Solution manual cost and managerial accounting 3rd by barfield relevant costing
Bạn đang xem bản rút gọn của tài liệu. Xem và tải ngay bản đầy đủ của tài liệu tại đây (283.13 KB, 29 trang )
Chapter 12
Relevant Costing
Questions
1.
A relevant cost is a cost that is applicable, pertinent, or
logically related to making a decision. In business, managers use
the concept of relevant costs in the allocation of resources.
Relevant costs to be considered by the directors of a
hospital in purchasing a new Xray machine would include the
investment cost of the machine as well as its operating costs.
Other relevant factors to the decision would be the life of the
machine, productive capacity and speed of operations, repairs and
maintenance, degree of technology and probability of obsolescence
as well as any incremental revenues or savings to the hospital.
An alternative would be to lease an Xray machine or contract
with another hospital for Xray services.
2.
A relevant cost is (1) associated with a decision that is
under consideration, (2) important to the decision maker, and
(3) bears on the future. All future costs are not relevant
because some are common to all alternatives under
consideration.
All relevant costs are not found in the accounting records.
In particular, it is unlikely that opportunity costs will be
found in the accounting records.
3.
An opportunity cost is a benefit that is sacrificed to pursue
one alternative over another. In the case of the makeorbuy
decision, an opportunity cost associated with the “make”
alternative is the rental value of the production facilities.
4.
This question cannot be answered out of the context of a
specific case because, in some cases, quantitative factors may
be more important than qualitative factors although, in
others, the opposite is true. Usually, both quantitative and
qualitative factors are considered when making a decision.
Quantitative factors are often reviewed first because these
are frequently more definitively addressable; the more
subjective qualitative factors are usually addressed second.
In some business situations, a decision that was
acceptable from a quantitative standpoint might not be chosen
due to qualitative reasons; a decision that was unacceptable
quantitatively would probably not even be considered
61
62
Chapter 12
Relevant Costing
qualitatively.
62
Chapter 12
Relevant Costing
5.
6.
7.
8.
63
It is true that a particular cost can be relevant for one
purpose, but not for other purposes. One example is fixed
factory overhead per unit. Fixed overhead is relevant to
determining product cost for financial statement purposes, but
may have little or no relevance to determining the bid price
of products in a special order situation. Another example is a
sunk historical cost of a fixed asset. Such a cost is relevant
to determining product line operating results, but is
irrelevant in deciding whether to replace that particular
fixed asset. A final example is the purchase price of a
machine. Before a machine is purchased, its price is relevant
to the choice of which machine to buy; once the fixed asset
has been acquired, its purchase price becomes a sunk cost that
is no longer relevant to any decision about keeping or selling
that machine.
No, sunk costs are never relevant in decision making because
sunk costs cannot, by definition, be "undone."
The only relevant item of information is the current market
value of the stereo, $150. The $500 historical cost is not
relevant because it is a sunk cost. There is no decision
alternative that can undo the incurrence of that cost. The
$375 replacement cost of the stereo is not relevant because
the decision at hand does not involve an alternative of
replacing the stereo. The only alternatives under
consideration are (1) sell and (2) keep the stereo.
Kelly should consider the following factors in her decision:
Insource tortillas:
The incremental production costs of each unit (direct
material, direct labor, variable factory overhead, and
incremental or additional fixed factory overhead)
Availability of production capacity
Opportunity costs of using facilities for other purposes
Costs of storage space
Taste or quality of her tortillas as compared to Ricardo's
Outsource tortillas:
Net purchase cost (price less discount plus shipping,
etc.)
Cost of storage space
Reliability of source of supply
Ability to control quality of tortillas
Delivery time
Future bargaining position with supplier
Concerns about possible future price changes
64
Chapter 12
Relevant Costing
9.
A scarce resource is any input that constrains production
capacity. In the short run, any constraint can be binding and
the tightest constraint changes over time. For example, in a
labor strike, direct labor may be the most constrained
resource. If a machine breaks down, the conversion operation
performed by that machine may be the most binding constraint
on capacity, and if a supplier becomes bankrupt, certain
materials may become the most binding constraint.
10.
Sales commissions could be based on contribution margin
generated by each salesperson. This policy would motivate
salespersons to sell the products that benefit the company's
profit the most. Recordkeeping would be a little more
difficult and the sales personnel may not generate quite as
many dollars of commissions this way, however. An alternative
would be to stipulate groupings of products into most
desirable, moderately desirable, and least desirable to be
sold while setting the commissions commensurate with such
classifications. The drawback would be that the salespeople
would have to know the category within which each product
falls and the recordkeeping would be significantly more
extensive.
11.
Because sales volume is linked to sales price through the
elasticity of demand. A greater volume change will follow a
price change for a product that has high elasticity than will
follow a price change for a product with low demand
elasticity.
