14e_gnbhr_ch12_sm

(1)

Chapter 12

Diferential Analysis: The Key to

Decision Making

Solutions to Questions

(2)

12-1

12-1 A relevant cost is a cost that i&ersA relevant cost is a cost that i&ers in total 'etween the

in total 'etween the alternaalternatives in atives in a ecision.

ecision.

12-2

12-2 An incremental cost (or 'ene)t* isAn incremental cost (or 'ene)t* is the change in cost (or 'ene)t* that will the change in cost (or 'ene)t* that will res"lt +rom some propose action. An res"lt +rom some propose action. An opport"nit cost is the 'ene)t that is lost opport"nit cost is the 'ene)t that is lost or sacri)ce when reecting some co"rse or sacri)ce when reecting some co"rse o+ action. A s"n cost

o+ action. A s"n cost is a cost that hasis a cost that has alrea 'een inc"rre an that cannot 'e alrea 'een inc"rre an that cannot 'e change ' an +"t"re ecision.

change ' an +"t"re ecision.

12-3

12-3 /o. aria'le costs are relevant/o. aria'le costs are relevant costs onl i+ the i&er in total

costs onl i+ the i&er in total 'etween'etween the alternatives "ner consieration. the alternatives "ner consieration.

12-

12- /o. /ot all )e costs are s"n/o. /ot all )e costs are s"n onl those +or which the cost has

onl those +or which the cost has alreaalrea 'een irrevoca'l inc"rre. A varia'le cost 'een irrevoca'l inc"rre. A varia'le cost can 'e a s"n cost i+ it has alrea 'een can 'e a s"n cost i+ it has alrea 'een inc"rre.

inc"rre.

12-!

12-! /o. A varia'le cost is a cost that/o. A varia'le cost is a cost that varies in total amo"nt in

varies in total amo"nt in irect proporirect proportiontion to changes in the level o+ activit. A

to changes in the level o+ activit. A i&erential cost is the i&erence in cost i&erential cost is the i&erence in cost 'etween two alternatives

'etween two alternatives. I+ . I+ the level o+the level o+ activit is the same +or the two

activit is the same +or the two

alternatives, a varia'le cost will not 'e alternatives, a varia'le cost will not 'e a&ecte an it will 'e irrelevant.

a&ecte an it will 'e irrelevant.

12-"

12-" /o. 3nl those +"t"re costs that/o. 3nl those +"t"re costs that i&er 'etween the alternatives are i&er 'etween the alternatives are relevant.

relevant.

12-#

12-# 3nl those costs that wo"l 'e3nl those costs that wo"l 'e avoie as a res"lt o+ ropping the avoie as a res"lt o+ ropping the pro"ct line are relevant in the ecision. pro"ct line are relevant in the ecision. Costs that will not 'e a&ecte ' the Costs that will not 'e a&ecte ' the ecision are irrelevant.

ecision are irrelevant.

12-$

12-$ /ot necessaril. An apparent loss/ot necessaril. An apparent loss ma 'e the res"lt o+ allocate common ma 'e the res"lt o+ allocate common costs or o+ s"n costs

costs or o+ s"n costs that cannot 'ethat cannot 'e avoie i+ the pro"ct is

avoie i+ the pro"ct is roppe. Aroppe. A

pro"ct sho"l 'e iscontin"e onl i+ the pro"ct sho"l 'e iscontin"e onl i+ the contri'"tion margin that will 'e lost as a contri'"tion margin that will 'e lost as a res"lt o+ ropping the pro"ct is less than res"lt o+ ropping the pro"ct is less than the )e costs that wo"l

the )e costs that wo"l 'e avoie.'e avoie. 4ven in that sit"ation the pro"ct ma 'e 4ven in that sit"ation the pro"ct ma 'e retaine

retaine i+  i+ it promotes the sale o+ it promotes the sale o+ otherother pro"cts.

pro"cts.

12-%

12-% Allocations o+ common )e costsAllocations o+ common )e costs can mae a pro"ct (or other segment* can mae a pro"ct (or other segment* appear to 'e "npro)ta'le, whereas in +act appear to 'e "npro)ta'le, whereas in +act it ma 'e pro)ta'le.

it ma 'e pro)ta'le.

12-1&

12-1& I+ a compan ecies to mae aI+ a compan ecies to mae a part internall rather than to '" it +rom part internall rather than to '" it +rom an o"tsie s"pplier, then a portion o+ the an o"tsie s"pplier, then a portion o+ the compan5s +acilities have to 'e "se to compan5s +acilities have to 'e "se to mae the part. The compan5s opport"nit mae the part. The compan5s opport"nit cost is meas"re ' the 'ene)ts that

cost is meas"re ' the 'ene)ts that co"l 'e erive +rom the 'est alternative co"l 'e erive +rom the 'est alternative "se o+ the

"se o+ the +acilities.+acilities.

