'Cost Accounting Chapter 11\r'

'Horngren, C. T. , Datar, S. M. and Foster, G. (2003) greet Accounting †A Managerial Emphasis, Pearson Education, Inc. , naked Jersey, El stock-stillth Edition CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION 11-1 The cardinal steps in the last process describe in demo 11-1 of the text argon: 1. 2. 3. 4. 5. predominate culture take a crap predictions round next bell Choose an resource Implement the finale gauge carrying out to provide feedback 11-2 germane(predicate) be ar expect early be that disagree among the alternate courses of action being considered.Historical woos ar hostile beca use up they be late(prenominal) mo authoriseary protects and, thence, heap non differ among alternating(a) proximo courses of action. 11-3 no pertinent approachs argon defined as those judge future follow that differ among utility(a) courses of action being considered. Thus, future exist that do non differ among the alternate(a)s atomic form 18 ir germane(predicate) to deciding which resource to choose. 11-4 Quantitative factors atomic number 18 outcomes that atomic number 18 measured in numerical terms. slightly denary factors atomic number 18 financialâ€â€that is, they keister be easily expressed in m whiztary terms. rule materials is an example of a denary financial factor.Qualitative factors atomic number 18 outcomes that atomic number 18 difficult to measure accurately in numerical terms. An example is employee morale. 11-5 Two potential difficultys that should be avoided in applicable be abridgment ar: 1. 2. Do non assume all(prenominal) t doddery variant be be germane(predicate) and all obstinate be argon unconnected. Do non use social whole- terms entropy indicately. It tolerate mislead end ingestrs because a. it whitethorn accept immaterial exist, and b. affinitys of social whole of measurement monetary value computed at diffe need output levels lead to erroneous concl usions 11-6 none Some protean be whitethorn non differ among the ersatzs chthonian consideration and, hence, lead be contrary.Some touch on address whitethorn differ among the elections and, hence, bequeath be relevant. 11-7 No. Some of the total whole be to even out a intersection heighten whitethorn be decided cost, and, hence, volition not differ in the midst of the contact and spoil alternatives. These dictated cost atomic number 18 irrelevant to the make-or- bargain decision. The key comparison is amongst obtain cost and the be that leave alone be furtherd if the compevery bribes the component dissociates from impertinent cocksure the supererogatory proceedss of utilize the resources freed up in the next best alternative use ( fortune cost). 1-8 hazard cost is the persona to income that is forgone (rejected) by not using a expressage resource in its next-best alternative use. 11-1 11-9 No. When deciding on the quantity of schedule to tain t, managers must(prenominal)(prenominal) consider two the purchase cost per whole and the probability cost of funds invested in the arsenal. For example, the purchase cost per building block may be low when the quantity of inventory purchased is large, but the benefit of the lower cost may be much(prenominal) than moodyset by the mellowed opport building blocky cost of the funds invested in acquiring and h venerableing inventory. 1-10 No. Managers should aim to die the highest percentage border thread per unit of the constraining (that is, scarce, limiting, or captious) factor. The constraining factor is what restricts or limits the output signal or bargain of a abandoned return (for example, availability of weapon-hours). 11-11 No. For example, if the taxations that get out be lost hand the cost that depart be saved, the branch or duty segment should not be shut dumpwardly. Shutting squander forget and growing the dismissal. completelyocated be a re cease slightly irrelevant to the shutting heap decision. 1-12 bell create verbally glum as wear and tear is irrelevant when it pertains to a past times cost. But the purchase cost of unsanded-sprung(prenominal)(a)-fashioned equipment to be acquired in the future that allow for thusly be compose saturnine as derogation is often relevant. 11-13 No. Managers tend to favor the alternative that makes their performance look best so they focalisation on the measures use in the performance- valuation vex. If the performanceevaluation seat does not emphasize maximise in operation(p) income or minimizing be, managers will most likely not choose the alternative that maximises in operation(p) income or minimizes cost. 1-14 The three steps in solving a bank billar programming problem are: 1. 2. 3. Determine the objective function. Specify the restraints. calculate the best termination. 11-15 The text out identifys two methods of determining the optimal solution to an LP problem: 1. Trial-and-error solution snuggle 2. graphical solution approach Most LP applications in practice use standard software packages that swan on the simplex method to compute the optimal solution. 11-2 11-16 (20 min. ) Disposal of assets. 1. This is an unfortunate situation, yet the $80,000 cost are irrelevant regarding the decision to re m disused or scrap.The simply relevant factors are the future tax taxs and future be. By ignoring the roll up cost and deciding on the basis of evaluate future cost, run(a) income will be maximized (or losings minimized). The residue in favor of remachining is $3,000: (a) Remachine Future revenues take time off future be operational(a) income departure in favor of remachining $35,000 30,000 $ 5,000 $3,000 (b) Scrap $2,000 †$2,000 2. This, too, is an unfortunate situation. But the $100,000 master copy cost is irrelevant to this decision.The disparity in relevant be in favor of rebuilding is $7,000 as follows: (a) transpose raw(a) motortruck Deduct received disposition footing of be truck redo lively truck $102,000 10,000 †$ 92,000 $7,000 (b) Rebuild ††$85,000 $85,000 Difference in favor of rebuilding none, here, that the current judicature worth of $10,000 is relevant, but the original cost (or tidings take to be, if the truck were not brand innovative) is irrelevant. 11-3 11-17 (10 min. ) The careening personal computer. Considered alone, book lever is irrelevant as a measure of acquittance when equipment is destroyed.The measure of the redness is shift cost or just about computation of the point value of future services lost because of equipment going or damage. In the specific case described, the following observations may be apt: 1. A fully depreciated item plausibly is relatively grey-headed. Chances are that the freeing from this equipment is little than the freeing for a partially depreciated item because the ex inter deepenment cost of an over-the-hill item would be far less(prenominal) than that for a nearly new item. 2. The loss of an doddery item, assuming replacement is necessary, automatically accelerates the timing of replacement.Thus, if the grey item were to be junked and replaced tomorrow, no economic loss would be evident. However, if the old item were supposed to stretch forth five just about much years, replacement is accelerated five years. The best practical measure of much(prenominal) a loss probably would be the cost of comparable to(predicate) used equipment that had five years of remaining useable life. The fact that the computer was fully depreciated to a fault unionizeion the accounting reports will not be abnormal by the accident. If accounting reports are used to guess the self-assurance managers performance, the manager will cull some(prenominal) accidents to be on fully depreciated units. 11-18 (15 min. Multiple choice. 1. (b) particular(prenominal) rewrite hurt per unit cov ariant manufacturing cost per unit persona bank per unit doing on in operation(p)(a) income = $1. 50 ? 20,000 units = $30,000 improver $1,200,000 $48 9 $57 1,140,000 60,000 25,000 $ 85,000 $6. 00 4. 50 $1. 50 2. (b) cost of purchases, 20,000 units ? $60 organic relevant be of fashioning: shifting manufacturing cost, $64 †$16 stiff cost eliminated be saved by not qualification Multiply by 20,000 units, so total cost saved are $57 ? 