CHAPTER5

SHORTTERMDECISIONSANDACCOUNTINGINFORMATION

5
1"WhereDoYouStart?"
Thequestionemphasizestheneedfordecisionmakerstoknowthestarting
place,thecircumstancesfromwhichtheybegin.Ifapersonalreadyhasa
carandisplanningatriptothevicinityofMonroe,theincrementalcosts
ofgivingaridetotheadvertiserarefortheextramileagetogotothat
specifictown(e.g.,tolls,additionalgasoline,possiblyanextrameal)
insteadofgoingstraighthome.Ifapersonhasacarbutisn'tplanninga
triptotheMonroearea,theincrementalcostsofgivingaridearethe
incrementalcostsofthetrip(allgasoline,tolls,meals,perhapsmotels).
Andifapersondoesn'talreadyhaveacar,theincrementalcostsofgivinga
ridetotheadvertiserincludethecostofbuyingacarandobtaining
insuranceandalicense,plusthecostslistedinthetwoalternativesabove.
Thus,theadvertisermadeaseriouserrorinthewordingoftheoffer.
NotetotheInstructor:Thisquestioncanbeusedtobegindiscussion
ofdecisionmaking.Afterestablishingtheideaofincrementalcosts,you
cancovertheconceptofjointcosts(andallocationsthereof)bydirecting
attentiontothosecoststhatwouldnotchangewiththeextrapassenger.
Thequestioncanbeusedtocoverthesamegeneralconceptsinan
executivedevelopmentprogrambyturningthesituationintooneofcarpooling
ratherthanoneofstudentridesharing.

5
2UnitCosts
The$52is$1,800/50plus$16.The$34is$1,800/100+$16.
Theanalysisisunsoundbecausetheincrementalcostofplayingaround
is$16.The$1,800duesaresunkandshouldnotaffectdecisionswhetherto
playanadditionalround.Thedues,andaperroundcomputationofcost,are
appropriateindecidingwhethertocontinueasamemberofthecluborto
seekanalternativeplacetoplaygolf.Theaveragecostisirrelevantto
decidingwhethertoplayasingleround.
NotetotheInstructor:Soasnottoleadstudentstoconsiderthe
duesperroundcalculations,wedidn'taskwhetherthedueswouldeverbe
relevant.Ifthepersonisdecidingwhethertoremainamemberoftheclub,
duesarerelevant.Thepointtobemadewiththisassignmentisthatwhether
acostisrelevantdependsontheparticulardecisiontobemade.

51


5
3TheGenerousManagement
Paper,printers'labor,andinkmightbeexpectedtobevariablecosts,
givingatotalvariablecostperpaperof$1.20.Thetwoothercosts
mentioned,salariesforeditorialemployeesandotheroperatingexpenses,are
likelytobecomposedofprimarilyfixedelements.FromChapter2,itis
knownthattheperunitcostamountsforthosetwoitemsmustbebasedon
someparticularlevelofoutput(quantityofpapersproduced).Iftherewere
nootherconsiderations,andiftheperunitfixedcostswerebasedon
currentcirculationquantities,itmightbesaidthatthesubscriberwas
gettingthepaperatlessthantotalcostperunit.Werecirculationhigher
thanatpresent,ofcourse,theperunitcostwoulddecrease.
Theanalysisinthenewspaper'sadvertisementignorestherevenues
derivedfromadvertisers.Thatis,theadvertisementimpliesthattheonly
revenuesavailabletocoverthelistedcostsaretherevenuesfromsalesof
thepaper.Advertisingaccountsforasubstantialportionoftotalnewspaper
revenues.Moreover,thecostperpaperincludesthecostsofprintingthe
advertisinginthatpaper.Ineffect,thesituationisoneofjoint
revenues,andthecostsofthenewspaperarejointtothetwotypesof
revenueproducingaspectsofthepaper,advertisinganddistributionand
sale.Themanagementofthenewspaperisnotbeinggenerousatall.For
mostnewspapers,revenuesfromadvertisersexceedrevenuesfromsubscribers.

5
4ShorttermPricingPolicy
Theairlinewouldgainbyacceptingyourofferbecausetheincremental
profitfromacceptingistheentire$50fare.Butthisissoonlybecause
thecarrieriscommittedtomakingtheflight.Theairlineknows,however,
thataconsequenceofacceptingyourofferisthatotherpotentialpassengers
wouldbeencouragedtofollowyourexample.Theimplicationsoflarge
numbersofcustomersfollowingthatexamplearemany,andonlyafeware
listedhere.Forexample,anystatedratestructurebecomesirrelevantas
potentialpassengersspurnreservationsystemswiththeintentionof
negotiatingfaresjustbeforedeparture.Further,customerdissatisfaction
wouldincreasebecauseofdelayeddepartures(whileairlinepersonnel
negotiatedwithpassengersaboutrates)andbecauseoflateflight
cancellationsortheinabilitytoaccommodatepotentialpassengerswhoshowed
upwiththeintentionofnegotiatingtheirfares.

NotetotheInstructor:Likequestion51,thisquestionmakesthe
pointthatacompanyisalwaysinsomepositionbeforeitfacesadecision.
Thespecialorderdecisionsdiscussedinthischapterassumethecompanyhas
alreadyplannedfortheperiod,muchastheairlinehasalreadycommittedto
makethisflight.Justasacompanyconsideringaspecialordermust
considertheeffectofacceptingtheorderontheactionsofregularor
potentialcustomers,theairlinemustevaluatetheimpactofacceptingthe
immediatelyprofitableofferontheactionsofitspotentialcustomers.
Anotherpointthatmeritsdiscussionisthetimeperiodaspectof
committedfixedcosts.Althoughthetextusuallyidentifiesfixedcostswith
atimeperiod,thatneednotbethecase.Forexample,anairlinehassome
coststhatarefixedperperiodandsomethatarefixedperflight.

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5
5EconomicandQualitativeFactors
Thetrusteesareresponsibleforthechurch'sproperty,reputation,and
finances,somanyfactors,monetaryandnonmonetary,arerelevanttotheir
decision.Iftheironlyobjectiveinsponsoringthedancesistogenerate
revenuetooffsetcostsofthefacilities,incrementalrevenuesandcostsare
important.Monetaryissuesarefarlessimportantifthetrusteesaretrying
toincreaseinterestinthechurchamongyoungpeopleand/ortoprovidean
organizedandsupervisedactivityforyouth.Ineithercase,thetrustees
mustactresponsiblywiththechurch'smoney,buttheirdecisionshouldnot
ignorethevalueofachievingnonmonetaryobjectives.
Revenuesmostrelevantareadmissionsfeesandperhapsreceiptsfrom
salesofsnacksandbeverages.Incrementalcostsincludeincreasesin
utilitiesduringtheadditionalhoursthefacilityisopen,cleaning
services,andcostsrelatedtotheentertainment.Decoratingcostsarealso
relevant.Thechurchmightengageaband,oradiskjockey.Thechurch
mightalsousevolunteersforcleaningormusic.
Theavailabilityofadultsforsupervisionandoversightisimportant
forsuccess.Ifthechurchnowhasanactiveyouthgroup,itsmembersmight
performmanyoftherequiredtasks.Inalllikelihood,danceswillgomuch
betteriftheyouthdomuchofthework.
56TheoryofConstraints
Youmustelevatetheconstraintbymakingsurethatthepersonishelped
atalltimesanddoesnotbecomeabottleneck.Wheneverthepersonstartsto
fallbehind,othersshouldhelphimuntiltheflowisbacktonormal.You
mustconcentrateonkeepingthatperson'sflowupandnotbeconcernedwith
others,untiltheirflowsbegintoconstrain.

5
7SpecialOrder(5minutes)
Acceptingtheorderincreasesexpectedprofitby$70,800,asshownbelow.
Additionalcontributionmargin,25,000x($14$11)$75,000
Additionalpackingcosts4,200
Incrementalprofitontheorder$70,800
Youmightaskstudentsaboutthepossibilityofleakageofregularsales
thatmightaccompanyacceptingthespecialorder.Youmightalsoaskwhether
thecompanyshouldaccepttheorderifprofitwere$3,000orso.Some
studentswillsaythatanyadditionalprofitisgood,butacceptingbusiness
withlowmarginsispotentiallytroublesome.First,thenumbersare
estimates.Unitvariablemanufacturingcostscouldturnouttobehigher
thannowexpected.Second,ABCtellsusthatsomeindirectcostsarelikely
toriseifweincreaseactivities.Whilesuchcostsmightnotincreaseifwe
acceptedasingleorder,makingacceptanceahabitcouldwellresultin
significantincreasesinindirectcosts.Finally,whybotherturningout
moreproductforminimalincreasesinprofit?If$3,000orsoissignificant
tothecompany,thengoahead,butifnot,whygothroughtheeffort
especiallyinviewofthefirsttwoobjections?

5
8JointProducts(10minutes)
ByxralandFrazinineshouldbeprocessedfurther,andDyzalineshouldbe
53

soldatthesplitoffpoint.
ByxralDyzalineFrazinine
Sellingpriceafterprocessing$24$18$8
Sellingpricebeforeprocessing10100
Incrementalrevenuefromprocessing1488
Incrementalcostofprocessing10122
Incrementalprofit(loss)fromprocessing$4($4)$6

9JointProducts(Extensionof5

8)(20minutes)
1.Frazinineshouldbeprocessedfurther;Byxralshouldnowbesoldat
splitoff,andDyzalineshouldstillbesoldatsplitoff.Analyzing
DyzalineisunnecessarybecauseifitwasunwisetoprocessDyzalinefurther
whentherewerenofixedcostsofsuchprocessing,suchcostssimplyincrease
thedisadvantageoffurtherprocessing.BelowisananalysisforByxraland
Frazinine.

Byxral
Frazinine
100gallonbatchesperperiod(120,000/100)1,2001,200
timesgallonsofproductfromeachbatch(given)4050
Gallonsofproductperperiod48,00060,000
Times,pergallonincrementalcontributionmargin
fromadditionalprocessing(from58)$4$6
Totalincrementalcontributionmarginfrom
additionalprocessing$192,000$360,000
Less,avoidablecostsoffurtherprocessing(given)196,00034,000
Incrementalprofit(loss)fromfurtherprocessing($4,000)$326,000
2.Totalmonthlyprofitis$808,000ascomputedbelow.
Revenues:
Byxral,48,000x$10$480,000
Dyzaline,10x1,200x$10120,000
Frazinine,60,000x$8480,000
Totalrevenues1,080,000
Variablecosts(costsofprocessingFrazinine,at
$2pergallonfor60,000gallons)120,000
Contributionmargin960,000
Fixedcosts:
AvoidablecostsoffurtherprocessingFrazinine$34,000
Unavoidablecostsofallfurtherprocessing
$50,000+$60,000+$8,000118,000152,000
Expectedprofitignoringcostsofjointprocess$808,000

5
10DroppingaSegment(15minutes)
1.$70,000.Thecompanyloses$40,000contributionmarginfromhats
($90,000$50,000)andsavesnothinginfixedcosts.Anincomestatement,
inthousands,shows

54

ShirtsJeansTotal
Sales$110$350$460
Variablecosts30160190
Contributionmargin$80$190270
Fixedcosts200
Income$70
Thisincomestatementavoidstheallocationofcommonfixedcostsandso
presentsthepicturemoreclearly.
2.$95,000,the$70,000fromrequirement1plusthe$25,000savedfixed
costs.
NotetotheInstructor:Youmightwishtoreviewtheseveralreasons
whyfixedcostscouldfallifasegmentwereeliminated.Thetextstates
thatthefixedcostsareallocatedtothesegmentsandthattheyare
unavoidable.However,inrequirement2,wechangedtheconditions.Asearly
asChapter2wepointedoutthatfixedcostsarenotfixedinthesensethat
theycannotchangeintotal.Rather,theyarefixedintotalwithinthe
relevantrange,andgiventhecompany'splansfordiscretionaryspending.
Droppingtheentirehatsegmentcouldputthecompanyinadifferentrelevant
range.Forinstance,ifthecompanynowhasfouremployeeswhoseworkis
commontothethreesegments,droppinganentiresegmentmightallow
restructuringdutiessoastoeliminateoneperson.

