Question

Pine Street Inc. makes unfinished bookcases that it sells for $58.10. Production costs are $37.49 variable and $10.50 fixed. Because it has unused capacity, Pine Street is considering finishing the bookcases and selling them for $74.91. Variable finishing costs are expected to be $5.79 per unit with no increase in fixed costs. Prepare an analysis on a per unit basis showing whether Pine Street should sell unfinished or finished bookcases. (Round answers to 2 decimal places, e.g. 15.25. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Answer:

Pine Street should sell  finished bookcases because they have a higher contribution margin.

Explanation:

We compare the contribution margin of the two categories to find out whether Pine Street should sell unfinished or finished bookcases.

Pine Street Inc.

Unfinished bookcases

Contribution Margin

Sales Price                                         $58.10

Less  Production costs

Variable Costs  $37.49

Fixed Costs $10.50                         (47.99)

Contribution Margin                      $ 10.11

Pine Street should sell  finished bookcases because they have a higher contribution margin. It is almost double of the unfinished book cases contribution margin.

Pine Street Inc.

Finished bookcases

CONTRIBUTION MARGIN

Sales Price                                                                 $74.91

Less Production costs

Variable Costs  $37.49 + $5.79 = $ 43.28

Fixed Costs $10.50                                                     $ (53.78)

Contribution Margin                                               $ 21.13