CHAPTER 14
Decision Making: Relevant Costs and Benefits ANSWERS TO REVIEW QESTIONS 14.1 14.1 The six steps steps in the decisi decision on-ma -makin king g proces process s are as follows: •
Clarify the decision
•
Specify the criterion
•
Identify the alternatives
•
evelop a decision model
•
Collect the data
•
Select an alternative 14.! 14.! The The mana manage geri rial al acco acco"n "nta tant nt#s #s role role in the the deci decisi sion on-mak making ing pro process cess is to part partic icip ipat ate e as a proa proac ctive tive mem$er of the management team% and% in partic"lar% to provide information relevant to the decision. 14.& ' decision model model is a simplified simplified representa representation tion of the choi choice ce pro$ pro$le lem. m. (nne (nnece cess ssar ary y deta detail ils s are are stri stripp pped ed away away%% and the the mo most st imp importa ortan nt elem elemen ents ts of the the pro$lem are highlighted. 14.4 14.4 ' )"an )"anti tita tati tive ve anal analys ysis is is ex expr pres esse sed d in n"me n"meri rica call terms. ' )"alitative analysis foc"ses on the factors in a deci decisi sion on pro$ pro$le lem m that that cann cannot ot $e ex expr pres esse sed d effectively in n"merical terms. 14.* 14.* The The res" res"lt lt of a )"an )"anti tita tati tive ve anal analys ysis is is that that one one alternative is preferred over the next-$est alte altern rnat ativ ive e $y so some me n"me n"meri rica call amo" amo"nt nt%% s"ch s"ch as prof profit it.. The The amo" amo"nt nt $y whic which h the the $est $est alte altern rnat ativ ive e dominates the second-$est alternative esta$lishes a +price, on the s"m total of the )"alitative char charac acte teri rist stic ics s that that migh mightt favo favor r the the seco second nd-$ -$es estt
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alternative. S"ppose% for example% that a hospital#s $oar $oard d of dire direct ctor ors s is cons consid ider erin ing g esta esta$l $lis ishi hing ng an o"tpatient clinic in one of the two s"$"r$an com comm"ni m"nitties. ies. The )"an )"anti tita tati tiv ve anal analys ysis is of the the dec decisio ision n s"gg s"gges ests ts that site site ' will ill $e more ore cos cost effective for the clinic than site . 'ss"me that the ann" ann"al al cost cost of r"nn r"nnin ing g the the clin clinic ic at site site ' will will $e */% */%// /// / less less than than the the ann" ann"al al cost cost of r"nn r"nnin ing g the the clin clinic ic at sit site . 0ow s"ppo "ppose se that that the $oard oard of directors feels that vario"s )"alitative considerations indi indica cate te that that it wo wo"l "ld d $e pref prefer era$ a$le le to loca locate te the the clinic at site . or example% s"$"r$ might $e an economically depressed area% where it is important to $ring $etter-)"ality health care to the comm"nity. 0ow the $oard of directors can p"t a price on these )"alitative advantages to locating the clinic at site . If the $oard of directors $elieves that the )"alitative $enefits $enefits at site o"tweigh o"tweigh the */%/// */%/// )"antita )"antitative tive adva advant ntag age e at site site '% then then they they sho" sho"ld ld loca locate te the the clinic at site . 14.2 4.2 3ele 3eleva van nt info inform rmat atio ion n is perti ertine nen nt to a dec decisio ision n pro$ pro$le lem. m. 'cc" 'cc"ra rate te info inform rmat atio ion n is prec precis ise. e. Time Timely ly information is availa$le to the decision maker in time to make the decision. $5ective information need not $e relevant or acc"rate. or example% several people may agree that the interest rate in the coming year in a local comm"nity will $e 1/ percent. 6owever% this this info inform rmat atio ion n may may not not $e acc" acc"ra rate te%% sinc since e that that predict iction may prove to $e wron rong. 7oreo reover% info inform rma ation tion a$o" $o"t the the inte intere res st rate rate may may not not $e pertinent to a decision a$o"t where to locate a new $ranch $ank within the comm"nity. 14.8 Two important criteria that m"st $e satisfied in order for information to $e relevant are as follows: 91 3elevant cost or $enefit information m"st involve a f"t"re event. In other words% the information m"st have a $earing on the f"t"re. 9! 3elevant information m"st involve costs or $enefits that differ among the alternatives. Costs McGraw-Hill/Irwin Inc. 14"# 14"#
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or $ene $enefi fits ts that that are are the the same same acro across ss all all of the the avai availa la$l $le e alte altern rnat ativ ives es have ave no $ear $earin ing g on the the decision. 14.; The $ook val"e val"e of an asset is its ac)"isitio ac)"isition n cost less its acc"m"lated depreciation. The $ook val"e is not a relevant cost $eca"se it is a s"nk cost. It occ"rred in the past and has no $earing on the f"t"re. 14.< 14.< The $ook val"e val"e of inven inventor tory% y% like the $ook val"e val"e of any any asse asset% t% is not not a rele releva vant nt cost cost.. The The inve invent ntor ory# y#s s $ook $ook val" val"e e is $ase $ased d on its its ac)" ac)"is isit itio ion n cost cost or its its prod"ction cost and is% therefore% a s"nk cost. It has no $earing on any f"t"re co"rse of action. 14.1/ 7anagers sometimes exhi$it a $ehavioral tendency to inappropriately consider a s"nk cost in making a decision% $eca"se they $elieve that their original decision to inc"r the s"nk cost% s"ch as when an asset is ac)"ired% will appear to have $een a $ad decision if the manager s"$se)"ently disposes of the asse asset. t. This This perc percei eive ved d need need $y mana manage gers rs fo for r thei their r past past deci decisi sion ons s to appe appear ar to have have $een $een good good ones ones may res"lt in their inappropriate emphasis on s"nk costs in making a decision. 14.1 14.11 1 'n exam exampl ple e of an irre irrele leva vant nt f"t" f"t"re re cost cost is a cost cost tha that will will occ" cc"r in the the f"t f"t"re $"t does does not diffe iffer r among the alternatives. or example% a $ank may $e considering several sites for the location of a new $ran $ranch ch of offi fice ce.. If the the cost cost of hiri hiring ng an arch archit itec ectt to desi design gn the the new new $"ild $"ildin ing g will will not not diff differ er amon among g the the alternatives% it is an irrelevant i rrelevant f"t"re cost. 14.1 14.1! ! 'n oppor opport" t"ni nity ty cost cost is the poten potenti tial al $enef $enefit it given given "p when the choice of one action ion precl"des a different action. or example% one opport"nity cost associ associate ated d with with gettin getting g a colleg college e ed"cat ed"cation ion is the st"dent#s forgone wages from a 5o$ that might have $een held d"ring the ed"cational period. 14.1& 4.1& =eo eop ple ofte ften ex exh hi$it i$it a $eha ehaviora iorall tend tenden enc cy to ignore ignore or downpl downplay ay the import importanc ance e of opport opport"ni "nity ty costs in making a decision. Since an opport"nity cost McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
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often is not a cash flow% people tend to think it is less important than costs that are represented $y cash flows. This $ehavioral tendency can res"lt in fa"lty decision making. 14.1 14.14 4 If a firm has has exces excess s prod"c prod"cti tion on capa capaci city ty%% there there is no opport"nity cost to the acceptance of a special order. n the other hand% if the firm is already at capacity and there is no excess prod"ction capacity% the the oppo opport rt"n "nit ity y cost cost asso associ ciat ated ed with with acce accept ptin ing g a special order involves the contri$"tion margin from the the prod prod"c "cts ts that that wo wo"l "ld d have have $een $een man" man"fa fact ct"r "red ed with the reso"rces devoted to the special order. 14.1 14.1* * In a diff differ eren enti tial al-c -cos ostt anal analys ysis is%% the the deci decisi sion on maker maker determ determine ines s the differ differenc ence e in each each cost cost or reven reven"e "e item that will occ"r "nder each of the alternatives "nde "nder r consi onside dera rattion. ion. Then hen the the decis ecisio ion n maker aker foc"ses on the differences in the costs and reven"es in making the decision. 14.1 14.12 2 In makin making g a deci decisi sion on a$o"t a$o"t addin adding g or dropp droppin ing g a prod"ct line% the decision maker sho"ld consider the avoida$le expenses if the prod"ct line is not carried as well as the impact of the decision to add or drop the prod"ct line on the firm#s other operations. 14.18 4.18 ' 5oin 5ointt prod prod"c "cti tion on proce roces ss is one one in whic which h the the processing of a common inp"t res"lts in two or more distinct prod"cts known as 5oint prod"cts. ' special decision that commonly arises in the context of the 5oint prod"ction process is the decision whether or not to process f"rther one of the 5oint prod"cts into a differ different ent prod"c prod"ct. t. The The proper proper approa approach ch for making making this type of decision is to compare the incremental $enefits from f"rther processing with the incremental costs. 14.1; 14.1; The allo allocat cated ed 5oint 5oint proc process essing ing costs costs are are irrelev irrelevant ant when making a decision as to whether a 5oint prod"ct sho" sho"ld ld $e so sold ld at the the spli splitt-of offf poin pointt or proc proces esse sed d f"rt f"rthe her. r. The The to tota tall 5oin 5ointt cost cost will will not not chan change ge as a
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res res"lt of the decision to process f"rther% therefore it is irrelevant to the decision.
and
14.1< The prop roper approach to making a prod"ction decisi decision on when when limite limited d reso"r reso"rces ces are invol involved ved is to maxi maximi mi>e >e prod prod"c "cti tion on of the the prod prod"c "ctt that that has has the the hig highest est cont ontri$ ri$"tio "tion n marg margin in per "nit nit of scar scarce ce reso"rce. ?hen two or more reso"rces are limited% the techni)"e of linear programming may $e appropriate.