12-11

12-11 An reso"rce that is re6"ire toAn reso"rce that is re6"ire to mae pro"cts an get them into the mae pro"cts an get them into the hans o+ c"stomers co"l 'e a constraint. hans o+ c"stomers co"l 'e a constraint. !ome eamples are machine time, irect !ome eamples are machine time, irect la'or time, 7oor space, raw materials, la'or time, 7oor space, raw materials, investment capital, s"pervisor time, an investment capital, s"pervisor time, an storage space. 8hile not covere in the storage space. 8hile not covere in the tet, constraints can also 'e intangi'le tet, constraints can also 'e intangi'le an o+ten tae the +orm o+ a +ormal or an o+ten tae the +orm o+ a +ormal or in+ormal polic that prevents the in+ormal polic that prevents the organi9at

organi9ation +rom ion +rom +"rthering its goals.+"rthering its goals.

12-12

12-12 Ass"ming that )e costs are notAss"ming that )e costs are not a&ecte, pro)ts are maimi9e when the a&ecte, pro)ts are maimi9e when the total contri'"tion margin is maimi9e. A total contri'"tion margin is maimi9e. A compan can maimi9e its total

compan can maimi9e its total contri'"tion margin ' +oc"sing on contri'"tion margin ' +oc"sing on thethe pro"cts with the greatest amo"nt o+ pro"cts with the greatest amo"nt o+ contri'"tion margin per "nit o+

contri'"tion margin per "nit o+ thethe constraine reso"rce.

constraine reso"rce.

12-13

12-13 :oint pro"c :oint pro"cts are tts are two or morwo or moree pro"cts that are pro"ce +rom a pro"cts that are pro"ce +rom a common inp"t. :oint costs are the costs common inp"t. :oint costs are the costs that are inc"rre "p to the split-o& point. that are inc"rre "p to the split-o& point. The split-o& point

The split-o& point is the point iis the point in then the man"+act"ring process where oint man"+act"ring process where oint pro"cts can 'e

pro"cts can 'e recogni9recogni9e as e as inivi"alinivi"al pro"cts.

pro"cts.

12-1

12-1 :oint costs sho" :oint costs sho"l not 'e allocl not 'e allocateate among oint

among oint pro"cts +or ecision-maingpro"cts +or ecision-maing p"rposes. I+ oint costs

p"rposes. I+ oint costs are allocateare allocate among the oint

among the oint pro"cts, then managerspro"cts, then managers ma thin the are avoia'le costs o+ the ma thin the are avoia'le costs o+ the en pro"cts. However, the oint costs will en pro"cts. However, the oint costs will contin"e to 'e inc"rre as long as the contin"e to 'e inc"rre as long as the process is r"n regarless o+ what is one process is r"n regarless o+ what is one with one o+ the

with one o+ the en pro"cts. Th"s, whenen pro"cts. Th"s, when maing ecisions a'o"t the en

maing ecisions a'o"t the en pro"cts,pro"cts, © The McGraw-Hill Companies, Inc., 2012. All rights reserve.

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12-1

12-1 A relevant cost is a cost that i&ersA relevant cost is a cost that i&ers in total 'etween the

in total 'etween the alternaalternatives in atives in a ecision.

ecision.

12-2

12-2 An incremental cost (or 'ene)t* isAn incremental cost (or 'ene)t* is the change in cost (or 'ene)t* that will the change in cost (or 'ene)t* that will res"lt +rom some propose action. An res"lt +rom some propose action. An opport"nit cost is the 'ene)t that is lost opport"nit cost is the 'ene)t that is lost or sacri)ce when reecting some co"rse or sacri)ce when reecting some co"rse o+ action. A s"n cost

o+ action. A s"n cost is a cost that hasis a cost that has alrea 'een inc"rre an that cannot 'e alrea 'een inc"rre an that cannot 'e change ' an +"t"re ecision.

change ' an +"t"re ecision.

12-3

12-3 /o. aria'le costs are relevant/o. aria'le costs are relevant costs onl i+ the i&er in total

costs onl i+ the i&er in total 'etween'etween the alternatives "ner consieration. the alternatives "ner consieration.

12-

12- /o. /ot all )e costs are s"n/o. /ot all )e costs are s"n onl those +or which the cost has

onl those +or which the cost has alreaalrea 'een irrevoca'l inc"rre. A varia'le cost 'een irrevoca'l inc"rre. A varia'le cost can 'e a s"n cost i+ it has alrea 'een can 'e a s"n cost i+ it has alrea 'een inc"rre.

inc"rre.

12-!

12-! /o. A varia'le cost is a cost that/o. A varia'le cost is a cost that varies in total amo"nt in

varies in total amo"nt in irect proporirect proportiontion to changes in the level o+ activit. A

to changes in the level o+ activit. A i&erential cost is the i&erence in cost i&erential cost is the i&erence in cost 'etween two alternatives

'etween two alternatives. I+ . I+ the level o+the level o+ activit is the same +or the two

activit is the same +or the two

alternatives, a varia'le cost will not 'e alternatives, a varia'le cost will not 'e a&ecte an it will 'e irrelevant.

a&ecte an it will 'e irrelevant.

12-"

12-" /o. 3nl those +"t"re costs that/o. 3nl those +"t"re costs that i&er 'etween the alternatives are i&er 'etween the alternatives are relevant.

relevant.

12-#

12-# 3nl those costs that wo"l 'e3nl those costs that wo"l 'e avoie as a res"lt o+ ropping the avoie as a res"lt o+ ropping the pro"ct line are relevant in the ecision. pro"ct line are relevant in the ecision. Costs that will not 'e a&ecte ' the Costs that will not 'e a&ecte ' the ecision are irrelevant.

ecision are irrelevant.

