Tandem Company produces and sells two models of a product (A+)

Tandem Company produces and sells two models of a product: economy and deluxe. The economy model is a standard product that is produced in large batches and kept in stock to be sold to a few large discount chains. The deluxe model is produced in smaller batches based on customer specifications and is distributed through smaller, high-end retail stores.

Production and sales last year were as follows:

Last year’s income statement (displayed in a variable costing format) is shown below:

Tandem company Produces and Sells two models of a Product economy and deluxe. The economy model is a standard product that is produced in large batches and kept in stock to be sold to a few large discount chains. The deluxe model is produced in smaller batches based on customer specifications and is distributed through smaller, high-end retails stores.

Production and Sales last year were as follows

Last year’s income Statement (displayed in A variable Costing Format) is shown below:

Details Economy 6000 units Deluxe 4000 units 10000 units

Per Unit Total Per Unit Total Total

Sales Revenue 40 $240,000 100 $400,000 $640,000

Total Variable Costs 28 $168,000 60 $240,000 $408,000

Contribution Margin 12 $72,000 40 $160,000 $232,000

Fixed Cost $181,250

Pre-Tax Profit $50,750

Taxes (30%) $15,225

After Tax Profit $35,525

Treat each of the questions below independently, unless otherwise noted.

1. Calculate the margin of safety (in total sales dollars) based on last year’s data

2. Calculate the weighted average contribution margin per unit based on last year’s data .

3. Assuming that the sales mix remains the same as last year, how many units (in total and by product line) must be sold to earn $116,725 in after-tax profit.?

Total Units:

Economy Units:

Deluxe Units:

4. For this question only, assume that Tandem creates a master budget based on last year’s actual results. The next year, the total number of units sold decreased by 10%. However, sales of the economy model decreased by a larger percentage than the deluxe model. Without making specific calculations, predict and explain whether the sales volume and sales mix variances would be favorable or unfavorable

Sales volume variance: Favorable or unfavorable

Sales mix variance: Favorable or unfavorable

Explain the difference:

5. For this question only, assume that the company is considering eliminating the economy product because it is not paying its “fair share” of the fixed costs. Only $20,000 of the total fixed costs are directly attributable to the economy product. The marketing manager estimates that sales of the deluxe product would increase by 10% if consumers did not have the option of buying the lower end product. In addition, the space currently used for the economy model could be used to store finished goods inventory. The company is currently paying $15,000 a year for a finished goods warehouse. How much would profit increase/decrease if the economy product is eliminated?

6. For this question only, assume that Tandem has received a special order request from a foreign customer who wants to buy 5,000 deluxe units at a price of $75 each. The company would save the 5% sales commission it normally pays on the sale of the deluxe product. Assume the company only has 4,000 hours of excess or idle machine capacity, and both the economy and the deluxe product take 1 hour to produce. To fill the special order (which is an all or nothing order), the company would have to forego some sales of either the deluxe or the economy units. If the company accepts the special order, what is the maximum incremental profit they would earn on the special order?

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