14e_gnbhr_ch12_sm

12-1 A relevant cost is a cost that i&ers in total 'etween the alternatives alternatives in a ecision. 12-2 An incremental cost (or 'ene)t* is the change in cost (or 'ene)t* that will res"lt +rom some propose action. An opport"nit cost is the 'ene)t that is lost or sacri)ce when reecting some co"rse o+ action. A s"n cost is a cost that has alrea 'een inc"rre an that cannot 'e change ' an +"t"re ecision. 12-3 /o. aria'le costs are relevant costs onl i+ the i&er in total 'etween the alternatives "ner consieration. 12- /o. /ot all )e costs are s"n onl those +or which the cost has alrea alrea 'een irrevoca'l inc"rre. A varia'le cost can 'e a s"n cost i+ it has alrea 'een inc"rre. 12-! /o. A varia'le cost is a cost that varies in total amo"nt in irect proportion proportion to changes in the level o+ activit. A i&erential cost is the i&erence in cost 'etween two alternatives. alternatives. I+ the level o+ activit is the same +or the two alternatives, a varia'le cost will not 'e a&ecte an it will 'e irrelevant. 12-" /o. 3nl those +"t"re costs that i&er 'etween the alternatives are relevant. 12-# 3nl those costs that wo"l 'e avoie as a res"lt o+ ropping the pro"ct line are relevant in the ecision. Costs that will not 'e a&ecte ' the ecision are irrelevant. 12-$ /ot necessaril. An apparent loss ma 'e the res"lt o+ allocate common costs or o+ s"n costs that cannot 'e avoie i+ the pro"ct is roppe. A pro"ct sho"l 'e iscontin"e onl i+ the contri'"tion margin that will 'e lost as a res"lt o+ ropping the pro"ct is less than the )e costs that wo"l 'e avoie. 4ven in that sit"ation the pro"ct ma 'e retaine retaine i+ it promotes the sale o+ other pro"cts.

12-% Allocations o+ common )e costs can mae a pro"ct (or other segment* appear to 'e "npro)ta'le, whereas in +act it ma 'e pro)ta'le. 12-1& I+ a compan ecies to mae a part internall rather than to '" it +rom an o"tsie s"pplier, then a portion o+ the compan5s +acilities have to 'e "se to mae the part. The compan5s opport"nit cost is meas"re ' the 'ene)ts that co"l 'e erive +rom the 'est alternative "se o+ the +acilities. 12-11 An reso"rce that is re6"ire to mae pro"cts an get them into the hans o+ c"stomers co"l 'e a constraint. !ome eamples are machine time, irect la'or time, 7oor space, raw materials, investment capital, s"pervisor time, an storage space. 8hile not covere in the tet, constraints can also 'e intangi'le an o+ten tae the +orm o+ a +ormal or in+ormal polic that prevents the organi9ation organi9ation +rom +"rthering its goals. 12-12 Ass"ming that )e costs are not a&ecte, pro)ts are maimi9e when the total contri'"tion margin is maimi9e. A compan can maimi9e its total contri'"tion margin ' +oc"sing on the pro"cts with the greatest amo"nt o+ contri'"tion margin per "nit o+ the constraine reso"rce. 12-13 :oint 12-13 :oint pro"cts pro"cts are two two or more more pro"cts that are pro"ce +rom a common inp"t. :oint costs are the costs that are inc"rre "p to the split-o& point. The split-o& point is the point in in the man"+act"ring process where oint pro"cts can 'e recogni9e recogni9e as inivi"al pro"cts. 12-1 :oint 12-1 :oint costs sho"l sho"l not 'e allocate allocate among oint pro"cts +or ecision-maing p"rposes. I+ oint costs are allocate among the oint pro"cts, then managers ma thin the are avoia'le costs o+ the en pro"cts. However, the oint costs will contin"e to 'e inc"rre as long as the process is r"n regarless o+ what is one with one o+ the en pro"cts. Th"s, when maing ecisions a'o"t the en pro"cts,

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#;0

the oint costs are not avoia'le an are irrelevant. 12-1! I+ the incremental reven"e +rom +"rther processing ecees the incremental costs o+ +"rther processing, the pro"ct sho"l 'e processe +"rther. 12-1" Most costs o+ a 7ight are either s"n costs, or costs that o not epen on

the n"m'er o+ passengers on the 7ight.

#;1

'(ercise 12-1 (1= min"tes*

a. '. c. .

e. +.

g. h.

i. . . l.

Case 1 Not Releva Releva Item nt nt !ales reven"e............. !a > ari aria'le a'le man"+act"ring overhea.................. > ?oo ?oo val" val"eM eMo oel el A$000 machine... ... . . > Mar Maret et val" val"e eMo Moel el ?$@00 machine (cost*........................ > ie ie man" man"+a +act ct"r "rin ing g overhea.................. > aria'le selling epense.................. . > ie selling epense. . > General aministrative overhea.................. >

Case 2 Not Relevan Relevan t t > > >

> >

> >

> > > >

>

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Managerial Acco"nting, 1;th 4ition

'(ercise 12-2 ($0 min"tes* 1. /o, the ho"seeeping program sho"l not 'e iscontin"e. It is act"all generating a positive program segment margin an is, o+ co"rse, proviing a val"a'le service to seniors. Comp"tations to s"pport this concl"sion +ollowB Contri'"tion margin lost i+ the ho"seeeping program is roppe.............. ie costs that can 'e avoieB

(@0,000*

1=,00 Dia'ilit ins"rance....................................... 0 Erogram aministrator5s salar................... $F,000 =2,000
#;$

Total )e epenses................ ;0=,000 $=$,000 =2,000 /et operating income (loss*....  =,000 (2$,000*  (2@,000* Incl"es pro-rate loss on isposal o+ the van i+ it is onate to a charit.

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'(ercise 12-2 (contin"e* 2. To give the aministrator o+ the entire organi9ation a clearer pict"re o+ the )nancial via'ilit o+ each o+ the organi9ation5s programs, the general aministrative overhea sho"l not 'e allocate. It is a common cost that sho"l 'e e"cte +rom the total program segment margin. ollowing the +ormat intro"ce in an earlier chapter +or a segmente income statement, a 'etter income statement wo"l 'eB

Total %00,00 even"es........................ 0 aria'le epenses........... ;%0,000 Contri'"tion margin........ ;10,000 Tracea'le )e epensesB
Home Nursing 2#0,00 0 120,000 1;0,000

#eals on $%eels ;00,00 0 210,000 1%0,000

Housekeeping 2;0,00 0 1#0,000 @0,000

@,000 20,000

;0,000 F,000

20,000 1=,000

;0,000

$@,000

$F,000

#@,000 @=,000 F2,000  10=,00 F2,000 0  @,000


#;=

'(ercise 12-3 ($0 min"tes* 1.

&er 'nit Dierential Costs #ak e +u, Cost o+ p"rchasing..................

1()*** units #ake

20

 # @

 %0,000 120,000

1

1=,000

2

$0,000

0

0

Total costs...............................

1F

20

$

+u, $00,00 0

0 0 2==,00 $00,00 0 0

;=,000

3nl the s"pervisor salaries can 'e avoie i+ the parts are p"rchase. The remaining 'oo val"e o+ the special e6"ipment is a s"n cost hence, the $ per "nit epreciation epense is not relevant to this ecision.

?ase on these ata, the compan sho"l reect the o&er an sho"l contin"e to pro"ce the parts internall. #ake

2.

+u, $00,00 0

Cost o+ p"rchasing (part 1*................... Cost o+ maing (part 1*......................... 2==,000 3pport"nit costsegment margin +orgone on a potential new pro"ct line..................................................... #=,000 Total cost............................................... $20,000 $00,00 © The McGraw-Hill Companies, Inc., 2012. All rights reserve. #;#


0
20,000

Th"s, the compan sho"l accept the o&er an p"rchase the parts +rom the o"tsie s"pplier.