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14.!/ The contri$"tion margin per "nit of scarce reso reso"r "rce ce is a prod prod"c "ct# t#s s "nit "nit cont contri ri$" $"ti tion on marg margin in divided $y the n"m$er of "nits of the scarce reso"rce re)" re)"ir ired ed to prod prod"c "ce e one one "nit "nit of the the prod prod"c "ct. t. o or r example% if a prod"ct#s contri$"tion margin per "nit is * and it re)"ires two ho"rs of la$or to prod"ce one "nit% "nit% the contri contri$" $"tio tion n margin margin per direct direct-la -la$or $or ho"r is !.*/. 14.!1 Sensitiv itiviity analysis may $e "sed to cope with "nce "ncert rtai aint nty y in deci decisi sion on maki making ng $y anal analy> y>in ing g how how sensitive a decision pro$lem is to the estimates of certain parameters. ne important )"estion that can $e answered is@ 6ow m"ch can a partic"lar para param meter eter est estimat imate e chang hange e $efo $efore re the optim ptimal al decision changesA 14.!! There is an important link $etween decision maki making ng and and mana manage geri rial al perf perfor orma manc nce e eval eval"a "ati tion on%% $eca $eca"s "se e mana manage gers rs typi typica call lly y make make deci decisi sion ons s that that maximi maximi>e >e their their percei perceived ved perfor performan mance ce eval"a eval"atio tions ns and rewards. If we want managers to make optimal decisi decisions ons $y proper properly ly eval"a eval"atin ting g the the relev relevant ant cost cost and and $en $enefit efits% s% then hen the perf perfor orma man nce eval eval"a "ati tion on system and reward str"ct"re m"st $e consistent with that goal. 14.!& 4.!& o o"r "r pote poten ntial tial pitfa itfallls in decis ecisio ion n maki aking that represent common errors are the following: 91 91
=ayi =aying ng too too m"c m"ch h atte attent ntio ion n to s"n s"nk k cost costs. s.
9! asing the analysis on "niti>ed fixed costs rather than total fixed costs. (sing "niti>ed fixed costs is dangero"s $eca"se the fixed cost per "nit changes as activity changes. 9& 0ot identi identifyi fying ng avoida avoida$le $le costs. costs. In some some kinds kinds of decisions% decisions% it is important important to identify identify the avoida$le avoida$le costs. It is critical that the decision maker make a distinction $etween the amo"nt of the fixed costs that will $e avoided and the amo"nt that may have McGraw-Hill/Irwin Inc. 14"' 14"'
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$een $een ar$i ar$itr trar aril ily y allo alloca cate ted d to a part partic ic"l "lar ar cost cost o$5ect. 94 94 ver verlo look okin ing g oppor opport" t"ni nity ty cost costs s or treat treatin ing g them them as less less import important ant than than o"t-of o"t-of-po -pocke ckett costs. costs. In a deci decisi sion on anal analys ysis is%% it is impo import rtan antt to pay pay spec specia iall attention to identifying and incl"ding opport"nity costs. 14.! 14.!4 4 (nit (niti> i>ed ed fixe fixed d cost costs s can can ca"s ca"se e erro errors rs in deci decisi sion on making $eca"se the fixed cost per "nit changes as the activity meas"re changes. or this reason% it is $etter to incl"de fixed costs in the analysis in their total amo"nts. 14.!* S"nk costs are irrelevant in decision making $eca"se they have already occ"rred in the past and will not change "nder any f"t"re% alternative co"rse of action. Two examples of s"nk costs are the $ook val"e of e)"ipment and the $ook val"e of inventory on hand. 14.!2 4.!2 This This rema remark rk fail fails s to rec recogn ogni>e i>e the the fac fact that that the identification of relevant information depends on the decision. ata that are relevant to one decision may $e irrelevant to another one. Therefore% it wo"ld $e impossi$le for the managerial-acco"nting system to prod prod"c "ce e only only info inform rmat atio ion n that that is rele releva vant nt to all all decisions. 14.! 14.!8 8 The The conc concep epts ts "nde "nderl rlyi ying ng a rele releva vant nt-c -cos ostt anal analys ysis is rema remain in vali valid d $oth $oth in an adva advanc nced ed man" man"fa fact ct"r "rin ing g environment and in a sit"ation where activity-$ased cost costin ing g is "sed "sed.. 6owe 6oweve ver% r% when when an 'C 'C syst system em is "sed% "sed% the decision decision maker typica typically lly is a$le a$le to more more acc"rately determine the relevant costs than when a traditional% vol"me-$ased costing system is "sed. 14.! 14.!; ; ive ive ways ways to relax relax a $ottle $ottlene neck ck const constra rain intt are as follows: •
?orking overtime at overtime at the $ottleneck operation.
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•
•
•
•
Retraining employees $ottleneck.
and
shifting
them
to
the
Bliminating any non-value non-value-adde -added d $ottleneck operation.
activities activities
at
the
Outsourcing 9s"$contracting $ottleneck operation.
or
of
the
all
part
Inve Invest stin ing g in addi additi tion onal al prod prod"c "cti tion on e)"i e)"ipm pmen entt and and employing parallel processing% processing% in which m"ltiple prod"ct "nits "ndergo the same prod"ction operation sim"ltaneo"sly.
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SO*TIONS TO E+ERCISES BB3CISB 14-!< 9!* 7I0(TBS St"d St"den ents ts## answ answer ers s to this this ex exer erci cise se will ill vary vary wide widely ly.. The following following ill"stration ill"stration is set in a small city in central central 0ew Dork. 3esidents of an o"tlying s"$"r$ of the city complained that it took too long for am$"lances and fire engines to reach their area when emergencies occ"rred. They demanded that the city $"ild a satellite fire and resc"e station in their neigh$orhood. The steps in the city#s decision-making process are s"mmari>ed as follows: E('0TIT'TIFB '0'GDSIS 1.
Clar Clarif ify y the the deci decisi sion on pro pro$l $lem em:: The The firs firstt step step was was to to clar clarif ify y the pro$lem. ?as the perceived slow response time real or merely a perception $y the residents of the neigh$orhoodA ?hat was the average response time for emergency vehicles to the areaA ?ere proper proced"res $ein $eing g fo foll llow owed edA A ?hat ?hat was was the the cond condit itio ion n of the the road roads% s% $ridges% and traffic lights on the ro"te to the neigh$orhood in )"estionA The The res res"lt "lt of this this in) in)"iry "iry was a rea reali> li>atio ation n that that the emergency response time to the s"$"r$ was slower than that experienced $y the rest of the city% altho"gh it was still within state g"idelines. g"idelines. 7oreover% 7oreover% proced"res proced"res were $eing followed properly $y emergency personnel% and the traffi traffic c system system was ade)"a ade)"ate te for emerge emergency ncy respon responses ses.. The concl"sion of the pro$lem clarification stage was that the neigh$orhood was simply too far from the city#s fire and resc"e station to respond as )"ickly as the residents of the neigh$orhood wo"ld have liked. !. Spec Specif ify y the the crit criter erio ion: n: The The City City Co"n Co"nci cill deci decide ded d that that some type of action was warranted. They specified tha that the city ity engin nginee eer r sho" sho"ld ld fin find a way way to c"t response time to the neigh$orhood $y five min"tes witho"t inc"rring "naccepta$le costs. &. Identi Identify fy the altern alternati atives ves:: The city city engine engineer er identi identifie fied d the following alternatives:
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a. "ild "ild a satelli satellite te fire and resc"e resc"e station station on the west end of the affected neigh$orhood. $. Station Station two fire tr"cks and an am$"lance am$"lance%% along with the the re)" re)"is isit ite e perso erson nnel% nel% in the park parkin ing g lot lot of a shopping center in the s"$"r$. 4. evelop a decision model: model: The decision model model consisted of a comp"ter program that wo"ld sim"late emergency response times and costs "nder each of the two alternatives.
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BB3CISB 14-!< 9C0TI0(B *. Coll Collec ectt the the data data:: The The data data need needed ed fo for r the the deci decisi sion on mode mo dell inc incl"de l"ded d empl employ oyee ee com ompe pen nsati satio on data% ata% ac)" ac)"is isit itio ion n and and main mainte tena nanc nce e cost costs s fo for r a sate satell llit ite e station% and the pro5ected costs of operating the new station.
E('GIT'TIFB C0SIB3'TI0S The The comp comp"t "ter er mo mode dell indi indica cate ted d that that eith either er alte altern rnat ativ ive e wo"ld wo"ld satisf satisfy y the criter criterion ion of red"ci red"cing ng emerge emergency ncy respon response se times $y five min"tes% and that the positioning of emergency vehi vehicl cles es at the the shop shoppi ping ng cent center er wo wo"l "ld d $e less less ex expe pens nsiv ive. e. 0evertheless% the City Co"ncil felt that this sol"tion wo"ld $e perceived $y the residents of the neigh$orhood as a temporary% stopgap meas"re that did not really address their needs. 2. 7ake 7ake a deci decisi sion on:: The The City City Co"n Co"nci cill deci decide ded d to $"il $"ild d a sate satell llit ite e fire fire and and resc resc"e "e stat statio ion n. 'ltho ltho"g "gh h this his alte altern rnat ativ ive e was was so some mewh what at mo more re ex expe pens nsiv ive% e% the the Co"n Co"nci cill felt felt that that the the )"al )"alit itat ativ ive e cons consid ider erat atio ions ns o"tweighed the cost advantage of the other alternative. BB3CISB 14-&/ 9!/ 7I0(TBS .*I/0T ROTE DECISION
=ass =assen enge ger r reven reven"e "e .... ...... .... ..... ...... ..... ..... ... Ganding fee in San rancisco . . . . . McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
3even"es and Costs (nder Two 'lternatives 9a 9$ 9c ?ith 0onsto Stop ifferen p In San tial 3o"teH rancisc 'mo"nt oH !4/ !4/%/ %// / !*;%// 91;%// / / / -/9*%/// *%/// � 2002 2002
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(se of airport gate facilities . . . . . . light cr crew co cost .. ........................ "el .......................................... 7eals and services .................... Tota To tall reven reven"e "e les less s cost costs s .... ...... .... .... .... ..
-/9&%/// &%/// 9!%/// 9!%*// *// 9!1%/// 9!4%/// &%/// 2// 94%/// 94%2// !1& !1&%/ %// / !1;%
HIn col"mns 9a and 9$% parentheses denote costs% and n"m$ers witho"t parentheses are reven"es. In col"mn 9c% parentheses denote differential items favoring option 9$.
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BB3CISB 14-&1 91* 7I0(TBS 1.
The owner# owner#s s reaso reasonin ning g pro$ pro$a$l a$ly y refl reflect ects s the the following calc"lation: Savings in ann"al operating expenses if old pi>>a !%2// oven is replaced .............. .................... ............. ............................... .......................... ?rite-off of old oven#s remaining r emaining $ook val"e 9&%/// 9<%/// K & ................................... .......................................... .............. ............. ........ .. +Goss, +Goss, associ associate ated d with replace replacemen mentt ........ ............ ......... ......... ...... 94//
!.