20,000 Extra be of purchase exterior Minimum oerall nest egg for Reno Necessary relevant be that would acquire to be saved in manufacturing Part No. 75 11-4 11-19 (30 min. ) Special graze, activity- gripd costing (CMA, adapted). 1. demo sum totals in operation(p) income below the alternatives of get d witnessing/rejecting the supernumerary consecrate are: Without OneWith erstwhile(prenominal) Only Time Only Special score Special Order 7, calciferol Units 10,000 Units Revenues unsettled cost: take away materials drive man ufacturing savvy Batch manufacturing cost bushel cost: opinionated manufacturing be set(p) merchandise cost come up cost run income 1 2 Difference 2, euchre Units $250,000 87, vitamin D 100,000 12, d â€â€ â€â€ 200,000 $ 50,000 $1,125,000 262,500 ccc,000 75,000 1,375,000 350,000 2 400,000 3 87,500 1 275,000 275,000 175,000 175,000 1,087,500 1,287,500 $ 37,500 $ 87,500 $ three hundred,000 ? 10,000 7,500 3 $262,500 ? 10,000 7,500 $75,000 + (25 ? $500) opti besides, we could calculate the additive revenue and the additive be of the surplus 2,500 units as follows: incremental revenue $100 ? 2,500 incremental deal manufacturing cost Incremental direct manufacturing costs Incremental batch manufacturing costs add incremental costs get along incremental operate income from accepting the superfluous score $262,500 ? 2,500 7,500 300,000 ? ,500 7,500 $500 ? 25 $250,000 87,500 100,000 12,500 200,000 $ 50,000 loot confident(p) should accept the one-time- exclusi vely redundant dress if it has no long-term implications because accepting the devote subjoins Award accessions operational(a) income by $50,000. If, however, accepting the special order would cause the weak customers to be dissatisfied or to demand lower prices, whence Award Plus will withstand to trade off the $50,000 gain from accepting the special order against the operating income it might lose from regular customers. 11-5 11-19 (Cont’d. ) 2. Award Plus has a depicted object of 9,000 medals.Therefore, if it accepts the special one-time order of 2,500 medals, it ignore shit but 6,500 medals instead of the 7,500 medals that it currently sells to existing customers. That is, by accepting the special order, Award Plus must forgo gross sales of 1,000 medals to its regular customers. opti but, Award Plus brush off reject the special order and stay on to sell 7,500 medals to its regular customers. Award Pluss operating income from trade 6,500 medals to regula r customers and 2,500 medals under one-time special order follow: Revenues (6,500 ? $ one hundred fifty) + (2,500 ? 100) 1 1 accost materials (6,500 ? $35 ) + (2,500 ? $35 ) 2 2 indicate manufacturing fatigue (6,500 ? $40 ) +(2,500 ? $40 ) 3 Batch manufacturing costs ( one hundred thirty ? $500) + (25 ? $500) Fixed manufacturing costs Fixed tradeing costs kernel costs Operating income 1 $1,225,000 315,000 360,000 77,500 275,000 175,000 1,202,500 $ 22,500 $35 = $262,500 7,500 2 $40 = 300,000 7,500 3 Award Plus makes regular medals in batch sizes of 50. To educate 6,500 medals takes 130 (6,500 ? 50) batches. accept the special order will chair in a decrease in operating income of $15,000 ($37,500 †$22,500).The special order should, therefore, be rejected. A more direct approach would be to focus on the incremental beliefsâ€â€the benefits of accepting the special order of 2,500 units versus the costs of selling 1,000 fewer units to regular customers. cast up in op erating income from the 2,500-unit special order tolerables $50,000 (demand 1). The loss in operating income from selling 1,000 fewer units to regular customers equals: Lost revenue, $150 ? 1,000 Savings in direct materials costs, $35 ? 1,000 Savings in direct manufacturing promote costs, $40 ? 1,000 Savings in batch manufacturing costs, $500 ? 0 Operating income lost $(150,000) 35,000 40,000 10,000 $ (65,000) Accepting the special order will result in a decrease in operating income of $15,000 ($50,000 †$65,000). The special order should, therefore, be rejected. 3. Award Plus should not accept the special order. Increase in operating income by selling 2,500 units under the special order ( fatality 1) Operating income lost from existing customers ($10 ? 7,500) clear up effect on operating income of accepting special order The special order should, therefore, be rejected. $ 50,000 (75,000) $(25,000) 11-6 11-20 (30 min. ) piddle versus bargain, activity- lay guttled costing . . The expected manufacturing cost per unit of CMCBs in 2004 is as follows: hail Manufacturing Manufacturing Costs of CMCB Cost per Unit (1) (2) = (1) ? 10,000 $1,700,000 $ clxx 450,000 45 120,000 12 320,000 800,000 $3,390,000 32 80 $339 manoeuver materials, $170 ? 10,000 bring manufacturing labor, $45 ? 10,000 changeable batch manufacturing costs, $1,500 ? 80 Fixed manufacturing costs Avoidable fixed manufacturing costs Unavoidable fixed manufacturing costs derive manufacturing costs 2. The following table identifies the incremental costs in 2004 if Svenson (a) do CMCBs and (b) purchased CMCBs from Minton. kernel Incremental Costs Make grease ones palms $ 3,000,000 $1,700,000 450,000 120,000 320,000 $2,590,000 $3,000,000 $410,000 Per-Unit Incremental Costs Make obtain $300 $170 45 12 32 $259 $300 $41 Incremental Items Cost of purchasing CMCBs from Minton Direct materials Direct manufacturing labor uncertain batch manufacturing costs Avoidable fixed manufacturing costs de scend incremental costs Difference in favor of fashioning tincture that the opportunity cost of using force to make CMCBs is slide fastener since Svenson would play along this cleverness inactive if it purchases CMCBs from Minton.Svenson should continue to occasion the CMCBs internally since the incremental costs to shape are $259 per unit discriminated to the $300 per unit that Minton has quoted. Note that the unavoidable fixed manufacturing costs of $800,000 ($80 per unit) will continue to be incurred whether Svenson makes or defiles CMCBs. These are not incremental costs under all the make or the buy alternative and are, hence, irrelevant. 3. Svenson should continue to make CMCBs. The simplest way to analyze this problem is to have intercourse that Svenson would prefer to keep any excess cogency idle alternatively than use it to make CB3s. wherefore?Because expected incremental future revenues from CB3s, $2,000,000 are less than expected incremental future costs, $2,150,000. If Svenson keeps its mental ability idle, we live on from requirement 2 that it should make CMCBs instead than buy them. 11-7 11-20 (Cont’d. ) An important point to label is that, because Svenson forgoes no portion by not being able to make and sell CB3s, the opportunity cost of using its facilities to make CMCBs is zero. It is, therefore, not forgoing any profits by using the capacity to manufacture CMCBs. If it does not manufacture CMCBs, rather than lose money on CB3s, Svenson will keep capacity idle.A continuing and more precise approach is to use the total alternatives or opportunity cost analyses shown in uncover 11-7 of the chapter. Choices for Svenson Make CMCBs Buy CMCBs Buy CMCBs and Do Not and Do Not and Make pertinent Items Make CB3s Make CB3s CB3s TOTAL-ALTERNATIVES burn down TO MAKE-OR-BUY DECISIONS list incremental costs of making/ get CMCBs (from requirement 2) Excess of future costs over future revenues from CB3s Total relevant costs $2 ,590,000 0 $2,590,000 $3,000,000 0 $3,000,000 $3,000,000 150,000 $3,150,000 Svenson will minimize manufacturing costs by making CMCBs.OPPORTUNITY-COST APPROACH TO MAKE-OR-BUY DECISIONS Total incremental costs of making/buying CMCBs (from requirement 2) $2,590,000 $3,000,000 luck cost: profit persona forgone because capacity will not be used to make CB3s 0* 0* Total relevant costs $2,590,000 $3,000,000 $3,000,000 0 $3,000,000 *Opportunity cost is 0 because Svenson does not give up anything by not making CB3s. Svenson is best off leaving the capacity idle (rather than manufacturing and selling CB3s). 