#;F

'(ercise 12- (1= min"tes* 3nl the incremental costs an 'ene)ts are relevant. In partic"lar, onl the varia'le man"+act"ring overhea an the cost o+ the special tool are relevant overhea costs in this sit"ation. The other man"+act"ring overhea costs are )e an are not a&ecte ' the ecision. &er 'nit Incremental reven"e....................... Incremental costsB aria'le costsB
$;%.%=

Total 1* racelets $,;%%.=0

1;$.00 @#.00 F.00

1,;$0.00 @#0.00 F0.00

#.00 2;2.00

#0.00 2,;20.00 ;#=.00 2,@@=.00  #1;.=0

4ven tho"gh the price +or the special orer is 'elow the companKs reg"lar price +or s"ch an item, the special orer wo"l a to the companKs net operating income an sho"l 'e accepte. This concl"sion wo"l not necessaril +ollow i+ the special orer a&ecte the reg"lar selling price o+ 'racelets or i+ it re6"ire the "se o+ a constraine reso"rce.

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'(ercise 12-! (20 min"tes* 1. The most pro)ta'le "se o+ the constraine reso"rce is etermine ' the contri'"tion margin per "nit o+ the constraine reso"rce. In part 1, the constraine reso"rce is time on the plastic inection moling machine. There+ore, the analsis wo"l procee as +ollowsB

!elling price per "nit............. aria'le cost per "nit............ Contri'"tion margin per "nit (a*...................................... Elastic inection moling machine processing time re6"ire to pro"ce one "nit ('*............................... Contri'"tion margin per "nit o+ the constraine reso"rce (a* L ('*.............................

.ki ault 220 #0 1#0

/olf Cadd, $00 120 1@0

0is%ing uiver 1F= == 120

; min"tes

= min"tes

2 min"tes

;0 per min"te

$# per min"te

#0 per min"te

Ero"ction o+ the ishing "iver pro"ct wo"l 'e the most pro)ta'le "se o+ the constraine reso"rce which is, in this case, time on the plastic inection moling machine. The contri'"tion margin per min"te is #0 +or this pro"ct, which is larger than +or the other two pro"cts. 2. In this part, the constraint is the availa'le po"ns o+ plastic pellets.

!elling price per "nit............. aria'le cost per "nit............ Contri'"tion margin per "nit (a*...................................... Eo"ns o+ plastic pellets re6"ire to pro"ce one "nit ('*............................... Contri'"tion margin per "nit o+ the constraine reso"rce

.ki ault 220 #0 1#0

= po"ns $2 per po"n

/olf Cadd, $00 120 1@0

0is%ing uiver 1F= == 120

# po"ns $0 per po"n

= po"ns 2; per po"n


#;%

(a* L ('*............................. In this case, pro"ction o+ the !i a"lt wo"l 'e the most pro)ta'le "se o+ the constraine reso"rce. The contri'"tion margin per "nit o+ the constraine reso"rce +or this pro"ct is $2, which is larger than +or the other two pro"cts.

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'(ercise 12-! (contin"e* $. The Gol+ Ca pro"ct has the largest "nit contri'"tion margin, '"t it is not the most pro)ta'le "se o+ the constraine reso"rce in either case a'ove. This happens 'eca"se the Gol+ Ca "ses more o+ the constraine reso"rces in proportion to its contri'"tion margin than the other two pro"cts. In other wors, more o+ the other pro"cts can 'e pro"ce +or a given amo"nt o+ the constraine reso"rce an this more than maes "p +or their lower contri'"tion margins.


#=1

'(ercise 12-" (20 min"tes* 1. The val"e o+ relaing the constraint can 'e etermine ' comp"ting the contri'"tion margin per "nit o+ the constraine reso"rceB

!elling price per "nit............................................ aria'le cost per "nit........................................... Contri'"tion margin per "nit (a*.......................... Npholster shop time re6"ire to pro"ce one "nit ('*.............................................................. Contri'"tion margin per "nit o+ the constraine reso"rce (a* L ('*..............................................

3eat%er 3irar, C%air 1,@00 1,200  #00 12 ho"rs =0 per ho"r

The compan sho"l 'e willing to pa "p to =0 per ho"r to eep the "pholster shop open a+ter normal woring ho"rs. 2. To answer this 6"estion, it is esira'le to comp"te the contri'"tion margin per "nit o+ the constraine reso"rce +or all three pro"ctsB

!elling price per "nit............. aria'le cost per "nit............ Contri'"tion margin per "nit (a*...................................... Npholster shop time re6"ire to pro"ce one "nit ('*............................... Contri'"tion margin per "nit o+ the constraine reso"rce (a* L ('*.............................

/ainsoroug% 4rmc%ai r 1,$00 @00  =00

3eat%e r 3irar, C%air 1,@00 1,200  #00

C%ippe n-dale 0aric 4rmc%a ir 1,;00 1,000  ;00

@ ho"rs

12 ho"rs

= ho"rs

#2.=0 per ho"r

=0.00 per ho"r

@0.00 per ho"r

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The o&er to "pholster chairs +or ;= per ho"r sho"l 'e accepte. The time wo"l 'e "se to "pholster Chippenale a'ric Armchairs. I+ this increases the total pro"ction an sales o+ those chairs, the time wo"l 'e worth @0 per ho"ra net gain o+ $= per ho"r. I+ Chippenale a'ric Armchairs are alrea 'eing pro"ce "p to eman, then having these chairs "pholstere in the other compan wo"l +ree "p capacit to pro"ce more o+ the other two chairs. In 'oth cases, the aitional time is worth more than ;= per ho"r. '(ercise 12-# (10 min"tes* &roduct 5 !ales val"e a+ter +"rther processing................................ !ales val"e at split-o& point........ Incremental reven"e................... Cost o+ +"rther processing........... Incremental pro)t (loss*..............

&roduct 6

&roduct 7

@0,000 1=0,000 F=,000 =0,000 %0,000 #0,000 $0,000 #0,000 1=,000 $=,000 ;0,000 12,000 (=,000* 20,000 $,000

Ero"cts O an P sho"l 'e processe +"rther, '"t not Ero"ct >.


#=$

'(ercise 12-$ (10 min"tes* Meri+"lon sho"l 'e processe +"rtherB !ales val"e a+ter +"rther processing......... #0,000 !ales val"e at the split-o& point............... ;0,000 Incremental reven"e +rom +"rther processing.............................................. 20,000 Cost o+ +"rther processing......................... 1$,000 Ero)t +rom +"rther processing...................  F,000 The 10,000 in allocate common costs (1Q$ R $0,000* will 'e the same regarless o+ which alternative is selecte, an hence is not relevant to the ecision.

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'(ercise 12-% (1= min"tes* The compan sho"l accept orers )rst +or Ero"ct P, secon +or Ero"ct >, an thir +or Ero"ct O. The comp"tations areB &roduct &roduct &roduct 5 6 7 (a*
2;.00 1=.00 $.00 $.00

%.00 $.00

@ $2.00

= 1;.00

$ 21.00

;.00

2.@0

F.00

?eca"se Ero"ct P "ses the least amo"nt o+ material per "nit o+ the three pro"cts, an 'eca"se it is the most pro)ta'le o+ the three in terms o+ its "se o+ this constraine reso"rce, some st"ents will immeiatel ass"me that this is an in+alli'le relationship. That is, the will ass"me that the wa to spot the most pro)ta'le pro"ct is to )n the one "sing the least amo"nt o+ the constraine reso"rce. The wa to ispel this notion is to point o"t that Ero"ct > "ses more material (the constraine reso"rce* than oes Ero"ct O, '"t et it is pre+erre over Ero"ct O. T%e ke, factor is not %o8 muc% of a constrained resource a product uses) ut rat%er %o8 muc% contriution margin t%e product generates per unit of t%e constrained resource9


#==

'(ercise 12-1& ($0 min"tes* /o, the overnight cases sho"l not 'e iscontin"e. The comp"tations areB Contri'"tion margin lost i+ the cases are iscontin"e........................................... Dess )e costs that can 'e avoie i+ the cases are iscontin"eB  !alar o+ the pro"ct line manager...... 21,000 Avertising........................................... 110,000 Ins"rance on inventories...................... %,000 /et isavantage o+ ropping the cases...