12.
A special order decision involves the analysis of a
nonrecurring sale of products. The typical circumstance
involves the opportunity to sell products outside of the
normal marketing area or to a onetime customer. The usual
analysis involves a consideration of incremental costs and
incremental revenues as well as the effect of the proposed
sale on existing business.
Chapter 12
Relevant Costing
65
13.
Avoidable fixed costs are those fixed costs that could be
eliminated should a particular product line be discontinued.
Because they are avoidable, they are relevant to a decision of
whether to keep or eliminate a product line.
Sunk direct fixed costs, while directly associated with a
particular product line, cannot be avoided even if the product
line is discontinued. Because the commitment to the cost was
made in the past and is irrevocable, such sunk fixed costs are
irrelevant to the decision of whether to keep or eliminate a
product line.
Common fixed costs are incurred at an organizational
level above that of the segment or product line under
consideration. As such, these common fixed costs are not
relevant to product line continuance or discontinuance. These
costs are incurred to "service" several product lines or
segments. If common fixed costs could be eliminated or avoided
if a product line were eliminated, then they could (under this
unusual situation) be considered relevant.
14.
Lazlow Optical should determine whether the negative segment
margin is being caused by temporary economic conditions or is
likely to continue indefinitely. Additionally, the company
should determine what the impact will be on the sale of its
other products and whether it is necessary to keep this camera
on the market so that its customers won’t turn to the
offerings of competitors.
15.
Segment margin is more important in making decisions about
whether to keep or eliminate a product line because the costs
deducted in arriving at segment margin include only relevant
costs (total direct variable expenses and avoidable fixed
expenses). The costs presented below the level of segment
margin to derive product line operating results are irrelevant
costs (sunk direct fixed costs) because such costs could not
be avoided or eliminated should the product line be
discontinued.
16.
Linear programming is used as an aid in complex decisions that
involve a single, identifiable objective function and multiple
decision constraints.
17.
Usually, the objective function is expressed to either
maximize profits, segment margin, or contribution margin, or
minimize costs.
18.
The nonnegativity constraints require that physical inputs to
a production activity cannot exist in negative quantities.
When using a graphical approach, it is not necessary to
express the nonnegativity constraints because the analysis is
confined to the upper righthand quadrant, i.e., the quadrant
involving only positivenumber alternatives.
66
Chapter 12
Relevant Costing
Chapter 12
Relevant Costing
67
19.
A feasible solution satisfies all of the constraints of the
linear programming problem; the optimal solution is simply the
feasible solution that maximizes (or minimizes) the objective
function.
20.
No, resource constraints can be equalities or inequalities.
While most resource constraints are inequalities, it is
possible that a resource constraint can be an equality. For
example, in a cost minimizing dietary formula, it might be
required that dietary fiber equal 14 percent of total intake.
21.
Slack variables represent an unused amount of a resource.
Surplus variables represent over achievement of a greater than
or equal to constraint. Slack variables and surplus variables
can certainly be found in the same linear programming problem.
All that is required for both to appear in the same problem is
that both lessthan and greaterthan constraints appear in the
problem.
Exercises
22.
Consumers are interested in buying the highest quality
products with the most features at the least cost. To
successfully compete for the consumer’s attention, a firm must
aggressively develop and defend core competencies and be
willing to cooperate with other firms in noncore functions.
By taking a more expansive view of cost management, firms can
identify more creative approaches to obtaining quality, cost
and functionality advantages over their competitors. The
ideas featured in the article about the value chain
demonstrate a very creative approach to managing costs,
quality, and environmental impacts by cooperatively working
within new value chains.
23.
Prior to acquiring the production facilities, personnel, and
other infrastructure necessary to produce a product, all costs
are relevant. All costs are avoidable by simply choosing not
to produce the product. After the production facilities are
acquired, some costs are no longer avoidable. Costs such as
depreciation and other costs incurred to maintain the
machinery can no longer be avoided by deciding not to produce.
At this point all variable costs are avoidable and some fixed
selling and administrative costs are avoidable. After
products are completed, nearly all costs are unavoidable. All
variable and fixed production costs are sunk and, therefore,
unavoidable. Some variable selling costs may be avoidable but
fixed selling expenses would be irrelevant.
68
24.
25.
Chapter 12
Relevant Costing
a.
The relevant factors include the difference between the
starting salaries for B.A.s and M.A.s, time until
retirement, time to complete the M.A., and the outof
pocket costs to obtain the M.A.
b.
The opportunity cost associated with earning the master's
degree is two year's of income that could have been
earned with the B.A. degree ($38,300 × 2 = $76,600).
Total cost to get the master’s degree:
Opportunity costs $ 76,600
Outofpocket costs 51,000
Total costs $127,600
The outofpocket cost would include the cost of tuition,
books, lab fees, and other direct educational costs. It
would not include room and board or other living expenses
that would be incurred irrespective of whether the
student works (with the B.A. degree) or attends school.
c.
