94638525 Solution Manual Managerial Accounting Hansen Mowen 8th Editions ch 12
Accountancy (Bicol University)
94638525 Solution Manual Managerial Accounting Hansen Mowen 8th Editions ch 12
Accountancy (Bicol University)
393911
CHAPTER 12
TACTICAL DECISION MAKING
QUESTIONS FOR WRITING AND DISCUSSION
1. A tactical decision is short-run in nature; it involves choosing among alternatives with an immediate or limited end in view. A stra- tegic decision involves selecting strategies that yield a long-term competitive advan- tage.
2. Depreciation is an allocation of a sunk cost.
This cost is a past cost and will never differ across alternatives.
3. The salary of a supervisor in an accept or reject decision is an example of an irrelevant future cost.
4. If one alternative is to be judged superior to another alternative on the basis of cash-flow comparisons, then cash flows must be ex- pressed as an annual amount (or periodic amount); otherwise, consideration must be given to the time value of the nonperiodic cash flows.
5. Disagree. Qualitative factors also have an important bearing on the decision and may, at times, overrule the quantitative evidence from a relevant costing analysis.
6. The purchase of equipment needed to pro- duce a special order is an example of a fixed cost that is relevant.
7. Relevant costs are those costs that differ across alternatives. Differential costs are the differences between the costs of two alter- natives.
8. Depreciation is a relevant cost whenever it is a future cost that differs across alternatives.
Thus, it must involve a capital asset not yet acquired.
9. Past costs can be used as information to help predict future costs.
10. Yes. Suppose, for example, that sufficient materials are on hand for producing a part for two years. After two years, the part will be replaced by a newly engineered part. If there is no alternative use of the materials, then the cost of the materials is a sunk cost and not relevant in a make-or-buy decision.
11. Complementary effects may make it more expensive to drop a product, as the dropped product has a negative impact on other products.
12. A manager can identify alternatives by using his or her own knowledge and experience and by obtaining input from others who are familiar with the problem.
13. No. Joint costs are irrelevant. They occur regardless of whether the product is sold at the split-off point or processed further.
14. Yes. The incremental revenue is $1,400, and the incremental cost is only $1,000, creating a net benefit of $400.
15. Regardless of how many units are pro- duced, fixed costs remain the same. Thus, fixed costs do not change as product mix changes.
16. No. If a scarce resource is used in producing the two products, then the product providing the greatest contribution per unit of scarce resource should be selected. For more than one scarce resource, linear programming may be used to select the optimal mix.
17. If a firm is operating below capacity, then a price that is above variable costs will in- crease profits. A firm may sell a product be- low cost as a loss leader, hoping that many customers will purchase additional items with greater contribution margins. Grocery stores often use this strategy.
18. Different prices can be quoted to customers in markets not normally served, to noncom- peting customers, and in a competitive bid- ding setting.
19. Linear programming is used to select the optimal product mix whenever there are mul- tiple constrained scarce resources.
20. An objective function is the one to be max- imized (or minimized) subject to a set of constraints. A constraint restricts the possi- ble values of variables appearing in the ob- jective function. Usually, a constraint is con-
393922 cerned with a scarce resource. A constraint set is the collection of all constraints for a given problem.
21. A feasible solution is a solution to a linear programming problem that satisfies the problem’s constraints. The feasible set of solutions is the collection of all feasible solu- tions.
22. To solve a linear programming problem graphically, use the following four steps: (1) graph each constraint, (2) identify the feasi- ble set of solutions, (3) identify all corner points in the feasible set, and (4) select the corner point that yields the optimal value for the objective function. Typically, when a li- near programming problem has more than two or three products, the simplex method must be used.
393933
EXERCISES 12–1
The correct order is: D, E, B, F, C, A.
12–2
Situation Flexible Resource Committed Resource Short Term
Committed Resource Multiple Periods A Forms & supplies Purchasing agents
Telephone/internet fees
Office equipment B Counter staff
Food Utilities
Paper supplies Advertising
Building and parking lot lease
C Substitute help Gasoline
Lawn mower oil Power mower Weed eater Pickup truck
12–3
1. The two alternatives are to make the component in house or to buy it from the outside supplier.
2. Alternatives Differential
Make Buy Cost to Make
Direct materials $ 2.95 — $ 2.95
Direct labor 0.40 — 0.40
Variable overhead 1.80 — 1.80
Purchase cost — $6.50 (6.50)
Total relevant cost $ 5.15 $6.50 $ (1.35) Chesbrough should make the component in house because operating income will decrease by $27,000 ($1.35 × 20,000) if it is purchased from Berham Elec- tronics.
