Elsinore Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment; Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 90,000 units per year. These units require 3 direct labor-hours each.
If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 77,500 of these units per year.
If Mobile does not obtain 77,500 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile's audio system. The units can be sold to the outside market for $201 each.
Home estimates that its total costs are $1,070,000 for fixed costs, $14 per direct labor-hour, and $6 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year.
Required:
Determine the following:
a. Total contribution margin to Home if it sells 90,000 units outside.
b. Total contribution margin to Home if it sells 77,500 units to Mobile
(c) & (d). The costs to be considered in determining the optimal company policy for sales by Home.
The annual contributions and costs for Home and Mobile under the optimal policy.