Hi everyone,
Can someone please help me with figuring out this part of the following TBS: How did we calculate the 25 DLH from the information given blow, resulting in $818.75 cost per unit & $2,046,875 per 2500 units ?
“If the company outsources the production of V-4 engines, Alcatara is exploring other options. One of the options the company is considering is to rent out the space to another entity for $500,000 per month. The company is also considering using the space to produce an electric motorcycle motor. The incremental revenue and costs per unit of the new motor are as follows:
Incremental revenue $6,000.00
Direct materials 2,732.00
Direct labor 675.00
Variable Overhead 32.75 per Direct Labor Hour
Traceable fixed costs 403.20 (assumes 2,500 units)
Common fixed costs 992,000.00 per month
Answer:
The potential opportunity costs would be the rental income of $500,000 per month or the segment margin of proposed new products to be made, whichever is greater. The segment margin would be calculated as follows:
Opportunity Costs Per Unit 2500 units
Incremental Revenues $6,000 $15,000,000
Incremental Variable Costs
Direct Materials 2,732 6,830,000
Direct Labor 675 1,687,500
Variable Overhead (25 DLH × $32.75) 818.75 2,046,875
Total Variable Costs 4,225.75 10,564,375
Contribution Margin 1,774.25 4,435,625
Traceable Fixed Costs 403.20 1,008,000
Segment Margin 1,371.05 3,427,625
The monthly segment margin exceeds the rental income and would be the opportunity cost.
Thanks!