12-$

12-$ /ot necessaril. An apparent loss/ot necessaril. An apparent loss ma 'e the res"lt o+ allocate common ma 'e the res"lt o+ allocate common costs or o+ s"n costs

costs or o+ s"n costs that cannot 'ethat cannot 'e avoie i+ the pro"ct is

avoie i+ the pro"ct is roppe. Aroppe. A

pro"ct sho"l 'e iscontin"e onl i+ the pro"ct sho"l 'e iscontin"e onl i+ the contri'"tion margin that will 'e lost as a contri'"tion margin that will 'e lost as a res"lt o+ ropping the pro"ct is less than res"lt o+ ropping the pro"ct is less than the )e costs that wo"l

the )e costs that wo"l 'e avoie.'e avoie. 4ven in that sit"ation the pro"ct ma 'e 4ven in that sit"ation the pro"ct ma 'e retaine

retaine i+  i+ it promotes the sale o+ it promotes the sale o+ otherother pro"cts.

pro"cts.

12-%

12-% Allocations o+ common )e costsAllocations o+ common )e costs can mae a pro"ct (or other segment* can mae a pro"ct (or other segment* appear to 'e "npro)ta'le, whereas in +act appear to 'e "npro)ta'le, whereas in +act it ma 'e pro)ta'le.

it ma 'e pro)ta'le.

12-1&

12-1& I+ a compan ecies to mae aI+ a compan ecies to mae a part internall rather than to '" it +rom part internall rather than to '" it +rom an o"tsie s"pplier, then a portion o+ the an o"tsie s"pplier, then a portion o+ the compan5s +acilities have to 'e "se to compan5s +acilities have to 'e "se to mae the part. The compan5s opport"nit mae the part. The compan5s opport"nit cost is meas"re ' the 'ene)ts that

cost is meas"re ' the 'ene)ts that co"l 'e erive +rom the 'est alternative co"l 'e erive +rom the 'est alternative "se o+ the

"se o+ the +acilities.+acilities.

12-11

12-11 An reso"rce that is re6"ire toAn reso"rce that is re6"ire to mae pro"cts an get them into the mae pro"cts an get them into the hans o+ c"stomers co"l 'e a constraint. hans o+ c"stomers co"l 'e a constraint. !ome eamples are machine time, irect !ome eamples are machine time, irect la'or time, 7oor space, raw materials, la'or time, 7oor space, raw materials, investment capital, s"pervisor time, an investment capital, s"pervisor time, an storage space. 8hile not covere in the storage space. 8hile not covere in the tet, constraints can also 'e intangi'le tet, constraints can also 'e intangi'le an o+ten tae the +orm o+ a +ormal or an o+ten tae the +orm o+ a +ormal or in+ormal polic that prevents the in+ormal polic that prevents the organi9at

organi9ation +rom ion +rom +"rthering its goals.+"rthering its goals.

12-12

12-12 Ass"ming that )e costs are notAss"ming that )e costs are not a&ecte, pro)ts are maimi9e when the a&ecte, pro)ts are maimi9e when the total contri'"tion margin is maimi9e. A total contri'"tion margin is maimi9e. A compan can maimi9e its total

compan can maimi9e its total contri'"tion margin ' +oc"sing on contri'"tion margin ' +oc"sing on thethe pro"cts with the greatest amo"nt o+ pro"cts with the greatest amo"nt o+ contri'"tion margin per "nit o+

contri'"tion margin per "nit o+ thethe constraine reso"rce.

constraine reso"rce.

12-13

12-13 :oint pro"c :oint pro"cts are tts are two or morwo or moree pro"cts that are pro"ce +rom a pro"cts that are pro"ce +rom a common inp"t. :oint costs are the costs common inp"t. :oint costs are the costs that are inc"rre "p to the split-o& point. that are inc"rre "p to the split-o& point. The split-o& point

The split-o& point is the point iis the point in then the man"+act"ring process where oint man"+act"ring process where oint pro"cts can 'e

pro"cts can 'e recogni9recogni9e as e as inivi"alinivi"al pro"cts.

pro"cts.

12-1

12-1 :oint costs sho" :oint costs sho"l not 'e allocl not 'e allocateate among oint

among oint pro"cts +or ecision-maingpro"cts +or ecision-maing p"rposes. I+ oint costs

p"rposes. I+ oint costs are allocateare allocate among the oint

among the oint pro"cts, then managerspro"cts, then managers ma thin the are avoia'le costs o+ the ma thin the are avoia'le costs o+ the en pro"cts. However, the oint costs will en pro"cts. However, the oint costs will contin"e to 'e inc"rre as long as the contin"e to 'e inc"rre as long as the process is r"n regarless o+ what is one process is r"n regarless o+ what is one with one o+ the

with one o+ the en pro"cts. Th"s, whenen pro"cts. Th"s, when maing ecisions a'o"t the en

maing ecisions a'o"t the en pro"cts,pro"cts, © The McGraw-Hill Companies, Inc., 2012. All rights reserve.

(4)

the oint costs are not avoia'le an are the oint costs are not avoia'le an are irrelevant.

irrelevant.