11-8 11-21 (10 min. ) instrument decision, opportunity costs. 1. Unit cost, orders of 20,000 Unit cost, order of 240,000 (0. 5 ? $8. 00) secondarys under consideration: (a) Buy 240,000 units at cause of year. (b) Buy 20,000 units at start of each month. amount investment in inventory: (a) (240,000 ? $7. 60) ? 2 (b) ( 20,000 ? $8. 00) ? 2 Difference in average investment $8. 00 $7. 60 $912,000 80,000 $832,000 Opportunity cost of divert forgone from 240,000-unit purchase at start of year = $832,000 ? 0. 08 = $66,560 2. No. The $66,560 is an opportunity cost rather than an incremental or outlay cost. No true transaction records the $66,560 as an entry in the accounting system. 3.The following table presents the two alternatives: Alternative A: Alternative B: acquire procure 240,000 20,000 spark plugs at spark plugs begin of at beginning year of each month Difference (1) (2) (3 )= (1) †(2) one-year purchase-order costs (1 ? $200; 12 ? $200) Annual purchase (incremental) costs (240,000 ? $7. 60; 240,000 ? $8) Annual interest income that could be earned if investment in inventory were invested (opportunity cost) (8% ? $912,000; 8% ? $80,000) relevant costs $ 200 1,824,000 $ 2,400 1,920,000 $ (2,200) (96,000) 72,960 $1,897, one hundred sixty 6,400 $1,928,800 66,560 $ (31,640) editorial (3) indicates that purchasing 240,000 spark plugs at the beginning of t he year is preferable relative to purchasing 20,000 spark plugs at the beginning of each month because the lower purchase cost returns the opportunity cost of holding larger inventory. If former(a) incremental benefits of holding lower inventory such as lower insurance, materials discussion, entrepot, obsolescence, and breakage costs were considered, the costs under Alternative A would have been higher, and Alternative B may have been preferred. 11-9 11-22 (20â€25 min. ) Relevant costs, theatrical role borderline, product emphasis. 1. Cola $18. 0 13. 50 $ 4. 50 Lemonade $19. 20 15. 20 $ 4. 00 Punch $26. 40 20. 10 $ 6. 30 Natural orangeness juice $38. 40 30. 20 $ 8. 20 trade price Deduct variable cost per case attitude molding per case 2. The argument fails to recognize that ledge berth is the constraining factor. There are only 12 feet of front shelf blank to be give to drinks. Sexton should aim to get the highest workaday contribution boundary line per foot of front shelf space: Natural orange Juice $ 8. 20 ? 5 plow sell bank per case gross revenue (number of cases) per foot of shelf space per day day-by-day contribution per foot of front shelf space 3.Cola $ 4. 50 ? 25 Lemonade $ 4. 00 ? 24 Punch $ 6. 30 ? 4 $112. 50 $96. 00 $25. 20 $41. 00 The allocation that maximizes the free-and-easy contribution from soft drink sales is: day-to-day role per Foot of Front Shelf quadrangle $112. 50 96. 00 41. 00 25. 20 Cola Lemonade Natural Orange Juice Punch Feet of Shelf Space 6 4 1 1 Total percentage Margin per Day $ 675. 00 384. 00 41. 00 25. 20 $1,125. 20 The utmost of six feet of front shelf space will be devoted to Cola because it has the highest contribution strand per unit of the constraining factor. quatern most feet of front shelf space will be devoted to Lemonade, which has the second highest contribution mete per unit of the constraining factor. No more shelf space buttocks be devoted to Lemonade since each of the remainin g two products, Natural Orange Juice and Punch (that have the second last and lowest contribution valuation reserves per unit of the constraining factor) must each be given at least(prenominal) one foot of front shelf space. 11-10 11-23 (10 min. ) pickax of most profitable product. Only puzzle 14 should be bugger offd. The key to this problem is the relationship of manufacturing knock to each product.Note that it takes twice as long to produce role case 9; machine-hours for Model 9 are twice that for Model 14. Management should choose the product motley that maximizes operating income for a given occupation capacity (the scarce resource in this situation). In this case, Model 14 will yield a $9. 50 contribution to fixed costs per machine hour, and Model 9 will yield $9. 00: Model 9 interchange price unsettled costs per unit parcel margin per unit coitus use of machine-hours per unit of product Contribution margin per machine hour $100. 00 82. 00 $ 18. 00 ? 2 $ 9. 00 Mo del 14 $70. 00 60. 50 $ 9. 50 ? $ 9. 50 11-23 Excel occupation Decision-Making and Relevant Information Body-Builders, Inc. Original Data interchange Price Costs Direct materials Direct manufacturing labor Variable manufacturing command operating expense Fixed manufacturing bang merchandise costs (all variable) Total costs Operating Income Model 9 $100. 00 28. 00 15. 00 25. 00 10. 00 14. 00 92. 00 $8. 00 $70. 00 13. 00 25. 00 12. 50 5. 00 10. 00 65. 50 $4. 50 intersection point Mix digest Selling price Variable cost per unit Contribution margin per unit Relative use of machine-hours per unit of product Contribution margin per machine-hour Model 9 $100 82. 0 18. 00 2 $9. 00 Model 14 $70 60. 50 9. 50 1 $9. 50 11-11 11-24 (20 min. ) Which beastly to close, relevant-cost epitome, opportunity costs. The future outlay operating costs will be $400 million regardless of which rack is closed, given the additional $100 million in costs at Everett if Alameda is closed. Further, one of the bases will for good remain open while the otherwise will be shut down. The only relevant revenue and cost comparisons are: a. $500 million from sale of the Alameda base. Note that the historical cost of building the Alameda base ($100 million) is irrelevant.Note, also, that future increases in the value of the shoot at the Alameda base is also irrelevant. One of the bases must be kept open, so if it is decided to keep the Alameda base open, the Defense Department will not be able to sell this land at a future date. b. $60 million in nest egg in fixed income note if the Everett base is closed. Again, the historical cost of building the Everett base ($150 million) is irrelevant. The relevant costs and benefits analysis favors occlusion the Alameda base despite the objections raised by the California committee in Congress. The net benefit equals $440 ($500 †$60) million. 11-25 (25? 0 min. ) terminal and inauguration chisel ins. 1. source Exhibit 11-25, Column 1, p resents the relevant loss in revenues and the relevant savings in costs from climax the Rhode Island blood. Lopez is localize that Sanchez crapper’s operating income would increase by $7,000 if it closes down the Rhode Island retentivity. Closing down the Rhode Island store results in a loss of revenues of $860,000 but cost savings of $867,000 (from cost of goods change, rent, labor, utilities, and unified costs). Note that by closing down the Rhode Island store, Sanchez pile will save none of the equipment-related costs because this is a past cost.Also note that the relevant bodily smasher costs are the true collective overhead costs $44,000 that Sanchez expects to save by closing the Rhode Island store. The integrated overhead of $40,000 deald to the Rhode Island store is irrelevant to the analysis. 2. resultant role Exhibit 11-25, Column 2, presents the relevant revenues and relevant costs of opening another store like the Rhode Island store. Lopez is mark t hat opening such a store would increase Sanchez passel’s operating income by $11,000.Incremental revenues of $860,000 exceed the incremental costs of $849,000 (from higher cost of goods exchange, rent, labor, utilities, and some additional merged costs). Note that the cost of equipment create verbally off as depreciation is relevant because it is an expected future cost that Sanchez will incur only if it opens the new store. Also note that the relevant corporal overhead costs are the $4,000 of actual bodied overhead costs that Sanchez expects to incur as a result of opening the new store. Sanchez may, in fact, allocate more than $4,000 of incarnate overhead to the new store but this allocation is irrelevant to the analysis. 