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639
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Item
Case 1
Case 2
Not
Relevant Relevant
Not
Relevant Relevant
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
641
$(80,000)
52,000
$(28,000)
Depreciation on the van is a sunk cost and the van has no salvage value
since it would be donated to another organization. The general
administrative overhead is allocated and none of it would be avoided if
the program were dropped; thus it is not relevant to the decision.
The same result can be obtained with the alternative analysis below:
Current
Total
Difference:
Net
Total If
Operating
HouseIncome
keeping Is Increase or
Dropped (Decrease)
$660,000
330,000
330,000
$(240,000)
160,000
(80,000)
68,000
27,000
78,000
180,000
353,000
$(23,000)
0
15,000
37,000
0
52,000
$ (28,000)
Total
Home
Nursing
Meals on
Wheels
Housekeeping
643
Per Unit
Differential
Costs
Make Buy
$ 6
8
1
$20
2
0
$17
15,000 units
Make
Buy
$ 90,000
120,000
15,000
$300,000
30,000
0
$20
0
0
$255,000 $300,000
$3
$45,000
Based on these data, the company should reject the offer and should
continue to produce the parts internally.
2.
Make
Buy
$255,000
$300,000
65,000
$320,000 $300,000
$20,000
Thus, the company should accept the offer and purchase the parts from
the outside supplier.
The McGraw-Hill Companies, Inc., 2012. All rights reserved.
644
Per
Unit
$349.95
143.00
86.00
7.00
6.00
$242.00
Total
10 bracelets
$3,499.50
1,430.00
860.00
70.00
60.00
2,420.00
465.00
2,885.00
$ 614.50
Even though the price for the special order is below the company's regular
price for such an item, the special order would add to the company's net
operating income and should be accepted. This conclusion would not
necessarily follow if the special order affected the regular selling price of
bracelets or if it required the use of a constrained resource.
645
Ski
Vault
Golf
Caddy
Fishing
Quiver
4 minutes
5 minutes
2 minutes
$40 per
minute
$36 per
minute
$60 per
minute
$220
60
$160
$300
120
$180
$175
55
$120
Ski
Vault
Golf
Caddy
Fishing
Quiver
5 pounds
6 pounds
5 pounds
$32 per
pound
$30 per
pound
$24 per
pound
$220
60
$160
$300
120
$180
$175
55
$120
In this case, production of the Ski Vault would be the most profitable
use of the constrained resource. The contribution margin per unit of the
constrained resource for this product is $32, which is larger than for the
other two products.
647
Leather
Library
Chair
Gainsborough
Armchair
Leather
Library
Chair
Chippendale
Fabric
Armchair
8 hours
12 hours
5 hours
$62.50
per hour
$50.00
per hour
$80.00
per hour
$1,300
800
$ 500
$1,800
1,200
$ 600
$1,400
1,000
$ 400
The offer to upholster chairs for $45 per hour should be accepted. The
time would be used to upholster Chippendale Fabric Armchairs. If this
increases the total production and sales of those chairs, the time would
be worth $80 per houra net gain of $35 per hour. If Chippendale
Fabric Armchairs are already being produced up to demand, then having
these chairs upholstered in the other company would free up capacity to
produce more of the other two chairs. In both cases, the additional time
is worth more than $45 per hour.
The McGraw-Hill Companies, Inc., 2012. All rights reserved.
648
$150,000
90,000
60,000
40,000
20,000
$75,000
60,000
15,000
12,000
3,000
649
$60,000
40,000
20,000
13,000
$ 7,000
The $10,000 in allocated common costs (1/3 $30,000) will be the same
regardless of which alternative is selected, and hence is not relevant to the
decision.
(a)
(b)
(c)
(d)
Product
X
$24.00
$3.00
8
$32.00
$4.00
Product
Y
$15.00
$3.00
5
$14.00
$2.80
Product
Z
$9.00
$3.00
3
$21.00
$7.00
Because Product Z uses the least amount of material per unit of the three
products, and because it is the most profitable of the three in terms of its
use of this constrained resource, some students will immediately assume
that this is an infallible relationship. That is, they will assume that the way
to spot the most profitable product is to find the one using the least
amount of the constrained resource. The way to dispel this notion is to
than does Product Y, but yet it is preferred over Product Y. The key factor is
not how much of a constrained resource a product uses, but rather how
much contribution margin the product generates per unit of the
constrained resource.
