Profitability Analysis:
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 while 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 work stations. Presented below are the selling price and costs associated with Sportway's tackle boxes.
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Selling price per box ..................
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$86.00
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Costs per box
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Molded plastic ............................
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$ 8.00
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Hinges, latches, handle .............
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9.00
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Direct labor ($15.00/hr.) .............
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18.75
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Manufacturing overhead .............
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12.50
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Selling and administrative cost ...
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17.00
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65.25
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Profit per box ..............................
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$20.75
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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 $68.00 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 a price of $45.00 per skateboard. Johnson's estimate of the costs to manufacture the skateboards is presented below.
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Selling price per skateboard ........
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$45.00
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Costs per box
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Molded plastic ..............................
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$5.50
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Wheels, hardware ........................
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7.00
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Direct labor ($15.00/hr.) ...............
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7.50
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Manufacturing overhead ...............
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5.00
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Selling and administrative cost.. ...
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9.00
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34.00
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Profit per box ................................
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$11.00
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In the Plastics Department, Sportway uses direct labor hours as the application base for manufacturing overhead. Included in total manufacturing overhead for the current year is $50,000 of factory-wide, fixed manufacturing overhead that has been allocated to the Plastics Department, and would not change irrespective of the option chosen. 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 for 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.