12-1!

12-1! I+ the incremental reven"e +romI+ the incremental reven"e +rom +"rther processing ecees the

+"rther processing ecees the

incremental costs o+ +"rther processing, incremental costs o+ +"rther processing, the pro"ct sho"l 'e processe +"rther. the pro"ct sho"l 'e processe +"rther.

12-1"

12-1" Most costs o+ a Most costs o+ a 7ight are either7ight are either s"n costs, or costs that o not epen on s"n costs, or costs that o not epen on

the n"m'er o+ passengers on the 7ight. the n"m'er o+ passengers on the 7ight. <epreciation o+ the aircra+t, salaries o+ <epreciation o+ the aircra+t, salaries o+ personnel on the gro"n an in the air, personnel on the gro"n an in the air, an +"el costs, +or eample, are the same an +"el costs, +or eample, are the same whether the 7ight is +"ll or almost empt. whether the 7ight is +"ll or almost empt. There+or

There+ore, aing more, aing more passengere passengers ats at re"ce +ares when seats wo"l otherwise re"ce +ares when seats wo"l otherwise 'e empt oes little to increase the total 'e empt oes little to increase the total costs o+ operating the

costs o+ operating the 7ight, '"t increases7ight, '"t increases the total contri'"tion an to

the total contri'"tion an total pro)t.tal pro)t.

(5)

'(ercise 12-1

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

C Caasse e 11 CCaasse e 22 Item Item Releva Releva nt nt Not Not Releva Releva nt nt Relevan Relevan t t Not Not Relevan Relevan t t a

a. !. !aallees s rreevveenn""ee... >> >> '

'.. <<iirreecct t mmaatteerriiaallss... >> >> c

c.. <<iirreecct t llaa''oorr... >> >> 

.. arariia'a'lele

man"+act"ring man"+act"ring o

ovveerrhheeaa... >> >> e.

e. ?o?oo o vaval"l"eMeMooelel A

A$$00000 0 mmaacchhiinnee... >> >> ++.. <<iissppososaal val vall""ee

Moel A$000 Moel A$000 m

maacchhiinnee... >> >> g.

g. <ep<eprereciciatatioionnMoMoelel A

A$$00000 0 mmaacchhiinnee... >> >> h.

h. MaMarret vaet val"l"eeMoMoelel ?$@00 machine ?$@00 machine

((ccoosstt**... >> >> i.

i. iie e maman"n"+a+actct"r"riningg o

ovveerrhheeaa... >> >> .

. aria'le sellingaria'le selling e

eppeennssee... >> >> 

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(6)

'(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... (@0,000*

ie costs that can 'e avoieB

Dia'ilit ins"rance...

1=,00 0

Erogram aministrator5s salar... $F,000 =2,000

<ecrease in net operating income +or the

organi9ation as a whole... (2@,000*

<epreciation on the van is a s"n cost an the van has no salvage val"e since it wo"l 'e onate to another

organi9ation. The general aministrative overhea is allocate an none o+ it wo"l 'e avoie i+ the program were roppe th"s it is not relevant to the ecision.

The same res"lt can 'e o'taine with the alternative analsis 'elowB Current Total Total If House-keeping Is Dropped Dierence: Net perating Income Increase or !Decrease" even"es... %00,00 0 ##0,000 (2;0,000* aria'le epenses... ;%0,000 $$0,000 1#0,000 Contri'"tion margin... ;10,000 $$0,000 (@0,000* ie epensesB <epreciation... #@,000 #@,000 0 Dia'ilit ins"rance... ;2,000 2F,000 1=,000 Erogram aministrators5 salaries... 11=,000 F@,000 $F,000 General aministrative overhea... 1@0,000 1@0,000 0

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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.

(8)

'(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 Home Nursing #eals on $%eels House-keeping even"es... %00,00 0 2#0,00 0 ;00,00 0 2;0,00 0 aria'le epenses... ;%0,000 120,000 210,000 1#0,000 Contri'"tion margin... ;10,000 1;0,000 1%0,000 @0,000 Tracea'le )e epensesB

<epreciation... #@,000 @,000 ;0,000 20,000

Dia'ilit ins"rance... ;2,000 20,000 F,000 1=,000

Erogram aministrators5

salaries... 11=,000 ;0,000 $@,000 $F,000 Total tracea'le )e

epenses... 22=,000 #@,000 @=,000 F2,000 Erogram segment margins... 1@=,000  F2,000 10=,00 0  @,000 General aministrative overhea... 1@0,000 /et operating income

(loss*...  =,000

(9)

1. &er 'nit

Dierential

Costs 1()*** units

#ak

e +u, #ake +u,

Cost o+ p"rchasing... 20 $00,00 0 <irect materials...  #  %0,000 <irect la'or... @ 120,000 aria'le man"+act"ring overhea... 1 1=,000 ie man"+act"ring overhea, tracea'le1_... ₂ _$0,000 ie man"+act"ring overhea, common... 0 0 0 0 Total costs... 1F 20 2==,00 0 $00,00 0 <i&erence in +avor o+

contin"ing to mae the

parts... $ ;=,000

1_{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.

2. #ake +u,

Cost o+ p"rchasing (part 1*...