651
Difference:
Net Operating
Keep
Drop
Income
Overnight Overnight
Increase or
Cases
Cases
(Decrease)
$(450,000)
130,000
48,000
12,000
190,000
(260,000)
21,000
0
0
110,000
9,000
0
140,000
$(120,000)
$0.35
0.08
$0.43
$2,000
960
480
60
$3,500
653
Per Unit
Differential
Costs
Make
Buy
20,000 Units
Make
Buy
$470,000
$ 96,000
140,000
64,000
80,000
$380,000 $470,000
Make
Buy
$380,000 $470,000
150,000
$530,000 $470,000
$60,000
$18
$12
8
1.5
$12
$36
$32
8
4.0
$ 9
$20
$16
8
2.0
$10
655
Total for
Per Unit 2,000 Units
$12.00
$24,000
2.50
3.00
0.50
1.50
$ 7.50
5,000
6,000
1,000
3,000
15,000
0
15,000
$ 9,000
2. The relevant cost is $1.50 (the variable selling and administrative costs).
All other variable costs are sunk because the units have already been
produced. The fixed costs are not relevant because they would not be
affected by the sale of leftover units.
657
$700,000
240,000
940,000
530,000
$410,000
Item
Relevant Costs
Make
Buy
$240,000
165,000
30,000
60,000
$600,000
$495,000 $600,000
659
$25
8
7
$40
* The junk food consumed during the trip may not be completely
relevant. Even if Steve were not going on the trip, he would still
have to eat. The amount by which the cost of the junk food
exceeds the cost of the food he would otherwise consume
would be the relevant amount.
The other costs are sunk at the point at which the decision is made to
go on another fishing trip.
2. If he fishes for the same amount of time as he did on his last trip, all of
his costs are likely to be about the same as they were on his last trip.
Therefore, it really doesnt cost him anything to catch the last fish. The
costs are really incurred in order to be able to catch fish and would be
the same whether one, two, three, or a dozen fish were actually caught.
Fishing, not catching fish, costs money. All of the costs are basically
fixed with respect to how many fish are actually caught during any one
fishing trip, except possibly the cost of snagged lures.
3. In a decision of whether to give up fishing altogether, nearly all of the
costs listed by Steves wife are relevant. If he did not fish, he would not
need to pay for boat storage, new fishing gear, a fishing license, fuel
and upkeep, junk food, or snagged lures. In addition, he would be able
to sell his boat, the proceeds of which would be considered relevant in
this decision. The original cost of the boat, which is a sunk cost, would
not be relevant.
661
$(2,100)
$600
700
125
50
175
1,650
$ (450)
Cost
Reason
Keep
the
Tour
Ticket revenue .................................
Less variable expenses .....................
Contribution margin..........................
Less tour expenses:
Tour promotion ..............................
Salary of bus driver ........................
Fee, tour guide ..............................
Fuel for bus ...................................
Depreciation of bus ........................
Liability insurance, bus ...................
Overnight parking fee, bus .............
Room & meals, bus driver and tour
guide..........................................
Bus maintenance and preparation ...
Total tour expenses ..........................
Net operating loss ............................
$3,000
900
2,100
600
350
700
125
450
200
50
Difference:
Net
Operating
Income
Drop
Increase or
the Tour (Decrease)
$
0
0
0
0
350
0
0
450
200
0
175
0
300
300
2,950
1,300
$ (850) $(1,300)
$(3,000)
900
(2,100)
600
0
700
125
0
0
50
175
0
1,650
$ (450)
663
Per 16-Ounce
T-Bone
$1.35
1.45
2.80
2.25
0.55
0.20
$0.35
2. The T-bone steaks should be processed further into filet mignon and the
New York cuts. This will yield $0.35 per pound in added profit for the
company. The $0.55 profit per pound for T-bone steak mentioned in
the problem statement is not relevant to the decision because it
contains allocated joint costs. The company will incur the allocated joint
costs regardless of whether the T-bone steaks are sold outright or
processed further; thus, this cost should be ignored in the decision.
$(308,000)
182,000
(126,000)
(14,000)
$(140,000)
No, the company should not close the plant; it should continue to
operate at the reduced level of 11,000 gallons produced and sold each
month. Closing will result in a $140,000 greater loss over the two-month
period than if the company continues to operate. Additional factors are
the potential loss of goodwill among the customers who need the
11,000 gallons of MJ-7 each month and the adverse effect on employee
morale. By closing down, the needs of customers will not be met (no
inventories are on hand), and their business may be permanently lost to
another supplier.