1-12 11-25 (Cont’d. ) The key primer that Sanchez’s operating income increases either if it closes down the Rhode Island store or if it opens another store like it is the behaviour of incarnate overhead costs. By closing down the Rh ode Island store, Sanchez can significantly reduce corporate overhead costs presumably by reducing the corporate stave that negociates the Rhode Island operation. On the other hand, adding another store like Rhode Island does not increase actual corporate costs by much, presumably because the existing corporate staff will be able to oversee the new store as well.SOLUTION EXHIBIT 11-25 Relevant-Revenue and Relevant-Cost Analysis of Closing Rhode Island interject and Opening Another interject Like It. Incremental (Loss in Revenues) Revenues and and Savings in (Incremental Costs) Costs from of Opening New Closing Rhode Store Like Rhode Island Store Island Store (1) (2) Revenues Cost of goods sold use up rent Labor costs wear and tear of equipment Utilities (electricity, heating) Corporate overhead costs Total costs Effect on operating income (loss) $(860,000) 660,000 75,000 42,000 0 46,000 44,000 867,000 $ 7,000 $ 860,000 (660,000) (75,000) (42,000) (22,000) (46,000) (4,000) (849, 000) $ 11,000 1-13 11-26 (20 min. ) Choosing customers. If Broadway accepts the additional concern from Kelly, it would take an additional 500 machine-hours. If Broadway accepts all of Kelly’s and Taylor’s business for February, it would require 2,500 machine-hours (1,500 hours for Taylor and 1,000 hours for Kelly). Broadway has only 2,000 hours of machine capacity. It must, therefore, choose how much of the Taylor or Kelly business to accept. To maximize operating income, Broadway should maximize contribution margin per unit of the restrain resource. Fixed costs will remain unchanged at $100,000 regardless of the business Broadway chooses to accept in February, and is, therefore, irrelevant. ) The contribution margin per unit of the constrained resource for each customer in January is: Taylor Corporation $78,000 = $52 1,500 Kelly Corporation $32,000 = $64 500 Contribution margin per machine-hour Since the $80,000 of additional Kelly business in February is identical to jobs done in January, it will also have a contribution margin of $64 per machine-hour, which is greater than the contribution margin of $52 per machine-hour from Taylor.To maximize operating income, Broadway should first allocate all the capacity needed to take the Kelly Corporation business (1,000 machine-hours) and accordingly allocate the remaining 1,000 (2,000 †1,000) machine-hours to Taylor. Taylor Corporation $52 ? 1,000 $52,000 Kelly Corporation $64 ? 1,000 $64,000 Total Contribution margin per machine-hour Machine-hours to be worked Contribution margin Fixed costs Operating income $116,000 100,000 $ 16,000 11-14 11-27 (30â€40 min. ) Relevance of equipment costs. 1a. controversys of Cash Receipts and Disbursements uphold Year 2, 3, 4 $150,000 (110,000) (15,000)Year 1 Receipts from operations: Revenues Deduct disbursements: otherwise operating costs carrying out of machine grease ones palms of â€Å"old” machine Purchase of â€Å"new” equipment Cash inflow from sale of old equipment lucre cash inflow $150,000 (110,000) ( 15,000) (20,000)* Four age unneurotic $600,000 (440,000) (60,000) (20,000) Buy New Machine Four Year age Year 1 2, 3, 4 Together $150,000 (110,000) (9,000) (20,000) (24,000) 8,000 $ (5,000) $150,000 (110,000) (9,000) $600,000 (440,000) (36,000) (20,000) (24,000) 8,000 $ 88,000 $ 5,000 $ 25,000 80,000 $ 31,000 *Some students ignore this item because it is the uniform for each alternative. However, note that a statement for the sinless year has been requested. Obviously, the $20,000 would affect Year 1 only under two the â€Å"keep” and â€Å"buy” alternatives. The difference is $8,000 for four years taken together. In particular, note that the $20,000 book value can be omitted from the comparison. yet cross out the entire line; although the column totals are affected, the net difference is still $8,000. 11-15 11-27 (Cont’d. ) 1b.Again, the difference is $8,000: Income Statement s Keep Year 1, 2, 3, 4 Revenues Costs (excluding disposal): other operating costs Depreciation Operating costs of machine Total costs (excluding disposal) Loss on disposal: Book value (â€Å"cost”) emergence (â€Å"revenue”) Loss on disposal Total costs Operating income $150,000 110,000 5,000 15,000 130,000 Four Years Together $600,000 440,000 20,000 60,000 520,000 Buy New Machine Four Years Year Together Year 1 2, 3, 4 $150,000 $150,000 110,000 6,000 9,000 125,000 110,000 6,000 9,000 125,000 $600,000 440,000 24,000 36,000 500,000 20,000* (8,000) 12,000 512,000 $ 88,000 30,000 $ 20,000 520,000 $ 80,000 20,000 (8,000) 12,000 137,000 125,000 $ 13,000 $ 25,000 *As in part (1), the $20,000 book value may be omitted from the comparison without changing the $8,000 difference. This change would mean excluding the depreciation item of $5,000 per year (a additive effect of $20,000) under the â€Å"keep” alternative and excluding the book value item of $20,000 in the loss on disposal computation under the â€Å"buy” alternative. 1c. The $20,000 purchase cost of the old equipment, the revenues, and the other costs are irrelevant because their amounts are common to both alternatives. 2.The net difference would be unaffected. Any number may be substituted for the original $20,000 figure without changing the utmost solvent. Of course, the net cash outflows under both alternatives would be high. The Auto Wash manager strongly blunder outed. However, guardianship the old equipment will increase the cost of the blunder to the cumulative tune of $8,000 over the next four years. 3. Book value is irrelevant in decisions about the replacement of equipment, because it is a past (historical) cost. exclusively past costs are down the drain. Nothing can change what has already been spent or what has already happened. The $20,000 has been spent.How it is subsequently accounted for is irrelevant. The analysis in requirement (1) all the way shows tha t we may completely ignore the $20,000 and still have a correct analysis. The only relevant items are those expected future items that will differ among alternatives. 11-16 11-27 (Cont’d. ) disrespect the economic analysis shown here, many managers would keep the old machine rather than replace it. Why? Because, in many cheeks, the income statements of part (2) would be a read/write head style of evaluating performance. Note that the first-year operating income would be higher under the â€Å"keep” alternative.The conventional collection accounting model might motivate managers toward maximizing their first-year reported operating income at the put down of long-run cumulative weakenment for the organization as a whole. This criticism is often made of the accretion accounting model. That is, the action favored by the â€Å"correct” or â€Å"best” economic decision model may not be taken because the performance-evaluation model is either inconsistent with the decision model or because the focus is on only the short-run part of the performance-evaluation model. There is yet another potential passage of arms etween the decision model and the performance evaluation model. replacement the machine so soon after it is purchased may reflect badly on the manager’s capabilities and performance. Why didn’t the manager search and take the new machine before buying the old machine? Replacing the old machine one day later at a loss may make the manager appear awkward to his or her superiors. If the manager’s bosses have no knowledge of the kick downstairs machine, the manager may prefer to keep the existing machine rather than energetic his or her bosses about the better machine. 11-28 (30 min. Equipment lift versus replacement (A. Spero, adapted). 