2C1F LAZAR INDUSTRIES PRODUCES TWO PRODUCTS, CRATES AND BOXES. PER U...

215.

CSO: 2C1c

LOS: 2C1f

Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs,

and resource utilization for these products are as follows.

Crates

Boxes

Selling price

$20

$30

Direct material costs

$ 5

$ 5

Direct labor costs

8

10

Variable overhead costs

3

5

Variable selling costs

1

2

Machine hours per unit

2

4

Production of Crates and Boxes involves joint processes and use of the same facilities.

The total fixed factory overhead cost is $2,000,000 and total fixed selling and

administrative costs are $840,000. Production and sales are scheduled for 500,000 units

of Crates and 700,000 units of Boxes. Lazar maintains no direct materials, work-in-

process, or finished goods inventory.

Lazar can reduce direct material costs for Crates by 50% per unit, with no change in

direct labor costs. However, it would increase machine-hour production time by 1-1/2

hours per unit. For Crates, variable overhead costs are allocated based on machine hours.

What would be the effect on the total contribution margin if this change was

implemented?

a.

$125,000 increase.

b.

$250,000 decrease.

c.

$300,000 increase.

d.

$1,250,000 increase.