The other factors to be considered would be the
qualitative factors, e.g., the relative satisfaction,
prestige, and happiness obtained from jobs that can be
secured with each degree, and each alternative's effect
on retirement plans, free time, and travel opportunities.
The only sunk cost is the purchase cost of the lettuce,
$0.50 per head.
a.
b.
The unspoken alternative is to do nothing. Do nothing
might simply mean throwing the heads of lettuce in a
dumpster.
c.
Do Sell to Sell to
Nothing Wholesaler Restaurant
Incremental revenue $ 0 $12,250 $23,520
Incremental costs 0 0 10,000
Incremental benefit $ 0 $12,250 $13,520
Based on a comparison of the incremental benefit
associated with each alternative, the company should sell
the lettuce to the restaurant.
26.
a.
You would explain to Bill that the purchase cost of $110
is not relevant to any decision he can now make regarding
the machine. No matter what action he takes now, the
$110 is not a recoverable cost. In deciding which action
to take, Bill should consider only those costs that can
be avoided by taking one action rather than another. Any
cost that is the same across all decision alternatives
can be ignored; such a cost is not relevant. Ignoring
qualitative factors, Bill should select the alternative
Chapter 12
Relevant Costing
69
that minimizes total relevant costs.
His logical choices are (1) repair the machine at an
estimated cost of $55 and (2) purchase a new machine.
Accordingly, the decision would logically be made by
comparing the purchase cost of a new machine to the
repair cost of the old machine. However, Bill may want
to consider differences in features between the existing
machine and replacement machines as well. He may be
willing to pay more than $55 for a new machine if it has
additional features. This would be a qualitative
consideration.
b.
27.
If labor costs are a major competitive problem for General
Motors, the company should consider ways to avoid incurrence
of labor costs. Assuming that the company cannot legally or
ethically remove benefits from existing employees, the company
needs to develop a longterm plan to reduce labor costs. One
major alternative to achieve labor cost reduction is to
mechanize more operations. By mechanizing operations, GM
could reduce the labor content of its products.
One other major strategy discussed in the article is to
increase the use of outsourcing. Assuming that its potential
supplier of parts and components has lower labor costs, GM
could lower its costs by purchasing parts and components from
vendors rather than making them internally. Traditionally GM
has outsourced to a much smaller extent than its major
competitors. GM could potentially obtain substantial operating
cost reductions by outsourcing to a greater extent.
Outsourcing decisions are made using the makeorbuy analysis
discussed in the chapter.
28.
a.
The sunk cost is the original cost of the old equipment,
$75,000.
b.
Irrelevant future costs include $4,000 of cash operating
costs and the (nondifferential) salvage values in five
years.
c.
The relevant costs include the cost of the new equipment,
$99,000, the current salvage value of the old equipment,
$22,000, and $13,000 of annual cash operating savings.
d.
The opportunity costs associated with keeping the old
equipment include the potential $13,000 savings in cash
operating costs, and the current $22,000 salvage value of
the old equipment.
e.
The incremental cost to purchase the new equipment is the
difference between the purchase cost of the new machine
and the current salvage value of the old machine, $99,000
$22,000 = $77,000
70
Chapter 12
Relevant Costing
71
Chapter 12
Relevant Costing
f.
29.
Some qualitative factors to be considered would include
how the new machine would affect the quality of
production relative to the old machine, effects on
employee morale if purchasing the new machine would
require layoffs, and whether current employees have the
skills to operate the new machine.
Incremental savings: $18,000 × 10 =
Incremental cost of software:
$210,000 $60,000 =
Incremental profit
$180,000
150,000
$ 30,000
From a quantitative perspective, the new software
should be purchased because it will result in increased
profits of $30,000 over the life of the system.
30. a.
b.
Relevant cost to manufacture = $1.20
Relevant cost to buy = $1.00
Advantage of buying: 120,000 × ($1.20 $1.00) = $24,000
Relevant cost to buy:
$1.00
Avoidable variable costs 0.92
Minimum avoidable fixed costs $0.08 per unit
31.
The relevant costs to make the bumpers include only the
variable costs:
Direct material $58 (includes purchased
mounting hardware)
Direct labor 14
Overhead ($36 × 1/3) 12
Total $84
Incremental profit per bumper = $150 $84 = $66
Increased profit from released facilities:
($66 × 4,800) $ 316,800
Increased cost of production on first
100,000 units: ($16 $12) × 100,000 (400,000)
Net profit effect of purchasing mounting hardware $ (83,200)
32. a.
Cost to make: $20,000 + ($2.5 × 25,000) = $ 82,500
Cost to buy: 25,000 × $3 = (75,000)
Advantage of purchasing $ 7,500
b.