The owne owner#s r#s ana analys lysis is is flaw flawed% ed% $eca $eca"se "se the the $ook $ook val" val"e e of the old pi>>a oven is a s"nk cost. It sho"ld not enter into the e)"ipment replacement decision.
&.
Correct an analysis: is: Savings in ann"al operating expenses if old pi>>a !%2// oven is replaced .............. .................... ............. ............................... .......................... 'c)"isition cost of new oven% which will $e 91%>a pi>>a oven oven .............. .............. 8// 8//
BB3CISB 14-&! 91* 7I0(TBS ear 9president#s name: ?e recommend against processing $anolide into kitrocide. The incremental cost of f"rther processing% ;%1//% exc ex ceed eeds the the incre ncreme men ntal tal rev reven"e% n"e% 8% 8%*//. *//. This his 8% 8%*// *// incremental reven"e is the difference $etween the sales val"e of the kitrocide% 1/%///% and the sales val"e of the $anolide% !%*//. ?e wo"ld also like to point o"t that the cost of the 5oint process% 1<%///% and the allocation of that cost to the 5oint prod"cts is irrelevant to the decision. decision. Sincerely%
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I.7. St"dent =artner% St"dent Cons"lting 'ssociates
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BB3CISB 14-&& 91* 7I0(TBS The ow own ner#s er#s anal analys ysis is incorr correc ecttly incl incl" "des des the the fo foll llow owiing allocated costs that will $e inc"rred regardless of whether the ice cream co"nter is operated: (tilities (tilities ....... .......... ....... ....... ....... ....... ...... ....... ....... ....... ....... ...... ....... ....... ....... ....... ........ .......... ..... epr eprec ecia iati tion on of $"il $"ildi ding ng .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... eli eli mana manager ger#s #s salary salary .... ....... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ...... ...... ...... ...... ..... Total ....... .......... ....... ....... ...... ....... ....... ....... ....... ...... ....... ....... ....... ....... ...... ....... ......... ........... ......... ...
!%
It is poss possi$ i$le le that that clos closin ing g the the ice ice crea cream m co"n co"nte ter r migh mightt save a portion of the "tility cost% $"t that is do"$tf"l. ' $etter analysis follows: Sales ..........................................................
4*%/ //
Gess: Cost of food ........................................ !/%// / !*%// /
Lross profit ................................................. Gess: perating perating expenses expenses ?ages of co"nter personnel ............... =aper prod"cts ................................... epreciation of co"nter e)"ipment and f"rnishingsH .............. ............................ .................................. ....................
1!% /// 4%// / !%*/ /
Total .................................................. 1;%*/ / 2%*//
=rofit on ice cream co"nter
Hepreciation on the co"nter e)"ipment and f"rnishings is incl"ded $eca"se it is tracea$le to the ice cream operation and is an expense in the determination of income. If a cash-flow analysis is desired% this noncash expense sho"ld $e excl"ded.
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BB3CISB 14-&4 9&/ 7I0(TBS 'nsw 'nswer ers s will will vary vary depe depend ndin ing g on the the comp compan any y and and acti activi vity ty chosen chosen.. There There are many trade-o trade-offs ffs involv involved ed in o"tso"rc o"tso"rcing ing deci decisi sion ons% s% incl incl"d "din ing g the the incr increm emen enta tall savi saving ngs s or cost cost from from o"tso"rcing% )"ality of the service% relia$ility of the s"pplier% morale effects if o"tso"rcing res"lts in closing a department% and so forth.
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BB3CISB 14-&* 91* 7I0(TBS 1.
3elevant data: C"rrent sales val"e l"e for "nmodified parts .... ...... .... .... .... .... .... Sales Sales val"e val"e for for modi modifie fied d parts parts .... ....... ...... ...... ...... ...... ...... ...... ...... ...... ... 7odificat 7odification ion costs costs ....... ........... ....... ...... ....... ....... ...... ......... ........... ........... ........... .....
<%/// !!%&/ !!%&/ / 1!%// 1!%// /
Irrelevant data: C"rren C"rrentt $ook $ook val"e val"e of invent inventory ory ...... ......... ....... ........ ........ ........ ....... ...
!1%// !1%// /
This is a s"nk cost. It will not affect any f"t"re co"rse of action. !.
There There are are two two alte alterna rnativ tives es for for disp disposi osing ng of the the o$solete parts: 9a sell in "nmodified condition or 9$ modify and then sell. 9a. . . .enefit if parts are sold witho"t modification
<%///
9$........................... 9$...........................Sales Sales val"e for modified parts
!!%& //
Cost of mo modific ifica ation .. ...........................................
0et $enefit if parts are sold after $eing modified
1!%// / 1/%& //
Concl"sion: 7odify the parts and then sell them.
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BB3CISB 14-&2 91* 7I0(TBS 1.
The rele releva vant nt cost cost of of the the theol theolite ite to to $e "sed "sed in in prod" prod"cin cing g the special order is the 14%*// p sales p sales val"e that the company will forgo if it "ses the chemical. This is an example of an opport"nity cost. p denotes p denotes 'rgentina#s peso.
!.
9a 14 14%*// p sales p sales val"e: isc"ssed in re)"irement 91. 9$12%/// p $ook p $ook val"e 9;%/// kilograms kilogram: Irrelevant% since the $ook val"e is a s"nk cost.
! p per p per
9c 1<%!/ 1<%!// / p c"rrent p c"rrent p"rchase cost 9;%/// kilograms !.4/ p per kilogram: Irrelevant% since the company will not $e $"ying any theolite.
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The relev relevant ant cost cost of genato genatope pe is is calc" calc"lat lated ed as as follows: Cost of replacing the 1%/// kilograms to $e "sed in the special order M91%/// kilograms ;.8/ p p ....... ........... ....... ...... ....... ....... ......... ........... ..... ;%8// ;%8// p H'dditional cost inc"rred on the next order of genatope as a res"lt of Mhaving to place the order early N4%/// kilograms 9;.8/ p O p O ;.&/ pP pP .................................................. 1%2// p Total relevant cost ....... ........... .......... ............ ........... ........... ............ ........... ........ ... 1/%&// 1/%&// p p denotes p denotes 'rgentina#s peso. HThis cost wo"ld not $e inc"rred if the special order were not accepted.
!.
9a 24%;// 24%;// p $ook p $ook val"e 9;%/// kilograms ;.1/ p per p per kilogram: Irrelevant% since it is a s"nk cost. 9$1%/// kilograms to $e "sed in the special order: 3elevant% as shown in re)"irement 91. 9c ;.8/ ;.8/ p price p price if next order is placed early: 3elevant% since this is the cost of replacing the "sed genatope. 9d;.&/ p price p price if next order is placed on time: 3elevant% $eca"se an additional 4%/// kilograms in the next order will $e p"rchased at a .4/ p per p per kilogram premi"m. This .4/ p premi"m p premi"m is the difference $etween the ;.8/ p price and the ;.&/ p price. p price.
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9a<%1// 9a<%1// alloc allocati ation on of rent rent on facto factory ry $"ild $"ilding ing:: Irrelev Irrelevant ant%% since "sion 7etals Company will rent the entire factory $"ilding regardless of whether it contin"es to operate the =ackaging epartment. If the department is eliminated% the space will $e converted to storage space. 9$11%/// rental of storage space in wareho"se: 3elevant% since this cost will $e inc"rred only if the =ackaging epartment is kept in operation. If the department is eliminated% this 11%/// rental cost will $e avoided.
!.
The 11 11%// %/// / wareho wareho"se "se rent rental al cost cost is the the oppor opport"n t"nity ity cost cost associated with "sing space in "sion 7etals Company#s factory $"ilding for the =ackaging epartment. BB3CISB 14-&< 91* 7I0(TBS 9a 9a
4*% 4*%// /// / sala salary ry of =ack =ackag agin ing g epa epart rtme ment nt mana manage ger: r: Irrelevant% since this manager will $e employed $y the the com ompa pan ny at 4*%// *%/// / per per year rega regard rdle less ss of whether the =ackaging epartment is kept in operation.
9$ 9$
2/% 2/%// /// / sala salary ry of C"tt C"ttin ing g epa epart rtme ment nt manag manager er if a new person m"st $e hired: 3elevant% since this cost will $e inc"rred only if the =ackaging epartment is kept kept in operat operation ion.. If the =ackag =ackaging ing epart epartmen mentt is eliminated% then that department#s c"rrent manager will move to the C"tting epartment at 4*%/// per year.
The following comparison may help to clarify the analysis: ANNA* SA*AR1 COST INCRRED B 1 .SION META*S COM2AN1
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epartm ent is Qept
epartm ent is Bliminate d
Salary of the person c"rrently managing the =ackaging epartment ............................. 4*%///H Salary of newly hired person to manage the 2/%// C"tting epartment epartment ................ ................ / Total ....................................... 1/*%// / ifference ............................... 2/%///
4*%///
4*%///
H
Contin"es to manage =ackaging epartment.
7oves to C"tting epartment position. 'dditional comment: There are many possi$le reasons why it might cost "sion 7eta 7etals ls Comp Compan any y mo more re to hire hire a new new C"tt C"ttin ing g epa epart rtme ment nt manager than to transfer a c"rrent employee to the position. ne possi$le scenario is that the c"rrent =ackaging epartment manager is a relatively yo"ng and inexperienced mana manage ger% r% to whom whom to top p mana manage geme ment nt is will willin ing g to give give the the C"tting epartment opport"nity if the =ackaging epartment is eliminated. 6owever% if a new person m"st $e hired% "sion 7etals Company will $e forced to go into the 5o$ market for more ore sen senior ior and and ex exp perie erienc nce ed manag anager ers s. t th her pos ossi si$ $le reas reason ons s incl incl"d "de e ex exis isti ting ng cont contra ract ct"a "all agre agreem emen ents ts%% "nio "nion n contracts% and so forth.
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BB3CISB 14-4/ 9!/ 7I0(TBS Sales reven"e for one 5ar of silver polish ...... Sales reven"e for 1R4 po"nd of grit &&8 . . . . . . . Incremental reven"e from f"rther processing Incremental costs of f"rther processing: M=ro M=roce cess ssin ing g cos costs ....... ........... ............ ............ ...... .... .... ..
