SHORT-TERM DECISION EXERCISES

8-1 The Mundo de Colores company produces three products that require the use
of a special machine. There are only 20,000 machine-hours available per month.
The products information is as follows:

Product A Product B Product C

Sales price per unit $1,200 $1,600 $2,100
Variable costs per unit $700 $800 $1,000
Contribution margin per unit $500 $800 $1,100
Required machine time, in hours 10/unit 20/unit 25/unit
Estimated demand in units, per month 500 1,000 400

It is requested:
1. If all products require the same amount of machine time and any quantity of any
product can be sold, what product should be manufactured to maximize profits?

The product that must be manufactured is product C, due to the high cost of sale
and the profits it represents.

2. With the estimated demand, with the machine-hour restriction and with the time
required for each product, determine the optimal composition that should be sold
for each product, in units, to maximize profits.

20,000/ 1200= 16.66

20,000/1600= 12.5
20,000/2100= 9.52

__________________________________________________________________
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8-2 The Aceros Bolivarianos company is analyzing the possibility of introducing a

new line, which has not been finalized to date because the managers assume that
it will not be useful. To clear up doubts, they hire an expert to use the information
provided to determine whether or not said line should be entered.
Budgeted selling price $3,670 per ton

Costs:
Direct material $1,950
Direct labor 390
Supervision (proration) 230
Energetic 60
Prorated depreciation 850
Unit cost per ton 3480
Direct sales expenses 120
Prorated administration expenses 280
Total cost per ton $3,880
Loss per ton ($2 10)

The owner of the company does not accept that there is a loss from the moment
the line is introduced. What does the expert think about it?
I believe that no one likes to lose in an investment, much less that the investment
resources are short-term, but this decision requires further study, in business on
many occasions you have to take risks to win in the future.

8-3 Sergio de Alba González has just opened the Rouche restaurant, specializing
in French food. The success of said restaurant was immediate, since it brought a
chef from Las Vegas specialized in this type of dishes. The problem is that the
place is always full and there is no way to expand the business without losing
quality, since it would be necessary to hire another chef who would not be of the
same level as the current one, so we want to get the most out of his services.
The owner has warned that when a dish is missing from the menu, customers do
not get upset and order another one instead, which shows that they come for good
cuisine and not for a particular dish.

El Rouche specializes in three types of strong meals:

Sales price Variable cost
Crepes $40 $25
Cheeses 30 10
Meats $80 $50

The owner carried out a study of the chef's times and movements to prepare each
dish and arrived at the following result
Crepes 10 minutes
Cheeses 16 minutes
Meats 25 minutes
The effective working time of the cook is 10 hours a day.
The owner knows that to a certain extent different foods are reciprocal substitutes
and carried out a study to determine what the maximum consumption per day
would be, per product, if the others did not exist, and came to the following results:
Crepes 30 orders
Cheeses 15 orders
Meats 20 orders

It is requested:
1. Determine which foods should be sold per day and how many orders of each,
taking into account existing restrictions.

In this case, it is determined that the food is crespa, since the cost is 40 pesos and
the preparation time is 10 minutes.

2. Assuming that Rouche has annual fixed costs of $1,500,000, and that for every
order of crepes it sells two orders of meat and two of cheese, how much must it
sell to have a profit, before taxes, equal to 20% of its costs fixed (composition)?

1,500,000/ (80+80+30+30)= 6818.18

6818.18 (20%)=1363.636

8-4 The Home Furniture manufacturing company manufactures game tables in a

plant with the capacity to produce 200,000 tables per year. The distribution
company Trigo wants to carry a table with its brand to complement its line. It has
offered to pay $540 for each of the 20,000 tables it wants to purchase.
The Muebles para el Hogar company sells the tables to its distributors for $700
and has an average cost of $538 distributed as follows:
Fixed Manufacturing Expense Allocation $640,000
Variable manufacturing costs $470 per unit
Prod. Esp. Over the next year 150,000 units
Variable selling expenses $36 per unit

If it produced the Wheat model, the Home Furniture company would have
additional fixed costs of $300,000. Due to minimal changes to the table design,
variable manufacturing costs would be $490 per unit. Since a contract would be
signed, the Home Furniture company would not have variable sales expenses. The
Muebles para el Hogar company and the Trigo company operate in different
markets.
It is requested:
Prepare an analysis to determine whether or not Muebles para el Hogar should
accept the order from Trigo Company.
One of the important activities, first of all, is to analyze the fixed and variable costs
in the production of each chair. The company has two important offers. As a
businessman, you always have to look for a way to earn more and generate
greater profits at the cash register. So much so that the company must sell the
furniture.

8-5 The company Alhambra, SA manufactures a partially finished spare part that
sells for $20 per unit. When the company operates at normal capacity it can
manufacture 100,000 units; At this volume of activity, the manufacturing costs are
as follows:

Direct materials $400,000

Direct labor (fixed) 120,000
Manufacturing indirect expenses:
Variables 80,000
Fixed 40,000
Production costs $640,000

The company has recently operated below normal capacity, producing and selling
only 60,000 units per year. The administration estimates that it can use the excess
installed capacity if it carries out an additional procedure to the 60,000 spare parts
it currently produces.
Said replacement part can be sold, fully finished, for $22 per unit. The cost of the
direct materials to be used in the additional procedure of the 60,000 units is
$40,000.
The direct labor cost will increase by $35,000 and the variable manufacturing
overhead will amount to 40% of the direct labor cost (relative to the increase).
Fixed manufacturing overhead will increase from $40,000 to $75,000.
It is requested:
Prepare an analysis showing whether or not to perform the additional processing.