(2#0,000 *

1;0,000 (120,000 *

The same sol"tion can 'e o'taine ' preparing comparative income statementsB Dierence: Net perating eep Drop Income vernig vernig% Increase or %t Cases t Cases !Decrease" !ales........................................ ;=0,000  0 (;=0,000* aria'le epensesB aria'le man"+act"ring epenses............................. 1$0,000 0 1$0,000 !ales commissions................. ;@,000 0 ;@,000 !hipping................................. 12,000 0 12,000 Total varia'le epenses............ 1%0,000 0 1%0,000 Contri'"tion margin................. 2#0,000 0 (2#0,000* ie epensesB !alar o+ line manager........... 21,000 0 21,000 General +actor overhea...... 10;,000 10;,000 0

 (F0,000 (1%0,000 /et operating loss.................... * *

(120,000*


#=F

'(ercise 12-11 (20 min"tes* ie cost per mile ($,=00 L 10,000 1. miles*................................................... aria'le operating cost per mile............. Average cost per mile.............................

0.$= 0.0@ 0.;$


© The McGraw-Hill Companies, Inc., 2012. All rights reserve. #=@


'(ercise 12-12 (20 min"tes* The costs that can 'e avoie as a res"lt o+ p"rchasing +rom the o"tsie are relevant in a mae-or-'" ecision. The analsis isB &er 'nit Dierential Costs 2*)*** 'nits #ake +u, #ake +u, 2$.= ;F0,00 Cost o+ p"rchasing.................. 0 0 Cost o+ maingB  
+u, ;F0,00 Total cost, as a'ove..................................... $@0,000 0 ental val"e o+ the space (opport"nit cost*......................................................... 1=0,000 ;F0,00 Total cost, incl"ing opport"nit cost.......... =$0,000 0 /et avantage in +avor o+ '"ing................

#0,000


#=%

Ero)ts wo"l increase ' #0,000 i+ the o"tsie s"pplier5s o&er is accepte.

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'(ercise 12-13 ($0 min"tes* 4 + C 1@ $# 20 12 $2 1# @ @ @ 1.= ;.0 2.0

1.

(1* Contri'"tion margin per "nit.......................... (2*
+

C

Contri'"tion margin per irect la'orho"r..................................................

12 % 10 R $,00 R $,00 R $,00

##1

'(ercise 12-13 (contin"e* I+ all the eman +or pro"ct A has 'een satis)e, ?anner Compan wo"l then "se an aitional irect la'or-ho"rs to man"+act"re pro"ct C. In that case, the compan sho"l 'e willing to pa "p to 1@ per ho"r (the @ "s"al wage pl"s the 10 contri'"tion margin per ho"r +or pro"ct C* to man"+act"re more pro"ct C. Diewise, i+ all the eman +or 'oth pro"cts A an C has 'een satis)e, aitional la'or ho"rs wo"l 'e "se to mae pro"ct ?. In that case, the compan sho"l 'e willing to pa "p to 1F per ho"r to man"+act"re more pro"ct ?.

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'(ercise 12-1 (1= min"tes* 1. Monthl pro)ts wo"l increase ' %,000B Total for 2)*** &er 'nit 'nits Incremental reven"e................................ 12.00 2;,000 Incremental costsB aria'le costsB

##$

'(ercise 12-1! (10 min"tes* Contri'"tion margin lost i+ the ?ath
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'(ercise 12-1" (1= min"tes* Item
Relevant Costs #ake +u, 2;0,00 0 1#=,000 $0,000

#0,000 #00,00 0 ;%=,00 #00,00 0 0

The two-thirs o+ the tracea'le )e man"+act"ring overhea costs that cannot 'e eliminate, an all o+ the common )e man"+act"ring overhea costs, are irrelevant. The compan wo"l save 10=,000 per ear ' contin"ing to mae the parts itsel+. In other wors, pro)ts wo"l ecline ' 10=,000 per ear i+ the parts were p"rchase +rom the o"tsie s"pplier.


##=

'(ercise 12-1# ($0 min"tes* 1. The relevant costs o+ a )shing trip wo"l 'eB "el an "peep on 'oat per trip.......................................... :"n +oo cons"me "ring trip........................................ !nagge )shing l"res................ Total..........................................

2= @ F ;0

 The "n +oo cons"me "ring the trip ma not 'e completel relevant. 4ven i+ !teve were not going on the trip, he wo"l still have to eat. The amo"nt ' which the cost o+ the "n +oo ecees the cost o+ the +oo he wo"l otherwise cons"me wo"l 'e the relevant amo"nt. The other costs are s"n at the point at which the ecision is mae to go on another )shing trip. 2. I+ he )shes +or the same amo"nt o+ time as he i on his last trip, all o+ his costs are liel to 'e a'o"t the same as the were on his last trip. There+ore, it reall oesn5t cost him anthing to catch the last )sh. The costs are reall inc"rre in orer to 'e a'le to catch )sh an wo"l 'e the same whether one, two, three, or a o9en )sh were act"all ca"ght. ishing, not catching )sh, costs mone. All o+ the costs are 'asicall )e with respect to how man )sh are act"all ca"ght "ring an one )shing trip, ecept possi'l the cost o+ snagge l"res. $. In a ecision o+ whether to give "p )shing altogether, nearl all o+ the costs liste ' !teve5s wi+e are relevant. I+ he i not )sh, he wo"l not nee to pa +or 'oat storage, new )shing gear, a )shing license, +"el an "peep, "n +oo, or snagge l"res. In aition, he wo"l 'e a'le to sell his 'oat, the procees o+ which wo"l 'e consiere relevant in this ecision. The original cost o+ the 'oat, which is a s"n cost, wo"l not 'e relevant. © The McGraw-Hill Companies, Inc., 2012. All rights reserve. ###


'(ercise 12-1# (contin"e* These three re6"irements ill"strate the slipper nat"re o+ costs. A cost that is relevant in one sit"ation can 'e irrelevant in the net. /one o+ the costs are relevant when we comp"te the cost o+ catching a partic"lar )sh some o+ them are relevant when we comp"te the cost o+ a )shing trip an nearl all o+ them are relevant when we consier the cost o+ not giving "p )shing. 8hat is even more con+"sing is that 8en is correct the average cost o+ a salmon is 1#F, even tho"gh the cost o+ act"all catching an one )sh is essentiall 9ero. It ma not mae sense +rom an economic stanpoint to have salmon )shing as a ho'', '"t as long as !teve is o"t in the 'oat )shing, he might as well catch as man )sh as he can.


##F

)ro*le+ 12-1$ ($0 min"tes* Contri'"tion margin lost i+ the to"r is 1. iscontin"e................................................. Dess to"r costs that can 'e avoie i+ the to"r is iscontin"eB To"r promotion........................................... ee, to"r g"ie........................................... "el +or '"s................................................ 3vernight paring +ee, '"s......................... oom W meals, '"s river an to"r g"ie. . /et ecrease in pro)ts i+ the to"r is iscontin"e.................................................

(2,100*

#00 F00 12= =0 1F=

1,#=0  (;=0*

The +ollowing costs are not relevant to the ecisionB Cost !alar o+ '"s river

Dia'ilit ins"rance, '"s ?"s maintenance W preparation

Reason The rivers are all on salar an there wo"l 'e no change in the n"m'er o+ rivers on the paroll.
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)ro*le+ 12-1$ (contin"e* Alternative !ol"tionB

eep t%e Tour Ticet reven"e............................ Dess varia'le epenses............... Contri'"tion margin.................... Dess to"r epensesB To"r promotion......................... !alar o+ '"s river.................. ee, to"r g"ie......................... "el +or '"s...............................
$,000 %00 2,100

Drop t%e Tour 

0 0 0

Dierence : Net perating Income Increase or !Decrease" ($,000* %00 (2,100*

#00 $=0 F00 12= ;=0 200 =0

0 $=0 0 0 ;=0 200 0

#00 0 F00 12= 0 0 =0

1F=

0

1F=

$00 $00 2,%=0 1,$00  (@=0* (1,$00*

0 1,#=0  (;=0*

2. The goal o+ increasing average seat occ"panc co"l 'e accomplishe ' ropping to"rs lie the Historic Mansions to"r with lower-than-average seat occ"pancies. This co"l re"ce pro)ts in at least two was. irst, the to"rs that are eliminate co"l have contri'"tion margins that ecee their avoia'le costs (s"ch as in the case o+ the XHistoric MansionsY to"r in part 1*. I+ so, then eliminating these to"rs wo"l re"ce the compan5s total contri'"tion margin more than it wo"l re"ce total costs, an pro)ts wo"l ecline. !econ, these to"rs might 'e acting as XmagnetsY that raw to"rists to other, more pro)ta'le to"rs. © The McGraw-Hill Companies, Inc., 2012. All rights reserve. !ol"tions Man"al, Chapter 12

##%

)ro*le+ 12-1% (1= min"tes* 1.