1. ascendant Exhibit 11-28 presents a cost comparison of the upgrade and replacement alternatives for the three years taken together. It indicates that Pacifica Corpo ration should replace the return line because it is better off by $180,000 by surrogate rather than upgrading. SOLUTION EXHIBIT 11-28 Comparing Upgrade and transpose Alternatives Three Years Together Upgrade Replace Difference (1) (2) (3) = (1) †(2) $2,160,000 $1,620,000 $ 540,000 (90,000) 90,000 300,000 $2,460,000 750,000 $2,280,000 (450,000) $ 180,000 Cash-operating costs, $12; $9 ? 80,000 modern disposal price One-time capital costs, written off sporadically as depreciation Total relevant costs Note that sales and book value of the existing machine are the same under both alternatives and, hence, are irrelevant. 11-17 11-28 (Cont’d. ) 2a. Suppose the capital expenditure to replace the fruit line is $X. employ data from solution Exhibit 11-28, the cost of replacing the payoff line is equal to $1,620,000 †$90,000 + $X. Using data from Solution Exhibit 11-28, the cost of upgrading the production line is equal to $2,160,000 + $300,000 = $2,460,000.We need t o find $X such that $1,620,000 †$90,000 + $X = $2,460,000 that is, $1,530,000 + $X = $2,460,000 that is, $X = $2,460,000 †$1,530,000 or $X = $ 930,000 Pacifica would prefer replacing, rather than upgrading, the existing line if the replacement cost of the new line does not exceed $930,000. Note that the $930,000 can also be obtained by adding the $180,000 calculated in requirement 1 to the replacement cost of $750,000 for the new machine assumed in requirement 1 ($750,000 + $180,000 = $930,000). 2b. Suppose the units produced and sold each year equal y.Using data from Solution Exhibit 11-28, the cost of replacing the production line is $9y †$90,000 + $750,000, while the cost of upgrading is $12y + $300,000. We ferment for the y at which the two costs are the same. $9y †$90,000 + $750,000 $9y + $660,000 $3y y = = = = $12y + $300,000 $12y + $300,000 $360,000 120,000 units For expected production and sales of less than 120,000 units over 3 years (40,000 units per y ear), the upgrade alternative is cheaper. When production and sales are low, the higher operating costs of upgrading are more than offset by the significant savings in capital costs when upgrading relative to replacing.For expected production and sales surpassing 120,000 units over 3 years, the replace alternative is cheaper. For high output, the benefits of the lower operating costs of replacing, relative to upgrading, exceed the higher capital costs. 3. Operating income for the first year under the upgrade and replace alternatives are as follows: Upgrade Replace Revenues $25 ? 60,000 $1,500,000 $1,500,000 Cash-operating costs $12 ? 60,000, $9 ? 60,000 720,000 540,000 a b Depreciation 220,000 250,000 c Loss on disposal of old production line â€â€ 270,000 Total costs 940,000 1,060,000 Operating income $ 560,000 $ 440,000 a $360,000 + $300,000) ? 3 = $220,000 $750,000 ? 3 = $250,000 c Book value †current disposal price = $360,000 †$90,000 = $270,000 b first-year oper ating income is higher by $120,000 under the upgrade alternative. If first years operating income is an important component of Azingers bonus, he would prefer the upgrade over the replace alternative even though the decision model (in requirement 1) prefers the replace to the upgrade alternative. This exercise illustrates the conflict among the decision model and the performance evaluation model. 11-18 11-29 (30 min. Contribution approach, relevant costs. 1. Average one-way make per rider Commission at 8% of $500 Net cash to denudate Frisco per ticket Average number of passengers per flying Revenues per flight ($460 ? 200) Food and drinkable cost per flight ($20 ? 200) Total contribution margin from passengers per flight 2. If fare is Commission at 8% of $480 Net cash per ticket Food and beverage cost per ticket Contribution margin per passenger Total contribution margin from passengers per flight ($421. 60 ? 212) All other costs are irrelevant. $ 500 40 $ 460 ? 200 $92,000 4, 000 $88,000 $480. 0 38. 40 441. 60 20. 00 $421. 60 $89,379. 20 On the basis of quantitative factors alone, advertize Frisco should decrease its fare to $480 because reducing the fare gives Air Frisco a higher contribution margin from passengers ($89,379. 20 versus $88,000). 3. In evaluating whether Air Frisco should charter its categorical to Travel International, we compare the charter alternative to the solution in requirement 2 because requirement 2 is preferred to requirement 1. Under requirement 2, contribution from passengers Deduct fuel costs Total contribution per flight $89,379. 0 14,000. 00 $75,379. 20 Air Frisco gets $74,500 per flight from chartering the vapid to Travel International. On the basis of quantitative financial factors, Air Frisco is better off not chartering the plane and, instead, lowering its own fares. Other qualitative factors that Air Frisco should consider in coming to a decision are: a. The lower risk from chartering its plane relative to the uncer tainties regarding the number of passengers it might get on its scheduled flights. b. The stability of the relationship mingled with Air Frisco and Travel International.If this is not a long-term arrangement, Air Frisco may lose current market dish out and not benefit from sustained charter revenues. 11-19 11-30 (30 min. ) Relevant costs, opportunity costs. 1. Easyspread 2. 0 has a higher relevant operating income than Easyspread 1. 0. Based on this analysis, Easyspread 2. 0 should be introduced immediately: Easyspread 1. 0 $150 $ 0 0 $150 Easyspread 2. 0 $185 $25 25 $160 Relevant revenues Relevant costs: Manuals, diskettes, compact discs Total relevant costs Relevant operating income Reasons for other cost items being irrelevant are: Easyspread 1. • Manuals, diskettesâ€already incurred • organic evolution costsâ€already incurred • market and administrativeâ€fixed costs of period Easyspread 2. 0 • Development costsâ€already incurred • m arket and validationâ€fixed costs of period Note that total marketing and administration costs will not change whether Easyspread 2. 0 is introduced on July 1, 2003, or on October 1, 2003. 2. Other factors to be considered: a. Customer satisfaction. If 2. 0 is significantly better than 1. 0 for its customers, a customer driven organization would immediately introduce it unless other factors offset this incline towards â€Å"do what is best for the customer. b. Quality level of Easyspread 2. 0. It is critical for new software products to be fully debugged. Easyspread 2. 0 must be error-free. Consider an immediate kick out only if 2. 0 passes all quality tests and can be fully supported by the salesforce. c. vastness of being perceived to be a market leader. Being first in the market with a new product can give sweet basil Software a â€Å"first-mover advantage,” e. g. , capturing an initial large share of the market that, in itself, causes future potential customers to black market towards purchasing Easyspread 2. 0. Moreover, by introducing 2. earlier, sweet basil can get quick feedback from users about ways to further purify the software while its competitors are still operative on their own first versions. Moreover, by fix in early customers, Basil may increase the likelihood of these customers also buying future upgrades of Easyspread 2. 0. d. esprit de corps of developers. These are key people at Basil Software. Delaying introduction of a new product can hurt their morale, especially if a competitor then preempts Basil from being viewed as a market leader. 11-20 11-31 (20 min. ) Opportunity costs (H. Schaefer). 