Thesituationinrequirement2couldalsocomeaboutifsomeofthe
allocatedcostsareinfactdirect.Theoriginalproductlineincome
statementcouldwellhavebeenpreparedasdescribed,withtotalfixedcosts
allocatedbasedonfloorspaceevenifsomearedirectandavoidable.This
caseismorelikelyiftheproductlinesarenotsorelatedastheyarein
thisassignment.Forinstance,anappliancedealermightdecidetostop
sellingwashersanddryers,whilestillcarryingtelevisionsets,stereos,CD
players,andotherelectronicproducts.Ataminimum,sucharetailerwould
avoidthecostofseparatelistingsintheYellowPages,possiblyseparate
advertisementsinlocalnewspapers,andmaybesomecostsoftheservice
department.
3.$68,000.Fromthe$95,000inrequirement2wesubtract$27,000in
contributionmarginlostfromtheothertwolines.
Lostcontributionmarginfrom:
Shirts$80,000x.10$8,000
Jeans$190,000x.1019,000
Totallostcontributionmargin$27,000
NotetotheInstructor:Toexpandthediscussion,youmightaskwhat
sortsofproductlinemixeswouldbemostlogicalinrequirement2andin
requirement3.Thatis,whattypeswouldnothave,orwouldhave,
complementaryeffects,asillustratedinthechapter?Somestudentswill
recallthesubstitutionprincipleandwillcommentonthat.Thediscussion
hereshouldbeopenendedandcommentswillreflecttheperceptionsof
individualstudents.
Theimportantpointisthatstudentsshouldgetintothehabitofbeing
alertwhenevaluatingdecisionsthatcouldincludeunintendedeffects.That
is,it'snotfarfetchedthatsomeonewouldadvocateclosingadepartment
withoutthinkingofpossibleadverseeffectsonotherdepartments.

5
11CapacityConstraint(15minutes)

55

1.Trekkerbecausetheyhavethehighestcontributionmarginperunit.
2.Walkersarethemostprofitableproduct,producing$140contribution
marginperhour,$28,000contributionpermonth.Therelative
profitabilitiespermachinehourandintotalforthethreeproductsareas
follows:

WalkerRunnerTrekker
Contributionmarginperunit$14$18$28
Numbermadeinonehour*1064
Contributionmarginperhour$140$108$112
Hoursavailable200200200
Totalmonthlycontribution$28,000$21,600$22,400
*60minutesdividedbymachinetimerequired
NotetotheInstructor:Manystudentswilldeterminethetotal
contributionforallproducts,aswedidabove.Studentsshouldbereminded
thatknowingthetotaltimeavailableisnotnecessaryfordeterminingthe
relativeprofitabilities.Itisenoughtoknowthatthereissomeconstraint
oncapacityandthatalloutputcanbesold.
3.ThesellingpriceofTrekkers,thesecondmostprofitableproductper
machinehour,mustrise$7.00(to$63.00)tobeasprofitableasWalkers.
HourlycontributionmarginofWalkers$140.00
DividedbynumberofTrekkersperhour4
RequiredunitcontributionmarginofTrekkers$35.00
PlusvariablecostperTrekker28.00
Requiredprice$63.00

5
12MakeorBuy(5minutes)
Fairboshouldmakethepart.Thevariablecoststoproducethepartare
Materials$9.00
Directlabor10.00
Variableoverhead9.00
Totalvariablecostperunit$28.00
Anotherapproachissimplytosubtractthe$13.00perunitcostoffixed
overheadfromthe$41.00totalcostperunitgivenintheproblem.However
onearrivesatthe$28perunit,it'sclearthatinternalproductioncostof
$28is$4lessthanthe$32outsidepurchasecost.Withavolumeof20,000
units,thetotalsavingsfrommakingratherthanpurchasingthepartis
$80,000.

5
13SpecialOrder(15minutes)
1.HiFlightshouldaccepttheorder.Thecompanyhasenoughcapacityto
maketheballsandtheincrementalrevenueexceedstheincrementalcosts.

56

Revenuefromsale(80,000x$9)$720,000
Variablecosts(80,000x$6)480,000
Incrementalprofit$240,000
2.Theanswermightormightnotchange.Thefactortoconsideriswhether
regularsaleswouldbelostifpeopleknewtheycouldbuytheballsat$16
insteadof$21perdozen.Themaximumlossmightbe80,000dozenballs,the
numberthatthechaincouldsell.Inthatcase,thecompanywouldlose
$400,000byacceptingtheoffer.
Declineinregularsales80,000
Contributionmarginperdozen,$14$6$8
Lostcontributionmargin$640,000
Gainfromrequirement1240,000
Loss$400,000

Moresimply,ifthecompanylostthewhole80,000dozen,itwouldhavetraded
salesat$14forsalesat$9,losing$5perdozen.
Thelostsalesmightevenbegreateriftheavailabilityoftheproductata
lowerpricethroughthechaincreatedillwillwithregularcustomers.
NotetotheInstructor:Thisearlyexerciseraisestheopportunityto
reinforcetheimportanceofestimatingtheeffectsofspecialordersonsales
atregularprices.Itcanalsobeusedtointroducethegeneralideaof
determiningthemaximumnumberofregularsalesthatcouldbelostforthe
ordertobeunacceptable.Inthissituation,
Gainfromorder$240,000
Dividedbycontributionmarginperunit,regularsales$8
Allowablelostregularsales30,000dozen
514TOC(15minutes)
1.Sandyshouldproduce100moreunitsofproductC.
Timetoproduceoneunit=laborcharge/laborrate
A:$2/$8=.25hours
B:$4/$8=.5hours
C:$8/$8=1hour
Timeusedforcurrentproduction:
A:.2510,000units=2,500
B:.54,000units=2,000
C:12,000units=2,000
Totaltimeused6,500
Timeavailableis7,000totalhours6,500hoursused=500hours
Contributionmargins
A
Sellingprice
$20
Materials
(8)
Labor
(2)
Variableoverhead
(2)
Variableselling
(3)
Contributionmargin$5

B
$30
(7)
(4)
(4)
(3)
$12

C
$50
(10)
(8)
(8)
(5)
$19

Sincetimeisnotaconstraint,profitswillbemaximizedbychoosing
theproductwiththehighestcontributionmarginperunit.

57

2.10,000productA,4,000productB,and1,500productC
Sincecurrentdemandwillrequire6,500hours,timeisaconstraint.Sandy
shouldchoosetheproductswiththelargestcontributionmarginperhour.
A:$5/.25=$20/hour
B:$12/.5=$24/hour
C:$19/1=$19/hour
ProduceBfirst,followedinorderbyAandC
Availablehours
ProductB:4,000units.5=
Remainingtime
ProductA:10,000units.25=
Remainingtime
ProductC:1,500hours1=1,500units1=

6,000
2,000
4,000
2,500
1,500
1,500
0

15Short

TermDecisions(1520minutes)
1.$280,anincreaseof$20.Thequickestwayistoworkwithchanges.
IncreaseincontributionmarginofproductA($250x0.30)$75
DecreaseincontributionmarginofproductB($300x0.05)15
Netincreaseincontributionmargin$60
Lessadditionalfixedcosts40
Increaseinincome$20
Usingtotalsproducesthesameanswer.
ProductAProductBTotal
Sales$585*$380$965
Variablecosts26095355
Contributionmargin$325$285610
Fixedcosts($290+$40)330
Income$280
*$450x1.30
**$400x0.95

Theincomestatementdoesn'tshowfixedcostsforeitherproduct;it
showsthemonlyintotal.Itisplausibletousetheoldallocatedfixed
costsplusthe$40forproductA,butthatisn'tnecessarytofindthenew
income.
2.About11.7%($35/$300).Theincreaseinincomejustfromthechangein
productA'ssalesis$35($75increasedcontributionmarginless$40
increasedfixedcosts).Thisincreasedividedbythe$300current
contributionmarginofproductAgivestheallowablereduction.

58

3.$620
ContributionmarginfromproductA$250
Increaseinfixedcosts60
RequiredcontributionmarginfromproductC$310
DividedbycontributionmarginpercentageforproductC50%
EqualsrequiredsalesfromproductC$620
Usingthetotals,
Requiredincome$260
Totalfixedcosts($290+$60)350
Requiredcontributionmargin610
LesscontributionmarginfromproductB300
ContributionmarginrequiredfromproductC$310
Dividedbycontributionmarginpercentage50%
EqualsrequiredsalesfromproductC$620

5
16ProductLineEmphasis(510minutes)
1.PortershouldconcentrateonLocalAreaConnectors(LACs).Their
contributionmarginis70%($3,780/$5,400)whileInternetConnectors(ICs)
haveamarginof50%($3,300/$6,600).IncreasingsalesofLACsby$1million
increasescontributionmarginby$700thousandwhilethelossofcontribution
marginfromthelossof$1millionsalesofICsisonly$500thousand.
LACshaveamuchlowerpercentageofproductmargintosalesthando
ICs,whichmightcatchsomestudentswhostrugglewithcostbehavior.The
lowertotalproductmarginisrelevantforthenextrequirement.
2.PortershoulddropLACsinfavorofthenewproduct.AlthoughLACshave
ahighercontributionmarginpercentage,theircontributiontocovering
commonfixedcostsis,becauseofitsrelativelyhighdirect,avoidablefixed
costs,lowerthanthatforICs.
NotetotheInstructor:Thisexercisereinforcesthepointthat
differentdataarerelevantfordifferentdecisions.Inrequirement1,
neithertypeoffixedcostwasrelevantbecausetherewasnochangeineither
typeaslongasthecompanycontinuedsellingbothproducts.Inrequirement
2,however,fixedcostsbecomerelevantbecausetheywillchange(inthis
case,beavoidedaltogether)iftheentireproductlineweredropped.

517SpecialOrderforServiceFirm(5minutes)
SolongasBurnsandCrosscannotprofitablyemploythestaff,thereis
noincrementalcostassociatedwiththeaudit.Themonthlysalariesare
irrelevantbecausethefirmwillpaythemregardless.Thefirmshouldaccept
theoffer.ThissituationisquitecommonforCPAsandsomewillevendo
slacktimeauditsgratisforcharitableorothernotforprofit
organizations.

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5
18JointProducts(1520minutes)
1.SellMandOatsplitoff.Thecompanywouldprobablyfinditbetterto
sellOatsplitoffsimplytoavoidtheextraworkandthelikelyeffectson
indirectcostsofdoingmorework.

MNOP
Salesvalue,furtherprocessed$450$140$45$20
Salesvalue,splitoff12040350
Incrementalrevenue3301001020
Additionalprocessingcosts360701015
Gain(loss)onaddedprocessing($30)$30$0$5
2.$120

MNOPTotal
Sales$120$140$35$20$315
Additionalprocessingcosts07001585
Margin$120$70$35$5230
Jointcosts110
Profit$120

19DroppingaProduct

ComplementaryEffects(1520minutes)
1.$280,000.Thequickestanalysisis(inthousandsofdollars)
Lostcontributionmargin($200)
Savedfixedcosts240
Gainfromdroppinglotion40
Currentincome240
Incomeiflotiondropped$280
Alternatively,workingwiththetotalsoftheremainingproducts,
After

ShaveCreamTotal
Contributionmargin$720$560$1,280
Avoidablefixedcosts300140440
Segmentmargin$420$420840
Jointfixedcosts560
Income$280
2.$80,000
Lostcontributionmargin:
Lotion($200)
Blades(20%x$720)(144)
Cream(10%x$560)(56)
Totallostcontributionmargin($400)
Savedfixedcosts,lotion240
Netlossfromdroppinglotion(160)
Currentincome240
Incomeiflotiondropped$80
NotetotheInstructor:Thisexerciseillustratestheconceptof
complementaryeffects.Bythemselves,lotionisunprofitable;butitshould
becontinuedinthelinebecauseofitseffectsonthesalesoftheother
products.
520TOC(1015minutes)

510

1.MapleGroveshouldacquiretheequipment.
Increasedcontributionmargin,40,000x$8$320,000
Increasedcosts
(140,000)
Increasedprofit
$180,000

2.MapleGroveshouldnotacquiretheequipmentbecauseitcannotsellthe
additionaloutput.
521QualityCostsandTOC(15minutes)
1.No,becausethesavingsareabout$21,000($30,000x70%reductionin
scrap),foranexpenditureof$25,000.
2.Yes,becausetheincreasedcontributionmarginisabout$42,000($60,000
x70%).
ThisassignmentgetstoafundamentaldifferencebetweenTOCandmostother
approachestocontinuousimprovement.TOCpaysattentiontoconstraints,
virtuallyignoringnonconstrainingresources.Someoneofthequalityis
freeschoolwouldprobablyopttomakethechangeeventhoughitappearednot
tobecosteffectivebecauseoftheexpectationofincreasedbenefitsother
thanthoseindicated.Ofcourse,itisalsoreasonabletoextendthesearch
forscrapreducingstepsthatmightbemoreeffective.