&er 1;unce T+one

even"e +rom +"rther processingB !elling price o+ one )let mignon (# o"nces R $.#0 per po"nQ1# o"nces per po"n*......... !elling price o+ one /ew Oor c"t (@ o"nces R 2.%0 per po"nQ1# o"nces per po"n*......... Total reven"e +rom +"rther processing................. Dess reven"e +rom one T-'one stea................... Incremental reven"e +rom +"rther processing..... Dess cost o+ +"rther processing............................ Ero)t per po"n +rom +"rther processing............

1.$= 1.;= 2.@0 2.2= 0.== 0.20 0.$=

2. The T-'one steas sho"l 'e processe +"rther into )let mignon an the /ew Oor c"ts. This will iel 0.$= per po"n in ae pro)t +or the compan. The 0.== Xpro)tY per po"n +or T-'one stea mentione in the pro'lem statement is not relevant to the ecision 'eca"se it contains allocate oint costs. The compan will inc"r the allocate oint costs regarless o+ whether the T-'one steas are sol o"tright or processe +"rther th"s, this cost sho"l 'e ignore in the ecision.

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)ro*le+ 12-2& (;= min"tes* 1. Ero"ct M:-F has a contri'"tion margin o+ 1; per gallon ($= U 21 Z 1;*. I+ the plant closes, this contri'"tion margin will 'e lost on the 22,000 gallons (11,000 gallons per month R 2 Z 22,000 gallons* that co"l have 'een sol "ring the twomonth perio. However, the compan will 'e a'le to avoi some )e costs as a res"lt o+ closing own. The analsis isB Contri'"tion margin lost ' closing the plant +or two months (1; per gallon R 22,000 gallons*......................................... ($0@,000* Costs avoie ' closing the plant +or two monthsB ie man"+act"ring overhea cost 120,00 (#0,000 R 2 months Z 120,000*.... .... 0 ie selling costs #2,00 ($10,000 R 10 R 2 months*.............. 0 1@2,000 /et isavantage o+ closing, 'e+ore start"p costs.................................................... (12#,000* A start-"p costs....................................... (1;,000*

#F1

)ro*le+ 12-2& (contin"e* Alternative !ol"tionB

&lant ept &lant pen Closed

Dierence
!ales (11,000 gallons R $= per gallon R 2*..............................  FF0,000  0 (FF0,000* Dess varia'le epenses (11,000 gallons R 21 per gallon R 2*. ;#2,000 0 ;#2,000 Contri'"tion margin.................. $0@,000 0 ($0@,000* Dess )e costsB ie man"+act"ring overhea cost (2$0,000 R 2 1F0,000 R 2*..................... ;#0,000 $;0,000 120,000 ie selling cost ($10,000 R 2 $10,000 R %0 R 2*...... #20,000 ==@,000 #2,000 Total )e cost.......................... 1,0@0,000 @%@,000 1@2,000 /et operating loss 'e+ore start"p costs.................................. (FF2,000* (@%@,000* (12#,000* (1;,000 !tart-"p costs............................ * (1;,000*  (FF2,000 (%12,00 /et operating loss..................... * 0* (1;0,000*

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)ro*le+ 12-2& (contin"e* 2. Ignoring the aitional +actors cite in part (1* a'ove, Hallas Compan sho"l 'e ini&erent 'etween closing own or contin"ing to operate i+ the level o+ sales rops to 12,000 gallons (#,000 gallons per month* over the two-month perio. The comp"tations areB Cost avoie ' closing the plant +or two months (see a'ove*...................................... 1@2,000 Dess start-"p costs.......................................... 1;,000 /et avoia'le costs......................................... 1#@,000 /et avoia'le costs 1#@,000 Z Contri'"tion margin per gallon 1; per gallon Z12,000 gallons

eri)cationB

!ales (12,000 gallons R $= per gallon* Dess varia'le epenses (12,000 gallons R 21 per gallon*................................ Contri'"tion margin.............................. Dess )e epensesB Man"+act"ring overhea (2$0,000 an 1F0,000 R 2 months*.............. !elling ($10,000 an 2F%,000 R 2 months*............................................ Total )e epenses.............................. !tart-"p costs........................................ Total costs............................................. /et operating loss.................................

perate at 12)*** /allons for T8o #ont%s  ;20,000

Close for T8o #ont%s  0

2=2,000 1#@,000

0 0

;#0,000

$;0,000

#20,000 ==@,000 1,0@0,000 @%@,000 0 1;,000 1,0@0,000 %12,000  (%12,000* (%12,000*


#F$

)ro*le+ 12-21 ($0 min"tes* 1. Incremental reven"eB ie +ee (10,000 pairs R [; per pair*...... eim'"rsement +or costs o+ pro"ctionB (aria'le pro"ction cost o+ [1# pl"s )e overhea cost o+ [= e6"als [21 per pair 10,000 pairs R [21 per pair*.... Total incremental reven"e........................ Incremental costsB aria'le pro"ction costs (10,000 pairs R [1# per pair*.......................................... Increase in net operating income................

[ ;0,000

210,000 2=0,000

1#0,000 [ %0,000

2. !ales reven"e thro"gh reg"lar channels (10,000 pairs R [$2 per pair*.................. [$20,000 !ales reven"e +rom the arm (a'ove*......... 2=0,000
© The McGraw-Hill Companies, Inc., 2012. All rights reserve. #F;


)ro*le+ 12-22 (#0 min"tes* 1. The )e overhea costs are common an will remain the same regarless o+ whether the cartriges are pro"ce internall or p"rchase o"tsie. Hence, the are not relevant. The varia'le man"+act"ring overhea cost per 'o o+ pens is 0.$0, as shown 'elowB Total man"+act"ring overhea cost per 'o o+ pens............................................................... Dess )e man"+act"ring overhea (=0,000 L 100,000 'oes*............................................... aria'le man"+act"ring overhea cost per 'o.

0.@0 0.=0 0.$0

The total varia'le cost o+ pro"cing one 'o o+ Pippo pens isB
1.=0 1.00 0.$0 2.@0

I+ the cartriges +or the Pippo pens are p"rchase +rom the o"tsie s"pplier, then the varia'le cost per 'o o+ Pippo pens wo"l 'eB
1.20 0.%0 0.2F 0.;@ 2.@=

The compan sho"l reect the o"tsie s"pplier5s o&er. Ero"cing the cartriges internall costs 0.0= less per 'o o+ pens than p"rchasing them +rom the s"pplier. Another approach to the sol"tion isB Cost avoie ' p"rchasing the cartrigesB
0.$0 0.10 0.0$


#F=

Total costs avoie.........................................

0.;$

Cost o+ p"rchasing the cartriges.....................

0.;@

Cost savings per 'o ' maing cartriges internall........................................................

0.0=

/ote that the avoia'le cost o+ 0.;$ a'ove represents t%e cost of making one o= of cartridges internall, .

© The McGraw-Hill Companies, Inc., 2012. All rights reserve. #F#


)ro*le+ 12-22 (contin"e* 2. The compan wo"l not want to pa an more than 0.;$ per 'o 'eca"se it can mae the cartriges +or this amo"nt internall. $. The compan has three alternatives +or o'taining the necessar cartriges. It canB \1 \2 \$

Ero"ce all cartriges internall. E"rchase all cartriges eternall. Ero"ce the cartriges +or 100,000 'oes internall an p"rchase the cartriges +or =0,000 'oes eternall.