393944
12–4
1. Alternatives Differential
Make Buy Cost to Make
Direct materials $ 2.95 — $ 2.95
Direct labor 0.40 — 0.40
Variable overhead 1.80 — 1.80
Avoidable fixed overhead 1.85 — 1.85
Purchase cost — $6.50 (6.50)
Total relevant cost $ 7.00 $6.50 $ (0.50)
2. Chesbrough should purchase the component from Berham Electronics be- cause operating income will increase by $10,000 ($0.50 × 20,000).
12–5
1. Regulars Seasonals Total
Sales revenue $135,000 $15,000 $150,000 Less: Variable expenses 50,000 8,600 58,600 Contribution margin $85,000 $6,400 $91,400
Less: Direct fixed expenses 3,000 1,200 4,200 Segment margin $82,000 $5,200 $ 87,200
Less: Common fixed expenses 60,000
Operating income $ 27,200
2. Dropping the seasonals line will reduce operating income by $5,200.
393955
12–6
1. If Product C is dropped, profit will decrease by $15,000 since the avoidable direct fixed costs are only $55,000 ($80,000 – $25,000). Depreciation is not re- levant.
2. A new income statement, assuming that C is dropped and demand for B de- creases by 10 percent, is given below (amounts are in thousands).
A B Total
Sales revenue $1,800 $1,440 $3,240
Less: Variable expenses 1,350 900 2,250 Contribution margin $450 $ 540 $990
Less: Direct fixed expenses 150 300 450
Segment margin $300 $ 240 $ 540
Less: Common fixed expenses 340
Operating income $ 200
Operating income will decrease by $50,000 ($250,000 – $200,000).
12–7
1. Direct materials $ 8.00 Direct labor 10.00 Variable overhead 4.00
Relevant cost per unit $22.00
Yes, Thomson should accept the special order, because operating income will increase by $68,000 [($24 − $22) × 34,000].
393966
12–7 Concluded
2. Additional revenue ($24 × 34,000) $816,000 Less:
Direct materials ($8 × 34,000) 272,000 Direct labor ($10 × 34,000) 340,000 Variable overhead ($4 × 34,000) 136,000 Contribution margin $68,000
Additional packing cost ($6,000 × 7)* 42,000 Increase in income $26,000
* 34,000/5,000 = 6.8, which is rounded up to 7 to reflect the lumpy nature of the packing capacity (since additional capacity is purchased in 5,000 unit in- crements)
Yes, the special order should be accepted because income will increase by
$26,000.
12–8
1. Direct materials $ 9.00 Direct labor 6.50 Variable overhead 2.00 Sales commission 1.75
Relevant cost per unit $19.25
No, Melton should not accept the special order, because operating income will decrease by $8,750 [($19.25 − $18) × 7,000].
2. Direct materials $ 9.00 Direct labor 6.50 Variable overhead 2.00
Relevant cost per unit $17.50
Yes, Melton should accept the special order, because operating income will increase by $3,500 [($18.00 − $17.50) × 7,000].
393977
12–9
1. Sales $ 293,000
Costs 264,000
Operating profit $ 29,000
2. Sell Process Further Difference
Revenues $40,000 $73,700 $33,700
Further processing cost 0 23,900 23,900 Operating income $40,000 $49,800 $ 9,800 The company should process Delta further, because operating profit would increase by $9,800 if it were processed further. (Note: Joint costs are irrele- vant to this decision, because the company will incur them whether or not Delta is processed further.)
12–10
1. ($30 × 2,000) + ($60 × 4,000) = $300,000
2. Juno Hera
Contribution margin $30 $60
÷ Pounds of material ÷ 2 ÷ 5
Contribution margin/pound $15 $12 Norton should make the 2,000 units of Juno, then make Hera.
2,000 units of Juno × 2 = 4,000 pounds
16,000 pounds – 4,000 pounds = 12,000 pounds for Hera Hera production = 12,000/5 = 2,400 units
Product mix is 2,000 Juno and 2,400 Hera.
Total contribution margin = (2,000 × $30) + (2,400 × $60) = $204,000
393988
12–11
1. Basic Standard Deluxe
Price $ 9.00 $30.00 $35.00
Variable cost 6.00 20.00 10.00
Contribution margin $ 3.00 $10.00 $25.00
÷ Machine hours ÷ 0.10 ÷ 0.50 ÷ 0.75
Contribution margin/MHr. $30.00 $20.00 $33.33 The company should sell only the deluxe unit with contribution margin per machine hour of $33.33. Sealing can produce 20,000 (15,000/0.75) deluxe units per year. These 20,000 units, multiplied by the $25 contribution margin per unit, would yield total contribution margin of $500,000.