Cost to make: $20,000 + ($2.5 × 60,000) = $170,000
Cost to buy: 60,000 × $3 = 180,000
Advantage of making $ 10,000
c.
Point of indifference occurs at the volume level that
equates the cost to make with the cost to buy:
$20,000 + $2.5X = $3X
X = 40,000 units
72
Chapter 12
Relevant Costing
33. a.
Beepers Cell Phones
Contribution margin $ 6 $10
Divide by labor hours per unit ÷1 ÷2
CM per machine hour $ 6 $ 5
Because the company can sell as many of either product as
it can make, it should make only beepers.
34.
b.
The company should consider the need to provide a market
assortment of goods and the possibility of customer
preferences permanently changing to cell phones not made
by Cambridge Electronics. This is acknowledging the
possible longterm consequences to a shortterm problem
solution.
a.
Individual Estate Corporate
Sales price $350 $1,200 $750
Variable costs (50) (200) (150)
Contribution margin $300 $1,000 $600
Contribution margin per hour of professional time:
Individual: $300 ÷ 2 = $150
Estate: $1,000 ÷ 8 = $125
Corporate: $600 ÷ 5 = $120
According to the CM generated per hour of
professional time, Ms. Reed would prefer to satisfy
demand for services in the following order: individual
taxation, estate taxation, and corporate taxation.
Because all of Ms. Reed’s time could be consumed in
providing individual income tax services, all of her time
should be dedicated to providing that service.
b.
Contribution margin: 2,500 × $150 $375,000
Fixed costs (50,000)
Pretax income $325,000
c.
Ms. Reed should carefully consider the relationship
between the three services she offers. For example, much
of the demand for individual and estate tax services may
be generated by the services she provides corporate
clients. It may be because of the quality of her
corporate tax services that demand is generated to
provide individual income and estate tax services.
Accordingly, there may be longterm negative consequences
to providing only individual income tax services.
Chapter 12
Relevant Costing
35.
36.
37.
73
a.
Only the variable production costs are relevant to this
decision: $340 + $60 + $50 = $450.
b.
Incremental revenue $480 × 400 = $192,000
Incremental costs ($340 + $60 + $50) × 400 = (180,000)
Incremental profit $ 12,000
Profits would increase by $12,000 if this special order
were accepted
a.
The relevant costs include the lost contribution margin
associated with the 25 units of regular production that
would be sacrificed to accept the special order, and the
variable production costs for the three special plaques:
Normal sales price (25 × $550) $13,750
Variable costs (25 × $295) (7,375)
Lost contribution margin $ 6,375
Production costs (3 × $970) 2,910
Total costs $ 9,285
b.
Additional sales $ 3,400
Less total relevant costs (9,285)
Incremental loss $(5,885)
a.
Airlines may use this tool more than other carriers
because they have difficulty pursuing strategies other
than pricebased ones. Few airlines are able to
successfully pursue a strategy based on differentiation
because the market has defined price to be the primary
dimension of competition.
b.
When one firm makes a move to capture greater market
share, competitors will not sit idly by while their sales
are lost. Instead, each competitor will react based on
an analysis of their situation. In the case of airlines,
for the reasons discussed in part (a), a pricebased
response is the only response that is likely to be
effective in maintaining market share. Another
similarity between special pricing and discounting fares
is the fact that a reduction in price for one customer
may be a reduction in price that must be offered to all
customers.
c.
The situation is similar to a special pricing decision
because the intention of discounting air fares is to
effectively use idle capacity and to gain demand that
would otherwise go to competition. If an airline can
reduce its price to fill seats that would otherwise be
unfilled, additional revenues are generated that have
only minor associated costs. Because the airlines have a
highly fixed cost structure, incremental costs associated
with increasing capacity utilization are quite small
74
Chapter 12
Relevant Costing
relative to the additional revenues that can be captured.
38. a.
Grooming Training Total
Revenue $600,000 $800,000 $1,400,000
Labor costs (160,000) (288,000) (448,000)
Material costs (80,000) (96,000) (176,000)
CM $360,000 $416,000 $ 776,000
Fixed costs (200,000) (180,000) (380,000)
Income before taxes $160,000 $236,000 $ 396,000
b.
Contribution margin $360,000 $416,000
Divide by sales 600,000 800,000
Contribution margin % 60% 52%
If $1 spent on advertising could increase revenue by
either service by $20, it should be spent on Grooming
because it has a higher contribution margin percent.
c.
Grooming Training
Revenue per hr. $30 $50
Variable costs per hr. (12) (24)
CM per hr. $18 $26
Because $1 will yield $26 in CM if spent on training, but
yield only $18 in CM if spent on grooming, the $1 should
be spent advertising the company’s training services.
39.
a.