Under this problem or situation of the company, the production capacity is greater
than what it sells normally is 40%, it has a production capacity of 100,000 and what
it sells is 60,000 units, the production cost of the company is increasingly However,
it is therefore necessary to accept the following additional processing, to generate
conditions of economic increase, it is important to grow, in every sense, although it
increases costs but ensures finances.

8-6 The company Fakirisa has labor capacity problems to manufacture three items
that it produces, so it has asked its accountant to determine the optimal
composition that should be produced and sold for each line.

The sales department presents the following forecasts

Items Demand Price
At 5,000 units $150
B 7 500 units 180
C 10,000 units $140

Production standards are as follows:

Items Material Labor
At $40 $20
B 50 40
C $30 $30

The labor cost is $400,000 and the labor capacity is 10,000 hours. The labor force
is assumed to be variable.
The total fixed manufacturing and selling expenses are $100,000. Variable
production overhead represents 50% of the material, and 25% of the selling price
is variable selling expense.
It is requested:
Determine the optimal composition to sell.

Items Demand Price

At 5,000 units $150
B 7 500 units 180
C 10,000 units $140
5000 x159 = 750,000
7500x180=1,350,000
10,000x140 = 1,400,000

According to the numbers, it indicates that the optimal product to sell is item C,
according to the calculations, the quantities are very precise and appropriate to
have more utility.

8-7 The company Alimentos Panificados, SA, plans to manufacture cakes for its
chain of cafeterias. You have two alternatives to carry out your plan: using an
automatic machine and using a semi-automatic one.
He currently buys the cakes from a supplier who sells them for $40 each. The
information available about the machines is as follows:

| Semi-automatic Automatic
Annual fixed cost $2,400,000 $4,000,000
Variable cost per cake $16 $12

It is requested:
1. What would be the minimum number of cakes that each machine should
produce so that continuing to buy from the supplier would be the same as
producing the cakes?

240000/40 = 60,000
4000000/40= 100,000
2. What would be the most profitable alternative if 300,000 cakes were sold
annually? What if 600,000 cakes were sold annually?
300,000x40 = 12,000,000
60,000x40 = 24,000,000

3. What is the volume at which it would be indifferent to use either machine?

The volume is 40,000 products, it is the difference in production from one machine
to another.

8-8 Gabriel Álvarez owns a candy store and is considering the possibility of adding
a pastry department or a wine and beer department. He found out the following:

1. The pastry department will generate sales of $80,000 annually; The contribution
margin is 50%. The additional fixed costs will be $10,000 and the candy store's
normal sales will increase 8% because customer attendance will increase.
2. The wine and beer department will generate sales of $70,000 per year. The
contribution margin is 60%; The additional fixed costs would be $20,000 and the
candy store's sales would increase 9%.
The income statement of Mr. Álvarez's candy store is as follows
Sales $600,000
Cost of sales (variable) 240,000
Contribution margin 360,000
Other variable expenses 120,000
Total contribution margin 240,000
Fixed costs 140,000
Operating income $100,000

It is requested:
What is the alternative that suits the company? (Show your operations).
The most optimal department for the company to use is the pastry department
because the annual profit cost is 36,400.

The one for brewery and liquor is only 12,550.

That's the difference between one department and another.

8-9 David Valladolid Freeman, sales director of the Canned Products company,
has problems with the market. In his opinion, these difficulties are due to a poor
pricing policy of his company. It lacks the necessary knowledge and does not have
an appropriate price scale for the following sales volumes:

10,000 units 20,000 units 30,000 units

You have asked an expert to facilitate your task, for which they offer you the
following information:
Variable manufacturing overhead costs $80
Variable sales expenses 20
Fixed manufacturing overhead costs 40
Fixed administration and sales expenses $2
These data represent a level of 35,000 units, which is the total capacity of the
company.
It is requested:

1. Determine the price at which the units of these three sales volumes must be
sold to obtain a profit of 25% on the cost.

35,000/ 142 = 246.48

246.48 x 25% = 61.62 units

10000/142= 70.42 = 17.61

20000/142 = 140.84 = 35.21
30000/142= 211.27 = 52.81

2. What should be the minimum price at which these units could be sold?

The minimum price is 17.61

3. If they offered a price of 4,245 for the 10,000 incremental units, would it be wise
to accept such an order? (Based on 10,000 units).

If the price of the unit of 10,000 units of each of them is 17.61, more than the
estimated quantity of 4245 could be obtained, therefore the proposal that is made
is NOT advisable to accept.
8-10 The company Trituradora de Ecuador, SA, currently buys product However,
you have been presented with the opportunity to produce the item yourself, which
would imply incurring variable production costs of $90 per unit and fixed production
costs of $2,100,000 per year and fixed operating expenses of $1,000,000 per year.
.

It is requested:
1. Determine the equilibrium point that:
a) Continue purchasing the item from the supplier.
At first glance we can see that when purchasing products you have a 400% profit,
therefore it is important to continue buying and avoid other variable and fixed
expenses.