665
Plant Kept
Open
Plant
Closed
$ 770,000
Difference
Net
Operating
Income
Increase
(Decrease)
0
$(770,000)
462,000
308,000
0
0
462,000
(308,000)
460,000
340,000
120,000
620,000
1,080,000
558,000
898,000
62,000
182,000
(772,000) (898,000)
(14,000)
$ (772,000) $(912,000)
(126,000)
(14,000)
$(140,000)
$182,000
14,000
$168,000
Verification:
Operate at
12,000
Gallons for
Close for
Two Months Two Months
$ 420,000
252,000
168,000
0
0
460,000
340,000
620,000
1,080,000
0
1,080,000
$ (912,000)
558,000
898,000
14,000
912,000
$(912,000)
667
40,000
210,000
250,000
160,000
90,000
320,000
250,000
70,000
20,000
50,000
*This assumes that the sales through regular channels can be recovered
after the special order has been fulfilled. This may not happen if regular
customers who are turned away to fill the special order are permanently
lost to competitors.
$0.80
0.50
$0.30
The total variable cost of producing one box of Zippo pens is:
Direct materials .......................................................
Direct labor .............................................................
Variable manufacturing overhead ..............................
Total variable cost per box ........................................
$1.50
1.00
0.30
$2.80
If the cartridges for the Zippo pens are purchased from the outside
supplier, then the variable cost per box of Zippo pens would be:
Direct materials ($1.50 80%) ................................
Direct labor ($1.00 90%) ......................................
Variable manufacturing overhead ($0.30 90%) .......
Purchase of cartridges ..............................................
Total variable cost per box ........................................
$1.20
0.90
0.27
0.48
$2.85
The company should reject the outside suppliers offer. Producing the
cartridges internally costs $0.05 less per box of pens than purchasing
them from the supplier.
Another approach to the solution is:
Cost avoided by purchasing the cartridges:
Direct materials ($1.50 20%)..............................
Direct labor ($1.00 10%)....................................
Variable manufacturing overhead ($0.30 10%) ....
Total costs avoided ................................................
$0.30
0.10
0.03
$0.43
$0.48
$0.05
669
Note that the avoidable cost of $0.43 above represents the cost of
making one box of cartridges internally.
$64,500
30,000
$94,500
$72,000
$43,000
24,000
$67,000
671
$420,000
30,000
$450,000
$427,500
$280,000
142,500
$422,500
Thus, the company should accept the outside suppliers offer, but only
for the cartridges for 50,000 boxes.
4. In addition to cost considerations, Bronson should take into account the
following factors:
a) The ability of the supplier to meet required delivery schedules.
b) The quality of the cartridges purchased from the supplier.
c) Alternative uses of the capacity that is used to make the cartridges.
d) The ability of the supplier to supply cartridges if volume increases in
future years.
e) The problem of alternative sources of supply if the supplier proves
undependable.
$(228,000)
$36,000
45,000
7,000
65,000
15,000
8,000
27,200
6,000
9,000
218,200
$ (9,800)
$45,000
7,000
15,000
8,000
75,000
12%
$ 9,000
2. The Downtown Store should not be closed. If the store is closed, overall
company net operating income will decrease by $9,800 per quarter.
673
$40
24
$16
20,000
$16
$320,000
150,000
$170,000
$22.30
0.70
1.50
$24.50
3. If the plant operates at 25% of normal levels, then only 5,000 units will
be produced and sold during the three-month period:
80,000 units per year 3/12 = 20,000 units.
20,000 units 25% = 5,000 units produced and sold.
Given this information, the simplest approach to the solution is:
Contribution margin lost if the plant is closed
(5,000 units $16 per unit*) ........................
$(80,000)
Fixed costs that can be avoided if the plant is closed:
Fixed manufacturing overhead cost
($400,000 3/12 = $100,000;
$100,000 40%) ................................... $40,000
Fixed selling cost ($360,000 3/12 =
$90,000; $90,000 1/3)..........................
30,000
70,000
Net disadvantage of closing the plant ...............
$(10,000)
*$40.00 ($9.50 + $10.00 + $2.80 + $1.70) = $16.00
The McGraw-Hill Companies, Inc., 2012. All rights reserved.