4.// .*/ &.*/
Selling costs ............................................. Incremental contri$"tion margin from f"rther processing into silver polish 9per 5ar .......... Indifference po point in "nits
!.* !.* / .&/
!.;/ .8/
avoida$lefixedcosts of f"rtherprocessing incrementa l contri$"to i n margin
*%2/ ;%/// 5ars .8/
If mo more re than than ;%// ;%/// / 5ars 5ars of silv silver er poli polish sh can can $e sold sold%% yte ytell Corpo Corporat ration ion sho"ld sho"ld proces process s the re)"ir re)"ired ed amo"nt amo"nt of grit grit &&8 f"rther into the polish. BB3CISB 14-41 91/ 7I0(TBS The most profita$le prod"ct is the one that yields the highest contri$"tion margin per "nit of the scarce reso"rce% which is direct la$or. ?e do not know the amo"nt of direct-la$or time re)"ired per "nit of either prod"ct% $"t we do know that os re)"ires six times as m"ch direct la$or per "nit as (no. efine an ar$itrary time period for which direct la$orers earn 1.//% and and call call this this a +tim +time e "nit "nit., ., The The two two prod prod"c "cts ts## cont contri ri$" $"ti tion on margins per +time "nit, are calc"lated as follows: (nit contri$"tion margin .................... +Time "nits, re)"ired per "nit of prod"ct Contri$"tion margin per +time "nit, M(n M( no: 9&./ &.// / K 1 ..... ...... .... ........ ...... .... .... .... .... .... ....... ... os: 91!.// K 2 .............................
(no &.// 1
os 1!.// 2
&./ &.// !. !.//
Therefore% (no is a more profita$le prod"ct. 'ny ar$itrary amo"nt of direct la$or time expended on (no prod"ction will McGraw-Hill/Irwin Inc. 14"## 14"##
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res" res"lt lt in a grea greate ter r cont contri ri$" $"ti tion on marg margin in than than an e)"i e)"iva vale lent nt amo"nt of la$or time spent on os prod"ction.
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BB3CISB 14-4! 91* 7I0(TBS 1. ecision ecision varia$les: varia$les: n"m$er of "nits of (no to $e prod"ced D n"m$er of "nits of os to $e prod"ced !. $5ective $5ective f"nction: f"nction: 7aximi>e & U 1!D The The coef coeffi fici cien ents ts of and and D are are the the "nit "nit cont contri ri$" $"ti tion on margin margins s fo for r (no and os% os% respec respectiv tively ely.. 7aximi 7aximi>in >ing g this this o$5ective o$5ective f"nction f"nction will res"lt in the highest possi$le total contri$"tion margin. &. Const Constrai raints nts:: 9a 9a ire irect ct-l -la$ a$or or tim time e cons constr trai aint nt:: 91R! 91R!4 4 U 91R4 91R4D D 1/%/// The coefficients of and D are the n"m$er of ho"rs of direct la$or re)"ired to prod"ce one "nit of (no and one "nit of os% respectively. or example% the directla$or cost per "nit of os is 2.//% so it m"st re)"ire 1R4 direct-la$or ho"r per "nit of os. 9$ 9$
7ach 7achin ine e tim time e con const stra rain int: t: 1 U !D
;%///
The coefficients of and D are the n"m$ers of ho"rs of mach machin ine e time time re)" re)"ir ired ed to prod prod"c "ce e one one "nit "nit of os% os% respectively. 9c 9c
0onn 0onneg egat ativ ive e prod prod"c "cti tion on )"an )"anti titi ties es:: % D
/
The complete linear program is the following 7aximi>e & U 1!D S"$5ect to: 91R!4 U 91R4D 1 U !D McGraw-Hill/Irwin Inc. 14"#% 14"#%
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% D
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9a 0otation: denotes prod"ced per day D denotes prod"ced per day 9$ 9$
the
the
)"antity
)"antity
of
kreolite-red kreolite-$l"e
Cont ontri$ ri$"tio "tion n mar margi gin n:
Qreolite3ed =rice ................................ &2 (nit varia$le cost ............. !; (nit contri$"tion margin . . ; 9c
of
Qreolitel"e 4! !; 14
Ginear program:
7aximi>e ; U 14D S"$5ect to:
! U !D
!4
1 U &D
!4
% D
/
!. Lraphical Lraphical sol"tio sol"tion: n: See next page. page. Corn Corner er poin points ts in feas feasi$ i$le le $5ective $5ective f"nction f"nction region: val"e: /
D/
/
D;
11!
2
D2
1&!
1!
D/
<2
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The maxim"m o$5ective f"nction val"e is achieved when 2 and D 2. Th"s% the company sho"ld prod"ce 2 dr"ms of kreolite-red per day and 2 dr"ms of kreolite-$l"e per day. &.
The The o$5e o$5ect ctiv ive e f"n f"nctio ction n val" val"e e at the the optim ptimal al sol" sol"ti tio on is a 1&! total contri$"tion margin as shown in re)"irement 9!.
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BB3CISB 14-4& 9C0TI0(B Lraphical sol"tion:
D !*
!/
1* 7achine I 1/
•
*
easi$l e *
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ptimal sol"tion 9 2% D $5ective f"nction 7achine II
1/
1*
!/
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SO*TIONS TO 2ROB*EMS =3GB7 14-44 9!* 7I0(TBS 1. Blectri lend c er 7ixer (nit cost if p"rchased from an o"tside !/ s"pplier .............. ..................... ............. ................................. ........................... &; Incremental "nit cost if man"fact"red: Mir Mirec ectt mate materi rial al .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 2 11 11 Mir Mirec ectt la$o la$or r ....... ........... ............ ............ ...... .... .... .... .... .... .... 4 < MFaria$le overhead MM12 MM12 O 1/ per ho"r ho"r fixed fixed ........ ............ ......... ......... ....... ... 2 MM&! MM&! O 9!91 9!91/ / per ho"r ho"r fixed fixed ..... ........ ...... ...... ...... ..... 1! MMTo MMTota tall .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 12 12 &! &! (nit cost savings if man"fact"red ................ 4 2 7achine ho"rs re)"ired per "nit .................. 1 ! Cost savings per machine ho"r if man"fact"red M4 K 1 ho"r ho"r ..... ....... .... ..... ..... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... 4 2 K ! ho"rs ............................................. & Therefore% each machine ho"r devoted to the prod"ction of $lenders saves the company more than a machine ho"r devoted to mixer prod"ction. 7achine ho"rs availa$le ........................................*/%/// ........................................*/%/// 7achine ho"rs needed to man"fact"re !/%/// $lenders ............. ....................... ..................................................!/ ........................................!/%/// %/// 3emaining machine ho"rs ......................................&/%/// 0"m$er of mixers to $e prod"ced 9&/%/// K ! .......1*%/// Concl"sion: 7an"fact"re. . . .!/%/// $lenders 7an"fact"re......................1*%/// mixers ="rc ="rcha hase se 1&%/ 1&%/// // mixe mixers rs !. If the compan company# y#s s manage managemen mentt team team is a$le to red"ce red"ce the direct material cost per mixer to 2 9* less than McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
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prev previo io"s "sly ly ass" ass"me med d%% then then the the cost cost savi saving ngs s from from man"fact"ring a mixer are 11 per "nit 92 savings comp comp"t "ted ed in re)" re)"ir irem emen entt 91 91 pl"s pl"s * red" red"ct ctio ion n in material cost:
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=3GB7 14-44 9C0TI0(B Blectri lend c er 7ixer 0ew "nit cost savings savings if man"fact man"fact"red "red ....... 4.//11. 4.// 11.// // 7achine 7achine ho"rs re)"ired re)"ired per "nit ................ 1 76 ! 76 Cost savings per machine ho"r if man"fact"red M4 K 1 ho"r .............. ..................... .............. ............. ................. ........... 4.// 11 K ! ho ho"rs ......................................... *.*/ Therefore% devote all */%/// ho"rs to the prod"ction of !*%/// mixers. Concl oncl"s "sio ion: n:
7an" an"fact fact"r "re: e: !*%/// %/// mixer ixers s ="rchase: &%/// mixers ="rchase: !/%/// $lenders
=3GB7 14-4* 9!* 7I0(TBS 1.
Des% Des% the the ord order er sho sho"l "ld d $e acc accep epte ted d $eca $eca"s "se e it gen gener erat ates es a profit of of & &4%/*/ for for th the fi firm. 0ote: The fi fixed administrative cost is irrelevant to the decision% $eca"se this this cost cost will will $e inc"rr inc"rred ed regard regardles less s of whethe whether r V"pite V"piter r accepts or re5ects the order. Selling priceWWWWWWWWWWWWWWWWW WW Gess: irect material 9;.!/ - !.1/ WWWWWWWW. irect la$orWWWWWWWWWWWWWWW W.. Faria$le man"fact"ring overhead 9.* ho"rs x 8.*/H WWWWWWWWWWW.. (nit contri$"tion marginWWWWWWWWWWWWW.
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Total Total contri contri$"t $"tion ion margin margin 911%// 911%/// / "nits x &.2*WW.. Gess: 'dditional set-"p costsWWWWWWWWWWW Special deviceWWWWWWWWWWWWWW W. 0et contri$"tion to profitWWWWWWWWWWWWW.
4/% 1*/ &%8 // !%4 2% // 1// &4% /*/
H ixed man"fact"ring overhead: 8*/%/// K 2/%/// machine ho"rs 1!.*/ per ho"r Faria$le man"fact"ring man"fact"ring overhead: !/.// - 1!.*/ 8.*/
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=3GB7 14-4* 9C0TI0(B !.
0o% V"piter lacks ade)"ate man"fact"re the entire order.
machine
=lanned machine ho"rs 9*%/// ho"rs x & monthsWW C"rrent "sage 91*%/// ho"rs x 8/X WWWWWWWW.. 'vaila$le ho"rsWWWWWWWWWWWWWWWWW W 3e)"ir 3e)" ired ed mach machin ine e "nits x .* ho"rsWW &.
ho"r ho"rs s
capacity
to
1*%// / 1/%*/ / 4%*/ /
911% 911%// /// / *%*/ /
ptions in incl"de th the fo following ing: Sacrificing some c"rrent $"siness in the hope that a long-term relationship with Fen"s can $e esta$lished and proves to $e profita$le 'c)"iring more machine capacity "tso"rcing some "nits ?orking overtime
•
• • •
=3GB7 14-42 9!* 7I0(TBS 1.