2. Produce and sell 12,000 deluxe units, which would use 9,000 machine hours.
Then, produce and sell 50,000 basic units, which would use 5,000 machine hours. Then produce and sell 2,000 standard units, which would use the re- maining 1,000 machine hours.
Total contribution margin = ($25 × 12,000) + ($3 × 50,000) + ($10 × 2,000) = $470,000
12–12
1. COGS + Markup(COGS) = Sales
$144,300 + Markup($144,300) = $206,349 Markup($144,300) = $206,349 – $144,300 Markup = $62,049/$144,300
Markup = 0.43, or 43%
2. Direct materials $ 800 Direct labor 1,600
Overhead 3,200
Total cost $ 5,600 Add: Markup 2,408
Initial bid $ 8,008
393999
12–13
1. COGS + Markup(COGS) = Sales
$1,000,000 + Markup($1,000,000) = $1,250,000 Markup($1,000,000) = $1,250,000 – $1,000,000 Markup = $250,000/$1,000,000
Markup = 0.25, or 25%
2. Price = $43,000 + (0.25 × $43,000) = $53,750
12–14
1. Model A-4 Model M-3
Contribution margin $24 $ 15
÷ Hours on lathe ÷ 6 ÷ 3
Contribution margin/hours on lathe $ 4 $ 5 Model M-3 has the higher contribution margin per hour of drilling machine use, so all 12,000 hours should be spent producing it. If that is done, 4,000 (12,000 hours/3 hours per unit) units of Model M-3 should be produced. Zero units of Model A-4 should be produced.
2. If only 2,500 units of Model M-3 can be sold, then 2,500 units should be pro- duced. This will take 7,500 hours of drilling machine time. The remaining 4,500 hours should be spent producing 750 (4,500/6) units of Model A-4.
404000
12–15
1. Model 14-D Model 33-P
Contribution margin $ 12 $ 10
÷ Hours on lathe ÷ 4 ÷ 2
Contribution margin/hours on lathe $ 3 $ 5 Model 33-P has the higher contribution margin per hour of lathe use, so all 12,000 hours should be spent producing it. If that is done, 6,000 (12,000 hours/2 hours per unit) units of Model 33-P should be produced. Zero units of Model 14-D should be produced.
2. If only 5,000 units of Model 33-P can be sold, then 5,000 units should be pro- duced. This will take 10,000 hours of lathe time. The remaining 2,000 hours should be spent producing 500 (2,000/4) units of Model 14-D.
12–16
1. Let X = Number of Model 14-D produced Let Y = Number of Model 33-P produced Maximize Z = $12X + $10Y (objective function) 4X + 2Y ≤ 12,000 (lathe constraint)
X ≤ 2,000 (demand constraint) Y ≤ 5,000 (demand constraint) X ≥ 0
Y ≥ 0
404011
12–16 Continued 2.
Y
6,000
5,000
4,000
3,000
2,000
1,000
A E X
0 1,000 2,000 3,000 4,000 5,000 Solution: The corner points are points A, B, C, D, and E. The point of intersec- tion of the linear constraints is obtained by solving the two equations simul- taneously.
Corner Point X-Value Y-Value Z = $12X + $10Y
A 0 0 $ 0
B 0 5,000 50,000
C 500 5,000 56,000
D 2,000 2,000 44,000
E 2,000 0 24,000
*The intersection values for X and Y can be found by solving the simultane- ous equations:
B C
D
404022
12–16 Concluded Corner Point C:
Y = 5,000
4X + 2Y = 12,000 4X + 2(5,000) = 12,000
4X = 2,000
X = 500
Z = $12(500) + $10(5,000) = $56,000 Corner Point D:
X = 2,000
4X + 2Y = 12,000 4(2,000) + 2Y = 12,000
2Y = 4,000
Y = 2,000
Z = $12(2,000) + $10(2,000) = $44,000
Optimal solution is Point C, where X = 500 units and Y = 5,000 units.
3. At the optimal level, the contribution margin is $56,000.
12–17
1. Let X = Number of Product A produced Let Y = Number of Product B produced
Maximize Z = $30X + $60Y (objective function) 2X + 5Y ≤ 6,000 (direct material constraint) 3X + 2Y ≤ 6,000 (direct labor constraint) X ≤ 1,000
Y ≤ 2,000 X ≥ 0 Y ≥ 0
404033
12–17 Concluded 2.