The costs "ner the three alternatives areB Alternative \1Ero"ce all cartriges internallB aria'le costs (1=0,000 'oes R 0.;$ per 'o*. ie costs o+ aing capacit............................ Total cost............................................................

#;,=00 $0,000 %;,=00

Alternative \2E"rchase all cartriges eternallB aria'le costs (1=0,000 'oes R 0.;@ per 'o*. .

F2,000

Alternative \$Ero"ce 100,000 'oes internall, an p"rchase =0,000 'oes eternallB aria'le costsB 100,000 'oes R 0.;$ per 'o..................... =0,000 'oes R 0.;@ per 'o....................... Total cost..........................................................

;$,000 2;,000 #F,000


#FF

)ro*le+ 12-22 (contin"e* 3r, in terms o+ total cost per 'o o+ pens, the answer wo"l 'eB Alternative \1Ero"ce all cartriges internallB aria'le costs (1=0,000 'oes R 2.@0 per 'o*. ;20,000 ie costs o+ aing capacit............................ $0,000 Total cost............................................................ ;=0,000 Alternative \2E"rchase all cartriges eternallB aria'le costs (1=0,000 'oes R 2.@= per 'o*. ;2F,=00 Alternative \$Ero"ce the cartriges +or 100,000 'oes internall, an p"rchase the cartriges +or =0,000 'oes eternallB aria'le costsB 100,000 'oes R 2.@0 per 'o.................... 2@0,000 =0,000 'oes R 2.@= per 'o...................... 1;2,=00 Total cost.......................................................... ;22,=00 Th"s, the compan sho"l accept the o"tsie s"pplier5s o&er, '"t onl +or the cartriges +or =0,000 'oes. ;. In aition to cost consierations, ?ronson sho"l tae into acco"nt the +ollowing +actorsB a* The a'ilit o+ the s"pplier to meet re6"ire eliver sche"les. '* The 6"alit o+ the cartriges p"rchase +rom the s"pplier. c* Alternative "ses o+ the capacit that is "se to mae the cartriges. * The a'ilit o+ the s"pplier to s"ppl cartriges i+ vol"me increases in +"t"re ears. e* The pro'lem o+ alternative so"rces o+ s"ppl i+ the s"pplier proves "nepena'le.

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)ro*le+ 12-23 (#0 min"tes* 1. The simplest approach to the sol"tion isB Gross margin lost i+ the store is close (22@,000* Dess costs that can 'e avoieB
;=,000 F,000 1=,000 @,000 F=,000 R 12  %,000

2. The

#F%

)ro*le+ 12-23 (contin"e* $. The
© The McGraw-Hill Companies, Inc., 2012. All rights reserve. #@0


)ro*le+ 12-2 (#0 min"tes* 1. !elling price per "nit................. aria'le epenses per "nit...... Contri'"tion margin per "nit.....

;0 2; 1#

%.=0 ^ 10.00 ^ 2.@0 ^ 1.F0 Z 2;.00 Increase "nit sales (@0,000 R 2=*............. 20,000 Contri'"tion margin per "nit......................... R 1# Incremental contri'"tion margin................... $20,000 Dess ae )e selling epense.................. 1=0,000 Incremental net operating income................ 1F0,000 Oes, the increase in )e selling epense wo"l 'e "sti)e. 2. aria'le pro"ction cost per "nit.................. 22.$0 Import "ties, etc. (1;,000 L 20,000 "nits*.......................................................... 0.F0 !hipping cost per "nit................................... 1.=0 ?rea-even price per "nit.............................. 2;.=0 $. I+ the plant operates at 2= o+ normal levels, then onl =,000 "nits will 'e pro"ce an sol "ring the three-month perioB @0,000 "nits per ear R $Q12 Z 20,000 "nits. 20,000 "nits R 2= Z =,000 "nits pro"ce an sol. Given this in+ormation, the simplest approach to the sol"tion isB Contri'"tion margin lost i+ the plant is (@0,000 close (=,000 "nits R 1# per "nit*....... * ie costs that can 'e avoie i+ the plant is closeB ie man"+act"ring overhea cost (;00,000 R $Q12 Z 100,000 100,000 R ;0*.............................. ;0,000 ie selling cost ($#0,000 R $Q12 Z %0,000 %0,000 R 1Q$*.................... $0,000 F0,000 (10,000 /et isavantage o+ closing the plant....... * © The McGraw-Hill Companies, Inc., 2012. All rights reserve. !ol"tions Man"al, Chapter 12

#@1

;0.00 U (%.=0 ^ 10.00 ^ 2.@0 ^ 1.F0* Z 1#.00 Ero)ts wo"l ecline ' 10,000 i+ the plant is close.

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)ro*le+ 12-2 (contin"e* Alternative approachB

!ales (=,000 "nits R ;0 per "nit*. . aria'le epenses (=,000 "nits R 2; per "nit*......... Contri'"tion margin........................ ie epensesB ie man"+act"ring overhea costB ;00,000 R $Q12........................ ;00,000 R $Q12 R #0............. ie selling epenseB $#0,000 R $Q12........................ $#0,000 R $Q12 R 2Q$............... Total )e epenses........................

eep t%e &lant Close t%e pen &lant  200,000  0 120,000 @0,000

0 0

100,000 #0,000 %0,000

#0,000 1%0,000 120,000 (120,000 /et operating income (loss*............ (110,000* *

;. The relevant cost is 1.F0 per "nit, which is the varia'le selling epense per Pet. !ince the 'lemishe "nits have alrea 'een pro"ce, all pro"ction costs (incl"ing the varia'le pro"ction costs* are s"n. The )e selling epenses are not relevant since the will remain the same regarless o+ whether or not the 'lemishe "nits are sol. The varia'le selling epense ma or ma not 'e relevantepening on how the 'lemishe "nits are sol. or eample, the "nits ma 'e sol thro"gh a li6"iator witho"t inc"rring the normal varia'le selling epense. =. The costs that can 'e avoie ' p"rchasing +rom the o"tsie s"pplier are relevant. These costs areB aria'le pro"ction costs...................................... ie man"+act"ring overhea cost (;00,000 R F0 Z 2@0,000 2@0,000 L @0,000 "nits*....... aria'le selling epense (1.F0 R #0*................

22.$0 $.=0 1.02


#@$

Total avoia'le cost...............................................

2#.@2

To 'e accepta'le, the o"tsie man"+act"rer5s 6"otation m"st 'e less than 2#.@2 per "nit.

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)ro*le+ 12-2! (F= min"tes* 1. The 2.00 per "nit general overhea cost is not relevant to the ecision 'eca"se the total general compan overhea cost will 'e the same regarless o+ whether the compan ecies to mae or '" the s"'assem'lies. Also, the epreciation on the ol e6"ipment is not a relevant cost 'eca"se it represents a s"n cost an the ol e6"ipment is worn o"t an m"st 'e replace. The cost o+ s"pervision is relevant 'eca"se this cost can 'e avoie ' '"ing the s"'assem'lies. Dierential Costs &er 'nit #ake +u, 3"tsie s"pplier5s price. .

@.00

2.F=

Total................................

@.;=

Total Dierential Costs for >*)*** 'nits #ake +u, $20,00 0 110,00 0

$.00

120,000

0.;= 0.F= 1.=0

1@,000 $0,000 #0,000 $$@,00 $20,00 0 0

@.00

0.;=

1@,000

 #0,000 per ear L ;0,000 "nits per ear Z 1.=0 per "nit


#@=

)ro*le+ 12-2! (contin"e* 2. a. /ote that "nit costs +or 'oth s"pervision an e6"ipment rental will change i+ the compan nees =0,000 s"'assem'lies each ear. These )e costs will 'e sprea over a larger n"m'er o+ "nits, there' ecreasing the cost per "nit. Dierential Costs &er 'nit #ake +u, 3"tsie s"pplier5s price. . . .
@.00 2.F= $.00 0.;=

Total Dierential Costs<(*)*** 'nits #ake +u, ;00,00 0 1$F,=00 1=0,000 22,=00

0.#0

$0,000

1.20

#0,000

@.00 @.00 0

;00,000

;00,00 0 0

The compan wo"l 'e ini&erent 'etween the two alternatives i+ =0,000 s"'assem'lies were neee each ear.