$00,00 0 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

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0 <i&erence in +avor o+ p"rchasing +rom

the o"tsie s"pplier... 20,000

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

(11)

'(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 Total 'nit 1* racelets Incremental reven"e... $;%.%= $,;%%.=0 Incremental costsB aria'le costsB <irect materials... 1;$.00 1,;$0.00 <irect la'or... @#.00 @#0.00 aria'le man"+act"ring overhea... F.00 F0.00 !pecial )ligree... #.00 #0.00

Total varia'le cost... 2;2.00 2,;20.00

ie costsB

E"rchase o+ special tool... ;#=.00

Total incremental cost... 2,@@=.00

Incremental net operating income. .  #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.

(12)

'(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

.ki /olf 0is%ing

ault Cadd, uiver

!elling price per "nit... 220 $00 1F=

aria'le cost per "nit... #0 120 ==

Contri'"tion margin per "nit (a*...

1#0 1@0 120

Elastic inection moling machine processing time re6"ire to pro"ce one "nit ('*... ; min"tes = min"tes 2 min"tes Contri'"tion margin per "nit

o+ the constraine reso"rce (a* L ('*... ;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.

.ki /olf 0is%ing

ault Cadd, uiver

!elling price per "nit... 220 $00 1F=

aria'le cost per "nit... #0 120 ==

1#0 1@0 120

Eo"ns o+ plastic pellets re6"ire to pro"ce one "nit ('*...

=

po"ns # po"ns

= po"ns Contri'"tion margin per "nit

o+ the constraine reso"rce

$2 per po"n $0 per po"n 2; per po"n

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(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.

(14)

'(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.

(15)

'(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

3eat%er 3irar,

C%air !elling price per "nit... 1,@00

aria'le cost per "nit... 1,200

Contri'"tion margin per "nit (a*...  #00

Npholster shop time re6"ire to pro"ce one

"nit ('*... 12 ho"rs Contri'"tion margin per "nit o+ the constraine

reso"rce (a* L ('*...

=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 /ains-oroug% 4rmc%ai r 3eat%e r 3irar, C%air C%ippe n-dale 0aric 4rmc%a ir

!elling price per "nit... 1,$00 1,@00 1,;00

aria'le cost per "nit... @00 1,200 1,000

 =00  #00  ;00

Npholster shop time

re6"ire to pro"ce one

"nit ('*... @ ho"rs

12

ho"rs = ho"rs Contri'"tion margin per "nit

o+ the constraine reso"rce (a* L ('*... #2.=0 per ho"r =0.00 per ho"r @0.00 per ho"r

(16)

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 &roduct 6 &roduct 7 !ales val"e a+ter +"rther

processing... @0,000 1=0,000 F=,000

!ales val"e at split-o& point... =0,000 %0,000 #0,000

Incremental reven"e... $0,000 #0,000 1=,000

Cost o+ +"rther processing... $=,000 ;0,000 12,000

Incremental pro)t (loss*... (=,000* 20,000 $,000

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

(17)

'(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.

(18)

'(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 5 &roduct 6 &roduct 7 (a* <irect materials re6"ire per

"nit... 2;.00 1=.00 %.00

('* Cost per po"n... $.00 $.00 $.00

(c* Eo"ns re6"ire per "nit (a* L

('*... @ = $

(* Contri'"tion margin per "nit... $2.00 1;.00 21.00

Contri'"tion margin per po"n

o+ materials "se (* L (c*... ;.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

(19)

'(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...

(2#0,000 * 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 1;0,000

/et isavantage o+ ropping the cases...

(120,000 * The same sol"tion can 'e o'taine ' preparing comparative

income statementsB eep vernig %t Cases Drop vernig% t Cases Dierence: Net perating Income Increase or !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

<epreciation o+ e6"ipment. ... $#,000 $#,000 0

Avertisingtracea'le... 110,000 0 110,000

Ins"rance on inventories... %,000 0 %,000

E"rchasing epartment... =0,000 =0,000 0

Total )e epenses... $$0,000 1%0,000 1;0,000

(20)

/et operating loss...

 (F0,000 *

(1%0,000

* (120,000*

(21)

'(ercise 12-11 (20 min"tes* 1.

ie cost per mile ($,=00 L 10,000

miles*... 0.$=

aria'le operating cost per mile... 0.0@

Average cost per mile... 0.;$

 <epreciation... 2,000 Ins"rance... %#0

Garage rent... ;@0

A"tomo'ile ta an license. #0

Total... $,=00

2. The varia'le operating costs wo"l 'e relevant in this sit"ation. The epreciation wo"l not 'e relevant since it relates to a

s"n cost. However, an ecrease in the resale val"e o+ the car "e to its "se wo"l 'e relevant. The a"tomo'ile ta an

license costs wo"l 'e inc"rre whether !amantha ecies to rive her own car or rent a car +or the trip "ring spring 'rea an are there+ore irrelevant. It is "nliel that her ins"rance costs wo"l increase as a res"lt o+ the trip, so the are

irrelevant as well. The garage rent is relevant onl i+ she co"l avoi paing part o+ it i+ she rives her own car.