250 – 50 = 200 product profits

b) You decide to produce said item instead of buying it.

If this action is determined,

The costs would be like this
Variable production costs is 90 per unit
Fixed production costs 2,100,000 annually
Fixed operating expenses 1,000,000 annually

2At what sales volume would you be indifferent to buying from the supplier or
producing the parts?

2100000+1000000/90 = 34,444.44 annual products

2100000+1000000/50= 62,000 products

3. Assuming that the company decided to manufacture the item, determine the
number of units it would have to sell to earn a profit of 20% of its total after-tax
costs. (Assume the tax rate is 40%).

34,444.44 x90= 3,099,999.6 X20%= 619,999.92

Total costs
Are

3100000
619,999.92 x 40% = 247,999.97

8-11 La Gloria Hospital uses its own cleaning team, which incurs the following
costs per year:
Labor $7,000
Supplements 10,000
General expenses 12,000
$29,000
Employees request a 20% salary increase. The hospital considers that after
negotiations it will remain at 15%. The Lava-Tap company offers its services at an
annual cost of $19,000. General expenses include
$9,000 Prorated administration expenses
2,500 Depreciation expense on equipment used in cleaning
$500 Variable cleaning expenses

It is requested:
a) Should the hospital accept Lava-Tap's offer? Explain the analysis carried out
The lava.Tap company offers its services, with an annual cost lower than the cost
of the hospital itself, I consider that it is important to take and decide with this
proposal, to avoid further expenditure of the finances of the hospital itself, given
that this proposal an opportunity saves the same company.

b) If employees were given a 20% raise, what would be the highest price the
hospital would pay Lava-Tap to accept their offer without increasing its total costs?
Calculate and justify the answer.

Labor $7,000
Supplements 10,000
General expenses 12,000
$29,000
Serious workmanship this way.
7000 x 20%= 1400 = 8400
Total costs would be 30,400.
And with the proposals that are being offered to them in the amount of 19,000
pesos there is a difference of 11,400. That's a good amount of cost to save.

8-12 Constructora La Providencia, SA, is concerned with establishing sales prices

for the houses it builds. Provides the following budgeted information for 2009:
Sales 10 houses
Materials to use $400,000/house
Labor to use 100,000/house
Manufacturing indirect expenses Variables 200,000/house
Manufacturing indirect expenses Fixed 100,000/house
Production cost $800,000/house
Sales and administration expenses $500,000 annually
Purchase of machinery $700,000 annually
Interest expense $200,000 annually
Cash/Sales 10%
CXC sales 15%
Inventories/sales 15%

Fixed asset:
Gross book value $100,000
Net book value $800,000
Updated value $2,000,000
% desired return/fixed asset 30 annual
% desired return/working capital 50 annual

It is requested:
What should the sales price of each home be if the desired yield pricing method is
used?

$400,000/house
100,000/house
200,000/house
100,000/house
$800,000/house
$500,000 annually
$700,000 annually
$200,000 annually
Each house must be sold according to cost according to the data.

For each house it has a value of 3000,000

8-13 The company Víveres del Golfo, SA, analyzes the possibility of eliminating
one of the lines it offers to the inhabitants of the region, because in recent months
said line has shown losses. Based on the following annual income statements by
line, the director of Víveres del Golfo, SA, wants to know if he should eliminate the
dairy line
Vegetables Dairy Meat
Sales $220,000 $135,000 $400,000
Cost of sales 110,000 115,000 210,000
Gross Profit 110,000 20,000 190,000
Operating costs:
Sale 30,000 15,000 36,000
Administration 20,000 15,000 50,000
Operating income $60,000 $(10,000) $104,000
The cost of purchase of each of the lines is included in the cost of sale. The sales
operating expenses correspond to the employees directly identified with the
shelves of said lines, and the administration expenses refer to the salaries of the
director and the company's staff, which were distributed among the three lines.

8-14 Nuevo León is a company dedicated to the manufacture of calculators and

electronic equipment. In 2010 the company sold its Tec-I-58C model with great
success, and at the end of the year it maintained an inventory of 20,000 units.
The unit cost during 2010 was $180, of which $60 was fixed manufacturing
overhead. In 2009 the company expects to sell 80,000 calculators at $300 each,
but will only produce 60,000 units because the model is becoming obsolete.
Cost forecasts for 2009 are as follows:
Direct materials $80
Direct labor 40
Manufacturing indirect expenses Variables 40Factory indirect expenses. Fixed 70
$230

The Tips, SA chain offers to buy 20,000 calculators for $140 each (the company's
normal capacity is 80,000 units). By accepting the order there will be no
modifications in the expected demand.
It is requested:
a) Show quantitatively whether or not the company should accept the additional
order of 20,000 units.

20000x140= 2,800,000
20000x180= 3600000
Differences is 800000
60,000x230= 13,800,000
According to these results, they should accept this order.

b) What must be the minimum sales price for the company to accept that special
order?

It is the amount of 140 pesos.