Sales 90,000 × $36 = $3,240,000
Variable costs ($21 + $4) × 90,000 = (2,250,000)
Contribution margin $ 990,000
Fixed costs (300,000)
Projected profit $ 690,000
b.
New sales (90,000 × 1.20)×($36 × 0.90)= $3,499,200
New variable costs (90,000 × 1.20) × $25 = (2,700,000)
New contribution margin $ 799,200
Old contribution margin (990,000)
Change in profit $ (190,800)
c.
Change in CM $990,000 × 0.25 = $247,500
Change in fixed costs (220,000)
Change in profit $ 27,500
75
Chapter 12
Relevant Costing
40.
a.
If the U. S. Division had been eliminated, Webfinder
Toys’ income statement would have appeared as follows:
Sales
Variable costs
Contribution margin
Fixed costs:
Direct
$ 480,000
Corporate
2,700,000
Operating income (loss)
b.
$ 3,600,000
(2,088,000)
$ 1,512,000
(3,180,000)
$(1,668,000)
United States Mexico Total
Sales
$7,200,000 $3,600,000 $10,800,000
Variable costs (4,740,000) (2,088,000) (6,828,000)
Direct fixed costs (900,000) (480,000) (1,380,000)
Segment margin $1,560,000 $1,032,000 $ 2,592,000
Corporate costs
(2,700,000)
Operating income (loss) $ (108,000)
If the U. S. Division is eliminated, corporate income
would decline by the $1,560,000 of segment margin
currently being generated by that division. The common
corporate costs of $2,700,000 would then need to be
covered in total by the Mexico Division, which it cannot
do.
41.
a.
thousands
Gross margin $ 600,000
Avoidable fixed and variable operating costs (725,000)
Segment margin $(125,000)
Yes, the company should strongly consider dropping the
tubing product line because it generates a negative
segment margin of $125,000.
b.
The pretax profit of the company would rise by $125,000
(the amount of the negative segment margin of the tubing
product line) if tubing were dropped.
42.
Objective function, MAX CM: 9.50X1 + 5.00X2 + 1.50X3
43.
Objective function, MIN VC: 0.65X1 + 0.93X2 + 1.39X3 + 0.72X4
44.
Objective function, MAX CM: 3.25X1 + 2.05X2 + 2.60X3
Subject to: 2.5X1 + 1.0X2 + 2.5X3 < 800
2.5X1 + 2.0X2 + 1.0X3 < 4,000
X1 > 0
X2 > 0
X3 > 0
Where: X1 = the number of pairs of pants
X2 = the number of pairs of shorts
X3 = the number of shirts
76
Chapter 12
Relevant Costing
45.
Minimize Cost: 3.99X1 + 1.29X2 + 0.93X3 + 2.12X4 + 3.42X5
Subject to: 38X1 + 1X2 + 35X3 + 23X4 + 42X5 > 50
10X1 + 13X2 + 7X3 + 3X4 + 8X5 > 10
0X1 + 0X2 + 120X3 + 110X4 + 100X5 > 100
500X1 + 60X2 + 190X3 + 110X4 + 210X5 > 2,000
3.99X1 + 1.29X2 + 0.93X3 + 2.12X4 + 3.42X5 < 120
X1, X2, X3, X4, X5 > 0
Where: X1 = pizza
X2 = tuna
X3 = cereal
X4 = macaroni & cheese
X5 = spaghetti
Problems
46.
47.
a.
Cost of new machine $ (500,000)
Sales value of old machine 100,000
Incremental cost of new machine $ (400,000)
Operating cost savings ($190,000 × 5) 500,000
Net advantage of buying new machine $ 100,000
b.
The qualitative factors that should be considered include
any quality differences between the output generated by
the two machines, whether the company’s employees have
the knowledge to operate the new machine, how acquisition
of the machine would affect safety considerations, and
the capacity levels of the two machines.
a.
The relevant costs include the cost to purchase the new
turbine, the current market value of the old turbine, and
the difference in annual operating costs between the old
and new turbines.
b.
Incremental cost of new turbine:
$2,000,000 $400,000 = $(1,600,000)
Incremental cost savings of new turbine:
($480,000 $180,000) X 8 2,400,000
Incremental profit from buying new turbine $ 800,000
48.
c.
The maximum amount that the company could pay:
Total annual operating savings $2,400,000
Cash value of old machine 400,000
Total $2,800,000
a.
Relevant costs include:
Variable production costs ($0.05 + $0.04 + $0.03), $0.12
per unit
Annual salary of manager who can be replaced, $30,000
Vendor’s offering price, $0.13 per unit
Chapter 12
Relevant Costing
49.
77
b.
Production costs saved ($0.12 × 4,000,000) $ 480,000
Salary savings 30,000
Purchase cost of part ($0.13 × 4,000,000) (520,000)
Disadvantage of outsourcing the part $ 10,000
c.