5
22InventoryValues(1520minutes)
1.Therelevantcostis$1,530,whichisthe$5.10perpoundsellingprice
times300pounds.Stoutshouldaccepttheorder.
Incrementalrevenue$2,600
Incrementalcosts$900
Opportunitycostofxyrex1,5302,430
Incrementalprofit$170
2.Therelevantcostisnow$1,830,whichisthe$6.10replacementcost
timesthe300pounds,andStoutshouldnotaccepttheorder.
Incrementalrevenue$2,600
Incrementalcosts$900
Opportunitycostofxyrex1,8302,730
Incrementalprofit(loss)($130)
The$7.50perpoundpurchasepriceisirrelevantundereithersituation
becauseitissunk.
NotetotheInstructor:Thoughthisexerciseisstraightforwardand
emphasizestheideaofrelevantcosts,invariablysomestudentshavetrouble
withitbecausetheydonotwanttoignorethehistoricalcostoftheonhand
xyrex.Youmightwishtousethefollowingcomparisonthatincludesthe
historicalcostinananalysisforrequirement1,wherethechoiceisbetween
sellingthexyrexandacceptingtheorder:
AcceptOrderRejectOrder
Revenue[$2,600,($5.10x300)]$2,600$1,530
Incrementalcost$900
Costofxyrex($7.50x300)2,2503,1502,250
Loss($550)($720)
511

The$170differenceistheincrementalprofitcomputedinrequirement1.

5
23MakeorBuy(1520minutes)
1.No.Itsincomewouldfallby$30,000.

MakeBuy
Purchaseprice$0$310,000
Materials40,000
Directlabor90,000
Variableoverhead80,000
Avoidablefixedoverhead50,000
Foregonerent20,000
Netcost$280,000$310,000
The$20,000rent,anopportunitycost,couldbesubtractedfromthecost
ofbuying.The$180,000totalfixedoverheadcouldbeshownunderthemake
decision,with$130,000($180,000$50,000)shownunderthebuydecisionas
costthatthecompanywouldnotavoidbybuying.Anysuchmanipulations
stillshowthattheadvantagetomakingis$30,000.
2.$2.80.Toequalizethecostofmakingandbuyingwemustmakethebuy
alternativecost$280,000,whichrequiresa$2.80price.Or,toequatethe
choices,wemusterasethe$30,000advantageofmaking.Over100,000units,
theadvantageis$0.30perunit.Soapriceof$2.80equalizescosts.
3.70,000units,whichwecandetermineinseveralways.Thevariablecost
tomakethepartis$2.10,($40,000+$90,000+$80,000)/100,000
Totalcosttomake=Totalcosttobuy
$3.10Q$20,000=$2.10Q+$50,000
$1.00Q=$70,000
Q=70,000
NotetotheInstructor:Thisrequirementallowsyoutofocusonthe
relevanceofvolumetomakeorbuydecisions.Iftherearenoavoidable
costsandnoopportunitycost,volumehasnoeffectonthedecisionbecause
allcostsarevariable.Butifthereareeitheravoidablefixedcostsor
opportunitycosts,volumematters.Ingeneral,thehighertheexpected
volumethemorelikelythecompanywillmakeinsteadofbuy.
Qualitativefactorsarealsoimportant,includingthequalityofthe
purchasedpart,thereliabilityofthesupplierinmeetingscheduleddelivery
dates,andwhetherthepartisofsufficientimportancethatthecompany
shouldensureitssupplybymakingit.Inaddition,thecompanyshould
considerthefuturebehaviorofcosts.(Willthesupplierraiseprices
fasterthanthefirm'smanufacturingcostswillrise?)

512

524CapacityConstraint(1015minutes)
1.GrayshouldmakeZsbecausetheyhavethehighercontributionmarginper
minuteofmachinetime.TotalcontributionmarginmakingZsis$384,000.

QZ.
Contributionmarginperunit,$11$7,$18$10$4$8.00
Dividedbyrequiredminutes22.50
Contributionmarginperminute$2$3.20
Minutesofproduction,10x200x60120,000
Totalcontributionmargin$384,000
Wecouldalsocalculatetotalcontributionmarginasfollows.
Minutesavailable120,000
Dividedby2.5=numberofZs48,000
Times$8CM=totalcontributionmargin$384,000
2.Grayshouldmake40,000Zsand10,000Qs.Itwillearn$360,000
contributionmargindoingso.
Annualcapacity,minutes120,000
Lessminutestomake40,000Zs,40,000x2.5100,000
AvailableforQs20,000
MinutesperQ2
NumberofQsthatcompanycanmake10,000

ContributionmarginfromZs,40,000x$8$320,000
ContributionmarginfromQs,10,000x$440,000
Totalcontributionmargin
$360,000
Youmightpointouttheobviousnessofthecompany'sproducingasmany
Zsasitcan,thendevotingtheremainingavailablecapacitytoQs.Ifthe
companywantstomakeandsell48,000Zs,butcannotsellmorethan40,000,
itcertainlywouldwanttomakeandsellallitcould.Theonlyquestion,
then,ishowmanyQsitcanproduceintheremainingtime.
525TOCandQuality(15minutes)
1.$40,000,2,000motorsat$20permotor,$8materialplus$12variable
costsinfabrication.
2.$64,000
Lostrevenue,2,000x$42
$84,000
Lesssavedvariablecostofassembly,2,000x$1020,000
Lostmonthlyprofit$64,000

513

Somestudentswillseethepointbetterusingtotals.

AsIsNoDefectives
Sales,18,000x$42
20,000x$42
Lessvariablecosts:
Materialcosts,20,000x$8
Fabrication,20,000x$6
Assembly,18,000x$10,20,000x$10
Totalvariablecosts
Contributionmargin

$756,000
$840,000
$160,000$160,000
120,000120,000
180,000200,000
$460,000$480,000
$296,000$360,000

Thepurposeofthisassignmentistoshowhowpoorqualitycancreate
bottlenecks.

5
26JointProducts(15minutes)
1.HighPlainsgains$20thousandbyprocessingthebones.
Incrementalrevenuefromprocessingbones$50
Incrementalcostofprocessingbones30
Incrementalprofitfromprocessingbones$20
2.HighPlainsshouldnotaccepttheoffer.Thecompanyis$80thousand
betterofftanningthehidesitself.
Incrementalrevenuefromhidesales$150
Incrementalcostoftanninghides40
Incrementalprofitfromtanninghides$110
Offerprice,equalssplitoffvalue30
Gainfromtanninghides$80
3.Thecontributionfromprocessingbonesfurtheris$20thousandas
computedinrequirement1.HighPlainsmustreceiveatleastthatfrombone
salestobenoworseoff.

5
27OpportunityCostPricing(1015minutes)
1.CDR,becausethecontributionmarginperminuteofmachinetimeis
highest.
CDRCDRWDVD
Unitcontributionmargin$10$15$25
Dividedbyminutesneeded51015
Equalscontributionperminute$2.00$1.50$1.67
2.$26forCDRW,$40forDVD.
CDRWDVD
Minutesrequired1015
times$2perminute=CMperunit$20$30
Addvariablecost610
Pricerequired$26$40
NotetotheInstructor:Thissimpleproblemillustratestheprinciple
statedinthetitle,thatopportunitycostisrelevanttomakingapricing
decision.Theopportunitycostofusingascarceresourceisthegainfrom
itsbest(mostprofitable)alternativeuse.Thebestusehere,makingCDR,
yields$2perminute,sothecostofusingtheresourceis$2.

514

28ComprehensiveReviewofShort

TermDecisions(2025minutes)
1.$1,000,000[($50x8,000)+($120x3,000)+($60x4,000)]
NotetotheInstructor:Incoveringthisrequirement,itisimportant
toemphasizethatperunitfixed(andtotal)costsandprofitarevalidonly
atthevolumeusedtocalculatethem.Few,ifany,studentshavetrouble
with
thisrequirement,butmanyfailtorecognizethatpointandsoerrinthe
subsequentrequirements.
2.Profitwillfallby$960,000.
Volume4,000
Unitcontributionmargin($600$360)$240
Lostcontributionmarginandprofit$960,000

3.Profitwillincreaseby$80,000.
Increasedcontributionmargin,sofas[(7,0004,000)x$240]$720,000
Decreasedcontributionmargin,chairs[8,000x($120$40)]640,000
Netgain$80,000
4.Profitwillincreaseby$25,000.
Currentcost(4,000x$60)$240,000
Newcost[$35,000+($45x4,000)]215,000
Savings$25,000
5.Profitwillincreaseby$85,000[1,000x($245$160)].
6.Profitwillincreaseby$7,500.
Contributionmarginonorder(1,500x$85)$127,500
Lostcontributionmargin(500x$240)120,000
Netgain$7,500

29UsingPer

UnitData(1520minutes)
1.Profitwillincreaseby$8,000.
Contributionfromspecialorder[20,000x($8$6)]$40,000
Contributionlostonregularsales[8,000x($10$6)]32,000
Netgainfromspecialorder$8,000
NotetotheInstructor:Toreinforcetheuseofsensitivityanalysisin
makingdecisions,youmightaskstudentshowmanyunitsofregularsales
wouldhavetobelosttomakeacceptingtheorderabaddecision.Theanswer
is10,000units,thetotalcontributionfromthespecialorder($40,000)
dividedbythenormalcontributionmarginonsales($4).Thecompanyhas
nearlya25%marginforerrorinitsestimateofthepotentiallossin
volume.
2.Profitwillincreaseby$10,000.
Totalcurrentcost(200,000x$2.80)$560,000
Costtomakethepart[(200,000x$2.25)+$100,000]550,000
Costdifferenceinfavorofmakingthepart$10,000
3.$14.Thesimplestanalysisinvolvesrecognizingthatifvariablecost
perunit,fixedcosts,andprofitaretoremainthesame,butvolumeistobe
cutinhalf,thesellingpriceperunitmustproducetwiceasmuchperunit
515

contributionmargin.Thecurrentmarginis$4andthesellingprice$10,so
apriceincreaseof$4(to$14)willbeneeded.
Alonger,lessthoughtfulapproachdealswiththeactualtotalsfor
profit,fixedcosts,etc.,asbelow.
Current(andfuture)fixedcosts,knowntobe$3
perunitatavolumeof200,000units$600,000
Desiredprofit(now$1perunitatavolumeof200,000)200,000
Requiredtotalcontributionmargin$800,000
Dividedbyno.ofunitstobesold100,000
Equalsrequiredperunitcontributionmargin$8
Plusvariablecostperunit,thesameascurrently6
Requiredsellingprice$14

30Just

inTime,CostsofActivities(20minutes)
Thememoshouldincludeacomparisonofthecostsundertheoldandnew
methods,suchasshownbelow.
Costsunderoldmethod
Variablecostsfor22,000units:
Materials($2.90x22,000)$63,800
Labor($2.80x22,000)61,600
Overhead($1.80x40%x22,000)15,840
Avoidablefixedcosts:
Inspection4,000
Productionscheduling2,500
Maintenance3,600
Total$151,340
JITcosts

given
Materials$55,000
Labor67,000
Overhead,incrementalonly9,000
Total131,000
Differenceincosts$20,340
Thememoshouldalsoincludethefollowingfactors.
(1)WorkersinaJITenvironmenttakeonadditionalresponsibilities,so
someoverheadcosts,suchasthoseenumeratedintheproblem,are
reduced.
(2)BecausemorecostsaredirecttoproductsunderJIT,productsmight
appeartoberelativelymorecostlywhencomparedwiththemanufacturing
costsidentifiedasdirecttoproductusingconventionalmethods.The
increaseincostidentifieddirectlywithproductsis,however,offset
bythedecreaseintotaloverheadcostsviewedasindirect.

516


5
31ChoosingaProduct(1520minutes)
1.Mashedisthebestchoice.Carrotsarearesourceinshortsupply,and
thecontributionmarginperprocessedpoundofcarrotsisthehighestfor
mashed.
SlicedMashedPickled
Sellingpricepercase$7.50$6.00$8.25
Variableprocessingcostpercase2.502.754.00
Processingmarginpercase$5.00$3.25$4.25
Poundsofrawcarrotspercase52.55
Processingmarginperpound$1.00$1.30$0.85
Includingthecostofcarrotsyieldsthesameanswer.
SlicedMashedPickled
Processingmarginpercase,asabove$5.00$3.25$4.25
Costofcarrots(lbs.x$0.25)1.250.6251.25
Netcontribution$3.75$2.625$3.00
Poundspercase52.55
Contributionperpound$0.75$1.050$0.60
Analternativeistousetotals.