1.The opportunity cost to wolverine of producing the 2,000 units of Orangebo is the contribution margin lost on the 2,000 units of Rosebo that would have to be forgone, as computed below: Selling price Variable costs per unit: Direct materials Direct manufacturing labor Variable manufacturing overhead Variable marketing costs C ontribution margin per unit Contribution margin for 2,000 units $20 $2 3 2 4 11 $ 9 $ 18,000 The opportunity cost is $18,000. Opportunity cost is the level best contribution to operating income that is forgone (rejected) by not using a limited resource in its next-best alternative use. . Contribution margin from manufacturing 2,000 units of Orangebo and purchasing 2,000 units of Rosebo from buckeye is $16,000, as follows: Manufacture Orangebo Selling price Variable costs per unit: Purchase costs Direct materials Direct manufacturing labor Variable manufacturing costs Variable marketing overhead Variable costs per unit Contribution margin per unit Contribution margin from selling 2,000 units of Orangebo and 2,000 units of Rosebo $15 †2 3 2 2 9 $ 6 $12,000 Purchase Rosebo $20 14 Total 4 18 $ 2 $4,000 $16,000As calculated in requirement 1, wolverines contribution margin from continuing to manufacture 2,000 units of Rosebo is $18,000. Accepting the Miami Company and Buckeye offe r will cost Wolverine $2,000 ($16,000 †$18,000). Hence, Wolverine should refuse the Miami Company and Buckeye Corporations offers. 3. The minimum price would be $9, the sum of the incremental costs as computed in requirement 2. This follows because, if Wolverine has surplus capacity, the opportunity cost = $0. For the short-run decision of whether to accept Orangebos offer, fixed costs of Wolverine are irrelevant.Only the incremental costs need to be cover for it to be worthwhile for Wolverine to accept the Orangebo offer. 11-21 11-32 (30-40 min. ) overlap mix, relevant costs (N. Melumad, adapted). 1. Selling price Variable manufacturing cost per unit Variable marketing cost per unit Total variable costs per unit Contribution margin per unit Contributi on margin per hour of the constraine d resource (the regular machine) Total contribution margin from selling only R3 or only HP6 R3: $25 ? 50,000; HP6: $30 ? 0,000 less(prenominal) term of a contract costs of high-precision mach ine to produce and sell HP6 Net relevant benefit R3 $100 60 15 75 $ 25 $25 = $25 1 HP6 $150 100 35 135 $ 15 $15 = $30 0. 5 $1,250,000 ? $1,250,000 $1,500,000 300,000 $1,200,000 Even though HP6 has the higher contribution margin per unit of the constrained resource, the fact that Pendleton must incur additional costs of $300,000 to achieve this higher contribution margin means that Pendleton is better off using its entire 50,000-hour capacity on the regular machine to produce and sell 50,000 units (50,000 hours ? 1 hour per unit) of R3.The additional contribution from selling HP6 rather than R3 is $250,000 ($1,500,000 ? $1,250,000), which is not enough to cover the additional costs of leasing the high-precision machine. Note that, because all other overhead costs are fixed and cannot be changed, they are irrelevant for the decision. 2. If capacity of the regular machines is increased by 15,000 machine-hours to 65,000 machine-hours (50,000 originally + 15,000 new), the net relevant be nefit from producing R3 and HP6 is as follows: R3 Total contribution margin from selling only R3 or only HP6 R3: $25 ? 5,000; HP6: $30 ? 65,000 Less Lease costs of high-precision machine that would be incurred if HP6 is produced and sold Less Cost of increasing capacity by 15,000 hours on regular machine Net relevant benefit HP6 $1,625,000 $1,950,000 300,000 150,000 150,000 $1,475,000 $1,500,000 11-22 11-32 (Cont’d. ) Investing in the additional capacity increases Pendleton’s operating income by $250,000 ($1,500,000 calculated in requirement 2 minus $1,250,000 calculated in requirement 1), so Pendleton should add 15,000 hours to the regular machine.With the otiose capacity available to it, Pendleton should use its entire capacity to produce HP6. Using all 65,000 hours of capacity to produce HP6 rather than to produce R3 generates additional contribution margin of $325,000 ($1,950,000 ? $1,625,000) which is more than the additional cost of $300,000 to lease the highpre cision machine. Pendleton should therefore produce and sell 130,000 units of HP6 (65,000 hours ? 0. 5 hours per unit of HP6) and zero units of R3. 3.R3 Selling price Variable manufacturing costs per unit Variable marketing costs per unit Total variable costs per unit Contribution margin per unit Contributi on margin per hour of the constraine d resource (the regular machine) $100 60 15 75 $ 25 $25 = $25 1 HP6 $150 100 35 135 $ 15 S3 $120 70 15 85 $ 35 $15 $35 = $30 = $35 0 . 5 1 The first step is to compare the operating profits that Pendleton could earn if it accepted the Carter Corporation offer for 20,000 units with the operating profits Pendleton is currently earning.S3 has the highest contribution margin per hour on the regular machine and requires no additional investment such as leasing a high-precision machine. To produce the 20,000 units of S3 requested by Carter Corporation, Pendleton would require 20,000 hours on the regular machine resulting in contribution margin of $35 ? 20,000 = $700,000. Pendleton now has 45,000 hours available on the regular machine to produce R3 or HP6. R3 Total contribution margin from selling only R3 or only HP6 R3: $25 ? 45,000; HP6: $30 ? 45,000 Less Lease osts of high-precision machine to produce and sell HP 6 Net relevant benefit HP6 $1,125,000 $1,350,000 ? 300,000 $1,125,000 $1,050,000 Pendleton should use all the 45,000 hours of available capacity to produce 45,000 units of R3. Thus, the product mix that maximizes operating income is 20,000 units of S3, 45,000 units of R3, and zero units of HP6. This optimal mix results in a contribution margin of $1,825,000 ($700,000 from S3 and $1,125,000 from R3). Relative to requirement 2, operating income increases by $325,000 ($1,825,000 minus $1,500,000 calculated in requirement 2).Hence, Pendleton should accept the Carter Corporation business and depict 20,000 units of S3. 11-23 11-33 (35â€40 min. ) Discontinuing a product line, selling more units. 1. The incremental reven ue losses and incremental savings in cost by discontinuing the Tables product line follows: Difference: Incremental (Loss in Revenues) and Savings in Costs from Dropping Tables bloodline Revenues Direct materials and direct manufacturing labor Depreciation on equipment trade and diffusion General administration Corporate purpose costs Total costs Operating income (loss) $(500,000) 300,000 0 70,000 0 0 370,000 $(130,000)Dropping the Tables product line results in revenue losses of $500,000 and cost savings of $370,000. Hence, Grossman Corporation’s operating income will be $130,000 higher if it does not drop the Tables line. Note that, by dropping the Tables product line, Home Furnishings will save none of the depreciation on equipment, common administration costs, and corporate magnate costs, but it will save variable manufacturing costs and all marketing and dispersal costs on the Tables product line. . Grossman’s will generate incremental operating income of $ 128,000 from selling 4,000 additional tables and, hence, should try to increase table sales. The calculations follow: Incremental Revenues (Costs) and Operating Income $500,000 (300,000) (42,000)* (30,000)† 0** 0** $128,000 Revenues Direct materials and direct manufacturing labor Cost of equipment written off as depreciation market and distribution costs General administration costs Corporate dapple costs Operating income Note that the additional costs of equipment are relevant future costs for the â€Å"selling more tables decision” because they set incremental future costs that differ between the alternatives of selling and not selling additional tables. †Current marketing and distribution costs which varies with number of shipments = $70,000 †$40,000 = $30,000. As the sales of tables double, the number of shipments will double, resulting in incremental marketing and distribution costs of (2 ? $30,000) †$30,000 = $30,000. *General administration and corporate office costs will be unaffected if Grossman decides to sell more tables. Hence, these costs are irrelevant for the decision. 11-24 11-34 (30 min. ) Discontinuing or adding another division (continuation of 11-33). 