Marginal Analysis Scenarios

Drop or Retain a Segment

  • A study indicates that 5,0005,000 of the fixed costs allocated to the Cars Division will continue even if the Cars Division is discontinued.
  • If the Cars Division is discontinued, this will result in a 10%10\% decrease in sales of the Trains Division.
  • Question 1: If the Cars Division is eliminated, how will this affect total operating income for All Aboard, Inc.?
  • Question 2: What if none of the fixed costs are avoidable? What would be the change in total operating income if the Cars Division were eliminated?

Make or Buy

  • Cost information for All Aboard, Inc. at a sales level of 2,0002,000 trains is provided.
  • Another toy manufacturer offers to make the trains for $27 per train.
  • If All Aboard, Inc. chooses to buy instead of make trains:
    • The factory supervisor would be laid off.
    • Insurance expense would be eliminated.
    • The company would still have to pay rent on the factory due to a 10-year lease.
  • Question 1: Should All Aboard, Inc. continue to make its trains or buy them from another manufacturer?
  • Question 2: What is the cost difference?

Accept or Reject a Special Offer

  • Considering a special order for 5050 trains.
  • Normal price is $50 per train.
  • A one-time customer is offering to pay $30 per train.
  • Manufacturing Overhead would be unaffected.
  • Each special train requires a layer of premium gold paint that will cost $1.00 per train.
  • This order will not affect regular sales and can be filled using existing capacity.
  • Question: Should All Aboard, Inc. accept this special offer?

Sell or Process Further

  • Currently sell 2,0002,000 trains each month for $50 each.
  • If an engraving machine were rented to customize each train with the customer's name, the trains could be sold for $75 each.
  • The monthly cost to rent the engraving machine would be $40,000.
  • Question: Should All Aboard, Inc. sell as is or process further?

Utilizing a Constrained Resource

  • Total time available for moving finished goods inventory is the constraint in the production process.
  • Question 1: If All Aboard, Inc. had to choose between trains and cars, which would be more profitable to manufacture?
  • Question 2: If there were 480480 hours available, what is the largest possible contribution margin that can be realized?