8-15 A large chain store offers to buy 5,000 tables from the Sic Sic company for
$240 each. Delivery must be made within a period of 30 days. Sic Sic's production
capacity is 32,000 tables per month.
Expected sales for the month, at normal prices, are 30,000 tables. The sales
manager predicts that sales will be 20% less than budgeted due to the acceptance
of a special order.
In the warehouse there is an inventory of 1,000 tables.
Sale price: $330. Variable production costs, $165, and sales costs, $45.
Additional variable costs for the special order will be $2,250.
It is requested:
a) Determine if the special order should be accepted.
Normal price is 330
Special order price of 240-
Production costs 165
Sales costs 45
Total costs 210

330-240 = 90 cost difference for each chair for a total of 5000 tables is equal to
450,000. For this sale you have to lose.
In addition to considering less 20% of sales if you decide to accept the order.
The decision is to consider that it is not feasible to accept the request

b) Determine what is the lowest price that Sic Sic can set the special order without
reducing its profit.

Consider the variable cost,

Costs 210
Additional cost. 2250 /1000= 2.25
Total costs 212.25

330+240/2= 285

The minimum cost of each chair is the amount of 285, considering those two
prices.

c) Suppose the chain now offers to buy 4,200 tables per month for $240. The offer
would be for an entire year. The expected sales are 30,000 tables in the month
without considering the special order; If the order is accepted, current demand is
reduced by 10%.

4200 X90= 378,000 x12 = 4,536,000 an estimated loss of the aforementioned

amount.
Normal sales of 30,000 less 10% depending on whether you accept the deal:
27,272.73, this is what I would sell if I accepted it, if we see these data they are
very clear, I consider it not appropriate to accept this decision.

8-16 Company W operates three product lines and its production data is provided
below:
To B.C.
Price $250 $300 $450
Variable cost 150 175 200
Contribution margin 100 125 250
Fixed cost 60 75 100
Operating profit $40 $50 $150
Units 1 500 3 500 2 150
Capital investment in necessary work (% sales) 15% 20% 12%

It is requested:
1. Which line is most profitable based on the investment in working capital?

Product line A, the general cost of 2100, although the investment percentage is
15% but it is leveled with the other prices.

2. If there is only $340,000 of working capital, which lines would be sold?

In that case it would be the 3 lines of work depending on the demand.

8-17 The Artec company applies the total cost method to set the selling price of its
products. Prices are equivalent to 120% of the cost. The annual costs of one of its
products are:
Variable production cost $40 per unit
Fixed production costs 100,000 per year
Variable selling and administration expenses 10 per unit
Fixed selling and administrative expenses $60,000 per year
It is requested:
a) Assuming that 10,000 units are produced and sold, calculate the selling price.
160,000/10000=16
b) Assuming that 20,000 units are produced and sold, calculate the selling price.

20,000x16 = 320,000

8-18 The partial income statements of the Unis restaurant for the first two quarters
of 2009 are as follows:
Unis Restaurant Partial Income Statement
First quarter Second quarter
Sales at $36 per meal (unit) $360,000 $630,000
Total costs 490,000 670,000
$(130,000) $(40,000)

The variable cost per meal is made up of 50% direct labor, 25% direct materials
and 25% variable indirect expenses. Units sold, selling price, variable cost per unit,
and total fixed costs are assumed to remain the same during the second and third
quarters. In the third quarter, 17,500 meals were sold.

It is requested:

a) What is the equilibrium point in number of meals?

490,000+670.00/ 17500 = $66.29

b) The business has just received a special order from a (business) customer to
provide 7,500 meals to its employees at a price of $32 each. The normal market in
the third quarter will not be affected if the order is accepted. Additional meals can
be made with existing capacity, but there is a 10% direct labor increase for all
meals because new labor needs to be hired. There will be a fixed cost increase of
$30,000 per quarter if the new order is accepted.

It is requested:
Should it be accepted?

If the break-even price is 66.29, this order will cost 32 pesos, therefore it should
not be accepted, because the price is very low, as if that were not enough, open a
10% labor increase. , this cost will affect the company's economy more.

8-19 Currently Nubo, SA, operates at 50% of its capacity, as it only produces
around 50,000 units per year of a patented electronic component. He recently
received an offer from a company in Guadalajara to buy 30,000 components at $60
per unit, LAB's destination point at the Nubo plant. The budgeted production for
50,000 and 80,000 units of product is as follows.
Units 50,000 80,000
Costs:
Direct material $750,000 $1,200,000
Direct labor 750,000 1,200,000
Manufacturing indirect costs 2,000,000 2,600,000
Total costs $3,500,000 $5,000,000
Cost per unit $70 $62.50

The sales manager believes that the order should be accepted, even if it
generates a loss of $10 per unit, since he believes that the sale can expand his
future market. The production manager does not want to accept the order because
it will result in a loss of $250 per unit based on the new average unit cost. The
treasurer, after performing a quick calculation, maintains that if the order is
accepted the total margin will increase.
It is requested:

a) Explain what caused the decrease from $70 to $62.50 per unit when budgeted
production increased from 50,000 to 80,000 items. Justify your calculations.

The company's production capacity is because it normally produces at the

minimum quantity and the capacity has been adjusted according to demand,
50,000. When purchasing raw materials in bulk, they obtain more discounts, with
this reason costs are reduced, considering in the same way that the same amount
of labor is used to start the work to produce the 80,000.

b) 1. Explain whether the production manager or treasurer (or both) is correct)

It is important that sales, it is necessary to expand the market, or consider

negotiating subsequent purchases, if in the first purchase you have to sell what is
considered the margin, but with the next sales you can improve profits, the
manager and treasurer are those who visualized these opportunities.