Solutions Manual, Chapter 12
675
Keep the
Plant Open
$ 200,000
Close the
Plant
$
120,000
80,000
100,000
0
0
0
60,000
90,000
60,000
190,000
120,000
$(110,000) $(120,000)
4. The relevant cost is $1.70 per unit, which is the variable selling expense
per Zet. Since the blemished units have already been produced, all
production costs (including the variable production costs) are sunk. The
fixed selling expenses are not relevant since they will remain the same
regardless of whether or not the blemished units are sold. The variable
selling expense may or may not be relevantdepending on how the
blemished units are sold. For example, the units may be sold through a
liquidator without incurring the normal variable selling expense.
5. The costs that can be avoided by purchasing from the outside supplier are
relevant. These costs are:
Variable production costs ..............................................
Fixed manufacturing overhead cost ($400,000 70% =
$280,000; $280,000 80,000 units) ...........................
Variable selling expense ($1.70 60%) .........................
Total avoidable cost ......................................................
$22.30
3.50
1.02
$26.82
677
Differential
Costs Per Unit
Make
Buy
$2.75
3.00
0.45
0.75
1.50
$8.45
$8.00
$8.00
Total Differential
Costs for
40,000 Units
Make
Buy
$110,000
120,000
$320,000
18,000
30,000
60,000
$338,000 $320,000
Differential
Costs Per Unit
Make
Buy
$8.00
$2.75
3.00
0.45
Total Differential
Costs50,000 Units
Make
Buy
$137,500
150,000
22,500
0.60
30,000
1.20
$8.00
60,000
$400,000
$8.00
$0
$400,000
$400,000
$0
679
Differential
Costs Per
Unit
Make Buy
$2.75
3.00
0.45
$8.00
0.50
Total Differential
Costs60,000 Units
Make
Buy
$165,000
180,000
27,000
$480,000
30,000
1.00
$7.70 $8.00
60,000
$462,000
$480,000
681
Cost
Depreciation
Variable
Fixed
CM ratio =
=
Contribution margin
Sales
R300,000-R240,000
= 20%
R300,000
683
Break-even point =
Fixed costs
CM ratio
R12,000
= R60,000
0.20
Therefore, as long as the sales revenue from the Model C3 lawnchair
exceeds R60,000, it is covering its own avoidable fixed costs and is
contributing toward covering the common fixed costs and toward the
profits of the entire company.
=
Marcy
Tina
Sewing
Lenny
Kit
Cari
0.70
$ 2.40
0.50
0.20
$14.00
1.50
2.40
0.80
4.70
$ 9.30
$46.50
Product
Marcy .........................
Tina ...........................
Cari ............................
Lenny .........................
Sewing Kit ..................
Total DLHs required .....
DLH
Per Unit
0.40
0.25
0.70
0.50
0.20
Estimated
Sales
(units)
26,000
42,000
40,000
46,000
450,000
Total
DLHs
10,400
10,500
28,000
23,000
90,000
161,900
3. Because the Cari doll has the lowest contribution margin per labor hour,
its production should be reduced by 17,000 dolls (11,900 excess DLHs
0.70 DLH per doll = 17,000 dolls). Thus, production and sales of the Cari
doll will be reduced to 23,000 dolls for the year.
685
$4.40
2.25
$2.15
$0.40
0.25
0.20
0.10
0.22
$1.17
$3,880
2,000
$5,880
687
Purchased
XSX Drums
Manufactured
Mountain
XSX
Bike
Drums
Frames
$154.00
$154.00
$65.00
120.00
0.00
0.85
120.85
$ 33.15
44.50
1.05
0.85
46.40
$107.60
17.50
0.60
0.40
18.50
$46.50
689
Manufactured
Mountain
XSX
Bike
Drums
Frames
$107.60
0.8 hour
$134.50
per hour
$46.50
0.2 hour
$232.50
per hour
3,500
1,625
1,375
$ 46.50
107.60
33.15
(c)
(a) (c)
Welding
Time
per Unit
Total
Welding
Time
0.20
0.80
700
1,300
2,000
1,300
0
Total
Contribution
$162,750
174,850
45,581
383,181
269,000
$114,181
Balance
of
Welding
Time
(a) (b)
691
Purchased
XSX Drums
Manufactured
Mountain
XSX
Bike
Drums
Frames
$154.00
$154.00
$65.00
120.00
0.00
0.00
0.85
120.85
$ 33.15
44.50
4.50
1.05
0.85
50.90
$103.10
17.50
22.50
0.60
0.40
41.00
$24.00
$24.00
0.2 hour
$120.00
per hour
2,500
0
500
$103.10
24.00
33.15
(c)
(a) (c)
Welding
Time
per Unit
Total
Welding
Time
0.80
0.20
2,000
0
2,000
0
0
Total
Contribution
$257,750
0
16,575
274,325
257,750
$ 16,575
Balance
of
Welding
Time
(a) (b)
693
Plan 1:
Mountain bike frames ..