1. Solution Exhibit 11-34, Column 1, presents the relevant loss of revenues and the relevant savings in costs from closing the northern office. As the calculations show, Grossman’s operating income would decrease by $140,000 if it shut down the Yankee particle (loss in revenues of $1,500,000 versus savings in costs of $1,360,000).Grossman will save variable manufacturing costs, marketing and distribution costs, and division oecumenic administration costs by closing the northerly segment but equipment-related depreciation and corporate office allocations are irrelevant to the decision. Equipment-related costs are irrelevant because they are past costs (and the equipment has zero disposal price). Corporate office costs are irrelevant because Grossman will not save any actual corporate office costs by closing the Federal Division. The corporate office costs that used to be allocated to the northern Division will be allocated to other divisions. . The manager at corporate provide responsible for making the decision is evaluated on Northern Division’s operating income after allocating corporate office costs. The manager will evaluate the options as follows: If the manager does not close the Northern Division in 2002, the division is expected to show an operating loss of $110,000 after allocating all corporate office costs. If the manager closes the Northern Division, the division would show an operating loss of $100,000 from the write off of equipment.It would show no revenues and, hence, would not attract any corporate office costs. It would also not incur any manufacturing, marketing and distribution, and general administration costs. From the viewpoint of maximizing the operating income against which the manager is eva luated, the manager would prefer to shut down Northern Division (and show an operating loss of $100,000 instead of an operating loss of $110,000 by operating it). In fact, the manager might argue that even the $100,000 operating loss is more a way out of accounting write offs rather than a â€Å"real” operating loss.Recall from requirement 1 that the decision model favored keeping the Northern Division open. The performance evaluation model of the manager making the decision suggests that the Northern Division be closed. Hence, the performance evaluation model is inconsistent with the decision model. 3. Solution Exhibit 11-34, Column 2, presents the relevant revenues and relevant costs of opening the southerly Division (a division whose revenues and costs are expected to be identical to the revenues and costs of the Northern Division).Grossman should open the Confederate Division because it would increase operating income by $40,000 (increase in relevant revenues of $1,500, 000 and increase in relevant costs of $1,460,000). The relevant costs include direct materials, direct manufacturing labor, marketing and distribution, equipment, and division general administration costs but not corporate office costs. Note, in particular, that the cost of equipment written off as depreciation is relevant because it is an expected future cost that Grossman will incur only if it opens the Southern Division.Corporate office costs are irrelevant because actual corporate office costs will not change if Grossman opens the Southern Division. The current corporate staff will be able to oversee the Southern Division’s operations. Grossman will allocate some corporate office costs to the Southern Division but this allocation represents corporate office costs that are already currently being allocated to some other division. Because actual total corporate office costs do not change, they are irrelevant to the division. 1-25 11-34 (Cont’d. ) SOLUTION EXHIBIT 11- 34 Relevant-Revenue and Relevant-Cost Analysis for Closing Northern Division and Opening Southern Division Incremental (Loss in Revenues) Revenues and and Savings in (Incremental Costs) Costs from Closing from Opening Northern Division Southern Division (1) (2) $(1,500,000) $1,500,000 825,000 0 205,000 330,000 0 1,360,000 $ (140,000) (825,000) (100,000) (205,000) (330,000) 0 (1,460,000) $ 40,000Revenues Variable direct materials and direct manufacturing labor costs Equipment cost written off as depreciation Marketing and distribution costs Division general administration costs Corporate office costs Total costs Effect on operating income (loss) 11-35 (30â€40 min. ) Make or buy, un cognise level of volume (A. Atkinson). 1. let X = 1 starter assembly. The variable costs required to manufacture 150,000X are: Direct materials Direct manufacturing labor Variable manufacturing overhead Total variable costs $200,000 150,000 100,000 $450,000 The variable costs per unit are $450,000 ? 150 ,000 = $3. 00 per unit. 11-26 11-35 (Cont’d. The data can be presented in both â€Å"all data” and â€Å"relevant data” formats: All Data Relevant Data Alternative Alternative Alternative Alternative 1: 2: 1: 2: Buy Make Buy Make Variable manufacturing costs $ 3X †$ 3X †Fixed general manufacturing overhead 150,000 $150,000 ††Fixed overhead, avoidable 100,000 †100,000 †Division 2 managers profits 40,000 50,000 40,000 $50,000 Division 3 managers salary 50,000 †50,000 †Purchase cost, if bought from Tidnish Electronics †4X †4X Total $340,000 $200,000 $190,000 $50,000 + $ 3X + $ 4X + $ 3X + $ 4X The number of units at which the costs of make and buy are equivalent is: All data analysis: or Relevant data analysis: $340,000 + $3X = $200,000 + $4X X = 140,000 $190,000 + $3X = $50,000 + $4X X = 140,000Assuming cost minimization is the objective, then: • If production is expected to be less than 140,000 units, it is preferable to buy units from Tidnish. • If production is expected to exceed 140,000 units, it is preferable to manufacture internally (make) the units. • If production is expected to be 140,000 units, this is the composure point between buying units from Tidnish and internally manufacturing (making) the units. 2. The information on the storage cost, which is avoidable if self-manufacture is discontinued, is relevant; these storage charges represent current outlays that are avoidable if self-manufacture is discontinued. swallow these $50,000 charges are represented as an opportunity cost of the make alternative.The costs of internal manufacture that bear this $50,000 opportunity cost are: All data analysis: Relevant data analysis: All data analysis: Relevant data analysis: $390,000 + $3X $240,000 + $3X $390,000 + $3X X $240,000 + $3X X = = = = $200,000 + $4X 190,000 $50,000 + $4X 190,000 The number of units at which the costs of make and buy are equivalent is: If prod uction is expected to be less than 190,000, it is preferable to buy units from Tidnish. If production is expected to exceed 190,000, it is preferable to manufacture the units internally. 11-27 11-36 (30 min. ) Make versus buy, activity-based costing, opportunity costs (N. Melumad and S. Reichelstein, adapted). 1. Relevant costs under buy alternative: Purchases, 10,000 ? $8. 0 Relevant costs under make alternative: Direct materials Direct manufacturing labor Variable manufacturing overhead Inspection, setup, materials handling Machine rent Total relevant costs under make alternative $82,000 $40,000 20,000 15,000 2,000 3,000 $80,000 The allocated fixed fix administration, taxes, and insurance will not change if virtuoso makes or buys the chains. Hence, these costs are irrelevant to the make-or-buy decision. The analysis indicates that Ace should not buy the chains from the after-school(prenominal) supplier. 2. Relevant costs under the make alternative: Relevant costs (as computed in requirement 1) Relevant costs under the buy alternative: Costs of purchases (10,000 ? $8. 0) Additional fixed costs Additional contribution margin from using the space where the chains were made to upgrade the bicycles by adding mud flaps and reflector bars, 10,000 ? ($20 †$18) Total relevant costs under the buy alternative $80,000 $82,000 16,000 (20,000) $78,000 Ace should now buy the chains from an outside vendor and use its own capacity to upgrade its own bicycles. 3. In this requirement, the decision on mud flaps and reflectors is irrelevant to the analysis. Cost of manufacturing chains: Variable costs, ($4 + $2 + $1. 50 = $7. 50) ? 6,200 Batch costs, $200/batcha ? 