$. 8hen )g"ring the incremental cost o+ the more epensive car, the relevant costs wo"l 'e the p"rchase price o+ the new car (net o+ the resale val"e o+ the ol car* an the increases in the )e costs o+ ins"rance an a"tomo'ile ta an license. The original p"rchase price o+ the ol car is a s"n cost an is

there+ore irrelevant. The varia'le operating costs wo"l 'e the same an there+ore are irrelevant. (!t"ents are incline to

thin that varia'le costs are alwas relevant an )e costs are alwas irrelevant in ecisions. This re6"irement helps to ispel that notion.*

(22)

'(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,

Cost o+ p"rchasing... 2$.= 0 ;F0,00 0 Cost o+ maingB <irect materials...  ;.@0  %#,000 <irect la'or... F.00 1;0,000 aria'le man"+act"ring overhea... $.20 #;,000 ie man"+act"ring overhea... ;.00  @0,000 Total cost... 1%.0 0 2$.= 0 $@0,00 0 ;F0,00 0  The remaining # o+ )e man"+act"ring overhea cost

wo"l not 'e relevant 'eca"se it will contin"e

regarless o+ whether the compan maes or '"s the parts.

The 1=0,000 rental val"e o+ the space 'eing "se to pro"ce part -$ is an opport"nit cost o+ contin"ing to pro"ce the part internall. Th"s, the complete analsis isB

#ake +u,

Total cost, as a'ove... $@0,000

;F0,00 0 ental val"e o+ the space (opport"nit

cost*... 1=0,000 Total cost, incl"ing opport"nit cost... =$0,000

;F0,00 0

/et avantage in +avor o+ '"ing... #0,000

(23)

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

(24)

1. 4 + C

(1* Contri'"tion margin per "nit... 1@ $# 20 (2* <irect la'or cost per "nit... 12 $2 1#

($* <irect la'or rate per ho"r... @ @ @

(;* <irect la'or-ho"rs re6"ire per "nit (2* L ($*. 1.= ;.0 2.0 Contri'"tion margin per irect la'or-ho"r (1*

L (;*... 12  % 10 2. The compan sho"l concentrate its la'or time on pro"cing

pro"ct AB

4 + C

Contri'"tion margin per irect

la'or-ho"r... 12 % 10

<irect la'or-ho"rs availa'le...

R $,00 0 R $,00 0 R $,00 0 Total contri'"tion margin...

$#,00 0 2F,00 0 $0,00 0 Altho"gh pro"ct A has the lowest contri'"tion margin per "nit an the secon lowest contri'"tion margin ratio, it has the

highest contri'"tion margin per irect la'or-ho"r. !ince la'or time seems to 'e the compan5s constraint, this meas"re sho"l g"ie management in its pro"ction ecisions. $. The amo"nt ?anner Compan sho"l 'e willing to pa in

overtime wages +or aitional irect la'or time epens on how the time wo"l 'e "se. I+ there are "n)lle orers +or all o+ the pro"cts, ?anner wo"l pres"ma'l "se the aitional time to mae more o+ pro"ct A. 4ach ho"r o+ irect la'or time generates 12 o+ contri'"tion margin over an a'ove the "s"al irect la'or cost. There+ore, ?anner sho"l 'e willing to pa "p to 20 per ho"r (the @ "s"al wage pl"s the contri'"tion

margin per ho"r o+ 12* +or aitional la'or time, '"t wo"l o+ co"rse pre+er to pa +ar less. The "pper limit o+ 20 per irect la'or ho"r signals to managers how val"a'le aitional la'or ho"rs are to the compan.

(25)

'(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 ?.

(26)

'(ercise 12-1 (1= min"tes*

1. Monthl pro)ts wo"l increase ' %,000B

&er 'nit Total for 2)*** 'nits Incremental reven"e... 12.00 2;,000 Incremental costsB aria'le costsB <irect materials... 2.=0 =,000 <irect la'or... $.00 #,000

aria'le man"+act"ring overhea... 0.=0 1,000

aria'le selling an aministrative... 1.=0 $,000

Total varia'le cost...  F.=0 1=,000

ie costsB

/one a&ecte ' the special orer... 0

Total incremental cost... 1=,000

Incremental net operating income...  %,000

2. The relevant cost is 1.=0 (the varia'le selling an

aministrative costs*. All other varia'le costs are s"n 'eca"se the "nits have alrea 'een pro"ce. The )e costs are not relevant 'eca"se the wo"l not 'e a&ecte ' the sale o+ le+tover "nits.

(27)

'(ercise 12-1! (10 min"tes*

Contri'"tion margin lost i+ the ?ath <epartment is roppeB

Dost +rom the ?ath <epartment... F00,000 Dost +rom the Sitchen <epartment (10 R

2,;00,000*... 2;0,000

Total lost contri'"tion margin... %;0,000

Dess avoia'le )e costs (%00,000 U $F0,000*... . =$0,000

<ecrease in overall net operating income... ;10,000

(28)

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

Relevant Costs

Item #ake +u,

<irect materials (#0,000 V ;.00*... 2;0,00

0

<irect la'or (#0,000 V 2.F=*... 1#=,000

aria'le man"+act"ring overhea

(#0,000 V 0.=0*... $0,000

ie man"+act"ring overhea, tracea'le

(1Q$ o+ 1@0,000*... #0,000

Cost o+ p"rchasing +rom o"tsie s"pplier (#0,000 V 10*... #00,00 0 Total cost... ;%=,00 0 #00,00 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.