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)ro*le+ 12-2! (contin"e* '. Again, notice that the "nit costs +or 'oth s"pervision an e6"ipment rental ecrease with the greater vol"me o+ "nits.

3"tsie s"pplier5s price....
Dierential Total Dierential Costs &er Costs<;*)*** 'nit 'nits #ak e +u, #ake +u, @.0 0 ;@0,000 2.F 1#=,00 = 0 $.00 1@0,000 0.;= 2F,000 0.=0 1.00 F.F 0

@.0 0

0.$ 0

$0,000 #0,00 0 ;#2,00 0 ;@0,000 1@,000

The compan sho"l rent the new e6"ipment an mae the s"'assem'lies i+ #0,000 "nits per ear are neee.


#@F

)ro*le+ 12-2! (contin"e* $. 3ther +actors that the compan sho"l consier incl"eB a. 8ill vol"me in +"t"re ears increase, or will it remain constant at ;0,000 "nits per ear_ (I+ vol"me increases, then renting the new e6"ipment 'ecomes more esira'le, as shown in the comp"tations a'ove.* '. Can 6"alit control 'e maintaine i+ the s"'assem'lies are p"rchase +rom the o"tsie s"pplier_ c.
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)ro*le+ 12-2" (;= min"tes* 1. 3nl the avoia'le costs are relevant in a ecision to rop the Moel C$ lawnchair pro"ct. The avoia'le costs areB
Reason not relevant All pro"cts "se the same +acilities no space wo"l 'e +ree i+ a pro"ct were roppe.

All pro"cts "se the same e6"ipment so no e6"ipment can 'e sol. "rthermore, the e6"ipment oes not wear o"t thro"gh "se.

General aministrative epenses

Having etermine the costs that can 'e avoie i+ the Moel C$ lawnchair is roppe, we can now mae the +ollowing comp"tationB !ales reven"e lost i+ the Moel C$ lawnchair is roppe............................................................... $00,000 Dess costs that can 'e avoie (see a'ove*........... 2=2,000
#@%

income i+ the Moel C$ lawnchair is roppe.......

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)ro*le+ 12-2" (contin"e* Th"s, the Moel C$ lawnchair sho"l not 'e roppe "nless the compan can )n more pro)ta'le "ses +or +o r the reso"rces cons"me ' the th e Moel C$ lawnchair. lawnchair. 2. To etermine the minim"m accepta'le level o+ sales, we m"st )rst classi+ the avoia'le costs into varia'le an )e costs as +ollowsB ariale 122,00
0i=ed

10,00 0

Ero"ct managers5 salaries........................ !ales !ales commis commissio sions ns (= o+ sales*. sales*.... ....... ......... ........ ... 1=,000 1=,000 ringe 'ene)ts (20 o+ o+ sa salaries an an co commissions*.. *.......... $,000 2,000 !hipp !hipping ing... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ........ .......... .......... ....... .. 10,000 10,000 2;0,00 12,00 Total Total costs....................................... costs................................ .............. ........... .... 0 0 The Moel C$ lawnchair sho"l 'e retaine as long as its its contri'"tion margin covers its avoia'le )e costs. ?rea-even analsis can 'e "se to )n the sales vol"me where the contri'"tion margin "st e6"als the avoia'le )e costs. The contri'"tion margin ratio is comp"te as +ollowsB CM ratio Z Z

Contri'"tion margin !ales H$00,000-H2;0,000 Z 20T H$00,000


#%1

)ro*le+ 12-2" (contin"e* The 'rea-even sales vol"me can 'e +o"n "sing the 'reaeven +orm"laB ?rea-even point Z Z

ie costs CM ratio H12,000 Z H#0,000 0.20

There+ore, as long as the sales reven"e reven"e +rom the Moel C$ lawnchair ecees #0,000, it is covering its own ow n avoia'le )e costs an is contri'"ting towar covering the common )e costs an towar the pro)ts o+ the entire compan. compan.

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)ro*le+ 12-2# (#0 min"tes* 1. #arc,

Tina

Cari

3enn ,

.e8in g it  2.;0 2.;0 0.20

22.0 [email protected] !ellin !elling g price..... price................. ............ $=.00 $=.00 2;.00 2;.00 0 0 1;.00 aria'le costsB
?stimate D3H d .ales &er 'nit !units" 0.;0 2#,000 0.2= ;2,000 0.F0 ;0,000 0.=0 ;#,000 0.20 ;=0,000

Total D3Hs 10,;00 10,=00 2@,000 2$,000 %0,000 1#1,%00

$. ?eca"se the Cari oll oll has the lowest contri'"ti contri'"tion on margin margin per la'or ho"r, its pro"ction sho"l 'e re"ce ' 1F,000 olls (11,%00 ecess

#%$

)ro*le+ 12-2# (contin"e* ;. ?eca"se the aitional capacit wo"l 'e "se to pro"ce the Cari oll, the compan sho"l 'e willing to pa "p to 21.00 per
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)ro*le+ 12-2$ (#0 min"tes* 1. A pro"ct sho"l 'e processe +"rther i+ the incremental reven"e +rom the +"rther processing ecees the incremental costs. The incremental reven"e +rom +"rther processing o+ the hone isB !elling price o+ a container o+ hone rop canies......................................................... ;.;0 !elling price o+ three-6"arters o+ a po"n o+ hone ($.00 R $Q;*...................................... 2.2= Incremental reven"e per container................. 2.1= The incremental varia'le costs areB

#%=

)ro*le+ 12-2$ (contin"e* I+ the compan can sell more than #,000 containers o+ the canies each month, then pro)ts will 'e higher than i+ the hone were simpl sol o"tright. I+ the compan cannot sell at least #,000 containers o+ the canies each month, then pro)ts will 'e higher i+ the compan iscontin"es maing hone rop canies. To veri+ this, we show 'elow the total contri'"tion to pro)ts o+ sales o+ =,000, #,000, an F,000 containers o+ canies, contraste to sales o+ e6"ivalent amo"nts o+ hone. or eample, instea o+ selling ;,=00 po"ns o+ hone, this same amo"nt o+ hone can 'e processe into #,000 containers o+ can. !ales o+ caniesB Containers sol per month............ =,000 #,000 F,000 !ales reven"e V ;.;0 per 22,00 container..................................... 0 2#,;00 $0,@00 Dess incremental varia'le costs V 1.1F per container..................... =,@=0 F,020 @,1%0 Incremental contri'"tion margin.. . 1#,1=0 1%,$@0 22,#10 Dess avoia'le )e costs............. =,@@0 =,@@0 =,@@0 10,2F Total contri'"tion to pro)ts............ 0 1$,=00 1#,F$0 !ales o+ e6"ivalent amo"nt o+ honeB Eo"ns sol per month................ $,F=0 ;,=00 =,2=0 11,2= !ales reven"e V $.00 per po"n. 0 1$,=00 1=,F=0  =,000 containers R $Q; po"ns per container Z $,F=0 po"ns #,000 containers R $Q; po"ns per container Z ;,=00 po"ns F,000 containers R $Q; po"ns per container Z =,2=0 po"ns I+ there is a choice 'etween selling $,F=0 po"ns o+ hone or selling =,000 containers o+ canies, pro)ts wo"l 'e higher selling the hone o"tright (11,2=0 vers"s 10,2F0*. The compan sho"l 'e ini&erent 'etween selling ;,=00 po"ns o+ hone or #,000 containers o+ can. In either case, the © The McGraw-Hill Companies, Inc., 2012. All rights reserve. #%#


contri'"tion to pro)ts wo"l 'e 1$,=00. 3n the other han, i+ +ace with a choice o+ selling =,2=0 po"ns o+ hone or F,000 containers o+ canies, pro)ts wo"l 'e higher processing the hone into canies (1#,F$0 vers"s 1=,F=0*.