SlicedMashedPickled
Sales,100,000x$7.50,200,000x$6,
100,000x$8.25$750,000$1,200,000$825,000
Carrotcost(125,000)(125,000)(125,000)
Variableprocessingcosts(250,000)(550,000)(400,000)
Contributionmargin$375,000$525,000$300,000
2.$445,000
Sales[$6.00x(500,000/2.5=200,000cases)]$1,200,000
Variableprocessingcosts($2.75x200,000)$550,000
Carrots(500,000x$0.25)125,000
Fixedproductioncosts80,000755,000
Profit$445,000
3.3.85pounds,suggestingthatthemanagershopeisforlornbecausethe
reductionisextremelylarge.Thesimplestwaytosolveistodeterminewhat
numberofpoundswouldturnthe$5.00percaseprocessingmarginforsliced
carrotsintothe$1.30perpoundthatmashedcarrotsearn.Thus,
$5.00processingmarginforslicedcarrotsdividedbyXlbs.=$1.30
X=3.85lbs.
4.Themostobviousfactoristhatthequantityoftheproductthecustomer
buysissmaller,whichcouldcreateproblemsifcustomersdonotrespond
favorably.Thevalueofthepurchaseisless,socustomersmightgotoother
brands.Anethicalquestioniswhetherthecompanyshouldtakesuchacourse
withoutdisclosingtheactiontocustomers.

32ProductPricing

Off

PeakHours(2025minutes)
Thespecialluncheonpricewouldbeunprofitabletotherestaurant,as
shownintheanalysisbelow.Thecurrentincrementalprofitfortheluncheon
hoursis$280whilethenewpricewouldproducealossduringtheperiodof
$46,fora$326disadvantage($46+$280).

517


Sales:
Pizza(250x$5.00)
$1,250
Beverages*
($150/150)x250
250
Totalsales
1,500
Variablecosts:
Pizza*[($450/150)x
110%x300]
990
Beverages**
($60/$150)x250
100
Totalvariablecosts
1,090
Contributionmargin
410
Avoidablefixedcosts
$380x120%
456
Loss($46)
*$1percustomer,from$150priorsalesto150customers
**$250newexpectedsalestimesthevariablecostratio($60/$150)for
beverages.Or,250customersis1.67timesthe150nowserved,so1.67x
$60=$100.
Theproblemisthatthecontributionmarginpercustomerfalls
precipitously.Undertheoldarrangement,theaveragepricewas$6.80
($1,020/150)andthevariablecost$3($450/150)fora$3.80contribution
margin.Nowthecontributionmarginonpizzaisonly$1.04percustomer.
Price
$5.00
Variablecostperpizza,$3x1.1$3.30
Ratioofpizzastocustomers,300/2501.20
Variablecostpercustomer3.96
Contributionmarginpercustomerfrompizza$1.04
Theincreasedvolumeofcustomersandofbeveragesisnotenoughto
makeupthedropincontributionmargin.
NotetotheInstructor:Youmightasktheclasswhatfactorsmight
prompttheownertoaccepttheproposaleventhoughitisunprofitable.One
possibilityistheprospectofgainingbusinessatotherhoursfromthenew
customerswhopatronizethebusinessatlunch.Thatgainmightmorethan
offsetthelossfromthesecustomersatlunch.
Angelomightalsoconsidertryingtoreducecostsonthespecialbynot
allowingeachcustomertoorderanycombinationofthetoppings.For
example,theluncheonspecialmightbeabuffet,withpizzasofparticular
combinationsoftoppings.(Abuffetmightalsoreducetheneedforparttime
help.)

33CarPool
BRelevantCosts(510minutes)
1.Thepossibilitiesrangefrom$2perday,thecostofthealternativeof
takingthebus,toabout$0.56perday,theincrementalcostoftheextra
fourmiles(4x$.14).

518

Variablecosts($1,350+$450+$300)$2,100
Miles15,000
Variablecostpermile$0.14
Betweentheextremesfallthesharingoffullcost,orofvariablecost,for
14miles(orevenfor4miles).Someplausiblepricesare:
*$.6533,basedonathreewaysharingofthe$1.96totalvariablecost
(14x$0.14)
*$0.98,atwowayshareoftotaldailyvariablecosts($1.96/2)basedon
thedriver'snothavingtosharevariablecost
*$2.24,basedonfullcostof$0.48permile($7,200/15,000)andathree
waysharefor14miles(14x$0.48=$6.72perday)
Maintenancecostismorelikelytobestepvariablethanvariable,which
introducesthequestionwhethertheextramileswilltakethecartooneof
themaintenancesteps.Also,ifthedriver'stimehasahighopportunity
cost,doubtfulinthiscase,thepriceshouldreflectthevalueofthattime.
2.The$0.56incrementalcost.However,thedriverwouldthennotbe
compensatedfortimeandtheaggravationoftheextrafourmilesoftraffic
perday.Nosinglepricemightbeconsideredperfectlyfair.Thecolleague
mightevenfeelthat$2ormoreperdayisfairbecausethebuswouldnot
pickhimupanddrophimoffathome.

5
34ProductLineAnalysisforServiceFirm(3035minutes)
1.Thefirmshouldcontinuedoingresidentialwork.Droppingresidential
workwouldlosethe$10.0thousandgrossmarginbutnotreducethecompany
sustainingcosts.

OfficePublic
BuildingsBuildingsResidencesTotal
Feeincome

$69.0$56.2$28.8$154.0
Costoffees26.430.618.875.8
Grossmargin$42.6$25.6$10.078.2
Companysustainingcosts
45.4
Profit
$32.8
2.Itappearsthatthefirmshouldconcentrateonofficebuildingsbecause
theirgrossmarginpercentageishighestofthethree.Thisisatentative
conclusion,butwarrantedgiventheinformationavailable.

5
35HoursofOperation(1520minutes)
1.The$591isprobablytheresultofdividingtheyear'stotaloperating
expenses($184,500)by312days(52weeksx6daysperweek).Thedifference
betweenthe$910salesfigureandthe$591is$319,whichisapproximately
35%of$910.And35%isalsotheratioofcostofsalestosalesforthe
year($162,700/$464,900),sothegrossmarginisabout65%.Thus,theowner
probablythoughtthatsalesontheextradaywouldneedtobringin
sufficientgrossmargintocoverwhathecomputedasdailyoperatingcost,
becausethe$910istheapproximateresultofdividing$591by65%.
2.Usingonlythequantitativeinformationavailable,italmostcertainly
paystostayopenonSunday,asthefollowingcalculationshows.
Sales$860
Costofsalesat35%301
519

Grossmarginat65%559
Payrollcost135
Profit$424
Theaboveanalysisassumesthatalloperatingexpensesareessentiallyfixed,
whichmightnotbetrue.However,evenifalltheexpensesotherthan
salaries,rent,andinsurancewerevariablewiththenumberofoperating
days,Sundayoperationappearstobeprofitable.
Utilitiesand"other"expenses($12,500+$27,200)$39,700
Dividedbynormalnumberofdays(6x52weeks)312
Equalscostperoperatingday$127

The$424profitshownabovemorethancoversthe$127peroperatingdaycost
ofutilities,etc.And,ifsuchcostisactuallyvariablewiththenumberof
operatinghoursintheday,eventhe$127overstatesthecostsforSunday
opening,sincetheperdaycostcovers12hourdays,whilethestoreis
expectedtobeopenonlysixhoursonSunday.Thisconclusionrestsonthe
premisethatSundaysaleswouldnototherwisebemade,i.e.,thattheSunday
salesareincremental.
3.Someitemsthememomightincludearelistedbelow.
(a)Dataaboutthepatternofsalesthroughouttheweekareimportant,
becausetheownerwillwanttoknowwhethertheSundayhoursproducean
increaseintotalsales.Thatis,stayingopenonSundaysmightbewiseif
totalrevenueincreasesbutunwiseifitsimplyshiftssalesfromotherdays
oftheweek.Thepublicasawholeisnotlikelytobuyalotmore
sationaeryitemsjustbecauseoftheopportunitytoshoponSunday.However,
theSundayhoursmightattractsomecustomerswhohavebeengoingtoother
storesduringtheweekbutwouldprefertoshoponSunday.
(b)Informationaboutthebehavioroftheindividualoperatingcostsis
importanttothefinaldecision.Theownerwillneedtoknowwhich,ifany,
oftheoperatingexpensesarevariable.(Thismatteriscoveredtosome
extentintheanswertorequirement2.)Forexample,theleaseagreement
mightincludeapercentagerentalprovision,andthecostofpublicliability
insurancemightrelateinparttothenumberofoperatinghoursordays.
(c)DetailsofthepayrollcostsfortheSundayoperationshouldbereviewed
toassurethatthefullamountofsuchcostswasconsideredinthe
preliminaryanalysis.Forexample,thatanalysismightnothaveincluded
suchthingsaspayrolltaxesandotherwagerelatedexpenses.

36SpecialOrder

AlternativeVolumes(2025minutes)
1.Yes,becauseincomeincreasesby$67,500.
Additionalrevenue(15,000x$14)$210,000
Additionalcosts:
Variablemanufacturingcostsat$9/unit*$135,000
Licensefeeat$0.507,500142,500
Increaseinincome$67,500
*Totalvariablemanufacturingcostsof$2,070,000($2,760,000
$690,000)dividedby230,000units.
Alternatively,contributionmarginonthespecialorderis$4.50perunit
($14$9.00$0.50),sotheincreaseinprofitis15,000x$4.50=$67,500

520

2.Incomewillincreaseby$46,000;contributionmarginonregularsalesis
$6.70perunit.Totalincomewillbe$621,000($575,000+$46,000).
Sellingprice($4,140,000/230,000)$18.00
Variablecosts:
Manufacturing$9.00
Licensefee0.50
Commissionat10%1.8011.30
Contributionmargin$6.70
Additionalcontributionmarginspecialorder($4.50x40,000)$180,000
Lostcontributionmarginonregularsales(20,000x$6.70)134,000
Increaseincontributionmarginandprofit$46,000
3.$9.50,theperunitvariablecost.
4.About26,866shirts
Contributionmarginonorder(above)$180,000
Dividedbycontributionmarginonregularsales$6.70
Volumetobelosttomakeorderbreakeven26,866
rounded

Thiscalculationisvaluablewhenpeoplemightbuyfromthechain
insteadoffromthecompany.(Theassignmentstatesthatthechaindealsin
areaswhereWildernessProductsdoesnot.)The26,866isafigurethatthe
managerscanexamineanddecidewhethertheriskisworthwhile.Managers
mightbereluctanttoplaceafigureonthelostsalesthroughleakagebut
wouldprobablybewillingtostatethelikelihoodofaderivedfigure.
NotetotheInstructor:Althoughthetextcoversveryearlytheidea
thataveragetotalcostisnotausefulnumberfordecisionmaking,thepoint
isimportantenoughtowarrantmentionagain,especiallysincetheproblem
specificallyreferstotheaveragecostperunit.Toemphasizethat
comparingaveragetotalcostandpriceisnotusefulwhenoneisdealingwith
special
orders,youmaywishtocomputeanaverageunitcostifthespecialorderis
acceptedunderthesituationpresentedinrequirement1.Theaveragecostis
Totalcostsat230,000units($2,760,000+$805,000)$3,565,000
Incrementalcostsofspecialorder(requirement1)142,500
Totalcostsfor245,000units$3,707,500
Averagecost($3,707,500/245,000units)$15.1327
The$14sellingpriceforthespecialorderisstilllessthanthe
averagetotalcost,yetrequirement1showsthatthecompanywillshowan
increaseinprofitifthespecialorderisaccepted.

5
37MakeorBuy(3040minutes)
1.

Buyingisthebetteralternative,costing$522,000(36,000x$14.50).

521

CosttoMake
Materials(36,000x$5.90)$212,400
Directlabor(36,000x$5.30)190,800
Rentofspace48,000*
Rentofmachinery45,000
Othervariableoverhead(36,000x$1.40**)50,400
Totalcosttomake$546,600
*Rentalonthenewspace,notonthespacealreadyleased.Theincremental
costis$48,000becausethatisthechangeincostoccasionedbythedecision
tomakethemotor.
**$4.10totalless$2.70fixed.
2.About48,947units.Equatingthecostsofmakingandbuying,whereQ=
volume
Costtomake=$48,000+$45,000+[Qx($5.90+$5.30+$1.40)]
=$93,000+$12.60Q
Costtobuy=$14.5Q
$14.5Q=$93,000+$12.60Q
Q=48,947
Theestimateofvolumewouldhavetobeoffbysome12,947units(48,947
36,000)or36%(12,947/36,000)forthebuydecisiontobeunwise.
3.$12.60,thevariablecosttoproduceaunit.Oncetherentalshavebeen
incurred,thecompany'sincrementalcosttomakethemotorisunitvariable
cost.(Thisrequirementunderscorestheimportanceofdeterminingprecisely
whatthedecisionisinagivencase.)

