Assignment: Magnu Electronics
Magnu Electronics manufactures two products, electronic organizers and mobile phones. Management projects that sales for March 2016 will amount to 70,000 organizers and 140,000 mobile phones. The projected income statement for the month of March appears below.
Projected Income Statement for the month of March 2016
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Electronic Organizers
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Mobile Phones
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Total (000s)
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Total (in 000)
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Per Unit
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Total (in 000)
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Per Unit
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Sales
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£ 5,250
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£ 75.00
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£ 15,750
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£ 112.50
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£ 21,000
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Production costs:
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Materials
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£ 1,400
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£ 20.00
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£ 3,150
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£ 22.50
|
£ 4,550
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Direct labor
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700
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10.00
|
2,100
|
15.00
|
2,800
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Manufacturing Overhead
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1,050
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15.00
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2,450
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17.50
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3,500
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Total production costs
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£ 3,150
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£ 45.00
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£ 7,700
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£ 55.00
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£ 10,850
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Gross Margin
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£ 2,100
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£ 30.00
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£ 8,050
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£ 57.50
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£ 10,150
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SG&A Expenses (all fixed)
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£ 4,800
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Income before taxes
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£ 5,350
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Income taxes
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|
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£ 2,140
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Net income
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|
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£ 3,210
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Magnum Electronics uses a specific ASIC computer chip in both products. These chips are in scarce supply and in the short run Magnum Electronics can only obtain a fixed number of them (the supplier of these chips is "swamped" with other orders at the moment and will give Magnum Electronics only the quantity contractually specified). The current production plan would utilize all available chips. Each organizer requires one ASIC chip, while each mobile phone requires two chips. Due to contractual obligations, Magnum Electronics must produce at least 50,000 organizers and 100,000 mobile phones. Beyond these minimum quantities, however, the company is free to change the product mix for March. There are no other production constraints besides the ASIC chips.
Jane Dunsmore, Magnum's CFO, recently conducted a detailed analysis regarding the structure of overhead costs. In particular, her report stated "We have been allocating overhead costs to products in an overly simplistic fashion. I believe that of the £3,500,000 in total manufacturing overhead expenses budgeted for next month, only £900,000 is fixed in the short to medium term. There are two types of variable overhead. The first type consists of £980,000 of fringe benefits and training expenditures that vary proportionally with direct labor costs. The second type consists of £1,620,000 of material handling costs that are primarily driven by the total number of material components put into production during the month."
Each organizer requires 12 components while each mobile phone needs 16 components.
Required: Based on the above information and Jane Dunsmore's analysis, should Magnum Electronics change its product mix in the coming months? Assume that any changes in the amounts sold for either product will not cause the prices to change. Round all overhead rates and per unit amounts to two decimal places. Explain your reasoning and provide detailed calculations to support your answer.