Y
3,000
2,000
1,000
X
0 1,000 2,000 3,000
Solution: The corner points are the origin, the points where X = 0, Y = 0, and where two linear constraints intersect. The point of intersection of the two li- near constraints is obtained by solving the two equations simultaneously.
Corner Point X-Value Y-Value Z = $30X + $60Y
A 0 0 $ 0
B 1,000 0 30,000
C 1,000 800 78,000*
D 0 1,200 72,000
*The values for X and Y are found by solving the simultaneous equations:
X = 1,000
2X + 5Y = 6,000 2(1,000) + 5Y = 6,000
Y = 800
Z = $30(1,000) + $60(800) = $78,000
Optimal solution: X = 1,000 units and Y = 800 units 3. At the optimal level, the contribution margin is $78,000.
A B C D
404044
12–18
1. The amounts Heath has spent on purchasing and improving the Silverado are irrelevant because these are sunk costs.
2. Alternatives
Cost Item Restore Silverado Buy Dodge Ram
Transmission $2,400
Water pump 400
Master cylinder 1,700
Sell Silverado — $(9,400)
Cost of new car — 12,300
Total $4,500 $ 2,900
Heath should sell the Silverado and buy the Dodge Ram because it provides a net savings of $1,600.
Note: Heath should consider the qualitative factors. If he restored the Silvera- do, how much longer would it last? What about increased license fees and in- surance on the newer car? Could he remove the stereo and put it in the Dodge Ram without decreasing the Silverado’s resale value by much?
12–19
1. Make Buy
Direct materials $360,000 —
Direct labor 120,000 —
Variable overhead 100,000 —
Fixed overhead 88,000 —
Purchase cost — $640,000 ($16 × 40,000) Total relevant costs $668,000 $640,000
Sherwood should purchase the part.
2. Maximum price = $668,000/40,000 = $16.70 per unit
3. Income would increase by $28,000 ($668,000 – $640,000).
404055
12–20
1. Make Buy
Direct materials $360,000 —
Direct labor 120,000 —
Variable overhead 100,000 —
Purchase cost — $640,000 ($16 × 40,000) Total relevant costs $580,000 $640,000
Sherwood should continue manufacturing the part.
2. Maximum price = $580,000/40,000 = $14.50 per unit
3. Income would decrease by $60,000 ($640,000 – $580,000).
404066
PROBLEMS 12–21
Steps in Austin’s decision:
Step 1: Define the problem. The problem is whether to continue studying at his present university, or to study at a university with a nationally recog- nized engineering program.
Step 2: Identify the alternatives. Events A and B. (Students may want to include event I—possible study for a graduate degree. However, future events indicate that Austin still defined his problem as in Step 1 above.)
Step 3: Identify costs and benefits associated with each feasible alternative.
Events C, E, F, and I. (Students may also list E and F in Step 5—they are included here because they may help Austin estimate future income benefits.)
Step 4: Total relevant costs and benefits for each feasible alternative. No specif- ic event is listed for this step, although we can intuit that it was done, and that three schools were selected as feasible since event J mentions that two of three applications met with success.
Step 5: Assess qualitative factors. Events D, E, F, G, and H.
Step 6: Make the decision. Event J is certainly relevant to this. (What did Austin ultimately decide? He decided that a qualitative factor, his possible fu- ture with his long-time girl friend was most important and stayed at his current school. After graduation, he was hired by a major aeronautical engineering firm. By the way, he and his girl friend broke up shortly af- ter his decision to stay was made. )
404077
12–22
1. Cost Item Make Buy
Direct materialsa $372,000 —
Direct laborb 102,600 —
Variable overheadc 30,400 —
Fixed overheadd 58,000 —
Purchase coste — $550,000
Total $563,000 $550,000
a($80 × 3,000) + ($165 × 800)
b$27 × 3,800
c$8 × 3,800
d$26,000 + $32,000
e($130 × 3,000) + ($200 × 800)
Net savings by purchasing: $13,000. Powell should purchase the crowns ra- ther than make them.
2. Qualitative factors that Powell should consider include quality of crowns, re- liability and promptness of producer, and reduction of workforce.