XSX drums ..................
Plan 2:
XSX drums ..................
Production
Total Direct
Labor-Hours
3,500
1,625
1.25*
0.25**
4,375
406
4,781
2,500
0.25**
625
$162,750
174,850
45,581
383,181
68,400
$314,781
$269,000
16,575
$285,575
$ 29,206
Plan 1, introducing the new product, would still be optimal even if two
more direct labor employees would have to be hired. The reason for this
is subtle. If the company does not make the XSX drums itself, it can still
buy them. Thus, using an hour of welding time to make the mountain
bike frames does not mean giving up a contribution margin of $128.88
on drums (assuming direct labor is a variable cost). The opportunity cost
of using the welding machine to produce mountain bike frames is less
than this since a purchased drum can replace a manufactured drum. An
amended analysis using the opportunity cost concept appears on the
next page.
695
$46.50
0.2 hour
$232.50
per hour
$24.00
0.2 hour
$120.00
per hour
$ 8,000,000
$6,700,000
400,000
1,900,000
9,000,000
900,000
$17,900,000
$1,300,000
2,100,000
700,000
600,000
1,700,000
$6,400,000
697
$2,000,000
800,000
$2,800,000
These two costs are relevant to the decision because they will be
incurred only if the plant is closed. The $2,000,000 salvage value of
the equipment and buildings offsets these costs.
3. No, the plant should not be closed. The computations are:
Cost of purchasing the covers outside ...
Annual costs avoided by closing the
plant (Part 2a) ...................................
Cost of closing the plant (first year nonrecurring costs) .................................
Salvage value of buildings and
equipment.........................................
Net advantage (disadvantage) of closing
the plant ...........................................
First Year
Other Years
$(21,000,000) $(21,000,000)
17,900,000
17,900,000
(2,800,000)
2,000,000
$ (3,900,000) $ (3,100,000)
699
$ 500
4,050
4,500
8,000
1,375
18,425
Direct labor: 30 DLHs per lot 25 lots = 750 DLHs. Because only 400
hours can be scheduled during regular time this month, overtime
would have to be used for the remaining 350 hours.
400 DLHs $14.00 per DLH ...............................................
350 DLHs $21.00 per DLH ...............................................
Total direct labor cost .........................................................
5,600
7,350
12,950
Overhead: This special order will not increase fixed overhead costs.
Therefore, only the variable overhead is relevant.
750 DLHs $4.50 per DLH .................................................
3,375
$ 9,000
4,500
8,000
1,625
$23,125
Direct labor: 60% (i.e., 450 DLHs) of the production of a batch can be
done on regular time; but the remaining production (i.e., 300 DLHs)
must be done on overtime.
Regular time 450 DLHs $14.00 per DLH ................
Overtime premium 300 DLHs $21.00 per DLH .......
Total direct labor cost ..............................................
$ 6,300
6,300
$12,600
Overhead: The full manufacturing cost includes both fixed and variable
manufacturing overhead.
Manufacturing overhead applied:
750 DLHs $12.00 per DLH .................................
$ 9,000
$44,725
17,890
$62,615
701
Total
$20,000,000
12,200,000
400,000
2,100,000
1,500,000
390,000
400,000
1,600,000
18,590,000
$ 1,410,000
703
$490
410
$ 80
$135
100
$ 35
* The overhead costs are not relevant, since they are fixed and will
remain the same whether the milling capacity is used to produce
cracked wheat or flour.
Therefore, the company makes more money using its milling capacity to
produce cracked wheat than flour.
2. Because the demand for the two products is unlimited and both require
the same amount of milling time, the company should process the
cracked wheat into flour only if the contribution margin for flour is at
least as large as the contribution margin for cracked wheat. In algebraic
form:
Added revenue from
Costs of
milling cracked wheat - further
into flour
processing
Contribution margin
of
cracked wheat
$80
$80 + $490 + $100 = $670
705