38DroppingaProduct

OpportunityCosts(20minutes)
Iftheliquidationofreceivablesandinventorycouldtakeplacewithin
arelativelyshorttime,wemightsimplycomparethelostproductmargin(if
theapparellineisdiscontinued)withthesavingsininterest.
Lostproductmargin$35,000
Savingsininterest($320,000investmentthat
iscoveredbydebtcarryinga14%interestrate)
$320,000x14%44,800
Savingsiflineisdropped$9,800
Becausethecompany'sstatedintentionistopayoffthedebtifcashis
releasedfromtheinvestmentininventoriesandreceivables,theinterest
savingsappeartoberelevant.Evenifthecashfromliquidatingtheworking
capitalitemswereusedforsomeotherpurpose,theremustbesomecost(an
opportunitycost)totyingupcashinaninvestmentinworkingcapitalitems.
Themeasurementofthatopportunitycostdependsonwhatalternativeusesare
availablefromthecashfreedbyliquidationoftheworkingcapitalitems.
NotetotheInstructor:Theopportunitycostofcashismoredirectly
relatedtothesubjectofcapitalbudgeting,butitisnottooearlyto
emphasizethepointthatthereissomecostassociatedwiththeuseofcash.
It'spossiblethatpayingoffdebt,evenwhenitcarriesaninterestrateof
14%,isnotagooduseofthecashavailabletothefirm.(Perhapsthe
companycouldexpandoneofitsotherlines,orputthecashintoproductive
investmentinproductlinesnotnowbeingcoveredatall,andearnareturn
inexcessof14%.)

522

Oneothermatterwarrantsdiscussion.Thoughsomecashflowwillresult
fromtheliquidationofreceivablesandinventories,there'snoassurance
thattheliquidationwillproducecashequaltotherecorded(book)
investments.Recoveryofbookvalueontheinvestmentinreceivablesisnot
unreasonable.Theamountrecoverablefromtheinvestmentininventories
dependsonthemarketfortheproductandtheapproachthecompanytakesto
liquidatingtheinventories.Anorderlyliquidationmaywellproducecash
inflowsinexcessofrecordedcosts,but,ofcourse,anydelayinthecash
inflows(suchasmightbecausedbyeffectinganorderlyliquidation)reduces
thesavingsininterestpayments.

5
39JointProcess(Extensionof58and59)(15minutes)
Westlakeshouldcontinuetooperatethejointprocess.Ignoringthe
costsofoperatingthejointprocess,themonthlyprofitthatcomesfrom
producingthejointproductsandprocessingfurtheroneofthoseproducts
(Frazinine)is$808,000(from59),andthecostssavedbynotoperatingthe
jointprocessareonly$604,000(avoidablecostsof$220,000+variablecosts
of$320perbatchfor1,200batches,or$384,000).Theadvantageto
operatingthejointprocessis$204,000($808,000$604,000).Thesame
answercanbedeterminedbycomparingtotalincome(loss)dependingon
whethertheprocessisoperated.
OperatetheProcessDropthe
andFurtherJoint

ProcessFrazinineProcess
Marginbeforecostsofjointprocess,from59$808,000
Costsofjointprocess:
Variable,1,200batchesx$320perbatch(384,000)
Fixed,avoidable(220,000)
Fixed,unavoidable(180,000)($180,000)
Profit(loss)$24,000($180,000)
Thedifferencebetweenaprofitof$24,000andalossof$180,000isthe
$204,000computedearlier.

5
40Salesperson'sTimeasScarceResource(1520minutes)
1.Onthebasisoftheaveragesalone,thesalesforceshouldconcentrateon
retailers.
Numberofwholesalerscalledoninoneweek(8x5)40
Averageorderperwholesaler,atwholesaleprice$500
Averageweeklywholesalesales,persalesperson$20,000
Variablecostofsalesat75%15,000
Weeklygrossmarginfromcallingonwholesalersat25%$5,000
Numberofretailerscalledoninoneweek(14x5)70
Averageorderperretailer,atretailprices$300
Averageweeklyretailsales,persalesperson$21,000
Variablecostofretailsalesat60%12,600
Weeklygrossmarginfromcallingonretailersat40%$8,400
2.Iftherewereothervariablecostsapplicabletoanysales,theemphasis
onretailersisstillappropriate.Thatis,solongasthesameproductsare
soldtobothretailersandwholesalers,anincreaseordecreaseinvariable
coststillmakesretailersthemoreprofitable.However,thememomight
523

raisequestionssuchasthefollowingaboutcostsassociatedwithsellingto
retailersbeinghigherthantheyareforsalestowholesalers.AnABC
analysisshouldprovideusefulinformationabouttherelativecostsof
servicingthetwochannelsofdistribution.

(a)Withmoreseparateorderstoretailers,suchcostsasshipping,making
uporders,andpackagingcouldwellbehigherforretailers.
(b)Clericalworkislikelytobehigherwithretailers,leadingtohigher
costsforcreditchecking,administrationofreceivables,andcollections.
Thelargernumberofordersmeansmorebookkeeping(recordingandposting
ordersandpayments)andmoremonthlystatementstoprepareandmail.

(c)Itisprobablethatretailersaregenerallylesscreditworthy,which
couldresultinhigherbaddebts,thoughnothinginthefactssuggeststhis.
Oneotherfactorthatmightbementionedistheadvantagetothecompany
tohavewholesalershandleitsproducts.Wholesalerscouldfillorders
betweenvisitsofsalespeopleandperformotherservicesthatcouldfavorably
affectsales.Forexample,somewholesalersmightsponsorregional
advertising("WeproudlystockLombardproducts.").

41SpecialOrder

CapacityLimitation(25minutes)
1.Incomewillnotchange(againof$480,000ontheorderitself,lessa
lossof$480,000fromlostsales).Theperunitcontributionmarginon
specialorderis$6($34$24$4).
ContributionMargin
SpecialOrderLostSales
Volume80,00024,000*
Contributionmarginpertire$6$20
Contributionmargin$480,000$480,000
*Maximumproduction320,000
Lessspecialorder80,000
Availableforregularsales240,000
Expectedregularsales300,000
Lostsalesformonth60,000
Netlostsales,40%x60,00024,000

2.$34.00

Contributionmarginonlostsales,requiredonorder$480,000
Dividedbyunitsinspecialorder80,000
Equalscontributionmarginperunit$6.00
Addvariablecostperunit28.00
Equalsrequiredprice$34.00
3.Incomewouldfallby$440,000permonth($800,000dropfromlostsales
less$360,000increasedprofitfromspecialorder).
SpecialOrderLostSales
Volume60,00040,000*
Contributionmarginpertire$6$20
Contributionmargin$360,000$800,000
*Production320,000

524

Specialorder60,000
Availableforregularsales260,000
Expectedregularsales300,000
Lostsalesatregularprices40,000
Thelowestacceptablepriceis$41.33.Dividingthe$800,000
contributionmarginonlostsalesbythe60,000unitsonthespecialorder
givesarequiredcontributionmarginperunitof$13.33.Addingthe$28
variablecosttothedesiredcontributionmargingivesapriceof$41.33.
NotetotheInstructor:Besidesnegotiatingonprice,thecompany
couldnegotiateonthesizeofthespecialorder.Youmightaskthestudents
howmanyunitsthespecialordermustbetomakethecompanyindifferent.
Obviously,atsomeprice,andsomemonthlyvolume,theorderbecomes
desirable.Theanalysisabovegetsatthepricingissue.Forthevolume
issue,thefollowingisthesimplest.
Overalllosson60,000unitorder$440,000
DividedbydifferenceinCMs,$20$6$14
Requiredreductioninspecialorder,rounded31,429
Maximumorder,60,00031,42928,571
Theideahereisthatthecompanytrades$6marginfor$20marginonevery
unitthatittakesfromthespecialorderandsellsattheregularprice.To
makeupthe$440,000lossrequiresnearly31,429suchexchanges.Sucha
calculationishelpfulifSouthlandhassomereasonforwantingthebusiness.
PerhapsthechainsellsinageographicalareaSouthlandwouldliketomove
into,orperhapsiscontemplatingexpansionandwouldlikesomeprivatebrand
businesstoprovideabaseofvolume.Southlandmightnotwanta$440,000
monthlydeclineinincome,butitmightundertakethebusinessataslight
profitorlosstofulfillsomeotherstrategicneed.
4.Thepurposeofthisrequirementistostresstheimportanceof
materiality.Thecompanyexpectsthefollowingmonthlyincomewithoutthe
order.
Contributionmargin,300,000x$20$6,000,000
Fixedcosts4,800,000
Profit$1,200,000
Wewouldcertainlynotaccepttheorder,withwhateverdisruptionitmight
cause,fornoincreaseina$1,200,000profitforonemonth.

525

542ProductionandMarketConstraints(2025minutes)
1.$2,000
Alpha
$180
40
50

$90
50
$4,500

Sellingprice
Rawmaterial1
Rawmaterial2
Rawmaterial3
Throughput
units

Beta
$180

50
30
$100
25
$2,500

Fixedcosts
Profit

Total

$7,000
5,000
$2,000

2.
Machine1
Alpha
A3050
A2050
B3050
B1050
2050
Beta
B3025
B1025
C2025
C3025
1025
Total
Availabletime
(40hrs60)
Loadfactor

Machine2

Machine3

Machine4

1,500
1,000
1,500
500
1,000
750
250
500
.
2,000

.
2,250

750
.
2,500

250
1,250

2,400
83%

2,400
94%

2,400
104%

2,400
52%

TheproductionconstraintisMachine3withaloadfactorgreaterthan100%.
3.Alpha:50units,Beta:22units.Alpharequires30minutesonMachine3
whileBetarequires40minutes.AsingleAlphayields$90/30=$3perminute;
asingleBetayields$100/40=$2.50perminute.Thus,Alphasshouldbe
producedfirst.Producingall50Alphaswillrequire5030minutes,or
1,500minutes,leaving2,4001,500=900minutestoproduceBetas.With
thisavailabletime,900/40=22Betascanbeproduced.
543ProductionandMarketConstraintswithChangingConditions(extension
of542)(30minutes)
1.Option1:$1,625;Option2:$1,235;Option3:$(1,130)

526

Option1
Sellingprice
Rawmaterial1
Rawmaterial2
Rawmaterial3
Throughput
units

Alpha
$180
40
55

$85
50
$4,250

Beta
$180

55
30
$95
25
$2,375

fixedcosts
profit

Total

$6,625
5,000
$1,625

Underthisoption,therewouldbenoproductionconstraint,only
marketingconstraints.Machine3wouldhavealoadfactorof2,000/2,400=
83%.(Alpha:50units(16+8minutes)=1,200andBeta:25units(8+24
minutes)=800)
Option2
Sellingprice
Rawmaterial1
Rawmaterial2
Rawmaterial3
Throughput
units

Alpha
$165
40
50

$75
49
$3,675

Beta
$200

50
30
$120
23
$2,760

fixedcosts
profit

Total

$6,435
5,200
$1,235

Underthisoption,theproductionconstraintstillexistsatmachine3.
Betaisnowthemoredesirableproduct,yielding$120/40=$3/minuteon
machine3whileAlphanowyields$75/30=$2.50/minute.Theentiredemandfor
Betashouldbeproduced,using2340minutes=920minutes,leaving1,480
minutesavailabletoproduceAlpha.Atotalof1,480/30=49Alphacanbe
produced.
Option3
Sellingprice
Rawmaterial1
Rawmaterial2
Rawmaterial3
Throughput
units

Alpha
$180
40
50

$90
43
$3,870

Beta
$180

50
30
$100
0
$0

fixedcosts
loss

Total

$3,870
5,000
$(1,130)

Thisoptionfocusesimprovementonanonbottleneckmachinetothe
detrimentofthebottleneckmachine.Theloadfactorofmachine3actually
increases(25minutes50+25minutes25=1,875additionalminutes)to
(2,500+1,875)/2,400=182%whiletheloadfactorformachine2dropsto
[2,250(1050+1025)]/2,400=2,250750/2,400=63%.
AunitofAlphawillnowtake(20+25+10)=55minutestoproduce.A
totalof2,400/55=43unitsofAlphacanbeproduced.NoBetaunitsare
possible.
2.Noneoftheoptionsispreferabletotheoriginal.Ifnoneoftheoptions
wherechosen,profitswouldbe5090+221005,000=$1,700.