3. It reduces the cost of making the crowns to 531,000, which is less than the cost of buying. (563,000 – 32,000)
4. Cost Item Make Buy
Direct materials $419,000 —
Direct labor 124,200 —
Variable overhead 36,800 —
Fixed overhead 58,000 —
Purchase cost — $640,000
Total $638,000 $640,000
Powell should produce its own crowns if demand increases to this level be- cause the fixed overhead is spread over more units.
404088
12–23
1. @ 600 lbs. Process Further Sell Difference
Revenuesa $30,000 $9,000 $21,000
Bagsb — (39) 39
Shippingc (408) (90) (318)
Grindingd (1,500) — (1,500)
Bottlese (3,000) — (3,000)
Total $25,092 $8,871 $16,221
a600 × 10 × $5 = $30,000; $15 × 600 = $9,000
b$1.30 × (600/20)
c[(10 × 600)/25] × $1.70 = $408; $0.15 × 600 = $90
d$2.50 × 600
e10 × 600 × $0.50
Primack should process rhinime further.
2. $16,221/600 = $27.035 additional income per pound $27.035 × 265,000 = $7,164,275
12–24
1. System A System B Headset Total Sales $45,000 $ 32,500 $8,000 $ 85,500 Less: Variable expenses 20,000 25,500 3,200 48,700 Contribution margin $25,000 $ 7,000 $4,800 $ 36,800 Less: Direct fixed costs* 526 11,158 1,016 12,700 Segment margin (loss) $24,474 $ (4,158) $3,784 $ 24,100
Less: Common fixed costs 18,000
Operating income $ 6,100
*$45,000/$85,500 × $18,000 = $9,474; $10,000 – $9,474 = $526 $32,500/$85,500 × $18,000 = $6,842; $18,000 – $6,842 = $11,158 $8,000/$85,500 × $18,000 = $1,684; $2,700 – $1,684 = $1,016
404099
12–24 Concluded
2. System A Headset Total
Sales $58,500 $6,000 $64,500
Less: Variable expenses 26,000 2,400 28,400 Contribution margin $32,500 $3,600 $36,100 Less: Direct fixed costs 526 1,016 1,542 Segment margin $31,974 $2,584 $34,558 Less: Common fixed costs 18,000
Operating income $16,558
System B should be dropped.
3. System A System C Headset Total
Sales $45,000 $ 26,000 $7,200 $78,200
Less: Variable expenses 20,000 13,000 2,880 35,880 Contribution margin $25,000 $ 13,000 $4,320 $42,320 Less: Direct fixed costs 526 11,158 1,016 12,700 Segment margin $24,474 $ 1,842 $3,304 $29,620 Less: Common fixed costs 18,000
Operating income $11,620
Replacing B with C is better than keeping B, but not as good as dropping B without replacement with C.
414100
12–25
1. Steve should consider selling the part for $1.85 because his division’s profits would increase by $12,800:
Accept Reject Revenues (2 × $1.85 × 8,000) $29,600 $0
Variable expenses 16,800 0
Total $12,800 $0
Pat’s divisional profits would increase by $18,400:
Accept Reject
Revenues ($32 × 8,000) $ 256,000 $0 Variable expenses:
Direct materials ($17 × 8,000) (136,000) 0 Direct labor ($7 × 8,000) (56,000) 0 Variable overhead ($2 × 8,000) (16,000) 0
Component (2 × $1.85 × 8,000) (29,600) 0 Total relevant benefits $ 18,400 $0
2. Pat should accept the $2 price. This price will increase the cost of the com- ponent from $29,600 to $32,000 (2 × $2 × 8,000) and yield an incremental bene- fit of $16,000 ($18,400 – $2,400).
Steve’s division will see an increase in profit of $15,200 (8,000 units × 2 com- ponents per unit × $0.95 contribution margin per component).
3. Yes. At full price, the total cost of the component is $36,800 (2 × $2.30 × 8,000), an increase of $7,200 (= 2 × 8,000 × 0.45) over the original offer. This still leaves an increase in profits of $11,200 ($18,400 – $7,200). (See the an- swer to Requirement 1.)