=er-"n -"nit contri$"tion margins: asic
Selling priceWWWWWWWWWWWWWWW ... Gess: Faria$le costs: irect materialWWWWWWWWWW. irect la$orWWWWWWWWWWW.. Faria$le Faria$le man"fact" man"fact"ring ring overhead W Sales commission McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
Bnhanc ed
! */
! ; 1 * ! 4
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!*/ x 1/X@ &&/ x 1/XWWW.
! *
Total "nit varia$le costWWWWWW (nit contri$"tion marginWWWWWWWWWW !.
& &
1 &/
1 *;
! //
The The fol follo lowi wing ng cost costs s are are not not rele releva vant nt to the the deci decisi sion on:: evelopment costsYs"nk ixe ixed d man man"fac "fact" t"ri ring ng over overhe head adYw Ywil illl $e inc" inc"rr rred ed regardless of which prod"ct is selected Sales salariesYidentical for $oth prod"cts 7arket st"dyYs"nk • •
• •
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=3GB7 14-42 9C0TI0(B &.
Vohnson and Lome>% Inc. expects to sell 1/%/// asic "nit "nits s 94/% 94/%// /// / "nit "nits s x !*X !*X or ;%// ;%/// / Bnha Bnhanc nced ed "nit "nits s 94/%/// "nits "nits x !/X. !/X. n the $asis of this sales forecast% forecast% the company wo"ld $e advised to select the asic model.
Total contri$"tion margin: 1/%/// 1/%/// "nits "nits x 1*;@ 1*;@ ;%/// ;%/// "nits x !//W. Gess: 7arketing and advertisingWWWWWW IncomeWWWWWWWWWWWWW WWWW... 4.
asic
Bnhanc ed
1%*;/% /// 1&/% /// 1%4*/% ///
1%2//% /// !//% /// 1%4//% ///
The The )"an )"anti tita tattive ive diffe iffere renc nce e $et $etwee ween the pro profita fita$i $illity ity of asic and Bnhanced is relatively small% which may prompt the firm to look at other factors $efore a final decision is made. These factors incl"de: Competitive prod"cts in the marketplace ata validity Lrow Lrowth th pote poten ntia tial of the the asi asic c and and Bnhan hanced ced models =rod"ction feasi$ility Bffects% if any% on existing prod"ct sales reak-even points • • •
• • •
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=3GB7 14-48 !* 7I0(TBS 1.
Tipton will $e worse off $y 1!%;// if it discontin"es wallpaper sales. =aint and S"ppli es
Carpet ing
?allpa per
SalesWWWWWW &;/%/ 42/%/ 14/%/ WW.. // // // Gess Gess:: Faria aria$l $le e !!;%/ &!!%/ 11!%/ costsW. // // // Contri$"tion 1*!%/ 1&;%/ marginW. // // !;%/// If wallpaper is closed% then: Goss of wallpaper contri$"tion marginW... 3emodelingWWWWWWWWW WWWWW. 'dded profita$ility from carpet salesHWW ixed cost savings savings 94*%/// 94*%/// x 4/XWWW. ecreased contri$"tion margin from paint an d s"pp s"pplie lies s 91* 91*!% !%// /// / x !/X !/X WWWWW.. Increased advertisingWWWWWWWWW.. Income 9loss from clos"reWWWWWWW
9!;%/ // 91!%4 // 2*%/ // 1;%/ // 9&/%4 // 9!*%/ // 91!%; //
H The c"rrent contri$"tion margin ratio for carpeting is &/X 91&; 91&;%/ %/// // K 42/ 42/%/ %/// //. . This This ratio ratio will will increase to &*X% prod"cing a new contri$"tion for the the line line of !/& !/&%/ %/// // N94 N942/ 2/%/ %/// // U 1!/ 1!/%/ %/// // x &*XP. The end res"lt is that carpeting#s contri$"t contri$"tion ion margin margin will rise $y 2*%/// 2*%/// 9!/&%/// 9!/&%/// McGraw-Hill/Irwin Inc. 14"$' 14"$'
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- 1&;%///% $oosting firm profita$ility $y the same amo"nt. !.
This This cos costt sho sho"l "ld d $e $e igno ignore red. d. The The inv inven enttory ory cos costt is s" s"nk 9i.e 9i.e.% .% a past past cost cost that that is not not rele releva vant nt to the the deci decisi sion on. . 3egardless of whether the department is closed% Tipton will have a wallpaper inventory of !&%8//.
&.
The Internet- and maga>ine-$ased several advantages:
firms
likely
have
These companies pro$a$ly carry little or no inventory inventory.. ?hen a c"stome c"stomer r places an an order% order% the firm simply simply calls calls its s"pplie s"pplier r and ac)"ires ac)"ires the the goods. goods. The res" res"lt lt may may $e lowe lower r ex expe pend ndit it"r "res es fo for r stor storag age e and and wareho"sing. Thes These e firm firms s do not not need need reta retail il spac space e fo for r walk walk-i -in n c"stomers. Inte Intern rnet et-- and and maga maga>i >ine ne-$ -$as ased ed firm firms s can can cond cond"c "ctt $"sin "sines ess s glo$a lo$all lly. y. Tip Tipto ton n% on the ot othe her r hand% nd% is confined to a single store in es 7oines. •
•
•
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=3GB7 14-4; 9!/ 7I0(TBS 1. ?hen ?hen there is no limit on prod"cti prod"ction on capacit capacity y the the =ro mode mo dell sho" sho"ld ld $e man"f n"fact" act"re red d since ince it has the the highest contribution margin per unit .
Selling price ..................................... irect material ................................. irect la$or ...................................... Faria$le overhead ............................ Total varia$le cost ............................ Contri$"tion ma margin .. ..........................
6ome el"x =ro 7odel e 7odel 7odel *; 2* ;/ 12 !/ 1< 1/ 1* !/ ; 1! 12 &4 48 ** !4 1; !*
!. ?hen ?hen la$or is in short short s"pply s"pply the 6ome 6ome model model sho"ld sho"ld $e man"fact"red% since it has the highest contribution margin per direct-labor hour . 6ome el"x =ro 7odel e 7odel 7odel Contri$"tion margin per "nit ............. !4 1; !* irect-la$or ho"rs re)"ired ............... .... 1 1.* ! Contri$"tion margin per direct-la$or !4 1!.*/ ho"r .............. ..................... ........................... ............................ ........ 1!
=3GB7 14-4< 9!/ 7I0(TBS The analysis prepared $y the engineering% man"fact"ring% and acco acco"n "nti ting ng depa depart rtme ment nts s of Cast Castin ing g Tech Techno nolo logy gy 3e 3eso so"r "rce ces s 9CT3 9CT3 was not correc correct. t. 6oweve 6owever% r% their their recomm recommend endati ation on was correct% provided that potential la$or-cost improvements are ignored. 'n incremental cost analysis similar to the following ta$le ta$le sho"ld sho"ld have have $een $een prepar prepared ed to determ determine ine whethe whether r the p"mp sho"ld $e p"rchased or man"fact"red. In the following ana analysi lysis% s% fixe fixed d fac facto tory ry over overhe hea ad cos ostts and and gene genera rall and and administrative overhead costs have not $een incl"ded $eca"se McGraw-Hill/Irwin Inc. 14"$) 14"$)
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they are not relevant@ these costs wo"ld not increase% $eca"se no addi additi tion onal al e)"i e)"ipm pmen ent% t% spac space% e% or s"pe s"perv rvis isio ion n wo wo"l "ld d $e re)" re)"ir ired ed if the the p"mp p"mps s were were man" man"fa fact ct"r "red ed.. Ther Theref efor ore% e% if potent potential ial la$or la$or cost cost improv improveme ements nts are ignore ignored% d% CT3 CT3 sho"ld sho"ld p"rchase the p"mps $eca"se the p"rchase price of 2;.// is less than the 8!.// relevant cost to man"fact"re.
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=3GB7 14-4< 9C0TI0(B Incremental cost analysis:
="rc ="rcha hase sed d comp compon onen ents ts .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .. 'sse 'ssem$ m$ly ly la$ la$or or ... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Faria aria$ $le man man"fac fact"r t"ring ing ove overhea rhead d .... ...... .... .... .... .... .. MTotal MTotal releva relevant nt cost. cost.... ..... .... .... ..... ..... .... ..... ...... ...... ...... ...... ...... ...
Cost of 1/%/// (nit 'ssem$ly =er 3"n (nit 1!/ 1!/%/ %/// // 1!. 1!.// // &//% &//%// /// / &/./ &/.// / &//%// %/// &/.// 8!/%/ 8!/%/// // 8!.// 8!.//
=3GB7 14-*/ 94/ 7I0(TBS 1.
a. 'n analysis of the relevant costs that shows whether the the 7idw 7idwes estt ivi ivisi sion on of =ai$ =ai$ec ec Corp Corpor orat atio ion n sho" sho"ld ld make 7T3-!/// or p"rchase it from 7arley Company is as follows: 'mo" nt =er (nit
Total for &!%/// (nits
18.&/
**&%2 //
Cost to p"rchase 7T3-!/// from 7arley: Mid price from 7arley ...................... MB)"ipment lease penalty 9&2%///R1! ! ................................ Total co cost to to p p" "rchase .. ..................... Cost for 7idwest to make 7T3-!///: Mirect material 91<*%///R&/%/// 91<*%///R&/%/// 1./; .................. ......................... .............. .......................... ................... 8./! Mirect la$or 91!/%///R&/%/// 91!/%///R&/%/// 1./*........... 1./*.................. .............. .............. .............. .................... ............. 4.!/ MFaria$le man"fact"ring overhead M 9!!*%/// .4R .4R&/ &/%/ %/// // .... ...... .... .... .... .... .... .... .... &.// &.// actory space rental ........................ McGraw-Hill/Irwin Inc. 14"%14"%-
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B)"ipment leasing costs .................. Total cost to to make ........................... Savings if p"rchased from 7arley ..... . .
&2%/// *8*%/ 4/ 91*%44 /
$. ased ased solely solely on the financi financial al res"lt res"lts% s% the &!%/// &!%/// "nits "nits of 7T37T3-!/ !/// // sho" sho"ld ld $e p"rc p"rcha hase sed d from from 7arl 7arley ey.. The The total cost from 7arley wo"ld $e **<%2//% or 1*%44/ less than if the "nits its were made $y the 7idwest ivision.