5
44SpecialOrdersandQualitativeFactors(15minutes)

527

1.$1,257,100
Revenuefromorder
$4,000,000
Ordervalueatregularprice($4,000,000/70%)$5,714,285
Variablecostoforder[60%20%(60%)x$5,714,285]
2,742,900
Additionalcontribution
$1,257,100
2.Factorsthatmightbeincludedinthememoincludethefollowing.
(a)SuperFi'scurrentdistributorsarelikelytobeunhappywithprivate
brandsales.
(b)DemandforSuperFi'shighqualityequipmentcouldincrease,inwhich
casethecompanywouldhavetoexpandtomeetsuchdemandbecauseofthe
capacityitdevotestotheprivatebrand.
(c)Thestrongdesiretomaintainthecompany'sreputationsuggeststheneed
forSuperFi'smanagerstolookbeyondtheirownbusinesspracticestothe
businesspracticesofthosetowhomtheysell.SuperFi'smanagersshouldbe
concernedaboutthediscounter'sconfidencethatbuyerswillbeawareofthe
maker'sname.Perhapsthatconfidenceisbasedonsomeplantomakethis
factknown;andperhapstheplandoesnotincludemakingbuyersawarethat
theproductsareofalowerqualitythanSuperFi'sregularproducts.
(d)Customerspurchasingthediscountedproductsandawareofthe
manufacturermay,becauseofthelowerquality,becomedisenchantedwith
SuperFiproductsingeneral.Thecompany'slonglivedreputationforhigh
qualitycouldbeirreparablydamaged.
(e)SuperFi'smanagersmustfacethedifficultproblemofdeterminingthe
acceptablemagnitudeofthequalitydifferencebetweenSuperFi'sregular
productsandthespecialorderitem.IfregularbuyersofSuperFiproducts
arereallydevotedseekersofthehighestquality,regularsalesshouldnot
sufferfromtheintroductionofthediscountedproduct.However,somebuyers
attractedbythepriceofthediscountedproductmightfindtheirneeds
satisfiedwithitsqualityandconcludethattheextentoftheirearlier
interestinproductswellknownforqualitywasexcessive.Ifgrowthisa
problemforSuperFi,thecompanymightwishtoconsiderproducing,underits
ownname,highqualityproductssufficienttomeetthedemandsofaless
discerningbuyer.Alternatively,SuperFimightestablishasubsidiaryto
sellequipmentoflesserquality.

5
45CostofBeingYourOwnBoss(15minutes)
IftheTaylorsconsideronlythemonetaryaspectsofthedecision,and
ifthemostrecentyear'sresultscanbeassumedtoberepresentativeof
futureyears,theywouldbebetteroffsellingthebusinessandgoingbackto
workasemployees.Theirincomewouldbe
Salaries($40,000+$45,000)$85,000
Interest($150,000x10%)15,000
Totalincome$100,000
Theopportunitycostoftheirbeinginbusinessforthemselvesis
$100,000,whichis$5,200greaterthantheircurrentincomeof$94,800.The
528

businessisalsolikelytobemuchriskierthantheirworkingasemployees
andearninginterestontheircapital,whichincreasestheadvantageof
sellingthebusiness.Thereare,however,anumberofqualitativefactorsto
beconsidered.Oneisthesatisfactionofowning(asopposedtobeingan
employee),whichcouldbeworthagreatdeal.TheTaylorsworklonghours,
buttheyaretogetherduringworkinghours,whichhasbothgoodandbad
points.Theymayalsohaveworkedlonghoursattheirotherjobs.They
cannotbefirediftheyworkforthemselves.
Thefutureofthebistroismorecriticalthanitspast,asarethe
salariestheTaylorscouldearnnow,asopposedtothesalariestheyusedto
earn;sosomequantitativeissuesremainunresolved.Theymightalsohave
incurredotherjobrelatedexpenses(asreflectedinEllen'sremarkabout
"fightingtraffic")thattheydonotnowincurr.WhatevertheTaylors'
attitudeaboutworkingforthemselvesasopposedtoworkingforsomeoneelse,
thefinancialconsequencesoftheirchoicesareimportantandtheyshouldbe
awareofthoseconsequences.
NotetotheInstructor:Wedeliberatelymadetheincomelevelhigh
enoughthatanotherissuecanberaised:thediminishingmarginalutilityof
income.It'sonethingtobeinbusinessforyourselfat$94,800and
sacrifice$5,200;it'squiteanothertodosowhentheincomefromthe
businessis,say,$26,800.TheTaylorsmighthavetastes,personalgoals,
andprioritiesthatcanbesatisfiedonmuchlessincomethantheypreviously
earned;buttheyneedsomeminimumlevelofincomeforbasicnecessities.

5
46PricingPolicyandExcessCapacity(15minutes)
First,assumethattheKwHsoldinthesummermonthswillnotincrease
asaresultofconversiontoelectricheat.Thatis,assumethatthoseusers
whoareexpectedtoconvertalreadyuseasmuchelectricityastheyneedin
the
summer.Withthisassumption,summerconsumptionpermonthwillnotexceed
capacity,andthefollowinganalysisisappropriate.
AdditionalrevenuefromadditionalKwHsalesatnew
rate(44millionKwHx$72per1,000KwH)$3,168,000
Less:
LossofrevenueduetoreducedpriceforallKwH
salesalreadybeingmadetocustomerswhowould
convertandbeentitledtothelowerratefor
alltheirconsumption
60millionKwHx$15decreaseper1,000KwH$900,000
VariablecostsofadditionalKwHsales
44millionKwHx$46per1,000Kwh2,024,000
Lossofrevenuefromlowerratetocustomers
alreadyusingelectricalheatingequipment
20millionKwHx$15decreaseper1,000KwH300,0003,224,000
Netlossfromthenewplan$56,000
Fromastrictlymonetarystandpoint,theproposedreductionisinadvisable.
Removingtheoriginalassumption,it'spossiblethat,inthepast,the
userswhowouldconverttoelectricheathavebeenconservativewiththeir
useofelectricityinthesummer.Conversionandthelowerratemaycause
themtobelessconservative,sothatsummersalesmayincrease.The
additional
demandisgoodforthecompanysolongastheincreasedoesn'texceed
availablecapacity.Theaddedsummerdemandwouldhelptooffsetthe
529

monetarydisadvantageofthenewplan.

5
47ProcessingDecisions(2025minutes)
1.Ayersshouldsellbarkandshavingsbecausetherevenuesof$3,000cover
theavoidablecostsof$520,leavinganincrementalprofitof$2,480.The
costsofthelogsandofcuttingthemuparejointtotheproducts.
2.Morethan$3,980.Ayersmustearn$2,480,thecurrentincremental
profit,plustheadditionalprocessingcostsof$1,500tobeindifferentto
thetwo
choices.
Currentincrementalprofit,sellatsplitoff$2,480
Additionalprocessingcosts1,500
Requiredrevenue$3,980

NotetotheInstructor:Anotherdimensionisaddedtotheassignment
whenyouaskstudentswhethertheywouldaccepttheofferiftherevenuewere
tobe,say$4,000,givingonlya$20increaseinprofit.Theansweris
likelytobeno,andexploringthereasonsthereforeshouldbeuseful.Some
willsuggestthattheactualadditionalcostcouldturnouttobehigherthan
theestimated$1,500.SomewillrecognizethatAyerswouldbeacceptingsome
riskifherentedequipmentandhiredadditionalhelp.Theassignmentdoes
notsaywhetherthereisafixedtermorwhetheramonth'snotice(orenough
forAyerstoeliminatethe$1,500additionalprocessingcosts)wouldbe
requiredtoterminatetheagreement.Mostmanagerswouldnotincreasethe
sizeofanoperationforasmalladditionalprofit.
Theroleofexpectationsisalsoimportant,bothhereandinrequirement
3.TheassignmentsaysthatAyersexpectsaboutthesameresultsinthe
future.Buthecannotknowthatthepriceofbarkandshavingswillcontinue
atthecurrentlevel.Acceptingtheoffercouldturnouttobeunwiseifthe
priceofbarkandshavingsrose.If,however,Ayerscouldgetafirm
contractfor,say,sixmonths,hewouldbeeliminatingtheriskthatthe
pricemightfall.
3.Ayersshouldnotaccepttheofferunlessheisoffered$35,530ormore.
Essentially,AyersnowhastheopportunitytosellthegradeBlumberatthe
splitoffpointratherthanprocessitfurther.
Revenueafterfurtherprocessing$41,000
Lessfurtherprocessingcosts:
Trimming$860
Sanding3,380
Shipping2,4306,670
Marginfromfurtherprocessing34,330
Plusnewshippingcosts1,200
Minimumpriceatsplitoff$35,530

530

48EvaluatingaDecision

CostsofActivities(15minutes)
Sales$320,000
Variablecostofsales*199,000
Grossmargin121,000
Incrementaloperatingexpenses**45,000
Profit$76,000
*Variablecostofsales=$86,000+$41,000+$72,000.The$72,000is60%
of$120,000
**Incrementaloperatingexpenses=$27,000+$12,000+$6,000.The$6,000
is$22,000lessthe$16,000administrativecharge.
The$27,000salaryseemsincrementalasthepersonspends80%ofher
timeonthisaccount.The$12,000isforaparttimeclerkwhoworksonlyon
thisaccount,whichisclearlyincremental.Theadministrativechargeis
almostcertainlynotincremental.
Thereisroomfordisagreementaboutsomeitems.Thereisalsosome
questionwhetherthecompanycouldloseregularsalesinthefuture.Ithas
operatedclosetocapacityinthepastsixmonths,somightreachcapacityin
thenextsix.Beforemakingadecision,thesalesmanagershouldinquire
furtherabouttheneedsformeetingregularsales.

5
49RelevantRange(30minutes)
1.Yes.Incomewillincreaseby$200,000iftheorderisaccepted.
Sellingprice$60
Variablecosts:
Materials($900,000/45,000)$20
Directlabor($810,000/45,000)18
Overhead($540,000/45,000)1250
Unitcontributionmargin$10
Volume20,000
Totaladditionalcontributionmargin$200,000
2.Yes.Ipswickwillearn$80,000ontheorder.Contributionmarginfalls
to$4perunit.
Originalcontributionmargin(above)$10.00
Commissionat10%of$606.00
Contributionmargin$4.00
Volume20,000
Increaseincontributionmargin$80,000
3.No.Thecompanywilllose$200,000.
Lostregularsales(10,000x$100)$1,000,000
Variablecostssavedon10,000units:
Manufacturingcosts(above)$50
Selling($100x10%)10
Totalunitvariablecost$60
Totalcostssavedfor10,000units($60x10,000)600,000
Lostcontributionmargin(400,000)
Contributionmarginonspecialorder(requirement1)200,000
Netlossincontributionmargin$(200,000)

531

4.Yes.Thecompanywillgain$93,000.
Sales(20,000x$60)
$1,200,000
Costs:
Basiccosts,requirement1(20,000x$50)$1,000,000
Premiumlaborandoverheadcosts*60,000
1,060,000
Additionalcontribution
140,000
Additionalfixedcosts
47,000
Additionalprofit$
93,000
*Directlaborcost$18
Variableoverheadcost12
Total$30
Premiumat20%$6
Unitsatpremiumcost(45,000+20,00055,000)10,000
Totalpremiumcost$60,000

50ValueofNewProducts

ComplementaryEffects(25minutes)
1.(a)$12,000($40,000x60%)$12,000
(b)$6,000($60,000x40%)$18,000
2.Thebeerandwinedepartmentshouldbeaddedbecause,asshownbelow,it
wouldcontributemoretothecompanythandoesthehardwaredepartment,
despitethehigherincrementalsegmentprofitfromthelatter.
WithWith
Beer
HardwareandWine
Grocerysales$630,000*
$648,000**
Costofsales252,000259,200
Grossprofit378,000388,800
Othervariablecosts,20%126,000129,600
Contributionmargin252,000259,200
Fixedcosts140,000140,000
Income112,000119,200
Incrementalprofit,addeddepartment(requirement1)12,0006,000
Incomeforstore$124,000$125,200
*$600,000x105%
**$600,000x108%
3.Themajorlessonisthatadecisionwilloftenaffectsegmentsofthe
companyotherthantheonebeingconsidered.Theeffectsofanactiononthe
entirecompanymustbeconsidered,notjustthosedirectlyassociatedwith
thesegment.Theproblemalsoshowsthattheproductwiththehighergross
profitrateisnotalwaysthemostprofitableortheonemostimportantto
maintain.

