Monroe Clock Company (A) Case Solution

1. What are the key concepts or issues in this case?

The main topic of the case, which encompasses all concepts, is the costing of the new electrical timer device. Firstly, there is an issue of fixed vs. variable cost handling. According to Jim Monroe, the president of the company, a significant portion of the cost is fixed and hence it is not relevant in cost computation and appraisal. Secondly, the issue of overhead allocation also arises. The company uses traditional absorption-based costing that allocates a single amount of overhead. The company also wants to compute the cost on the basis of activity-based costing. Thirdly, the company wants to make a decision regarding the costing method and the final cost of the household timer.

2. Examine Tom Grant’s calculation of the $11.60 for the new household timer included in Exhibit l, then explain why Frank Tyler adjusted Tom’s calculation of $11.60 to get $6.30.

The calculations for costing constitute four components, direct material (or purchased parts), direct labor, expend. Supplies and the overhead. The amounts related to material, labor, and expended supplies are fairly constant. However, the overhead allocation is done on the basis of one driver, direct labor. Tom Grant applied the traditional absorption costing technique to arrive at the factory cost. Additionally, the calculations of Tom Grant take into consideration both the fixed and variable factors in the overhead allocation. There are two types of cost allocations, one for the standard product and one for the additional features required to manufacture the product. There are two overhead figures for each allocation. Frank Tyler views that there are certain elements in the overhead allocation that are predominantly fixed in their cost nature. This applies that the cost related to these elements is permanent and it does not change in relation to the overall level of production. Fixed costs are only relevant when they are avoidable. In the current scenario, no considerable capital is required to start production. Hence, in consideration of their innate nature (they cannot be avoided), the existing fixed costs should not be included in the cost of a new product. Based on this logic, Frank Tyler separated the overhead items that are fixed and excluded them from the computations. By carrying out the relevant calculations, this was found that only $2 cost was variable. Therefore, he excluded the remaining overhead cost ($7.3-$2 =$5.3). After that, the standard increments to the costs were applied and the revised factory price was computed to be $8.

3. What volume (in units) would have to be sold at $14.70 factory price in order for Monroe to receive the same total contribution if Monroe sold 50,000 units at $8.00. Given the only variable overhead cost is $2.00 per Exhibit 2.

The total contribution unit can be computed by applying the following formula:

Total Contribution Margin = Total Revenue - Total Variable Costs 

This formula can be expanded and simplified to as follows:

Total Contribution Margin = (Retail Selling Price * Units Sold) - (Variable Cost Per Unit * Units Sold)

Total Contribution Margin = Units Sold * ( Retail selling Price * Per Unit Variable Cost)

The difference between the retail selling price and per unit variable costs is also known as the ‘unit contribution margin’. For the case of $8 factory price, the retail selling price comes out to be $16. Consequently, the unit contribution margin stands at $14. For 50000 units, the total contribution of the product stands at $700,000. Now, for the second scenario, the factory price is $14.7 which implies that the retail selling price of the product will be $29.4. At this amount, the unit contribution margin comes out to be $27.4. In order to find the number of units that create $700,000 in the total contribution, one needs to divide this number by the unit contribution margin. The calculation outputs the number of units to be 25547. Therefore, at a factory price of$14.7, Monroe needs to sell 25547 units in order to ensure a contribution margin that is equal to $700,000. The detailed calculations are shown in table 1.