(29)

'(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... 2= :"n +oo cons"me "ring

trip... @

!nagge )shing l"res... F

Total... ;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.

(30)

'(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.

(31)

)ro*le+ 12-1$ ($0 min"tes* 1.

Contri'"tion margin lost i+ the to"r is

iscontin"e... (2,100*

Dess to"r costs that can 'e avoie i+ the to"r is iscontin"eB

To"r promotion... #00 ee, to"r g"ie... F00 "el +or '"s... 12=

3vernight paring +ee, '"s... =0

oom W meals, '"s river an to"r g"ie. . 1F= 1,#=0

/et ecrease in pro)ts i+ the to"r is

iscontin"e...  (;=0*

The +ollowing costs are not relevant to the ecisionB

Cost Reason

!alar o+ '"s river The rivers are all on salar an

there wo"l 'e no change in the n"m'er o+ rivers on the paroll.

<epreciation o+ '"s <epreciation "e to wear an tear

is negligi'le an there wo"l 'e no change in the n"m'er o+ '"ses in the 7eet.

Dia'ilit ins"rance, '"s There wo"l 'e no change in the

n"m'er o+ '"ses in the 7eet. ?"s maintenance W

preparation

There wo"l 'e no change in the si9e o+ the maintenance W

preparation sta&.

(32)

)ro*le+ 12-1$ (contin"e* Alternative !ol"tionB eep t%e Tour Drop t%e Tour Dierence : Net perating Income Increase or !Decrease" Ticet reven"e... $,000  0 ($,000*

Dess varia'le epenses... %00 0 %00

Contri'"tion margin... 2,100 0 (2,100*

Dess to"r epensesB

To"r promotion... #00 0 #00

!alar o+ '"s river... $=0 $=0 0

ee, to"r g"ie... F00 0 F00

"el +or '"s... 12= 0 12=

<epreciation o+ '"s... ;=0 ;=0 0

Dia'ilit ins"rance, '"s... 200 200 0

3vernight paring +ee, '"s... =0 0 =0

oom W meals, '"s river an

to"r g"ie... 1F= 0 1F=

?"s maintenance an

preparation... $00 $00 0

Total to"r epenses... 2,%=0 1,$00 1,#=0

/et operating loss...  (@=0* (1,$00*  (;=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.

(33)

)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

$.#0 per po"nQ1# o"nces per po"n*... 1.$=

!elling price o+ one /ew Oor c"t (@ o"nces R

2.%0 per po"nQ1# o"nces per po"n*... 1.;=

Total reven"e +rom +"rther processing... 2.@0

Dess reven"e +rom one T-'one stea... 2.2=

Incremental reven"e +rom +"rther processing... 0.==

Dess cost o+ +"rther processing... 0.20

Ero)t per po"n +rom +"rther processing... 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.

(34)

)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 two-month 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

(#0,000 R 2 months Z 120,000*.... ....

120,00 0 ie selling costs

($10,000 R 10 R 2 months*...

#2,00

0 1@2,000

/et isavantage o+ closing, 'e+ore

start-"p costs... (12#,000*

A start-"p costs... (1;,000*

<isavantage o+ closing the plant... (1;0,000*

/o, the compan sho"l not close the plant it sho"l contin"e to operate at the re"ce level o+ 11,000 gallons pro"ce an sol each month. Closing will res"lt in a 1;0,000 greater loss over the two-month perio than i+ the compan contin"es to operate. Aitional +actors are the potential loss o+ goowill among the c"stomers who nee the 11,000 gallons o+ M:-F each month an the averse e&ect on emploee morale. ? closing own, the nees o+ c"stomers will not 'e met (no inventories are on han*, an their '"siness ma 'e

permanentl lost to another s"pplier.

(35)

)ro*le+ 12-2& (contin"e* Alternative !ol"tionB &lant ept pen &lant Closed Dierence <Net perating Income Increase !Decrease" !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*

!tart-"p costs...

(1;,000

* (1;,000*

/et operating loss...

 (FF2,000 *

(%12,00

0* (1;0,000*

(36)

)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 perate at

12)*** /allons for T8o #ont%s Close for T8o #ont%s

!ales (12,000 gallons R $= per gallon*  ;20,000  0

Dess varia'le epenses (12,000 gallons

R 21 per gallon*... 2=2,000 0

Contri'"tion margin... 1#@,000 0

Dess )e epensesB

Man"+act"ring overhea (2$0,000

an 1F0,000 R 2 months*... ;#0,000 $;0,000

!elling ($10,000 an 2F%,000 R 2

months*... #20,000 ==@,000

Total )e epenses... 1,0@0,000 @%@,000

!tart-"p costs... 0 1;,000

Total costs... 1,0@0,000 %12,000

/et operating loss...  (%12,000* (%12,000*

(37)

)ro*le+ 12-21 ($0 min"tes* 1. Incremental reven"eB

ie +ee (10,000 pairs R [; per pair*... [ ;0,000

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*.... 210,000

Total incremental reven"e... 2=0,000

Incremental costsB

aria'le pro"ction costs (10,000 pairs R

[1# per pair*... 1#0,000

Increase in net operating income... [ %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

<ecrease in reven"e receive... F0,000

Dess varia'le selling epenses avoie i+ the arm5s o&er is accepte (10,000 pairs

R [2 per pair*... 20,000 /et ecrease in net operating income with

the arm5s o&er... [ =0,000

This ass"mes that the sales thro"gh reg"lar channels can 'e recovere a+ter the special orer has 'een +"l)lle. This ma not happen i+ reg"lar c"stomers who are t"rne awa to )ll the special orer are permanentl lost to competitors.