3. Explain why the production manager's conclusions differ from those of the
treasurer.

The production manager considers that his concern is based on the costs
generated by the process and the responsibility that it implies when assuming.
The treasurer's decision is based more on the financial income to the fund,
assuming of course that it excludes all variable expenses.

c) Explain why each of the following statements may affect the decision to accept
or reject the special order.

1. The probability of repeating special sales or making all sales at $60 per unit.
There is a higher probability that more special sales will be made in the following
subsequent ones.

2. Whether sales are made to customers who operate in two separate and isolated
markets or whether sales are made to customers who compete in the same
market.

Depending on the operation that is expected to be mentioned in only sales, in how

many market segment there is a probability that it will only be in separate markets.

8-20 CMM, SA managers analyze the profitability of four of the company's

products and the potential effect of various proposals to vary the product mix.
Below is a statement of results and other data
Products
Total PQR S
Sales $626,000 $100,000 $180,000 $126,000 $220,000
Cost of sales 442,740 47,500 70,560 139,680 185,000
Gross profit 183,260 52,500 109,440 (13,680) 35,000
Operating expenses 120 120 19,900 29,760 28,260 42,200
Income before ISR $63,140 32,600 79,680 ( 41,940 ) ( 7,200)
Units sold 1,000 1,200 1,800 2,000
Sales price per unit 100 150 70 110
Variable cost of items sold per unit 25 30 65 60
Variable operating expenses per unit $11.70 $12.50 $10 $12
Each of the following proposals must be considered independently of the others.
Consider only the product changes established in each; the situation of the other
products remains stable. Ignore income taxes:
1. If product R is discontinued, the effect on profit will be:
a) An increase of $9,000b) An increase of $41,940
c) An increase of $126,000
d) An increase of $13,680
e) None of the above

2. If product R is discontinued and a consequent loss of customers generates a

decrease of 200 units in the sales of product Q, the total effect on profit will be:
a) A decrease of $156,000
b) An increase of $28,660
c) An increase of $20,440
d) A decrease of $12,500

e) None of the above

3. If the selling price of product R increases to $80 but 1,500 fewer units are sold,
the effect on profits will be:
a) A decrease of $21,990
b) A decrease of $6,000
c) An increase of $7,500
d) An increase of $21,990
e) None of the above
4. The plant where product R is manufactured can be used to produce a new
product, T. The total variable costs and operating expenses per unit of product T
amount to $80.50; 1,600 units can sell for $95 each. Furthermore, if product T is
introduced, product R is discontinued. What will be the total effect on profits?
a) An increase of $26,000
b) An increase of $23,200
c) An increase of $32,200
d) An increase of $14,200
e) None of the above

5. Part of the plant where product P is produced can easily be adapted to produce
product S, but changes in quantities can cause variations in sales prices. If the
production of P is reduced to 500 units (to sell for $120 each) and that of product S
is increased to 2,500 units (to sell for $105 each), the total effect on profit will be:
a) A decrease of $17,650
b) An increase of $2,500
c) A decrease of $20,600
d) A decrease of $15,150
e) None of the above

6. Manufacturing of product P can be doubled a second shift, but higher wages

must be paid, which increases the variable cost of goods sold for each of the
additional units to $35. If the additional 1,000 units of product P can be sold for
$100 each, the total effect on profit will be:
a) An increase of $100,000
b) An increase of $53,300
c) An increase of $65,000
d) An increase of $22,600
e) None of the above

7. Assuming that having a high inflation rate increases the variable production
costs per unit for product P to $35 and for product S to $10, how would profit be
affected?
a) Increase by $30,000
b) Decrease by $30,000
c) Decrease in $53,300
d) Decrease by $56,000
e) None of the above

8. Product R has had great acceptance in the market and it is predicted that its
sales will increase 100%. How would it affect profit?
a) An increase of $126,000
b) A decrease of $126,000
c) An increase of $9,000
d) A decrease of $9,000
e) None of the above

9. The production manager is considering eliminating product Q. Demonstrate

numerically whether it would be a good decision. How would it affect profit?
a) Increases by $129,000
b) Decreases by $129,000
c) Increases by $180,000
d) Decreases by $180,000
e) None of the above

10. Suppose that the variable production cost of product R has been reduced by
40%, the effect on profit will be:
a) Increases by $37,800
b) Decreases by $37,800
c) Increases by $46,800
d) Decreases by $46,800
e) None of the above

8-21 Centro Plaza Maya developed a promotional program for all shopping
centers located in the city of Gómez Palacio, Durango. After investing $360,000 in
developing the promotional campaign, the company is ready to present clients with
an additional contract that offers services other than the original promotion.
Promotion areas include:
1. TV advertising
2. Sending brochures by mail
3. Catalogs of “great offers” from 10 of the 28 stores in the shopping center
Below are the income based on the terms of the original contract and the new
income if the additional contract is finalized:
Original contract Additional contract
Advertising $520,000 $580,000
Sending brochures by mail 210,000 230,000
Catalogs 170,000 190,000
Total $900,000 $1,000,000
Maya estimates that it will incur the following additional costs if the original
contract is extended.
TV Brochures Catalogs
Direct labor $30,000 $9,000 $7,000
GIF variables 22,000 14,000 6,000
Fixed GIFs* $12,000 $4,000 $2,000
*Twenty percent are unavoidable fixed costs applied to this contract.