=3GB7 14-*/ 9C0TI0(B !. The )"alitat )"alitative ive factor factors s that that the 7idwest 7idwest ivisi ivision on and =ai$ec Corporation sho"ld consider $efore agreeing to p"rchase 7T3-!/// from 7arley Company incl"de the following: •
•
•
The )"ality of the 7arley component sho"ld $e e)"al to% or $etter than% the )"ality of the internally made comp compon onen ent% t% or else else the the )"al )"alit ity y of the the fina finall prod prod"c "ctt might $e comprised and =ai$ec#s rep"tation adversely affected. 7arley#s relia$ility as an on-time s"pplier is important% since late deliveries co"ld hamper =ai$ec#s prod"ction sched"le and delivery dates for the final prod"ct. Gayoffs may res"lt if the component is o"tso"rced to 7arley. This co"ld impact 7idwest#s and =ai$ec#s other empl employ oyee ees s and and ca"s ca"se e la$o la$or r pro$ pro$le lems ms or affe affect ct the the company#s position in the comm"nity. In addition% there may $e termination costs that have not $een factored into the analysis.
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Gynn Gynn 6ard 6ardtt wo" wo"ld ld cons consid ider er the the re) re)"e "est st of Vohn Vohn =ort =orter er to $e "nethical for the following reasons% which are $as $ased on the the Stan Standa dard rds s of Bt Bth hica ical Cond" ond"ct ct fo for r 7anagement 'cco"ntants.
Competence •
=repare complete and clear reports and recommendations afte after r appr approp opri riat ate e anal analys ysis is of rele releva vant nt and and reli relia$ a$le le information. 6e has asked her to ad5"st and falsify her repo report rt and and leav leave e o"t o"t so some me man" man"fa fact ct"r "rin ing g over overhe head ad costs. Integrity
•
•
3efrain from either actively or passively s"$verting the attainment of the organi>ation#s legitimate and ethical o$5ectives. =ai$ec has a legitimate o$5ective of trying to o$tain the component at the lowest cost possi$le% regardless of whether it is man"fact"red $y 7idwest or o"tso"rced to 7arley. Comm" mm"nicate "nfavora$le as well as favora$le inform informati ation on and profes professio sional nal 5"dgme 5"dgments nts or opinio opinions. ns. 6ardt needs to comm"nicate the proper and acc"rate res"lts of the analysis% regardless of whether or not it is favora$le to 7idwest.
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=3GB7 14-*/ 9C0TI0(B •
3efrain from engaging in or s"pporting any activity that wo"ld discredit the profession. alsifying the analysis wo"ld discredit 6ardt and the profession. Objectivity
•
•
Comm"nicate information fairly and o$5ectively. 6ardt need eeds to perf perfo orm an o$5ec $5ecttive ive makeake-v vers" ers"ss-$ $"y analysis and comm"nicate the res"lts fairly. iscl isclos ose e f"ll f"lly y all all rele relev vant ant info inform rmat atio ion n that that co"l co"ld d reasona$ly $e expected to infl"ence an intended "ser#s "nderstanding of the reports% comments% and reco recomm mmen enda dati tion ons s pres presen ente ted. d. 6ard 6ardtt need needs s to f"ll f"lly y disclose the analysis and the expected cost increases.
=3GB7 14-*1 94* 7I0(TBS 30'-1 is converted into astkil. 30'-! can $e sold as is or converted into two new prod"cts. a. 7ana 7anage geme ment nt#s #s anal analys ysis is is inco incorr rrec ectt $eca $eca"s "se e it inco incorp rpor orat ates es allo alloca cate ted d port portio ions ns of the the comm common on costs of F. The weekly cost of F 9!42%/// will $e inc"rred whether or not 30'-! is converted thro"gh f"rther processing. Th"s% any allocation of the common cost of F is strictly ar$itrary and not relevant to the decision to market 7-& and =estrol. The decision not to process 30'-! f"rther is incorrect. This flawed decision res"lted in the company failing to earn an incremental !/%/// in gross profit per week% as indicated $y the following analysis. $. 3even"e 3even"e from from f"rthe f"rther r processi processing ng of 30'!: M7-& 94//%/// *8 *8.*/R1// .. ............. M=estrol 94//%/// * *8.*/R1// ............ McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
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M Total reven"e from f"rther processing Gess re reven"e from sale of 30'-! ....... ....... ...... .. MInc MIncre reme ment ntal al reve reven" n"e e .... ...... .... .... .... .... .... .... .... .... .... .... .... .. MGes MGess s incr increm emen enttal cos costH .... ...... .... .... ........ ...... .... .... .... .... .. MInc MIncre reme ment ntal al prof profit it .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... ..
42/%/// &!/%/// 14/ 14/%/ %/// // 1!/% !/%/// /// !/%/ !/%/// //
HThe cost of F is not relevant and therefore is omitted from the sol"tion.
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=3GB7 14-*! 9*/ 7I0(TBS 1.
Sets res"lt in a !/X increase% or 1%*// dresses 91%!*/ 1.!/ 1%*//. Total 0"m$er of
=erc ent of Total Comp Comple lete te sets sets.. .... .... .... ..... ...... ... 8/X 8/X ress and cape............. ress and hand$ag....... ress only....................
2X 1*X
ress es 1%/*/
Cape 6and$ag s s 1%/* / 1%/*/
Total
1&* Total "nits if accessories are introd"ced.................. Gess: (nit sales if accessories are not introd"ced............ Incremental sales......... Incremental contri$"tion margin per "nit 9excl"ding material and c"tting costs.............. Total incremental contri$"tion margin........................ 'dditional costs: 'dditional c"tting c"tting cost 91%*// < <.............. 'dditional material cost 9!*/ */............... Gost remnant sales 91%!*/ *.............. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
1// X
1%*//
1%14 /
1%!8*
Y 1%!*/
Y
!*/
1%14 /
1%!8*
1!/
;
&
&/%/ //
<%1 !/
&%;!*
4!%< 4*
1&%*//
1!%*// 2%!*/ � 2002 2002
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Incremental c"tting for extra dresses 9!*/ !/............................. Incremental profit.. . . .. . .
!.
*%///
&8%!* / *%2<*
E"alitative factors that co"ld infl"ence the comp compan any# y#s s mana manage geme ment nt team team in its its deci decisi sion on to man"fact"re matching capes and hand$ags incl"de:
•
acc"racy of forecasted increase in dress sales.
•
acc"racy of forecasted prod"ct mix.
=3GB7 14-*! 9C0TI0(B •
•
•
company image of a dress man"fact"rer vers"s a more extensive s"pplier of women#s apparel. comp compet etit itio ion n apparel.
fro from
other ther
man man"fac fact"re t"rers rs
of
wom omen en#s #s
whet whethe her r ther there e is ade) ade)"a "ate te capa capaci city ty 9la$ 9la$or or%% faci facili liti ties es%% storage% etc..
=3GB7 14-*& 94/ 7I0(TBS 1. The costs that will will $e relevant in =eters# =eters# analysis analysis of the the spec pecial ial ord order $ei $eing con consid sidered ered $y 7adei adeira ra Compan Company y are those those expect expected ed f"t"re f"t"re costs costs that that are applica$le to a partic"lar decision 9the costs that will diff differ er $etw $etwee een n the the alte altern rnat ativ ives es of acce accept ptin ing g or re5ecting the offer. nly the varia$le costs of la$or and and mater ateria iall are are rele releva van nt. Sin Since the the orde order r was was received directly $y 7adeira% varia$le marketing is not relevant% $eca"se additional marketing costs will not $e inc"rred "nder this order. 'lso% the fixed costs are are not not rele releva vant nt%% $eca $eca"s "se e no addi additi tion onal al capi capita tall investments are needed to meet the order. The firm McGraw-Hill/Irwin Inc. 14"%' 14"%'
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is operating $elow f"ll capacity and will $e a$le to a$sor$ this order. !. 7adeira 7adeira Company Company sho"ld accept the offer. 'ltho"gh 'ltho"gh the average "nit average "nit cost of !<8.*/ is higher than the price offered% the "nit incremental cost is only 18/.//. 'ccepting the special order will res"lt in a contri$"tion per "nit of &/.// 9!//.// less 18/.// and a total additional contri$"tion margin of 1;%8* %8*/ 92! 92!* "nit "nits s &/.//. &/.//. The calc"lati calc"lations ons follow.
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=3GB7 14-*& 9C0TI0(B C"rrent 7onthly =rod"ction
Special rder 2!* 1!*%/ $ //
Com$ine d =rod"ctio n !%*// 8;1%!*/
(nits prod"ced .......... ...... .. Sales Sales ...... ......... ...... ........ ......... ......... .......
1%;8* 2*2%!* 2*2%!*/ /a
Faria$le costs: ............. ire irect ct la$o la$orM rM .... ...... .... .... .... .... ....
1;8% 1;8%*/ *// /
2!% 2!%*/ */ c / 1&1%!*/ 4&%8*/ d
!*/%/// 18*%///
<&%8*/ Y 41!% 41!%*/ *// / 1/2 1/2%! */
<&%8*/ *1;%8*/
1&8%*/ 1&8%*// /
1&8%*// ;8%*// !!*%/// 84&%8*/ &8%*//
irect ma materialM .......... 7arketing ingM .... ....... ...... .... .... .... .... Tottal varia To aria$ $le cost costsM sMM M. ixed costs: 7an"fa 7an"fact" ct"rin ringM gM ...... .......... ......
Y 7arketing ingM .... ....... ...... .... .... .... .... Tota To tall fixe fixed d cost costsM sMM M .... .. ....
;8%*// Y !!*% !!*%// /// / Y Tota To tall cost costs s .... ...... .... .... .... .... .... .... .... 2&8% 2&8%*/ *// / 1/2 1/2%! %! */ Income $efore tax ........ 1;%8*/ 1;%8*/ Cost per "nit Faria$lee......................
!!/.//
ixedf .... ...... .... .... .... .... .... .... .... .... .... .... .... g 'verageM "nit cost . . . . .