414111
12–26
1. Salesa $ 3,751,500
Less: Variable expensesb 2,004,900 Contribution margin $ 1,746,600
Less: Direct fixed expensesc 1,518,250
Divisional margin $ 228,350
Less: Common fixed expensesc 299,250 Operating (loss) $ (70,900)
aBased on sales of 41,000 units Let X = Units sold
$83X/2 + $100X/2 = $3,751,500 $183X = $7,503,000 X = 41,000 units
b$83/1.25 = $66.40 Manufacturing cost 20.00 Fixed overhead
$46.40 Per internal unit variable cost 5.00 Selling
$51.40 Per external unit variable cost Variable costs = ($46.40 × 20,500) + ($51.40 × 20,500) = $2,004,900
cFixed selling and admin: $1,100,000 – $5(20,500) = $997,500 Direct fixed selling and admin: 0.7 × $997,500 = $698,250 Direct fixed overhead: $20 × 41,000 = $820,000
Total direct fixed expenses = $698,250 + $820,000 = $1,518,250 Common fixed expenses = 0.3 × $997,500 = $299,250
2. Keep Drop
Sales $ 3,751,500 $ —
Variable costs (2,004,900) (2,050,000)*
Direct fixed expenses (1,518,250) —
Annuity — 100,000
Total $ 228,350 $(1,950,000)
*$100 × 20,500 (The units transferred internally must be purchased externally.) The company should keep the division.
414122
12–27
1. Napkins: CM/machine hour = ($2.50 – $1.50)/1 = $1.00 Tissues: CM/machine hour = ($3.00 – $2.25)/0.5 = $1.50
Tissues provide the greatest contribution per machine hour, so the company should produce 400,000 packages of tissues (200,000 machine hours times 2 packages per hour) and zero napkins.
2. Let X = Boxes of napkins; Y = Boxes of tissues a. Z = $1.00X + $0.75Y (objective function)
X + 0.5Y ≤ 200,000 (machine constraint) X ≤ 150,000 (demand constraint)
Y ≤ 300,000 (demand constraint) X ≥ 0
Y ≥ 0
414133
12–27 Concluded b. and c.
(in thousands)
Y
400 300 200 100
X
0 100 200 300 400
Corner Point X-Value Y-Value Z = $1.00X + $0.75Y
A 0 0 0
B 150,000 0 150,000
C* 150,000 100,000 225,000
D* 50,000 300,000 275,000*
E 0 300,000 225,000
*Point C: Point D:
X = 150,000 Y = 300,000
X + 0.5Y = 200,000 X + 0.5Y = 200,000 150,000 + 0.5Y = 200,000 X + 0.5(300,000) = 200,000
Y = 100,000 X = 50,000
The optimal mix is D: 50,000 packages of napkins and 300,000 boxes of tissues. The maximum profit is $275,000.
A B
C D
E
414144
12–28
1. Dept. 1 Dept. 2 Dept. 3 Total
Product 401 (500 units):
Labor hoursa 1,000 1,500 1,500 4,000
Machine hoursb 500 500 1,000 2,000
Product 402 (400 units):
Labor hoursc 400 800 — 1,200
Machine hoursd 400 400 — 800
Product 403 (1,000 units):
Labor hourse 2,000 2,000 2,000 6,000
Machine hoursf 2,000 2,000 1,000 5,000 Total labor hours 3,400 4,300 3,500 11,200
Total machine hours 2,900 2,900 2,000 7,800
a2 × 500; 3 × 500; 3 × 500 d1 × 400; 1 × 400
b1 × 500; 1 × 500; 2 × 500 e2 × 1,000; 2 × 1,000; 2 × 1,000
c1 × 400; 2 × 400 f2 × 1,000; 2 × 1,000; 1 × 1,000 The demand can be met in all departments except for Department 3. Produc- tion requires 3,500 labor hours in Department 3, but only 2,750 hours are available.
414155
12–28 Continued
2. Product 401: CM/unit = $196 – $103 = $93 CM/DLH = $93/3 = $31
Direct labor hours needed (Dept. 3): 3 × 500 = 1,500 Product 402: CM/unit = $123 – $73 = $50
Requires no hours in Department 3.
Product 403: CM/unit = $167 – $97 = $70 CM/DLH = $70/2 = $35
Direct labor hours needed (Dept. 3): 2 × 1,000 = 2,000
Production should be equal to demand for Product 403 because it has the highest contribution margin per unit of scarce resource. After meeting de- mand, any additional labor hours in Department 3 should be used to produce Product 401 (2,750 – 2,000 = 750; 750/3 = 250 units of 401).