Other considerations include the relative quality of the
part acquired from the vendor and the part produced
internally, the ability of the vendor to deliver in a
timely manner, the existence of competitors of the
vendor, the likelihood that future volume levels will
differ from present volume levels.
a.
Cost to make:
Direct materials $139.00
Direct labor $66 × .75 = 49.50
Variable overhead $43 × .75 = 32.25
Fixed overhead:
Rental value of production space
$114,000 ÷ 50,000 2.28
Depreciation on new machine
($5,000,000 ÷ 5) ÷ 50,000
20.00
Total unit cost to make $243.03
Cost to buy: $240.00
b.
If 60,000 subassemblies were required annually, the "cost
to make" would change because of the lower fixed costs on
a perunit basis. The depreciation would be ($5,000,000
÷ 5) ÷ 60,000 = $16.67, and the rental value opportunity
cost would decline to: $114,000 ÷ 60,000 = $1.90.
This would change the overall cost to make to
$139.00 + $49.50 + $32.25 + $16.67 + $1.90 = $239.32. At
this volume level, the advantage is slightly in favor of
making.
c.
If 75,000 subassemblies were required annually, the "cost
to make" would again change due to the lower fixed costs
on a perunit basis. The depreciation would be
($5,000,000 ÷ 5) ÷ 75,000 = $13.33, and the rental value
opportunity cost would decline to $114,000 ÷ 75,000 =
$1.52. This would change the overall cost to make to
$139.00 + $49.50 + $32.25 + $13.33 + $1.52 = $235.60. At
this volume level, the advantage is significantly in
favor of making.
Qualitative considerations:
Quality control systems in place by potential supplier
Reliability of the supplier
Risk of future price increases by supplier
Lead time to receive orders
Number of competing suppliers
d.
78
Chapter 12
Relevant Costing
50.
a.
Labor relations in supplier's plants
Maximize the contribution per unit of the scarce resource
(direct labor hours):
Desks
Chairs
Footstools
Sales per unit $900 $680 $240
VC per unit (720) (570) (186)
CM per unit $180 $110 $ 54
Hours per hour ÷12 ÷11 ÷3
CM per hour $15 $10
$18
Since footstools yield the greatest contribution margin per
direct labor hour, the company should devote all of its
capacity to their production in the absence of market or other
restrictions. Profit can be determined as follows:
Production of footstools = 34,000 3 = 11,333 (rounded)
Contribution margin 11,333 × $54 $611,982
Fixed costs (225,000)
Pretax income $386,982
b.
In part (a), it was determined that footstools are the
most profitable product, so the company will devote 50
percent of its time to that product. Chairs yield the
lowest contribution margin per hour, so 20 percent of
the time should be devoted to them. This would leave 30
percent of the time to manufacture desks.
Production levels:
Footstools (34,000 × .50) 3 5,667 (rounded)
Desks (34,000 × .30) 12 850
Chairs (34,000 × .20) 11 618 (rounded)
Contribution margin:
Footstools (5,667 × $54) $306,018
Desks (850 × $180) 153,000
Chairs (618 × $110) 67,980
Total $526,998
Less Fixed costs (225,000)
Pretax income $301,998
c.
Yes. These products are related, and as such, probably
sell in fairly fixed ratios. For example, it is
reasonable to assume that one chair is sold for each desk
sold. However, the footstools’ sales may be somewhat
independent of the other two products.
d.
The company’s tax rate is irrelevant because it does not
change across the choices under consideration in this
decision.
Chapter 12
Relevant Costing
51.
a.
79
Plan 1:
New commission on scarves = 0.11($40 $22) = $1.98
New commission on handkerchiefs = 0.11($10 $5) = $0.55
New CM on scarves =
($40 $1.98 $22 $4)95,000 = $1,141,900
New CM on handkerchiefs =
($10 $0.55 $5 $0.50)115,000 = $454,250
Income from scarves = $1,141,900 $580,000 = $561,900
Income from handkerchiefs = $454,250 $180,000 = 274,250
Total Plan 1 income $836,150
Plan 2:
New FC for scarves = $580,000 + $25,000 = $605,000
New sales for scarves = 119,000 units;
CM = $12 × 119,000 = $1,428,000
New sales for handkerchiefs = 91,000
CM = 91,000 × $4 = $364,000
Income from Scarves = $1,428,000 $605,000 = $ 823,000
Income from Handkerchiefs=$364,000 $180,000 = 184,000
Total Plan 2 income $1,007,000
Plan 3
New sales for scarves = 94,000 units
CM = $16.75 × 94,000 = $1,574,500
New sales for handkerchiefs = 90,000 units
CM = $6.85 × 90,000 = $616,500
Income from scarves = $1,574,500 $580,000 = $ 994,500
Income from handkerchiefs=$616,500 $180,000= 436,500
Total Plan 3 income $1,431,000
b.