1!/. 1!/.// // &4/.//
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a
&*/ 1%;8* "nits 2*2%!*/ !// 2!* "nits 1!*%/// c 91;8%*//R1%;8* 91;8%*//R1%;8* "nits 2!*"nits 2!%*// d 91&1%!*/R1%;8* 91&1%!*/R1%;8* "nits 2!* "nits 4&%8*/ e Total varia$le costR"nits prod"ced varia$le incremental cost per "nit f Total fixed costR"nits prod"ced fixed cost per "nit g Total costR"nits prod"ced average cost per "nit $
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=3GB7 14-*& 9C0TI0(B &.
ther the r cons consid ider erat atio ions ns that that Sam Saman anth tha a =et =eter ers s sho" sho"ld ld inc incl" l"de de in her analysis of the special order incl"de the following: •
•
=ossi$le pro$lems with other c"stomers who press"re the company for similar treatment. The f"t"re c"stomer potential of the $"yer of the special order% generating additional reven"es.
4 Samant Samantha ha =eters =eters co"ld co"ld try to resolve resolve the ethical ethical conflic conflictt arising o"t of the controller#s insistence that the comp compan any y avoi avoid d comp compet etit itiv ive e $idd $iddin ing g $y taki taking ng the the following steps: •
•
•
•
•
She sho"ld follow the company#s esta$lished policies on s"ch matters. If s"ch policies do not exist% or if they do not resolve the conf confli lict ct%% she she sho" sho"ld ld disc disc"s "ss s the the sit" sit"at atio ion n with with her her manager "nles less% as in this case% the manager is involved in the conflict. Then% she sho"ld disc"ss the sit"ation with the manager#s s"pervisor. If this approach does not help her resolve the matter% then then she she sho" sho"ld ld cont contin in"e "e goin going g to the the next next-h -hig ighe her r managerial level% incl"ding the a"dit committee of the $oard of directors% if necessary. She She sho" sho"ld ld clar clarif ify y rele releva vant nt conc concep epts ts $y conf confid iden enti tial al disc disc"s "ssi sion ons s with with an o$5e o$5ect ctiv ive e advi adviso sor r to o$ta o$tain in an "nderstanding of possi$le co"rses of action. If the ethical conflict still exists after exha"sting all of thes these e aven aven"e "es s of inte intern rnal al revi review ew%% she she may may have have to resi resign gn from from the the comp compan any y and and s"$m s"$mit it an info inform rmat ativ ive e memorand"m to the $oard of directors.
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=3GB7 14-*4 94/ 7I0(TBS 1. The incremental cost of prod"cing one component ;1 is comp"ted as follows:
"nit
of
irect irect materi material al ..... ....... .... .... ..... ..... .... .... ..... ..... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .. ire irect ct la$o la$or r ... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Faria$ Faria$le le overhe overhead ad .... ....... ..... .... .... ..... ..... .... ..... ..... .... .... ..... ..... .... .... ..... ...... ..... Tota To tall varia varia$l $le e cost cost per per "nit "nit ... ..... .... .... .... .... .... .... ..... ...... ...... ...... ..... ..
&.8* &.8* 4.*/ 4.*/ !.!* !.!* 1/. 1/.*/ */
="rc ="rcha hase se pric price e )"o )"ote ted d for for comp compon onen entt ;1 ;1 ...... ......... ... Incr Increm emen enta tall cost cost of prod prod"c "cti tion on per per "nit "nit ...... ......... ...... ..... 0et 0et loss loss per per "ni "nitt if p"rc p"rcha hase sed d ... ..... .... .... .... .... .... .... .... .... .... .... .... ....
1&. 1&.*/ */ 1/.* 1/.*/ / &.// &.//
0et loss per machine ho"r if component ;1 is p"rchased &.//R& machine ho"rs 1.// per machine ho"r.
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=3GB7 14-*4 9C0TI0(B !. T8<
;1
="rchase price )"oted )"oted ......................... ............................... ...... 11. !* irect irect materia materiall ..... ....... ..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. !.!* irec irectt la$ la$or .... ............... ........... ...... ....... ...... .... .... .... .... .... ........ ...... 4./ 4.// Fari Faria$ a$le le over overhe head ad .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ... !.// Total Total varia$ varia$le le cost cost .... ...... ..... ..... .... .... ..... ...... ...... ...... ...... ...... ...... ..... ;.!*
1&. */ &.8* 4.*/
0et $ene $eneffit per "nit "nit of mak makin ing g com compo pone nen nt .
&.//
&.//
K !.* 0et $enefit per machine ho"r of making component ............. .................... .............................. ............................ ..... 1.!/
K&
!.!* 1/. */
K 7ach 7achin ine e ho"r ho"rs s re)" re)"ir ired ed per per "nit "nit .... ...... .... ..... ..... ..
1.//
7ach achine ine ho"r ho"rs s ava availa$ ila$le le ..... ...... .... .... .... .... .... .... .... ........ ...... .... .... est "se of machine time: prod"ce ;%/// "nits of component T8< 9;%/// !.* hrs. per "nit ........................... 7achine ho"rs remaining for prod"ction of component ;1 .............. ............................................ ..............................
41%/ 1%/// ho"rs
!/%/// ho"rs !1%/// ho"rs
7achine ho"rs re)"ired per "nit of component & ho"rs per ;1 .............................................................. "nit easi$le prod"ction of component ;1: 8%/// 9!1%///R& .............. .................... ............. ................................ ......................... "nits 3e)"ired )" )"antity of of co component ; ;1 .. ..... ...... ...... .... eas easi$ i$le le prod prod"c "cti tion on of comp compon onen entt ;1 ;1 .... ...... .... .... .. E"an E"anti tity ty of comp compon onen entt ;1 ;1 to $e p"rc p"rcha hase sed d. McGraw-Hill/Irwin Inc. 14"&# 14"&#
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Concl"sion: p"rchase 4%/// "nits of component ;1 and man"fact"re the remaining $earings. 'nswer to re)"irement 9!: d &.
Faria$le cost per "nit of component ;1 . .... ...... .... Tracea$le% avoida$le% fixed cost per "nit of com component ;1 944%///R11%/// "nits .... ...... .... .... 7axim"m price (pstate 7echanical sho"ld pay for fo r comp compon onen entt ;1. ;1... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..
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=3GB7 14-** 92/ 7I0(TBS 1. Calc"lation Calc"lation of net reven"e contri$"t contri$"tions: ions:
Cost Items esign ?ord processing =aper costa =rinting cost$ =ostagec 6andling d Total cost 3even"e potential 0et reven"e contri$"tion
McGraw-Hill/Irwin Inc. 14"&% 14"&%
4/%///
Colored =aper irst Class "lk 1%/// 1%/// ;// ;// 12%/// 12%/// !/%/// !/%/// 4/%/// !2/%///
!2/%///
;/%/// !2/%///
!/%/// 82%4//
!/%/// <8%;//
!/%/// &18%;//
4/%/// 4!1%///
4/%/// 4!1%///
1%!//%/ // 1%1!&% 2//
!%///%/ // 1%
!%!//%/ // 1%;;!% !//
!%*//%/ // !%/8<% ///
!%!//%/ // 1%88<% ///
=lain =aper "lk &// 1// 1/%/// 2%///
� 2002 2002
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!%/// &2%///
The McGraw-Hill Companies,
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a
=aper cost: =lain .//*R"nit !%///%/// "nits 1/%/// Colored .//;R"nit !%///%/// "nits 12%/// Llossy ./1;R"nit !%///%/// "nits &2%///
$
=rinting cost: =lain .//&R"nit !%///%/// "nits 2%/// Colored ./1/"nit !%///%/// "nits !/%/// Llossy ./4/R"nit !%///%/// "nits ;/%///
c
=ostage:
"lk ./!R"nit !%///%/// "nits 4/%/// irst class .1&R"nit !%///%/// "nits !2/%/// d
6andling: =lain Z colored ./1R"nit !%///%/// "nits !/%/// Llossy ./!R"nit !%///%/// "nits 4/%///
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14-&& 14-&&
=3GB7 14-** 9C0TI0(B !.
Net revenue realized: The glossy glossy $roch" $roch"re re provid provides es the most most net reven" reven"e e as compared to the other alternatives if it can $e mailed on time. 6owever% there is a risk of earning only the fo"rth $est net reven"e if it is mailed late. The colored paper $roch"re% if it can $e mailed at $"lk mail rates% prod"ces the the seco second nd larg larges estt amo" amo"nt nt of net net reve reven" n"e. e. 6owe 6oweve ver% r% there is the risk of a lower amo"nt if it m"st $e mailed firs firstt clas class. s. The The plai plain n pape paper r $"lk $"lk mail mail $roc $roch" h"re re has has a sign signif ific ican antl tly y lowe lower r net net reve reven" n"e e than than any any of the the ot othe her r alternatives. Image as a well-run organization: The image wo"ld $e $ased "pon comparison of two things related to the mail campaignYthe )"ality of the $roch"re 9appearance and the arrival of the $roch"re immediately follow following ing the radio radio and and televi televisio sion n covera coverage. ge. The The glossy glossy $roch"re% if it arrives on time% wo"ld pro$a$ly convey the $est image@ however% however% there is some risk that it wo"ld wo"ld not arri arrive ve on a time timely ly $asi $asis. s. The The colo colore red d pape paper r $roc $roch" h"re re wo"ld $e the next $est in terms of )"ality% $"t the $"lk mail alternative raises some risk of a timely receipt of the $ro $roch" ch"res res $y the pot ote entia ntiall dono onors. rs. The plain lain pap paper $roch"re wo"ld $e the poorest )"ality% and $eca"se it is to $e sent $"lk mail% r"ns the additional risk of not $eing delivered on a timely $asis. Image as a iscally responsible organization: The image of fiscal responsi$ility will $e $ased "pon a compar compariso ison n of potent potential ial donors donors## percep perceptio tions ns regard regarding ing the the cost cost of the the $roc $roch" h"re re and and cost cost of the the mail mailin ing. g. The The glossy $roch"re mailed first class may $e perceived as an extr ex trav avag agan ance ce $y the the pote potent ntia iall dono donors rs.. 't the the ot othe her r extreme% the potential donors may concl"de that the plain pape paper r $"lk $"lk mail mail alte altern rnat ativ ive e is an indi indica cati tion on that that the the organi organi>at >ation ion is "nwill "nwilling ing to devote devote ade)"a ade)"ate te financ financial ial reso"rces to the f"nd-raising efforts.