51SpecialOrders

EffectsonExistingSales(25minutes)
1.Acceptingtheorderbringsadditionalcontributionmarginof$300,000
[30,000x($30$20)].

532

2.Theordershouldstillbeaccepted,asitwillincreaseprofitby
$30,000.
Lostsales(90,000unitsx10%)9,000
Contributionperunit($50$20)$30
Contributionlost$270,000
Gainfromacceptingtheorder(requirement1)300,000
Netgain$30,000
3.Regularsalesmustdeclinemorethan$500,000,or10,000units
($500,000/$50perunit),beforeacceptanceoftheorderwouldbeunwise.
Gainincontributionfromtheorder(requirement1)$300,000
Contributionpercentageonregularsales$2,700,000/$4,500,000
60%
Regularsaleswithcontributionmarginof$300,000that
canbeearnedonthespecialorder($300,000/60%)$500,000
4.Thespecialorderisforonlyoneyear.Supposesomeoftheregular
customersbuyfromthediscounter,andthediscounterstocksanotherbrandin
thefuture.Iftheregularcustomerissatisfiedwithhispurchasefromthe
discounter,hemayreturnasecondyear.Hence,futuresalesbyHuntwillbe
hurt,sincetheregularcustomerwillbelostformorethanayear.
Somecustomersmight,atthelowerpriceofferedbythediscounter,buy
moreunitsthanmightordinarilybethecase.Ifso,again,thepossibility
existsthatfuturesaleswillsuffer.

5
52AlternativeUsesofProduct(35minutes)
1.7,000jars($5,600avoidablefixedcostsdividedby$0.80contribution
marginperjar).
Contributionmarginperjar:
Sellingprice$4.00
CostofGrit337($1.60/4)$0.40
Othervariableproductioncosts2.50
Variablesellingcosts0.303.20
Contributionmarginperjar$0.80
2.8,000jars.Onewaytoapproachthisrequirementisasafurther
processingdecision.Theadditionalfixedprocessingcostsare$5,600and
theadvantagetofurtherprocessingis$0.70perjar,ascomputedbelow.
Dividingthe$5,600fixedprocessingcostsbythe$0.70advantagefor
furtherprocessingyields8,000jars.
SalesvalueofGrit337per1/4pound($2.00/4)$0.50
Additionalprocessingcostsperjar2.50
Additionalsellingcosts0.30
Total$3.30
Advantageoffurtherprocessing,perjar($4.00$3.30)$0.70
Thefollowingscheduleshowsthatat8,000jarsthecompanyisindifferent
betweenthealternatives.ThecostofGrit337isignoredbecauseitisthe
sameunderbothalternatives.
Revenuefrompolish(8,000x$4.00)$32,000
Variablecosts,excludingcostofGrit337
($2.50+$0.30)x8,000$22,400
Avoidablefixedcosts5,60028,000
533

Netrevenuefrompolish$4,000
LostsalesofGrit337[(8,000/4)x$2.00]$4,000
Thus,thelossof2,000poundsofGrit337at$2.00perpoundequalsthenet
revenuefrom8,000jarsofpolish.

5
53ProcessingDecision(35minutes)
1.Thisrequirementpresentsafurtherprocessingdecision,thoughnot
obviouslyso.Eachnewmonthisasplitoffpoint,withanothermonthonthe
lotbeingthefurtherprocessing.Thefollowinganalysisshowsthatthree
monthsistheoptimalholdingperiod.
Cost
HoldingperiodRevenueat$260+($52x

inmonthsWeight$0.50/lb.monthsheld)Profit
1640$320$312$8
277038536421
389044541629
499049546827
2.Thisrequirementisacapacityproblem.Thelotcanbekeptfullevery
month,sothequestionishowbesttouseit.Asshownintheschedule
below,theanimalsshouldbekeptfortwomonths.
Contributionmarginperunitofcapacity

HoldingPeriods
OneMonthTwoMonthsThreeMonths
Totalnumberofanimalsperyear
12months/monthsheld1264
Timescontributionmarginper
animal(fromrequirement1)$8$21$29
Equalstotalcontributionper
unitofcapacity$96$126$116
Analternativeapproachistousetotals,workingwiththeannualresults
fromeachholdingperiod.

HoldingPeriods
OneMonthTwoMonthsThreeMonths
Animalsperyear:
5,000x1260,000
5,000x630,000
5,000x420,000
Contributionmargins$8$21$29
Totalannualcontributionmargin$480,000$630,000$580,000

5
54SpecialOrder(35minutes)
1.Incomewillfallby$4,500.Criticaltotheanalysisisdeterminingthe
lostsalesatthenormalprice.
Lostregularsales:
Maximumcapacityfortwomonthperiod(7,500x2x2)30,000cases
Specialorder10,000
Availableforregularsales20,000
Expectedsales(6,000x2x2)24,000
Lostregularsalesiforderaccepted4,000cases

534

Theanalysisproceedsasfollows.Variablecostis$6.25percase.
Materials$2.50
Directlabor3.00
Variableoverhead(1/2hourx$1.50)0.75
Totalvariablecost$6.25
Contributionmarginonthespecialorderistherefore$1.25($7.50$6.25)
and$4.25onregularsales($10.50$6.25).
Contributionmarginonspecialorder(10,000x$1.25)$12,500
Contributionmarginonlostregularsales(4,000x$4.25)17,000
Netlossonspecialorder($4,500)
Analternativeis
Gaininrevenuefromspecialorder:
Revenuefromspecialorder(10,000x$7.50)$75,000
Lostrevenuefrom4,000cases(4,000x$10.50)42,000
Netgaininrevenue33,000
Incrementalcostsofspecialorder:
Costofoperatingatcapacityfortwomonths
15,000casesx2monthsx$6.25percase$187,500
Costofoperatingatexpectedsaleslevel
12,000casesx2monthsx$6.25150,000
Netadditionalcost37,500
Netloss($33,000$37,500)$4,500

2.$7.95.Asimplewaytofindthisistodividethelossof$4,500bythe
10,000unitsofthespecialorderandaddthe$0.45($4,500/10,000)tothe
originalpriceof$7.50.Anotherapproachusesthebasicideaoftarget
pricingfromChapter2.
Requiredcontributionmargin[4,000x($10.50$6.25)]$17,000
Dividedbyvolumeonspecialorder10,000
Equalsperunitrequiredcontributionmargin$1.70
Plusvariablecostpercase6.25
Equalsrequiredprice$7.95

55ServicesofanAthlete

JumpingLeagues(5060minutes)
NotetotheInstructor:Thereisnosingle,bestanswerforeither
requirementofthiscase.Whatindividualownerswillconsiderafairwayto
sharethecostofattractingJonestotheCCSL,orkeepingJonesintheNSL,
dependsontheriskaversionpreferencesoftheowners.Theadditional
confoundingfactorinrequirement2isthatsoldoutgamescouldbeeither
homeorawaygamesforJones'team,sothepotentiallossforindividual
teamsotherthanJones'isnotdeterminableevenifthehomeawaysplitof
gatereceiptswereknown(whichitisnot)andunequal.
Nevertheless,thepreliminarycalculationsforeachrequirementpermit
someconclusionsaboutproposalsthatareunreasonable.Youcanalso
concludethatproposalsfailingtoaddressthepotentialimpactofaninjury
thatsidelinesJonesaredeficient.Moreover,youcanassessthe
reasonablenessofanyassumptionsstudentsmaketodealwithmissing
informationanddeterminewhetherstudentsrecognizethattheirproposals
incorporateassumptions.Youmightwanttopointoutthatthetwo
requirementsunderscoretheideathatsomeonefacingadecisionalwayshasa

535

startingpoint.Inrequirement1,noneoftheteamscurrentlyriskslosing
ifJonesmissesagame.Inrequirement2,alloftheteamscurrentlyface
thatrisk.
1.PreliminarycalculationspotentialgainforCCSL
PotentialGainforLeague
Totaladditionaladmissions(10,000personsx10games)100,000
Contributionmarginperadmission($20$4)$16
Additionalcontributionfor10games$1,600,000
PotentialfortheTitans
Contributionfromhomegames:
Contribution,peradmissionathome($20$6$4)$10
Additionaladmissionsexpectedperhomegame10,000
Additionalcontributionexpectedperhomegame$100,000
Numberofhomegames5
Totaladdedcontributionfromhomegames$500,000
Contributionfromawaygames:
Visitingteam'sreceiptforeachadmission$6
Additionaladmissionsexpectedperawaygame10,000
Additionalcontributionexpectedperawaygame$60,000
Numberofawaygames5
Totaladditionalcontributionfromawaygames300,000
Totaladditionalcontributionfromallgames$800,000
ThepotentialfortheCCSLis$1,600,000andfortheTitansis
$800,000,sotheotherfiveteamshavethepotentialfor$800,000,or
$160,000eachonaverage.TheTitanswillnottrytosignJoneswithouthelp
fromtheotherteamsbecausehis$1,000,000salarydemandexceedsthe
additionalcontribution.Moreover,theentireanalysisdependsonJonesbeing
abletoplayineverygame.Anyinjurythattemporarilysidelineshim,if
thefansknowaboutitpriortothegame,couldreducethecontribution.
ThepotentialtotheTitansisfivetimesthattoeachoftheother
teams,sotheownersmightbelieveitfairfortheTitanstopayhalfofthe
salary($500,000)andtheotherstosplittheremainderequally($100,000
each).TheTitansthenstandtogain$300,000($800,000$500,000)andthe
others$60,000($160,000$100,000).TheTitanstakemoreriskbecausethey
areexposedtoJonesbeingsidelinedforalloftheirgames,whileeachof
theotherteamsisexposedonlytwice.
Note,however,thateachteam'spayinginproportiontoitspotential
gainappearsfaironlyifJoneswillplayeverygame.Ifhemissesagame,
onlyoneotherteamisaffected.TheTitansdonotcarewhichotherteamis
affected,buttheotherteamsdo.Fortheaffectedteam,a$60,000gain
turnsintoa$40,000lossforahomegameorbreakevenforanawaygame.The
otherownersprobablywouldnotconsidersuchasplitfairbecauseofthat
risk.Onepossiblesolutionisfortheteamstosharetherisk,sothatif
Jonesmissesagame,alloftheotherteamssharetheloss.Thus,ifJones
missesaTitan'shomegame,costingtheotherteam$60,000,eachofthe
otherspays$12,000towardJonessalary.IfJonesmissesaTitan'saway
game,theothersshare$100,000,or$20,000each.
Suchaplanisastartingpointfordiscussions.Becauseeveryonecan
benefitfromacquiringJones,theincentiveistofindasolution.

536

2.PreliminarycalculationspotentiallosstoNSL
Lostcontributionongamesnotsoldout:
Contributionmarginperadmission$20
No.ofadmissionslostpergame8,000
Contributionlostpergame$160,000
Averagenumberofgamesnotsoldout6
Lostadmissionsfor6games$960,000
Lostcontributionongamessoldout:
Contributionmarginperadmission$20
No.ofadmissionslostpergame
No.oflostticketrequests8,000
No.ofunfilledticketrequests
forselloutgames3,0005,000
No.ofactualticketsaleslost
Contributionlostpergame$100,000
Averagenumberofgamessoldout6
Lostadmissionsfor6games$600,000
Totallostcontribution($960,000+$600,000)$1,560,000
SavingsifJonesleaveshissalary600,000
Netdeclineinprofitsforleague$960,000
AswiththeanalysisfortheCCSL,thisonedoesnotconsiderinjuries.
Becausetheselloutscouldbeanycombinationofhomeandawaygames,we
cannotdeterminethepotentiallosstoanygiventeamfromJonesbeinghurt.
TheNSLcanmatchthe$1,000,000offerbecauseitstandstolose$1,560,000
beforeconsideringhissalary,leaving$560,000($1,560,000$1,000,000)net
iftheleaguekeepsJonesat$1,000,000.Thequestionofsharingthesalary
dependsonthesplitofrevenues.
Iftheteamssplitcontributionmarginequally,thentheLumberjacks
standtolose$780,000($1,560,000x50%)andtheothers$780,000,oran
averageof$130,000.Workingintheselloutscomplicatesmattersbecause
theotherteamscouldlose$160,000(fromtwononsellouts)to$100,000(two
sellouts).(Jonescontributionforanonselloutis$160,000pergame,
split5050,soitis$80,000foreachofthetwogamesandsimilarlyfor
nonsellouts.)
TheLumberjacksstandtolose$180,000($780,000$600,000salary)if
Jonesmoves,theothers$130,000each.Soasplitofthe$400,000increase
insalaryalongthelinesoftherelativelossesisnotunreasonable.