It is requested:
a) Calculate the cost that Maya will have for each part that adds to the original
contract.

Advertising $520,000 $580,000 60,000

Sending brochures by mail 210,000 230,000 20,000
Catalogs 170,000 190,000 20,000
Total $900,000 $1,000,000 100,000

b) Should Maya offer the additional contract or offer only the original contract?

You only have to offer the original contract

c) If the mall manager indicates that the terms of the additional contract are
negotiable, what should Maya's response be?

The original contract is recommended, but if an additional contract is necessary, it

must be contracted, you just have to be more careful as a last option.
8-22 Submar is a rowboat manufacturing company that operates at 70% of its
capacity; produces approximately 10,000 units per year. To utilize more capacity,
the manager has suggested to the research and development department that they
should produce their own ships. Currently Submar buys the boats at a unit price of
$2,800. Estimates show that Submar can produce its own boats at $1,000 per unit
in direct materials cost and $800 in direct labor. Manufacturing overhead is $200,
of which $40 is variable.
It is requested:
a) Should Submar make or buy the ships?

In this case you must make the boats because the costs are less when purchasing

b) Suppose Submar can rent a portion of the factory, which it currently does not
use, for $100,000 per month, how does the decision in part (a) affect Submar?

Well in this case, it directly affects the decision that was made previously, if the
factory produces 10,000 products annually and also that the factory is only
operating at 70%, this new approach would require serious consideration and
reconsideration of the possibility of monthly rent.
Because by making the products it will generate more profit for the company.

8-23 Maquinaria del Norte operates at 85% of its capacity. Received an offer to
produce 4,000 units of a special tool. The price they offer is $200 per unit. The
product normally sells for $270. The activity-based accounting system provides the
following information:
Cost driver Unused capacity Quantity demanded* Activity rate**
Fixed Variable
Raw material Units 0 3 000 $100
Labor h. labor 0 500 140
Starting the machine H. starter 30 50 $1,200 160
H inspection. inspection200 100 100 30
Use of the H machine. machine 6,000 4,000 $200 $40
*Represents the amount of resources demanded by the special order.
**The fixed activity rate is the unit cost that must be paid to increase capacity. The
variable activity rate is the cost per unit of resources used.
To expand the capacity of machinery preparation, they must use blocks of a
minimum of 25 hours, whose cost per hour will be the fixed activity rate. To expand
inspection activity, blocks of 2,000 hours per year will be paid, costing $200,000
per year (the salary of an additional supervisor). Machinery capacity can be rented
for one year at a rate of $20 per machine hour. Machinery capacity must be
acquired in blocks of at least 2500 machine hours.
It is requested:
1. Calculate the changes in profit for Maquinaria del Norte if it accepts the order.
Explain whether or not you should accept it.

200,000/2500= $80
270 -200= 70.
The cost per unit is considerable, so you should not accept it.

2. Assume that the computer activity has 60 hours of unused capacity. How would
this affect analysis?
200000/2500-60=81.96
This would affect because the cost gradually increases.
3. Assume that the equipment capacity has 60 hours of unused capacity and that
the machinery has an activity of 3000 hours in the same situation. How would this
circumstance affect the analysis?

200,000/3000-60= 68.03
If we realize, the more the machine hour, the lower the cost value.

8-24 Montevideo produces two types of peanut butter: Smooth and Crunchy. The
soft one is the most popular. The data related to the two products is as follows.
used Soft crunchy Used capacity Purchase units
Expected sales (in boxes) 50,000 10,000
Sale price (per box) $100 $80
Labor hours 40,000 10,000 As needed
Machine hours 10,000 2,500 2,500
Orders received 500 250 250 500
Packing orders 1,000 $500 $500 $250
Material cost per box $50 $48
MOD cost per box $10 $8
Advertising costs $200,000 $60,000
Below are the annual costs of GIF, which are classified as fixed or variable with
respect to their corresponding cost driver:
Activity Fixed Variable
Labor $200,000
Machine $200,000 250,000
Order receipt $200,000 22,500
Packaging 100,000 45,000
Total costs $500,000 $517,500
It is requested:
1. Using the traditional system, determine whether the Crunchy product line
should be discontinued or maintained.

The Crunchy product, at first glance, the numbers it indicates are much lower than
expected. If there is a variety of demand in the market in the product line, it is best
to eliminate that product line and supply a new line.

2. Using the activity-based costing system, determine whether the Crunchy

product line should be discontinued or maintained.

8-25 The Rico Products division has several food processing plants. One works
only with chickens. The plant produces three products through a common process:
breast packaging, wings and legs packaging, and organ meats. The organ meats
are sold by the kilo to a local company that produces soups. The packages are
sold to supermarkets. The costs of a common company are as follows:
Direct materials $30,000
Labor 20,000
GIF $15,000

The revenue for each product is as follows: brisket, $43,000; wings and legs,
$32,000; viscera, $25,000.
The plant manager plans to process chicken breast, which should increase sales
to $76,000. Chicken breast must be cut into small pieces, breaded, packaged and
sold to supermarkets as chicken nuggets. However, the additional process means
the company will have to rent special equipment that would cost $1,250 per week.
Additional materials and labor will be required, costing $12,750 per week, plus
$15,000 per week for increased other activities.
It is requested:
1. What will be the profit earned by the three products in one week?
It is 35,000 pesos a week

Breast profit is 47,000.