Plan 3 should be adopted because it maximizes total
income relative to the existing price and cost structure
and Plans 1 and 2.
80
52.
Chapter 12
Relevant Costing
a.
Fish Chicken Total
Sales $4,000,000 $1,800,000 $5,800,000
Variable costs
Merchandise sold (2,400,000) (1,300,000) (3,700,000)
Commissions (400,000) (150,000) (550,000)
Delivery costs (600,000) (105,000) (705,000)
CM $ 600,000 $ 245,000 $ 845,000
Avoidable fixed costs
Allocated corporate (15,000) (15,000)
Manager's salary (80,000) (75,000) (155,000)
Segment margin $ 520,000 $ 155,000 $ 675,000
Unavoidable direct
fixed costs
Delivery costs (15,000) (15,000)
Depreciation (200,000) (100,000) (300,000)
Product line results $ 320,000 $ 40,000 $ 360,000
Common costs (100,000) ( 85,000) (185,000)
Net income (loss) $ 220,000 $ (45,000) $ 175,000
b.
According to the segment margin of $155,000, the Chicken
Division generates $155,000 of income above its avoidable
expenses. Additional computations are necessary to
determine whether the chicken product line should be
kept:
Chicken segment margin $155,000
Opportunity cost, rent (85,000)
Net advantage to keeping chicken line $ 70,000
c.
To the extent the two product lines enhance each other’s
sales, the company should be concerned. Some customers
who prefer to purchase both fish and chicken from the
same vendor may seek another vendor that has a broader
product offering.
d.
Layoffs could adversely affect morale and trust between
employees and managers. If cordial relations existed
between managers and workers prior to the layoffs, the
culture could be destroyed by the layoffs. The
consequence might be a loss of key employees, a drop in
profits, and a decline in customer service.
Chapter 12
Relevant Costing
53.
a.
81
Note that in the following solutions, the fact that the total
allocated fixed costs will decline from $1,000,000 to $500,000
can be ignored because this change is not differential across
the three alternatives.
Georgia factory expansion
Sales
$4,200,000
Fixed costs:
Factory $ 672,000
Administration 242,000 $ 914,000
Variable costs*
$1,344,000
Alloc. home office costs 350,000 1,694,000 (2,608,000)
Est. net profit from operations
$1,592,000
Tennessee factory estimated
net profit from operations
1,080,000
Home office expense allocated to
Florida factory
(200,000)
Estimated net profit from operations
$2,472,000
*
($2,800,000 $50) $16 $1.50 = $1,344,000
b.
Estimated net profit from operations:
Tennessee factory
$1,080,000
Georgia factory
820,000
Estimated royalties to be received (30,000 X $8) 240,000
$2,140,000
Less home office expense allocated
to Florida’s factory
(200,000)
Estimated profit from operations
$1,940,000
c.
Estimated net profit from operations:
Tennessee factory
$1,080,000
Georgia factory
820,000
$1,900,000
Less home office expense allocated
to Florida factory
(200,000)
Estimated profit from operations $1,700,000
(AICPA adapted)
54.
a.
Sales $1,100,000
Variable costs (825,000)
Contribution margin $ 275,000
Units sold = ($1,100,000 $10)100 = 11,000,000
Contribution margin per unit= $275,00011,000,000 = $.025
Required unit sales = (($350,000 + $50,000) $.025)
= 16,000,000 units
82
Chapter 12
Relevant Costing
b.
Plan A (000 omitted)
Ohio New Jersey Total
Sales $1,700 $2,000 $3,700
Variable costs:
Direct material $ 425 $ 500 $ 925
Direct labor 510 500 1,010
Factory overhead 340 350 690
Total $1,275 $1,350 $2,625
Contribution margin $ 425 $ 650 $1,075
Direct fixed costs:
Overhead $ 350 $ 450 $ 800
Promotion costs 170 50 220
Total $ 520 $ 500 $1,020
Segment margin $ (95) $ 150 $ 55
Allocated fixed costs 55 100 155
Operating income (loss) $ (150) $ 50 $ (100)
Plan B
Sales $3,100,000
Variable costs:
Direct material $775,000
Direct labor 775,000
Variable overhead 542,500 (2,092,500)
Contribution margin $1,007,500
Fixed costs:
Factory overhead $450,000
Promotion costs 100,000
Allocated costs 155,000 (705,000)
Operating income $ 302,500
Plan C
Sales $2,000,000
Royalties 137,500
Variable costs:
Direct material $500,000
Direct labor 500,000
Variable overhead 350,000 (1,350,000)
Contribution margin $ 787,500
Fixed costs:
Factory overhead $450,000
Promotion costs 100,000
Allocated costs 155,000 (705,000)
Operating income $ 82,500
Chapter 12
Relevant Costing
83
Cases
55. a.
