?
2. Calculate the improvement in Sportways total contribution margin if it adopts the
optimal strategy rather than continuing with the status quo.
SOLUTION
Based on the data provided and the analysis conducted, it is concluded that to
maximize the companys profitability, Sportway Corporation should purchase 9,000
tackle boxes from Maple Products, while also manufacture 17,500 skateboards and
1,000 tackle boxes. By having this combination of purchased and manufactured goods,
it will maximize the contribution of per direct-labor hour available.
The details of the analysis are as follows:
1.

Calculating the unit contribution margins:

Purchased
Tackle Boxes

Selling Price
Less
Material
Direct Labor
Manufacturing Overhead
Selling & Admin Costs
Contribution Margin
Direct Labor hours per Unit
Contribution per hour

Manufactured
Tackle Boxes

Skateboards

$86.00

$86.00

$45.00

(68.00)

(17.00 = 9+8)
(18.75)
(6.25)
(11.00 = 17 - 6)
$33.00

(12.50=5.50+7)
(7.50)
(2.50)
(3.00 = 9 - 6)
$19.50

1.25 (see below)

$26.40

0.5 (see below)

$39.00

(4 = 10 - 6)
$14.00

Since there is an allocated $6.00 fixed overhead cost per unit lot distribution that is
included in the selling and administrative cost for all products, this amount is subtracted
to get the actual Selling and Administrative costs as shown above.

The Variable Manufacturing Overhead per unit shown in the above table is calculated as
follows:
Tackle boxes:
Direct-labor hours
Overhead per direct-labor hour
Capacity of Direct Labor hours
Total overhead
Total variable overhead
Variable overhead per hour
Variable overhead per box
Skateboards:
Direct Labor hours.
Variable overhead.

$18.75 / 15.00 = 1.25 hrs

$12.50 / 1.25 = $10.00
8,000 boxes x 1.25 = 10,000 hrs
10,000 hrs x $10/hr = $100,000
$100,000 - $50,000 = $50,000
$50,000 / 10,000 hrs = $5.00/hr
$5.00/hr x 1.25 hrs = $6.25
$7.50 / $15.00 = 0.5 hrs
$5.00/hr x 0.5 hrs = $2.50

The optimal strategy is to manufacture skateboards, up to the number of skateboards

that the company can sell which is 17,500, and with the remaining labor time, Sportway
can produce 1,000 tackle boxes. This optimal approach takes into account Sportways
scarce resource which is its direct labor.
The decision for this optimal strategy is shown as follows:
We are trying to maximize the following objective function:
0.5S + 1.25T < 10,000 hrs, where:
S = # of Skateboards
T = # of Tackle boxes
So if the strategy is to produce the 17,500 skateboards, then that leaves us with:
0.5 (17,500) + 1.25 T = 10,000 and solving for T we get:
1.25T = 10,000-8,750
1.25t = 1,250 hrs
T= 1000 tackle boxes

2.

The following table shows the improvement in the companys total contribution
margin if it manufactures 17,500 skateboards and 1,000 tackle boxes, rather than
just manufacturing 8,000 tackle boxes. The table also uses the optimal
Sportways available capacity of 10,000 direct-labor hours (DLH)

Items

Quantity DLH/unit

Total hours
Skateboards
Manufactured

17,500
1,000

tackle boxes
Purchased tackle

9,000

0.50
1.25

DLH
10,000
8,750
1,250

Unit

Total item

Contribution

Contribution

$19.50
$33.00

$341,250
$33,000

$14.00

$126,000

boxes
Total Contribution

$500,250

However, we need to account and subtract the contribution from manufacturing the
8,000 tackle boxes Sportway does annually. This is calculated as follows:
8,000 x $33 = $264,000
So the final improvement in contribution margin is:
$500,250 - $264,000 = $236,250