2. Should the division process chicken breasts into nuggets or should it continue to
sell them whole? What effect will this decision have on weekly profit?

With this processing, the result of the sale of brisket leaves more profit with this
procedure than the other three products.
Definitely, the other two products, viscera and wings and legs, would have to
undergo the necessary processes to innovate.

8-26 Dental Clinic carries out operations in a large metropolitan area. He currently
has his own dental laboratory where he produces porcelain and gold crowns. The
unit cost of producing the crowns is
Porcelain Gold
Raw material $70 $130
Direct labor 27 27
Variable indirect expenses 8 8
Fixed direct expenses 22 22
Total $127 $187

Fixed overhead costs in detail

Salaries (supervisor) $26,000
Depreciation 63,000
Rent (laboratory area) 32,000
Indirect expenses are applied based on direct labor hours. The above quantities
were calculated using 5,500 direct labor hours
A local dental laboratory has offered to provide Clínica Odontológica with all the
crowns it needs, at $125 for porcelain crowns and $150 for gold. However, the
offer is conditional on the sale of both products, that is, only one type of crown will
not be provided at the indicated price. If the offer is accepted. The equipment used
by the Dental Clinic laboratory will be discarded, as it is old and has no market
value, and the laboratory area will be closed. The clinic uses 2,000 porcelain and
600 gold crowns a year.
It is requested:
1. Should Clínica Odontológica continue making its own crowns or should it
purchase them from an outside supplier? What is the effect of purchasing in
pesos?

2000x125=250,000
600x150= 90,000

250000+90000/5500=$61.82

The hospital must continue manufacturing its products.

2. What qualitative factor should the administration of the Dental Clinic consider
when making its decision?

The cost of the unit of products

3. Assume that you own the lab area and that the $32,000 is for depreciation and
not rent. What effect does this have on the analysis in point 1?

Beforehand you have to consider some necessary additional costs, depreciation

and income being one of them, for this reason it helps to make definitive criteria.

8-27 Francisco Javier Cantú, general director of Proexa, has just received the
following income statement for variable costing:
Product A Product B
Sales $100,000 $250,000
Variable cost 50,000 145,000
Contribution margin $50,000 $105,000
Fixed cost 80,000 110,000
Operation result $( 30,000 ) $( 5,000 )

The director was concerned since this was the fifth consecutive quarter in which
both products showed losses. After careful review, Mr. Cantú discovered that
$70,000 of total fixed costs are common to both products; Common fixed costs are
applied to individual products based on sales revenue. Mr. Cantú was informed
that the products were being replaced. If either of them stopped producing, the
sales of the other would increase: the sales of product A would increase 50% if
product B stopped producing and the sales of product B would increase 10% if
product A stopped producing. produce.
It is requested:
1. Suppose that Mr. Cantú will choose between one of the following alternatives:
a) Maintain both products
b) Stop producing both products
c) Stop producing product A
d) Stop producing product B

What is the best alternative?

Stop producing product A, said production according to the data in the table there
was a considerable loss of 30,000, due to the sales that are estimated at 50% it
would only be able to level the prorated cost, therefore it is necessary to eliminate
within the sales line.
Opting for line B according to the data analyzed from your sale, there is a very
minimal loss, and the sale would increase by 10% and which I consider very little,
but doing an analysis of variable costs, the profit will improve.

8-28 José Barquet, general director of Papelería del Norte, SA de CV, was
distressed by an offer for an order of 5,000 calendars. LaPapelería operates at
70% of its capacity and could use the remainder; Unfortunately, the price offered
on the order, $4.2 per calendar, is below the cost of production. The controller
objects to sustaining a loss on the sale. However, Michael Fisher, personnel
manager, agrees to accept the order even if a loss could be incurred, in this way
he would avoid and help maintain the company's good image. The total cost of
producing a calendar is as follows:
Direct raw material $1.15
Direct labor 2.00
Variable indirect expenses 1.10
Fixed indirect expenses 1.00
Total $5.25

That same afternoon, Barquet and Fisher met, Barquet agreed with Fisher's
rationale and suggested that the two discuss the special order decision. Fisher
would list the activities that would be affected by a series of layoffs.
Fisher arrived with the following information: severance payments, layoff
notification costs for approximately 20 employees, increased costs for rehiring and
training employees when production is restored. Barquet determined that these
activities would have the following costs:
• Compensation $35,000
• Administration expenses for layoffs $20 per employee
• Rehiring and training $160 per new employee

It is requested:
1. Assume that the company would accept the order only if total profits would
increase. Should the company accept or reject the order? Accept the order for
5000 calendars with a very low price of 5.25 minus 4.2, the loss per calendar is
$1.05, below the profits and profits, considering for this occasion whether it should
be accepted , only suggesting to apply new ways to generate a good image and
conquer the market, rethink new schemes to minimize costs.

2. Consider new information on the costs of layoff-related activities. Should the

company accept or reject the order?