Contribution to profits:
Product 401: 250 × $93 = $ 23,250 Product 402: 400 × $50 = 20,000 Product 403: 1,000 × $70 = 70,000 Total contribution margin $113,250 3. Let X = Number of Product 401 produced
Let W = Number of Product 402 produced = 400 units Let Y = Number of Product 403 produced
Max. Z = $93X + $70Y + $50(400) (objective function) 2X + Y ≤ 1,500 (machine constraint)
3X + 2Y ≤ 2,750 (labor constraint) X ≤ 500 (demand constraint) Y ≤ 1,000 (demand constraint) X ≥ 0
Y ≥ 0
414166
12–28 Concluded
Corner Point X Y W Z = $93X + $70Y + $50W
A 0 0 400 $ 20,000
B 500 0 400 66,500
C 500 500 400 101,500
D 250 1,000 400 113,250*
E 0 1,000 400 90,000
*The optimum output is:
Product 401: 250 units Product 402: 400 units Product 403: 1,000 units
At this output, the contribution to profits is $113,250.
Y
1,500
1,000
500
X
0 500 1,000
A
C D
E
B
414177
12–29
1. Cost Item Lease and Make Buy
Purchase cost — $50,000
Variable manufacturing costs $14,000* —
Lease 27,000 —
Supervisor salary 10,000 —
Total relevant costs $51,000 $50,000 *$7 × 2,000
Drop B and Make
Purchase cost —
Variable manufacturing costs $14,000 Lost contribution margin 34,000 Total relevant costs $48,000
Note: The $38,000 of direct fixed expenses is the same across all alternatives.
The most favorable alternative is to drop B and make the subassembly.
2. Analysis with complementary effect:
Make Buy
Lost sales for Aa $ 9,000 —
Cost of making componentb 13,160 —
Reduction of other variable costsc (1,800) — Lost contribution margin for B 34,000 —
Cost to purchased — $50,000
Total relevant costs $54,360 $50,000
a0.06 × $150,000
b0.94 × 2,000 × $7.00
c0.06($80,000 – $50,000); since sales decrease by 6 percent if the component is manufactured, the other variable costs (those other than the cost of the component) will decrease proportionately.
dIf the buy alternative is chosen, there is no reduction in sales and the same number of components will be needed.
The correct decision now is to keep B and buy the component.
414188
12–29 Concluded
3. Lease and Make Buy
Variable manufacturing costs $19,600a —
Lease 27,000 —
Supervisor salary 10,000 —
Purchase cost — $70,000b
Total relevant costs $56,600 $70,000
a$7 × 2,800
b$25 × 2,800
Drop B and Make
Lost sales from A $ 9,000
Variable cost of manufacturinga 18,424 Reduction of other variable costsb (600) Loss in contribution margin for B 34,000
Purchase cost —
Total relevant costs $60,824
a0.94 × 2,800 × $7.00
b0.06 × ($80,000 – $70,000)
The correct decision now is to lease and make the component.
414199
12–30
1. To maximize the company’s profitability, Sportway should purchase 9,000 tackle boxes from Maple Products, manufacture 17,500 skateboards, and manufacture 1,000 tackle boxes. This combination of purchased and manu- factured goods maximizes the contribution per direct labor hour, as calcu- lated below.
Unit contribution:
Purchased Manufactured
Tackle Boxes Tackle Boxes Skateboards Selling price $86.00 $ 86.00 $ 45.00 Less:
Direct material (68.00) (17.00) (12.50)
Direct labor — (18.75) (7.50)
Variable overheada — (6.25) (2.50)
Mktg. and admin.b (4.00) (11.00) (3.00)
Contribution margin $14.00 $ 33.00 $ 19.50
DLH/unit none ÷ 1.25 ÷ 0.50
Contribution margin/hour none $ 26.40 $ 39.00
aVariable overhead per unit Tackle boxes:
Direct labor hours = $18.75/$15.00 = 1.25 hours Overhead/DLH = $12.50/1.25 = $10.00
Capacity = 8,000 boxes × 1.25 = 10,000 hours Total overhead = 10,000 hours × $10 = $100,000
Total variable overhead = $100,000 – $50,000 = $50,000 Variable overhead per hour = $50,000/10,000 = $5.00 Variable overhead per box = $5.00 × 1.25 = $6.25 Skateboards:
Direct labor hours = $7.50/$15.00 = 0.5 hour
Variable overhead per skateboard = $5.00 × 0.5 = $2.50
b$6 of selling and administrative costs are fixed.
424200
12–30 Concluded
Optimal Use of Sportway’s Available Direct Labor
Unit DLH Total Balance Total
Item Quantity Contrib. per Unit DLH of DLH Contrib.