PotentialLossPercentageofTotalAddedSalaryPayment
Lumberjacks$180,00018.75%$75,000
Others780,00081.25%325,000
Total$960,000$400,000
Itappearsthatthe$1,000,000salaryisonlyastartingpoint.Both
leagueshaveincentivestosignJones,withtheCCSLbeingabletopayupto
$1,600,000andtheNSL$1,560,000.Becausetheseamountsareclose,and
becauseofalloftheestimatesandnonquantifiablefactors,itisdifficult
topredictwhichleaguewillwin.Civicprideandotherfactorscouldalso
becomeinvolved.

5
56DroppingaSegment(30minutes)
ItwillcostMr.Johnson$18,930toactinaccordancewithhisviews
aboutsmoking.
TobaccoDrugsSundriesTotal
Lostsales$31,000$8,960*$3,600**$43,560
537

Costofsales10,5003,780*1,050**15,330
Lostgrossprofit$20,500$5,180$2,55028,230
Less:
Grossprofitgainedon
greetingcardsales5,000
Reducedcarryingcosts300
Clerk'ssalary4,000
Totaloperatingexpenses9,300
Netreductioninprofitbeforetaxes$18,930
*7%reductioninsalesofpriorperiods(5%duetodroppingtobaccoand2%
duetothepharmacist'shavingtohandlegreetingcardsales)
**10%reduction
Theaboveanalysisdoesnotrecognizethepositiveeffectseither(a)for
personswhomightbenefitfrombeingunabletoobtaintobaccoproductsor(b)
oftheexampleprovidedbyMr.Johnson.Nordoesitincludeameasurementof
Mr.Johnson'ssatisfactioninhavingabidedbyhisconvictions.
NotetotheInstructor:Inadditiontoraisingtheproblemof
quantifyingthefactorsmentionedabove,thecaseisinterestinginthatthe
owner'sdecisionwillbeheavilyaffectedbynonquantitativefactors,and
thattheconceptsintroducedinmanagerialaccountingcanbeusedtopresent
theownerwithsomequantifiedimplicationsofthedecision.We'renot
suggestingthatownersandothermanagersshouldmakedecisionsbasedsolely
onquantifiableconsiderations,oreventhatthereis(orshouldbe)alimit
tohowfartheywill(orshould)goinexercisingtheirconvictions.We
suggestonlythatownersandothermanagersarebetteroffwiththis
informationthanwithoutit.Inanyevent,we'vefoundthatthecase
generateslivelyclassdiscussionwhenstudentsarepromptedtosuggestother
personalbeliefsthatmightpresentaproblemtotheownersand/ormanagers
ofotherbusinesses.
Forexample,onemighthaveconvictionsaboutthemoralityoflotteries
orbirthcontrolorbededicatedtothepreservationoftheenvironment.
Eachopportunitytoactontheseconvictionsislikelytohavefinancial
implications,anditistruethatonecannotdoeverythingonemightwantto
do.Thequestionofvaluehierarchiescomesintoplayhere.WhatisMr.
Johnsonwillingtohavehisfamilyforgotoexercisehisconvictions?(Will
theexpecteddropinincomemeannotbeingabletofulfiladesiretosend
hischildrentocollege?Willitmeanreducingfinancialassistancehe
providestohisparentsortocharitableorganizationsheregularly
supports?)Itmaynotbepossibletomeasurethedegreeofone'sconvictions
onvariousissues,butitistruethattherearedifferentdegrees.Would
Mr.Johnsonbewillingtochangehislineofbusinessaltogetherinorderto
abidebyhisconvictionwithrespecttotobacco?(Wouldthecountrytolerate
theexpendituresandconsequenttaxationrequiredtoensurethatnotraffic
deathscouldbeattributedtofaultyroads?)

538


5
57AlternativeUsesofSpace(45minutes)
Theanalysisinvolvescomparingtheincrementalprofitthatcanbe
expectedfromthetwoalternativesforusingthespacenowoccupiedbythe
boutiquewiththerevenueexpectediftheleasewiththeboutiquechainwere
renewed.Theexpectedrevenueiftheleaseisrenewedfollows.
Revenue,firsttenmonthsthisyear$400,000
Expectedrevenue,lasttwomonths[($400,000/10)x2x2]160,000
Boutiquesales,currentyear(estimated)560,000
Salesincreaseexpectednextyear,10%56,000
Salesexpectedforboutiquenextyear$616,000
Percentagerentalexpectedfromlease,5%$30,800
Baserentalprovidedincontract36,000
Expectedrevenuefromleaseddepartment$66,800
Theexpectedincrementalprofitsfromthetwoalternativesarecomputed
below.
InHouseOperationExpandedShoe

ofBoutiqueDepartment
Sales:
Projectedsalesof$380,000x90%$342,000
Projectedsalesof$200,000$200,000
Variablecosts:
Costofgoodssold
($171,000/$380,000)x$342,000(153,900)
(100%45%)x$200,000(110,000)
Salescommissions($200,000x10%)(20,000)
Expectedcontributionfromsales188,10070,000
Fixedcosts(given)(104,000)
Lostcontributionmargin
Customerscomingespeciallyto
ClothesHorse
$616,000x40%x20%x(45%8%)(18,234)(18,234)
Regularcustomersofthestore
$616,000x60%x2x10%x(45%8%)(27,350)(27,350)
Incrementalprofit$38,516$24,416
Somestudentswillprobablyapproachtheanalysisbycomputingthecost
ofabandoningtheleaseddepartment.Thatcostis$112,384,theexpected
rentalfee($66,800)plusthecostofthelostsales$45,584($18,234+
$27,350).Foraninhouseuseofthespacetobeadvisable,thepromised
profitwouldhavetoexceed$112,384,andneitheroftheavailable
alternativespromisesthatlevelofreturn.
Onecouldconcludethatthemostprofitableuseofthespacenow
occupiedbytheleaseddepartment(ClothesHorse)wouldbetorenewthe
lease.
Revenuesfromtheleasewouldbe$66,800,whilethemostprofitableofthe
alternativeusewouldbeaninhouseoperationoftheboutique,whichcould
resultinareturnofonly$38,516.
Theestimatesmadeoftheshoppinghabitsofcustomersnowfrequenting
theboutiquemustbecarefullyconsidered.Weretheobservedhabitstypical?
Withoutregardtothelostcontributionmargins(computedasaresultofthe
firm'sobservationsofshoppinghabitsofboutiquecustomers),theinhouse
operationoftheboutiquewouldproduceanincrementalprofitof$84,100
($188,100$104,000).Ofsomeimportancealsoismanagement'sconclusion
thatthesalesestimatefortheinhouseboutiqueisoverlyoptimistic.If
Rausch'sestimateiscorrect,theincrementalprofitproducedbyaninhouse
539

boutiqueoperationis$59,416[($380,000x55%)fixedcostsof$104,000
lostcontributionmarginof$45,584];andonceagain,theestimateoflost
contributionmarginbecomescriticallyimportant.

5
58ProductProcessing(45minutes)
NotetotheInstructor:Thisisadifficultcasebecauseitseemstobe
asimplequestionofproductprofitabilitybutisactuallyafurther
processingquestion,thoughitreversestheusualjointproductsproblem.
Themanagers'pastinsistenceonviewingthecompanyasapaneling
manufacturerhascausedittoforgoprofits.Thecompanyoperatesthree
processes,plywood,veneer,andgluing.Itcanmakethreeproducts,plywood,
veneer,andpaneling.Thespecialfeatureoftheoperationisthatthethird
productistheresultofcombiningtheothertwo.Theschedulebelowshows
thecontributionmarginsofeachproductandprocess.
Per1,000squarefoot

Product&ProcessProductProcess
PlywoodVeneerTotalPanelingGluing
Sellingprices$81$74$155$178$23
Variablecosts:
Materials181634340
Directlabor2520455510
Variableoverhead*201636448
Totalvariablecosts635211513318
Contributionmargin$18$22$40$45$5
Capacity**1,2001,0001,000***1,300
Used1,0001,0001,0001,000
*80%ofdirectlabor
**inthousandsofsquarefeet
***Capacityinveneerlimitspanelingcapacity.

Thecompanywasrighttoprocessveneerandplywoodintopaneling;the
incrementalrevenueof$23exceededtheincrementalcostof$18.Butthe
companygaveup$36,000bynotmakinganother200,000feetofplywoodand
whateveritmighthavemadeusingthe300,000feetofunusedgluingcapacity.
Themanagersappeartoberealizingthatchangesinoperationsmightbe
desirable.Buttheirresponsestocomplaintsfromworkersandfromthe
managerofthegluingprocesssuggestalackofunderstandingofthe
company'scoststructure.
Thescheduledrawsattentiontothegluingoperationasapotentially
profitablefurtherprocessingopportunity.Themanagersneedtounderstand
thebreakpointsinpriceswhereitbecomesmoreprofitabletosellthetwo
productsseparately.A$5increaseinthepriceofeitherintermediate
productordeclineinthepriceofpanelingmakesthecompanyindifferent
betweenpanelingandthetwointermediateproducts.Thusadropof$12in
thepriceofpaneling,to$164,asChenmentioned,makesthecompanybetter
offsellingtheproductsseparately.
AcompleteevaluationoftheCEO'sproposalrequiresknowingthecost
ofobtainingadditionalcapacity.(The$2,000figurewastheauthorization,
notastatementaboutthecost.)Wecan,however,determinehowmuchthe
companycouldpayforadditionalcapacityatvariousproductprices.
Atprevailingprices,addingcapacitytoplywood,whichalreadyhas
excesscapacity,adds$18contributionmarginper1,000squarefeetof
540

capacity.Soadditionalcapacityisdesirableifitcostslessthan$18per
1,000feet.Increasingveneercapacityisprofitableifitcostslessthan
$27per1,000feet.
Gain,contributionmarginon1,000feetofpaneling$45
Loss,contributionmarginon1,000feetofplywood18
Netgain$27
Ofcourse,thelossappliesonlywhenveneercapacityexceeds1,200,000feet,
thecurrentcapacityinplywood.
559ProductMixwithProductionConstraints(40minutes)
1.40unitsofXand70unitsofY.Step1ofthetheoryofconstraintsis
toidentifytheconstraint.Thiscanbeaccomplishedmostreadilyby
calculatingtheloadfactorsforeachstationasfollows:
timeperunit
X
Y
totalforproduct
X(40units)
Y(80units)
Total
availabletime
Loadfactor

B
4+5+15=24

C
15+18=33

D
20

E
8

28+6=34

4+5=9

9+6=15

18

8+8+9=25

A
0
2,720
2,720
2,400
113%

B
960
720
1,680
2,400
70%

C
1,320
1,200
2,520
2,400
105%

D
800
1,440
2,240
2,400
93%

E
320
2,000
2,320
2,400
97%

Thequestionbecomeswhichstationistheconstraint,AorC,sincebothhave
loadfactorsinexcessof100%.StationAcansupportamaximumproductionof
2,400/34=70unitsofYwhileStationCcansupport2,400/15=160unitsof
Y.StationAistheconstraint.NoticethatStationAisnotaconstraining
factoronproductX,so70unitsofYcanbeproduced.Thiswilluse1570
=1,050minutesonStationC,leaving2,4001,050minutes=1,350minutes
forproductionofX.Atotalof1,350/33=40unitsofXcanbeproduced.
2.StationAshouldserveasthedrumoftheproductionprocess.Buffers
shouldbemaintainedimmediatelypriortothisstationsothatthereisno
downtimeduetolackofproduct.Managementcannotbecomplacentaboutthe
otherworkstations,however.NoticethattheloadfactorsforstationCat
theactualproductmixisalsoat99%.Managementwillneedtomaintaina
bufferbeforethisstationaswell,asanyshortagewouldcausestationCto
becometheconstraint.StationsDandEhaveloadfactorsof86%.Thereis
littlemarginoferroratthesestationssomanagementmustbediligent.
totalforproduct
X(40units)
Y(70units)
Total
availabletime
Loadfactor

A
0
2,380
2,380
2,400
99%

B
960
630
1,590
2,400
66%

C
1,320
1,050
2,370
2,400
99%

D
800
1,260
2,060
2,400
86%

E
320
1,750
2,070
2,400
86%

NotetoInstructorThisproblemcanbeusedtoillustrateGoldratts
conceptofacriticallyconstrainedresource,onethathasthepotentialto
becometheconstraintifcareisnottaken.AnydowntimeatstationCwould
causetheconstrainttoshiftfromstationA.Anyprolongedproblemsat
eitherstationsDorEcouldalsocausetheconstrainttoshift.

541

542