For May, it would appear that store 2 is more profitable.
Although store 2 had lower sales than store 1, it is
clear that store 1 incurred more expense. For example,
store 1 spent twothirds of the entire district
advertising budget; this was 10 times more than store 2
spent. Store 1 also incurred more expense for rent and
would have been allocated more district level costs
because of its higher sales.
b.
Store 1 is generating the most revenue. This is given in
the first bulleted statement.
c.
The incentive for Store 1 is to generate as much revenue
as possible. The bonus scheme for that store does not
take into account any expenses. Consequently, the
manager of the store can benefit from the advertising
without bearing any advertising costs.
d.
Store 1 would have more incentive. Since store 2 is
evaluated on net income, any expenditure for maintenance
will reduce the net income that might otherwise have been
recorded. Store 1 would want to spend an adequate amount
for maintenance so that no machine malfunction or
downtime occurs that might interfere with sales.
e.
Both bonus schemes have some problems. The bonus scheme
based on sales volume is not likely to increase profits
in either the short or long term because no incentive is
given to the manager to be conscious of the costs that
are incurred to generate revenues. The bonus based on
net income is more promising. The only detrimental
aspect of this performance measure is that it is short
term oriented. It encourages managers to take actions
that may generate shortterm profits at the expense of
longterm profits. For example, a manager may forgo
maintenance activities to reduce costs in the short term.
However, the longterm implications of this act may be
higher costs resulting from broken machinery.
84
56.
Chapter 12
Relevant Costing
a.
Potpourri Co. should price the regular compound at $22
per case and the heavyduty compound at $30 per case. The
contribution margin is the highest at these prices as
shown below.
Regular Compound
Selling price per case $ 18 $ 20 $ 21 $ 22 $ 23
Variable cost per case 16 16 16 16 16
Contribution margin/case $ 2 $ 4 $ 5 $ 6 $ 7
Volume in cases
(000 omitted) 120 100 90 80 50
Total contribution margin
(000 omitted) $240 $400 $450 $480 $350
HeavyDuty Compound
Selling price per case $ 25 $ 27 $ 30 $ 32 $ 35
Variable cost per case 21 21 21 21 21
Contribution margin/case $ 4 $ 6 $ 9 $ 11 $ 14
Volume in cases
(000 omitted) 175 140 100 55 35
Total contribution
margin (000 omitted) $700 $840 $900 $605 $490
b.
1. Potpourri Co. should continue to operate during
the final six months of 2003 because any
shutdown would be temporary. The company clearly
intends to remain in the business and expects a
profitable operation in 2004. This is a shortrun
decision analysis problem. Therefore, the fixed
costs are irrelevant to the decision because they
cannot be avoided in the short run. The products
do have a positive variable contribution margin so
operations should continue.
Potpourri Co.
Cincinnati Plant
Pro Forma Contribution Statement
for the Final Six Months of 2003
($000 omitted)
Heavy
Regular
Duty
Sales
$1,150
$1,225
Variable costs
Selling & admin.
$ 200
$ 245
Manufacturing
600
490
Total variable costs
$ 800 $ 735
Contribution margin
$ 350
$ 490
Total
$2,375
$ 445
$1,090
$1,535
$ 840
85
Chapter 12
Relevant Costing
2.
Potpourri Co. should consider the following
qualitative factors when making the decision to keep
the Cincinnati Plant open or to close it:
* The effect on employee morale.
* The effect on market share.
* The disruption of production and sales due to shut
down.
* The effect on the local community.
(CMA adapted)
57.
a.
The manufacturing overhead rate is $18 per standard
direct labor hour and the standard product cost
includes $9 of manufacturing overhead per pressure
valve. Accordingly, the standard direct labor hour per
finished valve is .5 hour ($9 ÷ $18). Therefore, 30,000
units per month would require 15,000 direct labor
hours.
b.
Per unit
$19.00
Totals for
120,000 Units
$2,280,000
Incremental revenue
Incremental costs
Variable cost
Direct material
$ 5.00
$ 600,000
Direct labor
6.00
720,000
Variable overhead
3.00
360,000
Total variable costs
$14.00
$1,680,000
Fixed overhead
Supervisory and clerical costs
(4 months × $12,000)
48,000
Total incremental costs
$1,728,000
Incremental profit before tax
$ 552,000
Shipping, sales commission, and fixed factory overhead
(direct and allocated) are irrelevant to the incremental
analysis.
c.
The minimum unit price that Hydraulic Engineering could
accept without reducing net income must cover variable
costs plus the additional fixed costs.
Variable unit cost
$14.00
Additional fixed cost ($48,000 ÷ 120,000)
.40
Minimum unit price
$14.40