#%F

Case 12-2% (120 min"tes* 1. The pro"ct margins comp"te ' the acco"nting epartment +or the r"ms an mo"ntain 'ie +rames sho"l not 'e "se in the ecision o+ which pro"ct to mae. The pro"ct margins are lower than the sho"l 'e "e to the presence o+ allocate )e common costs that are irrelevant in this ecision. Moreover, even a+ter the irrelevant costs have 'een remove, what matters is the pro)ta'ilit o+ the two pro"cts in relation to the amo"nt o+ the constraine reso"rceweling timethat the "se. A pro"ct with a ver low margin ma 'e esira'le i+ it "ses ver little o+ the constraine reso"rce. In short, the )nancial ata provie ' the acco"nting epartment are prett m"ch "seless +or maing this ecision. 2. !t"ents ma have answere this 6"estion ass"ming that irect la'or is a varia'le cost, even tho"gh the case strongl hints that irect la'or is a )e cost. The sol"tion is shown here ass"ming that irect la'or is )e. The sol"tion ass"ming that irect la'or is varia'le will 'e shown in part (;*.

Solution assuming direct labor is fxed

!elling price.............................. aria'le costsB
#anufactured &urc%ase #ountain d 5.5 5.5 +ike Drums Drums 0rames 1=;.00 1=;.00 #=.00 120.00 0.00

;;.=0 1.0=

1F.=0 0.#0

0.@=

0.@=

0.;0

120.@=  $$.1=

;#.;0 10F.#0

1@.=0 ;#.=0

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Case 12-2% (contin"e* $. ?eca"se the eman +or the weling machine ecees the 2,000 ho"rs that are availa'le, pro"cts that "se the machine sho"l 'e prioriti9e 'ase on their contri'"tion margin per 8elding %our . The comp"tations are carrie o"t 'elow "ner the ass"mption that irect la'or is a )e cost an then "ner the ass"mption that it is a varia'le cost.

Solution assuming direct labor is fxed #anufactured #ountai 5.5 n +ike Drums 0rames Contri'"tion margin per "nit (+rom part 2* (a*........................................................... 8eling ho"rs per "nit ('*......................... Contri'"tion margin per weling ho"r (a* L ('*.......................................................

10F.#0 0.@ ho"r 1$;.=0 per ho"r

;#.=0 0.2 ho"r 2$2.=0 per ho"r


#%%

Case 12-2% (contin"e* ?eca"se the contri'"tion margin per "nit o+ the constraine reso"rce (i.e., weling time* is larger +or the mo"ntain 'ie +rames than +or the >!> r"ms, the +rames mae the most pro)ta'le "se o+ the weling machine. Conse6"entl, the compan sho"l man"+act"re as man mo"ntain 'ie +rames as possi'le "p to eman an then "se an le+tover capacit to pro"ce >!> r"ms. ?"ing the r"ms +rom the o"tsie s"pplier can )ll an remaining "nsatis)e eman +or >!> r"ms. The necessar calc"lations are carrie o"t 'elow. Analysis assuming direct labor is a fxed cost !a"

!" 'nit Contriution uantit, #argin Total ho"rs availa'le.............. Mo"ntain 'ie +rames pro"ce............................. >!> !>
$,=00 1,#2=

 ;#.=0 10F.#0

1,$F=

$$.1=

!c" $eldin g Time per 'nit 0.20 0.@0

!a" @ !"

!a" @ !c" Total $eldin g Time F00 1,$00

DessB Contri'"tion margin +rom present operationsB 2,=00 r"ms R 10F.#0 CM per r"m............................. Increase contri'"tion

+alanc e of $eldin g Time 2,000 1,$00 0

Total Contriution 1#2,F= 0 1F;,@=0 ;=,=@ 1 $@$,1@1

2#%,00 0 11;,1@


margin an net operating income................................

F00

1

margin an net operating income................................

1


F01

Case 12-2% (contin"e* ;. The comp"tation o+ the contri'"tion margins an the analsis o+ the 'est pro"ct mi are repeate here "ner the ass"mption that irect la'or costs are varia'le.

Solution assuming direct labor is a variable cost #anufactured &urc%ase #ountain d 5.5 5.5 +ike Drums Drums 0rames !elling price................................ 1=;.00 1=;.00 #=.00 aria'le costsB
Case 12-2% (contin"e* ;. The comp"tation o+ the contri'"tion margins an the analsis o+ the 'est pro"ct mi are repeate here "ner the ass"mption that irect la'or costs are varia'le.

Solution assuming direct labor is a variable cost #anufactured &urc%ase #ountain d 5.5 5.5 +ike Drums Drums 0rames !elling price................................ 1=;.00 1=;.00 #=.00 aria'le costsB !> r"ms appear to 'e a 'etter "se o+ the constraint than the mo"ntain 'ie +rames. The ass"mption a'o"t the 'ehavior o+ irect la'or reall oes matter.


F02

Case 12-2% (contin"e* Solution assuming direct labor is a variable cost !a"

uantit, Total ho"rs availa'le...............

!" 'nit Contriution #argin

>!>
2,=00

10$.1 0

0

2;.00

>!>
=00

$$.1=

!c" !a" @ !c" $eldin g Time Total per $eldin 'nit g Time 0.@0 0.20

2,000 0

DessB Contri'"tion margin +rom present operationsB 2,=00 r"ms R 10$.10 CM per r"m.............................. Increase contri'"tion margin an net operating income.................................

!a" @ !" +alanc e of $eldin g Time 2,000 0 0

Total Contriution 2=F,F= 0 0 1#,=F = 2F;,$2=

2=F,F= 0  1#,=F =


F0$

Case 12-2% (contin"e* =. The case strongl s"ggests that irect la'or is )eB XThe mo"ntain 'ie +rames co"l 'e pro"ce with eisting e6"ipment an personnel.Y /evertheless, it wo"l 'e a goo iea to eamine how m"ch la'or time is reall neee "ner the two opposing plans.

Direct 3aor&roduction Hours &er 'nit Elan 1B Mo"ntain 'ie +rames..................

Total Direct 3aorHours

$,=00 1.2=

;,$F=

Case 12-2% (contin"e* =. The case strongl s"ggests that irect la'or is )eB XThe mo"ntain 'ie +rames co"l 'e pro"ce with eisting e6"ipment an personnel.Y /evertheless, it wo"l 'e a goo iea to eamine how m"ch la'or time is reall neee "ner the two opposing plans.

Direct 3aor&roduction Hours &er 'nit Elan 1B Mo"ntain 'ie +rames.................. >!> r"ms............... Elan 2B >!> r"ms...............

Total Direct 3aorHours

$,=00 1,#2=

1.2= 0.2=

;,$F= ;0# ;,F@1

2,=00

0.2=

#2=

 22.=0 L [email protected] per ho"r Z 1.2= ho"rs  ;.=0 L [email protected] per ho"r Z 0.2= ho"r !ome ca"tion is avise. Elan 1 ass"mes that irect la'or is a )e cost. However, this plan re6"ires over ;,000 more irect la'or-ho"rs than Elan 2 an the present sit"ation. A +"ll-time emploee wors a'o"t 1,%00 ho"rs a ear, so the ae worloa is a'o"t e6"ivalent to two +"ll-time emploees.

F0;

Case 12-2% (contin"e* Contri'"tion margin +rom Elan 1B Mo"ntain 'ie +rames pro"ce ($,=00 R ;#.=0*........................................................... >!> !>
1#2,F= 0 1F;,@=0 ;=,=@ 1 $@$,1@1 #@,;0 0 $1;,F@ 1

Contri'"tion margin +rom Elan 2B.........................

/et e&ect o+ Elan 2 on net operating income.......

2#%,00 0 1#,=F = 2@=,=F =

/et avantage o+ Elan 1......................................