The conclusion of a meeting to fire 20 employees and hire new ones, all of them
imply an expense and liquidity problem for the company. This decision should NOT
be accepted, there is another way to find solutions to this problem. For example,
train the employee to be more productive.
8-29 The company Electrónica General, SA de CV, manufactures two products, A
and B. The income statement for a typical quarter is as follows:
Product A Product B Total
Sales $150,000 $80,000 $230,000
Variable costs 80,000 46,000 126,000
Contribution margin $70,000 $34,000 $104,000
Direct fixed expenses* 20,000 38,000 58,000
Segment margin $50,000 $( 4,000 ) $46,000
Common fixed expenses 30,000
Operating income $16,000

Product A requires a component that is purchased from an outside supplier for

$25 per unit. Every quarter, 2,000 components are purchased. All units produced
are sold and there are no final inventories of components. The company is
considering making the same component instead of buying it. Variable unit
manufacturing costs are
Direct raw material $2.00
Direct labor 3.00
Variable indirect expenses 2.00

There are two alternatives to establish production capacity:

1. Rent the required area and equipment at a cost of $27,000 per quarter for the
area and $10,000 per quarter for the supervisor. There are no other fixed costs.
2. Stop producing product B. The equipment can be retrofitted at virtually zero cost
and existing space can be used to manufacture the component. Direct fixed costs,
including supervision, would be $38,000, $8,000 of which is for equipment
depreciation. If product B is discontinued, there will be no effect on the sales of
product A.

It is requested:

1. Should the company manufacture or buy the component? If you manufacture

the component, which alternative should you choose?

Buy 2000x25= 50,000

Manufacture
Rent of area and equipment 27,000
Supervisor 10,000
Cost per production 7X2000= 14,000

Total variable cost = 51,000

Under this analysis, the components must continue to be purchased, because
when manufacturing the products, the variable cost value exceeds the cost.

2. Suppose that stopping production of B will reduce the sales of A by 6%. What
effect does this have on the decision? If the company continues to produce
adequately from both lines, if some of that line stopped producing and in addition to
them affecting some production line, within a company it would significantly affect
the economic sphere. .

3. Suppose that stopping production of B reduces A's sales by 6% and that 2,800
components are required per quarter. Assume that there are no ending inventories
of components and that all units produced are sold. Assume that the unit selling
price and the unit variable cost are the same as in point 1. Include the rental
alternative in your decision. What is the right decision now?

Produce the required quantities of 2800 components, because it is already

committed and sales are already secure.

8-30 The company Essa, SA de CV, currently manufactures the K-9 product, of
which it produces 50,000 units per year. The part is a component of several
products manufactured by Essa. The unit cost of K-9 is as follows:

Direct materials $70.00

Direct labor 30.00
Variable indirect expenses 15.00
Fixed indirect expenses 25.00
Total $140.00

Of the total fixed overhead applied to K-9, $900,000 relates to the rental of
production machinery and the salary of the production line supervisor (neither of
which will be necessary if the line disappears). The rest of the fixed overheads are
common fixed overheads. An outside supplier has offered to sell Essa the
component for $130.00. There is no alternative use for the facilities used in K-9
production.
It is requested:
1. Should Essa manufacture or purchase the K-9 component?

If you must buy, because it would help reduce variable costs.

2. What is the maximum price that Essa would be willing to pay to an external
supplier?

900000/50,000= 18 the unit price.

3. If Essa were to purchase the component, how much does its utility increase or
decrease?

130,000/18 = 7222.22 increase in profit

8-31 Tiendad Fashion expects to have sales during 2008 of $6,000,000, a

contribution margin of 20% and a credit period of 20 days. As a strategy to
increase sales, the store's finance director has presented a proposal to increase
the credit period to 45 days, which would bring an increase of $800,000 annually.
The opportunity cost of Tiendas Fashion is 10% annually.
Given the above, determine:

a) The current amount of accounts receivable from customers

6,000,000 x 20%= 1,200,000 /12 = 100,000 monthly during the period.

b) The amount of accounts receivable from customers that the company would
have if this new customer credit policy was accepted.
800,000/12= 66666.67 to monthly customers during the annual period.

c) Is it convenient for Tiendas Fashion to increase its credit policy? Explain using
incremental analysis

It is extremely important to generate credit policies, both participation criteria, such

as to receive from suppliers and also to grant to clients in products or cash.

8-32 Galletera de Zamora, SA, is analyzing the possibility of increasing the prompt
payment discount it gives to its clients, which is currently 2/10 n/30 and would
increase to 4/10 n/30. If this were done, the balance of accounts receivable from
customers would be reduced to 40% (currently this average amounts to $320,000),
and it is also estimated that 40% of current customers would choose to take
advantage of the discount. The company's current sales are $2,350,000. The
opportunity cost is 11%.
Determine, through incremental analysis, whether it is in the company's best
interest to increase the customer cash discount.

8-33 Industrialized foods currently have the possibility of covering the debt with
only one of its suppliers within the discount period. The company has three
suppliers who could be paid and take advantage of the discount they offer:
Supplier A: conditions 3/15 n/45
Supplier B: conditions 2/10 n/30
Supplier C: conditions 4/10 n/60

If the annualized discount rate is used, which supplier has a higher opportunity
cost, and therefore should take advantage of the discount it offers?
Supplier B: conditions 2/10 n/30, which has a 40% discount that helps reduce
company costs.