EXERCISE 4: (7 marks) RELEVANT COSTING

Terrazo Corporation produces and sells three kinds of ceramic tile which are used
in home and office construction. Details of each type of tile are provided below

Type I Type II Type III

Selling price/unit $40 $60 $100

Unit variable cost 10 28 48

Machine hours required .2 .5 1.25

Terrazo has 30,000 machine hours available per year.

Required:

Part 1: Assume there is unlimited demand for all three types of tile. Determine
the recommended product mix that is the amount of each type of tile this
company should make. TYPE I__________ TYPE II___________TYPE III_________
(3 Marks)

Part 2: Now assume the maximum demand for each tile is 20,000 units.
Determine the best product mix and the total contribution margin for this
company if it produces according to this product mix.

TYPE I__________ TYPE II___________TYPE III_________ Total

CM________

Question 2 Answers
Part 1
Type I Type II Type III
Price $40 $60 $100
Less VC 10 28 48
CM per unit 30 32 52 III best
Mach hrs. .2 .5 1.25
CM per Mach hr. $150 $64 $41.6 I best

Dedicate all production to Type I

Part II
Production priorities are as follows:

I 20,000 Tiles X .2hrs=4,000M hrs. 20,000x $30CM= Total CM $600,000

II 20,000 Tiles x .5hrs =10,000 M hrs. 20,000x$32 CM= Total CM$640,000
Total 14,000M hrs.
II (30,000M hrs-14,000Mhrs=16,000M hrs. x $52 Total CM$665,600
Total CM $1,905.600