 2%,20 #

>!> !>
Elan 1, intro"cing the new pro"ct, wo"l still 'e optimal even i+ two more irect la'or emploees wo"l have to 'e hire. The reason +or this is s"'tle. I+ the compan oes not mae the >!> r"ms itsel+, it can still '" them. Th"s, "sing an ho"r o+ weling time to mae the mo"ntain 'ie +rames oes not mean giving "p a contri'"tion margin o+ 12@.@@ on r"ms (ass"ming irect la'or is a varia'le cost*. The opport"nit cost o+ "sing the weling machine to pro"ce mo"ntain 'ie +rames is less than this since a p"rchase r"m can replace a man"+act"re r"m. An amene analsis "sing the opport"nit cost concept appears on the net page.


F0=

Case 12-2% (contin"e* Amended solution assuming direct labor is fxed #anufactured #ountai 5.5 n +ike Drums 0rames Contri'"tion margin per "nit (+rom part 2* (a*............................................................. F;.;= ;#.=0 8eling ho"rs per "nit ('*........................... 0.@ ho"r 0.2 ho"r Contri'"tion margin per weling ho"r (a* %$.0# 2$2.=0 L ('*......................................................... per ho"r per ho"r Amended solution assuming direct labor is a variable cost #anufactured #ountai 5.5 n +ike Drums 0rames Contri'"tion margin per "nit (+rom part 2* (a*............................................................. #%.%= 2;.00 8eling ho"rs per "nit ('*........................... 0.@ ho"r 0.2 ho"r Contri'"tion margin per weling ho"r (a* @F.;; 120.00 L ('*......................................................... per ho"r per ho"r  /et o+ the $$.1= contri'"tion margin o+ a p"rchase r"m. I+ the compan oes not mae a r"m, it can p"rchase one, so the lost contri'"tion +rom maing 'ie +rames rather than r"ms is less than it otherwise wo"l 'e. 8ith this amene approach, ass"ming irect la'or is varia'le points to the same sol"tion as when irect la'or is ass"me to 'e )eplace the highest priorit on maing mo"ntain 'ie +rames. This won5t alwas happen.


F0#

Case 12-3& (F= min"tes* 1. Contin"ing to o'tain covers +rom its own Greenville Cover Elant wo"l allow Mo'ile !eating Corporation to maintain its c"rrent level o+ control over the 6"alit o+ the covers an the timing o+ their eliver. Seeping the Greenville Cover Elant open also allows Mo'ile !eating Corporation more 7ei'ilit than p"rchasing the coverings +rom o"tsie s"ppliers. Mo'ile !eating Corporation co"l more easil alter the coverings5 esign an change the 6"antities pro"ce, especiall i+ longterm contracts are re6"ire with o"tsie s"ppliers. Mo'ile !eating Corporation sho"l also consier the economic impact that closing Greenville Cover will have on the comm"nit an how this might a&ect Mo'ile !eating Corporation5s other operations in the region. 2. a. The +ollowing costs can 'e avoie ' closing the plant, an there+ore are relevant to the ecisionB Materials............................... Da'orB
 @,000,000 #,F00,000 ;00,000 1,%00,000

Total ann"al relevant costs....

%,000,000 %00,000 1F,%00,00 0

'. The +ollowing costs can5t 'e avoie ' closing the plant, an there+ore are not relevant to the ecisionB
1,$00,000 2,100,000 F00,000 #00,000 1,F00,000 #,;00,000


F0F

Case 12-3& (contin"e*
0irst 6ear t%er 6ears (21,000,00(21,000,000 0* * 1F,%00,000

1F,%00,000

(2,@00,000* 2,000,000


F0@

/et avantage (isavantage* o+ closing the plant...........................

 ($,%00,000  ($,100,000 * *


F0%

Case 12-3& (contin"e* ;. actors that sho"l 'e consiere ' Mo'ile !eating Corporation 'e+ore maing a ecision incl"eB a. Alternative "ses o+ the '"iling an e6"ipment. '. An ta implications. c. The o"tsie s"pplier5s prices in +"t"re ears. . The cost to man"+act"re coverings at the Greenville Cover Elant in +"t"re ears. e. The val"e o+ the time estin an her sta& wo"l have spent managing the Greenville Cover Elant. +. The morale o+ Mo'ile !eating Corporation emploees at other plants.


F10

Case 12-31 (%0 min"tes* 1. The lowest price :enco co"l 'i +or the one-time special orer o+ 2=,000 po"ns (2= lots* witho"t losing mone wo"l $;,F=0, as shown 'elow. -#B $00 po"ns per lot R 2= lots Z F,=00 po"ns at 0.#0 per po"n....................................................... ;,=00 MP-@B 200 po"ns per lot R 2= lots Z =,000 po"ns at 1.#0 per po"n................................................... @,000 ?4-FB 100 po"ns per lot R 2= lots Z 2,=00 po"ns at 0.== per po"n, the amo"nt :enco co"l reali9e ' selling ?4-F `0.#= maret price U 0.10 hanling 1,$F charge..................................................................... = Total irect materials cost........................................... 1@,;2 =
=,#00 F,$= 0 12,%= 0

3verheaB This special orer will not increase )e overhea costs. There+ore, onl the varia'le overhea is relevant. F=0
$,$F=

Total relevant cost o+ the special orer.......................

$;,F= 0


F11


F12

Case 12-31 (contin"e* 2. In this part, we calc"late the price +or rec"rring orers o+ 2=,000 po"ns (2= lots* "sing the compan5s r"le o+ maring "p its +"ll man"+act"ring cost. This is pro'a'l not the 'est pricing polic to +ollow, '"t is a common practice in '"siness. -#B F,=00 po"ns R 0.#0 per po"n............. ;,=00 MP-@B =,000 po"ns R 1.#0 per po"n............ @,000 ?4-FB 2,=00 po"ns R 0.#= per po"n............ 1,#2= Total irect materials cost................................. 2$,12=

F1$

Case 12-32 (%0 min"tes* 1. The original cost o+ the +acilities at Ashton is a s"n cost an sho"l 'e ignore in an ecision. The ecision 'eing consiere here is whether to contin"e operations at Ashton. The onl relevant costs are the +"t"re +acilit costs that wo"l 'e a&ecte ' this ecision. I+ the +acilit were sh"t own, the Ashton +acilit has no resale val"e. In aition, i+ the Ashton +acilit were sol, the compan wo"l have to rent aitional space at the remaining processing centers. 3n the other han, i+ the +acilit were to remain in operation, the '"iling sho"l last ine)nitel, so the compan oes not have to 'e concerne a'o"t event"all replacing it. 4ssentiall, there is no real cost at this point o+ "sing the Ashton +acilit espite what the )nancial per+ormance report inicates. Inee, it might 'e a 'etter iea to consier sh"tting own the other +acilities 'eca"se the rent on those +acilities might 'e avoie. The costs that are relevant in the ecision to sh"t own the Ashton +acilit areB ;00,00 Increase in rent at Eocatello an Iaho alls............ 0

F1;

Case 12-32 (contin"e* inancial Eer+ormance A+ter !h"tting
F1=

In s"m, it is i]c"lt to escri'e the recommenation to close the Ashton +acilit as ethical 'ehavior. In ?ra"n5s e+ense, however, it is not +air to hol him responsi'le +or the mistae mae ' his preecessor.


F1#

Case 12-32 (contin"e* It sho"l 'e note that the per+ormance report re6"ire ' corporate hea6"arters is liel to lea to other pro'lems s"ch as the one ill"strate here. The ar'itrar allocations o+ corporate an regional aministrative epenses to processing centers ma mae other processing centers appear to 'e "npro)ta'le even tho"gh the are not. In this case, the pro'lems create ' these ar'itrar allocations were compo"ne ' "sing an irrelevant +acilities epense )g"re on the per+ormance report. $. Erices sho"l 'e set ignoring the epreciation on the Ashton +acilit. As arg"e in part (1* a'ove, the real cost o+ "sing the Ashton +acilit at this point is 9ero. An attempt to recover the s"n cost o+ the original cost o+ the '"iling ' charging higher prices than the maret will 'ear will lea to less '"siness an lower pro)ts.


F1F

14e_gnbhr_ch12_sm

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