(38)

)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... 0.@0 Dess )e man"+act"ring overhea (=0,000 L

100,000 'oes*... 0.=0

aria'le man"+act"ring overhea cost per 'o. 0.$0

The total varia'le cost o+ pro"cing one 'o o+ Pippo pens isB <irect materials... 1.=0 <irect la'or... 1.00

aria'le man"+act"ring overhea... 0.$0

Total varia'le cost per 'o... 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

<irect materials (1.=0 R @0*... 1.20

<irect la'or (1.00 R %0*... 0.%0

aria'le man"+act"ring overhea (0.$0 R

%0*... 0.2F E"rchase o+ cartriges... 0.;@

Total varia'le cost per 'o... 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

<irect materials (1.=0 R 20*... 0.$0

<irect la'or (1.00 R 10*... 0.10

aria'le man"+act"ring overhea (0.$0 R

10*... 0.0$

(39)

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, .

(40)

)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 Ero"ce all cartriges internall.

\2 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*. #;,=00

ie costs o+ aing capacit... $0,000

Total cost... %;,=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... ;$,000

=0,000 'oes R 0.;@ per 'o... 2;,000

Total cost... #F,000

(41)

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.

(42)

)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

<irect avertising... $#,000

!ales salaries... ;=,000

<eliver salaries... F,000

!tore rent... #=,000 !tore management salaries (new

emploee wo"l not 'e hire to )ll

vacant position at another store*. . . 1=,000

General o]ce salaries... @,000

Ntilities... 2F,200 Ins"rance on inventories (2Q$ R

%,000*... #,000

4mploment taes... %,000 21@,200

<ecrease in compan net operating income i+ the <owntown !tore is

close...  (%,@00*

!alaries avoie ' closing the storeB

!ales salaries... ;=,000

<eliver salaries... F,000

!tore management salaries... 1=,000

General o]ce salaries... @,000

Total salaries... F=,000

4mploment ta rate... R 12

4mploment taes avoie...  %,000

2. The <owntown !tore sho"l not 'e close. I+ the store is

close, overall compan net operating income will ecrease ' %,@00 per 6"arter.

(43)

$. The <owntown !tore sho"l 'e close i+ 200,000 o+ its sales are pice "p ' the Nptown !tore. The net e&ect o+ the

clos"re will 'e an increase in overall compan net operating income ' F#,200 per 6"arterB

Gross margin lost i+ the <owntown !tore is close....

(22@,000 * Gross margin gaine at the Nptown !toreB

200,000 R ;$... @#,000

/et loss in gross margin... (1;2,000* Costs that can 'e avoie i+ the <owntown !tore is

close (part 1*... 21@,200 /et avantage o+ closing the <owntown !tore...  F#,200

(44)

)ro*le+ 12-2 (#0 min"tes*

1. !elling price per "nit... ;0

aria'le epenses per "nit... 2;

Contri'"tion margin per "nit... 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

close (=,000 "nits R 1# per "nit*...

(@0,000 * 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

/et isavantage o+ closing the plant...

(10,000 *

(45)

;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.

(46)

)ro*le+ 12-2 (contin"e* Alternative approachB eep t%e &lant pen Close t%e &lant

!ales (=,000 "nits R ;0 per "nit*. .  200,000  0

aria'le epenses

(=,000 "nits R 2; per "nit*... 120,000 0

Contri'"tion margin... @0,000 0

ie epensesB

ie man"+act"ring overhea costB

;00,000 R $Q12... 100,000

;00,000 R $Q12 R #0... #0,000

ie selling epenseB

$#0,000 R $Q12... %0,000

$#0,000 R $Q12 R 2Q$... #0,000

Total )e epenses... 1%0,000 120,000

/et operating income (loss*... (110,000*

(120,000 * ;. 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... 22.$0 ie man"+act"ring overhea cost (;00,000 R

F0 Z 2@0,000 2@0,000 L @0,000 "nits*... $.=0

aria'le selling epense (1.F0 R #0*... 1.02

(47)

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.

(48)

)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

Total Dierential Costs for

>*)*** 'nits

#ake +u, #ake +u,

3"tsie s"pplier5s price. . @.00

$20,00 0 <irect materials... 2.F= 110,00 0 <irect la'or (;.00 R 0.F=*... $.00 120,000 aria'le overhea (0.#0 R 0.F=*... 0.;= 1@,000 !"pervision... 0.F= $0,000 46"ipment rental... 1.=0 #0,000 Total... @.;= @.00 $$@,00 0 $20,00 0 <i&erence in +avor o+ '"ing 0.;= 1@,000

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