Total hours 10,000
Skateboards 17,500 $19.50 0.50 8,750 1,250 $341,250 Make boxes 1,000 33.00 1.25 1,250 — 33,000 Buy boxes 9,000 14.00 — — — 126,000
Total CM $500,250
Less:
Contribution margin from manufacturing
8,000 boxes (8,000 × $33) 264,000
Improvement in CM $236,250
2. Some qualitative factors to be considered include quality and reliability of vendor, quality of market data for skateboards, and problems in switching from tackle boxes to skateboards in the Plastics Department.
424211
MANAGERIAL DECISION CASES 12–31
1. Pamela should not have told Roger about the deliberations concerning the Power Department. She is obligated by Standard II-1 to “keep information confidential except when disclosure is authorized or legally required.” She had been explicitly told to keep the details quiet but deliberately informed the head of the unit affected by the potential decision. By revealing the informa- tion, Pamela also initiated an activity that would prejudice her ability to carry out her duties ethically (III-2).
2. The romantic relationship between Pamela and Roger sets up a conflict of in- terest for this particular decision, and Pamela should have withdrawn from any active role in it. However, she should definitely provide the information she currently has about the cost of eliminating the Power Department. This is required by standard IV-2, which states that “all relevant information that could reasonably be expected to influence an intended user’s understanding”
should be disclosed. Moreover, she has the obligation to communicate infor- mation fairly and objectively (IV-1). These ethical requirements, however, do not in any way prevent Pamela from discussing the qualitative effects of eli- minating the Power Department. The effects on workers, community relations, reliability of external service, and any ethical commitments the company may have to its workers should all enter into the decision. If I were Pamela, I would communicate the short-term quantitative effects and express my concerns about the qualitative factors. I might also project what the costs of operating internally would be for the next five years and compare that with estimates of the costs of external acquisition.
424222
12–32
MEMO TO: Central University President DATE: November 15, 2008
SUBJECT: Decentralization of Continuing Education
In recommending whether to centralize or decentralize continuing education (CE), I have first focused on the economic implications. The income statements, show- ing a favorable trend for CE, are misleading, at least in terms of their implications for centralization. Tuition revenues will be present whether we centralize or de- centralize and, therefore, are not relevant to the decision. Department heads are already heavily involved in scheduling and staffing off-campus and evening courses, and individual faculty are largely responsible for generating our noncre- dit offerings. Thus, it would be difficult to argue that decentralizing CE would have any adverse impact on the level of tuition revenues.
In a similar vein, one can argue that the operating costs for evening and noncre- dit courses and the direct costs for off-campus offerings are also irrelevant.
These costs, which consist of instructional wages, rental of facilities, and sup- plies, will be incurred regardless of whether CE is centralized or decentralized.
This leaves two categories of costs, indirect costs and administration, which af- fect the decision. These categories include advertising, secretaries, assistants, and other support personnel. If we choose to decentralize, all of these costs, with the exception of the director’s salary and advertising, can be avoided. Further- more, because the director will be teaching in her department, some of her salary is avoidable as well ($20,000). The total avoidable costs are outlined as follows.
Administrationa $ 82,000 Indirectb 410,000 Total $492,000
a[$112,000 – ($50,000 – $20,000)] = $82,000
bIndirect costs – Advertising = $440,000 – $30,000
424233
12–32 Concluded
I have retained the budget for advertising and would recommend that this amount be allocated to the individual colleges in proportion to the evening and off- campus revenues generated by each college.
As you can see, the savings from decentralization are significant. This presumes, of course, that the overhead of the individual units will not increase because of the added responsibilities. I have discussed this matter with my department heads and with the deans of the other colleges. They all seem to feel that the ad- ditional administrative work can be easily absorbed by their existing staff. Thus, it seems that the promised savings are real.
In choosing to decentralize, however, we do lose some intangible benefits. First, we no longer have one individual who can be contacted by outside parties. In- stead, we have numerous individuals involved. This may prove to be frustrating for some of those whom we serve, and it is possible that they will perceive a drop in service quality.
There is also a risk that some units will not exert the effort needed to provide good service. Accountability is more diffuse, and some department heads may feel that they have more than enough to do without continuing education. This problem can be alleviated to some extent by localizing the CE responsibility at the college level, rather than at the departmental level.
I am personally convinced that a decentralized CE will work as well, if not better, than our current arrangement. Given our current budgetary crisis, I would rather risk reducing the quality of service for CE than risk reducing the quality of service for our main programs. Therefore, I strongly recommend that CE be decentralized and that the savings from this action be used to maintain the quality of our on- campus programs.
RESEARCH ASSIGNMENTS 12–33
Answers will vary.
12–34
Answers will vary.
424244