8 batches Machine rent Cost of buying chains, $8. 20 ? 6,200 a $46,500 1,600 3,000 $51,100 $50,840 $2,000 ? 10 batches In this case, Ace should buy the chains from the outside vendor. 11-28 11-37 (60 min. Multiple choice; comprehensive problem on relevant costs. You may wish to assign only some of the parts. Pe r Unit Fixed Manufacturing costs: Direct materials Direct manufacturing labor Variable manufac. indirect costs Fixed manufac. indirect costs Marketing costs: Variable Fixed Total $1. 00 1. 20 0. 80 0. 50 $1. 50 0. 90 Variable $3. 50 $0. 50 $3. 00 2. 40 $5. 90 0. 90 $1. 40 1. 50 $4. 50 1. (b) $3. 50 Manufacturing Costs Variable $3. 00 Fixed 0. 50 Total $3. 50 2. (e) no(prenominal) of the above. Decrease in operating income is $16,800. Differential $1,440,000+ $ 91,200* 720,000 + 360,000 + 1,080,000+ 360,000 †120,000 216,000 336,000 $ 24,000 New Old Revenues 240,000 ? $6. 0 Variable costs Manufacturing 240,000 ? $3. 00 Marketing and other 240,000 ? $1. 50 Variable product costs Contribution margin Fixed costs: Manufacturing $0. 50 ? 20,000 ? 12 mos. = Marketing and other $0. 90 ? 240,000 Fixed product costs Operating income *Incremental revenue: $5. 80 ? 24,000 Deduct price reduction $0. 20 ? 240,000 264,000 ? $5. 80 792,000 396,000 1,188,000 343,200 120,000 216,000 $ 7,200 72,0 00264,000 ? $3. 00 36,000264,000 ? $1. 50 108,000 16,800 â€â€ â€â€ â€â€ †$ 16,800 3 $139,200 48,000 $ 91,200 3. (c) $3,500 If this order were not landed, fixed manufacturing overhead would be underallocated by $2,500, $0. 50 per unit ? 5,000 units.Therefore, taking the order increases operating income by $1,000 plus $2,500, or $3,500. 11-29 11-37 (Cont’d. ) Another way to present the same idea follows: Revenues will increase by (5,000 ? $3. 50 = $17,500) + $1,000 Costs will increase by 5,000 ? $3. 00 Fixed overhead will not change Change in operating income $18,500 15,000 †$ 3,500 Note that this answer to (3) assumes that variable marketing costs are not influenced by this contract. These 5,000 units do not displace any regular sales. 4. (a) $4,000 less ($7,500 †$3,500) Government Contract As above $3,500 Regular Channels Sales, 5,000 ? $6. 00 Increase in costs: Variable costs only: Manufacturing, 5,000 ? $3. 0 $15,000 Marketing, 5,000 ? $1. 5 0 7,500 Fixed costs are not affected Change in operating income 5. (b) $4. 15 $30,000 22,500 $ 7,500 Differential costs: Variable: Manufacturing Shipping Fixed: $4,000 ? 10,000 $3. 00 0. 75 $3. 75 ? 10,000 0. 40 ? 10,000 4,000 $4. 15 ? 10,000 $41,500 $37,500 Selling price to break even is $4. 15 per unit. 6. (e) $1. 50, the variable marketing costs. The other costs are past costs, and are, therefore, irrelevant. None of these. The correct answer is $3. 55. This part always gives students trouble. The short-cut solution below is followed by a longer solution that is helpful to students. 7. (e) 11-30 11-37 (Cont’d. Short-cut solution: The highest price to be paid would be measured by those costs that could be avoided by halting production and subcontracting: Variable manufacturing costs Fixed manufacturing costs saved $60,000 ? 240,000 Marketing costs (0. 20 ? $1. 50) Total costs long-lasting but clearer solution: Comparative Annual Income Statement Present Difference Propose d Revenues Variable costs: Manufacturing, 240,000 ? 3. 00 Marketing and other, 240,000 ? $1. 50 Variable costs Contribution margin Fixed costs: Manufacturing Marketing and other Total fixed costs Operating income $1,440,000 720,000 360,000 1,080,000 360,000 120,000 216,000 336,000 $ 24,000 $ †+132,000 †72,000 $1,440,000 852,000* 288,000 1,140,000 300,000 60,000 216,000 276,000 $ 24,000 $3. 00 0. 25 0. 30 $3. 55 †60,000 $ 0 This solution is obtained by choice in the above schedule with all the known figures and working â€Å"from the bottom up” and â€Å"from the top down” to the unknown purchase figure. level best variable costs that can be incurred, $1,140,000 †$288,000 = maximum purchase costs, or $852,000. Divide $852,000 by 240,000 units, which yields a maximum purchase price of $3. 55. 11-31 11-38 (15 min. ) Make or buy (continuation of 11-37). The maximum price Class Company should be voluntary to pay is $3. 9417 per unit. Expected unit pro duction and sales of new product must be fractional of the old product (1/2 ? 240,000 = 120,000) because the fixed manufacturing overhead rate for the new product is twice that of the fixed manufacturing overhead rate for the old product.Proposed Make New Old Present convergence Product Total Revenues $1,440,000 $1,080,000 $1,440,000 $2,520,000 Variable (or purchase) costs: Manufacturing 720,000 600,000 946,000* 1,546,000 Marketing and other 360,000 240,000 288,000 528,000 Total variable costs 1,080,000 840,000 1,234,000 2,074,000 Contribution margin 360,000 240,000 206,000 446,000 Fixed costs: Manufacturing 120,000 120,000 120,000 Marketing and other 216,000 60,000 216,000 276,000 Total fixed costs 336,000 180,000 216,000 396,000 Operating income $ 24,000 $ 60,000 $ (10,000) $ 50,000 *This is an example of opportunity costs, whereby subcontracting at a price well above the $3. 50 current manufacturing (absorption) cost is still desirable because the old product will be displaced in manufacturing by a new product that is more profitable.Because the new product promises an operating income of $60,000 (ignoring the irrelevant problems of how fixed marketing costs may be newly reallocated between products), the old product can sustain up to a $10,000 loss and still help win managements overall objectives. utmost costs that can be incurred on the old product are $1,440,000 plus the $10,000 loss, or $1,450,000. Maximum purchase cost: $1,450,000 †($288,000 + $216,000) = $946,000. Maximum purchase cost per unit: $946,000 ? 240,000 units = $3. 9417 per unit. Alternative reckoning Operating income is $9. 00 †$8. 50 = $0. 50 per unit for 120,000 new units Target operating income Maximum loss allowed on old product Maximum loss per unit allowed on old product, $10,000 ? 40,000 = Selling price of old product Allowance for loss Total costs allowed per unit Continuing costs for old product other than purchase cost: Fixed manufacturing costsâ€â€all trans ferred to new product Variable marketing costs Fixed marketing costs Maximum purchase cost per unit $60,000 50,000 $10,000 $0. 0417 $6. 0000 0. 0417 6. 0417 $ †1. 20 0. 90 2. 1000 $3. 9417 11-32 11-39 (30 min. ) Appendix). 1. Optimal production plan, computer manufacturer (Chapter X = Units of printers Y = Units of desktop computers Objective: maximize total contribution margin of $200X + $100Y Constraints: For production line 1: 6X + 4Y ? 24 For production line 2: 10X ? 0 Sales of X and Y: X †Y ? 0 Negative production unacceptable: X 0 ? Y ? 0 2. Solution Exhibit 11-39 presents a graphical summary of the relationships. The sales-mix restraint here is somewhat unusual. The X †Y ? 0 line is the one going upward at a 45-degree angle from the origin. The optimal corner is the point (2, 3), 2 printers and 3 computers. The corner point where the production line 1 and production line 2 constraints meet is X = 2, Y = 3 that can be calculated by solving: 6X + 4Y = 24 (1) Pr oduction line 1 constraint 10X = 20 (2) Production line 2 constraint From (2) X = 20 ? 10 = 2 change for X in (1) 6 ? 2 + 4Y = 24 4Y = 24 †12 = 12 Y = 12 ? = 3 The corner point where the production line 2 constraint and the product-mix constraint meet is X = 2, Y = 2 that can be calculated by solving: 10X = 20 (2) Production line 2 constraint X †Y = 0 (3) Product-mix constraint From (2) X = 20 ? 10 = 2 Substituting for X in (3) Y = 2 Using the trial-and-error method: Trial 1 2 3 4 Corner (X; Y) (0; 0) (2; 2) (2; 3) (0; 6) Total Contribution Margin $ 200(0) + $100(0) = $ 0 200(2) + 100(2) = 600 200(2) + 100(3) = 700 200(0) + 100(6) = 600 The optimal solution that maximizes operating income is 2 printers and 3 computers. 11-33 11-39 (Cont’d. ) SOLUTION EXHIBIT 11-39 Graphic Solution to Find Optimal Mix, Information Technology, Inc. Product Line 1 Constraint Product Y Production in Units 6 Product Line 2\r\n'