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Conclusions: The The fo fo"n "nda dati tion on staf stafff m"st m"st weig weigh h the the cons conse) e)"e "enc nces es of each each of the the alte altern rnat ativ ives es and and the the risk risks s asso associ ciat ated ed with with them on the three criteria to select a specific alternative. The staff has good information on net reven"e reali>ed% $"t $"t need needs s to o$ta o$tain in info inform rmat atio ion n on the the effe effect ct of the the )"ality of the $roch"re% the timeliness of mailing% and the type of mailing on potential donors# opinions as to what is a well-r"n and fiscally responsi$le organi>ation. =3GB7 14-*2 9!* 7I0(TBS 1.
Incre ncrem menta entall "n "nit cos cost if if p"r p"rc chas hased: ed: M="rchase M="rchase price ....... .......... ........ .......... ........... ........... .......... ........... ........... ..... 1*%/// 1*%/// M7ater M7aterial ial handl handling ing .... ...... ..... ..... .... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ..... &%/// &%/// MTotal MTotal ....... .......... ....... ....... ....... ....... ...... ....... ....... ....... ....... ...... ....... ......... .......... ......... .... 1;%/// 1;%/// Incremental "nit cost if man"fact"red: Mirect Mirect material material ....... .......... ...... ....... ....... ....... ....... ........ .......... ........... .......... .... 1%/// M7at M7ate erial rial handli ndling ng .......... ........... ........ ...... .... .... .... .... .... .... .... ....... ... !// Mir Mirec ectt la$o la$or r .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. ;%// ;%/// / MFaria$le man"fact"ring overhead 91!%/// 1R& ...... .......... ....... ....... ....... ...... ....... ....... ....... .......... ........... .......... ........... ........... .......... ..... 4%/// 4%/// MTotal MTotal ....... .......... ....... ....... ....... ....... ...... ....... ....... ....... ....... ...... ....... ......... .......... ......... .... 1&%!// 1&%!// Increase in "nit cost if p"rchased 91;%/// O 1&%!// 1&%!// ....... .......... ....... ....... ...... ....... ....... ....... ....... ...... ....... ....... ........ .......... .......... ..... 4%;// 4%;//
!.
Incr Increa ease se in in mon month thly ly cos costt of ac) ac)"i "iri ring ng part part V32 V32& & if p"rchased 91/ 4%;// 4%;//%% as comp"t comp"ted ed a$ove a$ove ...... .......... ......... ......... .... 4;%// 4;%/// / Gess: Gess: rental rental reven reven"e "e from from idle idle space space .......... ................. ....... !*%/// !*%/// Increase Increase in monthly monthly cost ........... ................. ........... ........... ............. ....... !&%/// !&%///
&.
Cont Contri ri$" $"ti tion on fo forg rgon one e $y $y not not man" man"fa fact ct"r "rin ing g alternative alternative prod"ct prod"ct ...... ......... ...... ....... ......... ........... ........... ........... ........... ..... *!%/// *!%/// Savings in the cost of ac)"iring V32& 91/ 4%; 4%;// // as comp comp"t "ted ed in re)" re)"ir irem emen entt 1 1 .... 4;%/ 4;%/// // 0et cost of "sing limited capacity to prod"ce part V32& ....... .......... ....... ....... ...... ....... ........ ......... ........... ........... .......... ........... ......... ... 4%///
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=3GB7 14-*8 94* 7I0(TBS 1. Sell to Qaytel l as Specia l rder MSales price .............. ........................2;% ..........2;%4/ 4/ / MGess cash disco"nt ............ -Y M0et price ..........................2;%4/ / M'dditional man"fact"ring costs MMi MMire rect ct mate materi rial al .... ...... .... .... .... .... .... 2%!// MMi MMire rect ct la$ la$or or ... ..... .... .... .... .... .... .... .... .... 4%!// MMFaria$le man"fact"ring overhead ............................. !%1// MTotal additional 1!%*/ man"fact"ring costs costs ............ .......... .. / MCo MCommis mmiss sions ions .... ...... .... .... .... .... .... .... .... .. !%/*! MTotal MTotal costs and expenses expenses . .14%** .14%** ! 0et contri$"tion ..................*&%;4 ;
Conve rt to Stand ard 7odel 2!%*/ / 1%!*/ 21%!* /
!%;*/
Sell as Specia l rder as Is *!%// / Y *!%// /
Y Y
&%&// Y 1%2*/ 8%;//
Y
1%!*/
1%*2/
<%/*/ *!%!/ /
1%*2/ */%44 /
!. Contr Contri$" i$"tio tion n from from sale sale to to Qayt Qaytell ell .... *&%;4 *&%;4; ; Contri$"tion from next $est alternative: sell sell as standa standard rd model model .... ....... ..... ..... ...... ...... ... *!%!// *!%!// iff iffer eren ence ce in cont contri ri$" $"ti tion on ....... ........... ....... ... 1%24 1%24; ;
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=ercentage of sales price received net of commission on special order: 1//X 1//X O &X .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..
<8X <8X
'ccepta$le red"ction in sales price from Qaytell 1%24 1%2<< 9ro"nded .<8
rigin riginal al pric price e )"ote )"ote to Qayt Qaytell ell ...... ........ .. 2;%4/ 2;%4// / 'cce 'ccept pta$ a$le le red" red"ct ctio ion n .... ...... .... .... ..... ...... ...... ..... .. 1%2< 1%2<< < 7inim"m accepta$le price from Qayte Qaytell ll ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ...... 22%8/ 22%8/1 1 =roof: S"ppose Qaytell pays a price of 22%8/1: MSales MSales price ....... ........... ....... ........ ........... ........... ......... .... 22%8/1 22%8/1 MGess: MGess: Sales commission commission 9&X 9&X .... . ..... .... 9ro"nded !%//1 24%8// MGess: 'dditional man"fact"ring costs costs ..... ....... .... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... 1!%*// 1!%*// MContri$"tion with red"ced price to Qaytell Qaytell ....... .......... ...... ...... ...... ...... ...... ....... ......... ......... .... *!%!/ *!%!// / =3GB7 14-*8 9C0TI0(B Therefore% at a price of 22%8/1 to Qaytell% 7iami Ind"st Ind"stries ries## manage managemen mentt wo"ld wo"ld $e indiff indiffere erent nt $etwee $etween n sell sellin ing g the the mach machin ine e to Qayt Qaytel elll and and conv conver erti ting ng it to a standard model. 't any price )"ote from Qaytell $elow 22%8/1% 7iami Ind"stries# management wo"ld prefer to convert the machine to a standard model. &. ixed man"fact"ring man"fact"ring overhead sho"ld have no infl"ence infl"ence on the the sale sales s pric price e )"ot )"oted ed $y 7iam 7iamii Ind" Ind"st strie ries s fo for r specia speciall orders orders.. 7anage 7anagemen mentt sho"ld sho"ld accept accept specia speciall orders whenever the firm is operating s"$stantially $elow capacity% incl"ding $elow the $reakeven point% when whenev ever er the the marg argina inal reve reven n"e from from the orde order r exce ex ceed eds s the the marg margin inal al cost cost.. 0orm 0ormal ally ly%% this this wo wo"l "ld d mean that the order sho"ld $e accepted as long as the the sale sales s pric price e of the the orde order r ex exce ceed eds s the the varia varia$l $le e McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
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prod"ction costs. The special order will res"lt in a positi positive ve contri contri$"t $"tion ion toward toward fixed fixed costs. costs. The fixed fixed man"fact"ring overhead is not considered in pricing $eca $eca"s "se e it will ill $e inc" inc"rr rred ed whet whethe her r the the orde order r is accepted or not. =3GB7 14-*; 94/ 7I0(TBS 1. The costs costs that that will $e releva relevant nt in Senna# Senna#s s analy analysis sis of the special order $eing considered $y ?inner#s Circle% Inc. are those expected f"t"re costs that are applica$le to a partic"lar decision 9the costs that will dif differ fer $etw etween een the the alter lterna nattives ives of accep ccepti ting ng or re5ecting the offer. nly the varia$le costs of la$or and material are relevant. Since the order was received dire irectly $y ?inner#s Circl rcle% varia$le marketing is not rele relev vant% $eca"se additional marketing costs will not $e inc"rred "nder this order. 'lso 'lso%% the the fixe fixed d cost costs s are are not not rele releva vant nt%% $eca $eca"s "se e no additional capital investments are needed to meet the order. The firm is operating $elow f"ll capacity and will $e a$le to a$sor$ this order. !. ?inner#s ?inner#s Circle% Circle% Inc. sho"ld accept accept the offer. offer. 'ltho"gh 'ltho"gh the average average "nit cost of 14;.8* is higher than the price offered% the "nit incremental cost cost is only ;*.//. 'ccepting the special order will res"lt in a contri$"tion per "nit of 1*.// 91//.// less ;*.// and a total additional contri$"tion margin of &8%*// 9!%*// "nits 1*.//. The calc"lations follow.
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=3GB7 14-*; 9C0TI0(B C"rrent 7onthly =rod"ction
Special rder
Com$ine d =rod"ctio n
!%*// !*/%/ $ //
1/%/// 1%*2!%* //
1!*%/ c //
*//%/// &*/%///
(nits prod"ced ....... . .. . . 8%*// Sales ...........................1%&1!%* a // Faria$le costs: ............. irect la$or ............... &8*%/// irect material .......... !2!%*//
d
;8%*// 7arketing ................. 1;8%*// Total varia$le costs . ;!*%/// ixed costs: 7an"fact"ring ........... !8*%/// 7arketing ................. 18*%/// Total fixed costs . . . . . 4*/%/// Total costs ...................1%!8*%/ // Income $efore tax ........ &8%*// Cost per "nit Faria$lee...................... 11/.// ixedf ........................... 2/.// g M'verage "nit cost . . . . . 18/.//
McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
Y !1!%* //
Y Y
1;8%*// 1%/&8%* // !8*%///
Y !1!%* // &8%*//
18*%/// 4*/%/// 1%4;8%* // 8*%///
;*.// Y ;*.//
1/&.8* 4*.// 14;.8*
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a
18* 8%*// "nits 1%&1!%*// 1// !%*// "nits !*/%/// c 9&8*%///R8%*// 9&8*%///R8%*// "nits !%*// "nits 1!*%/// d 9!2!%*//R8%*// 9!2!%*//R8%*// "nits !%*// "nits ;8%*// e Total varia$le costR"nits prod"ced varia$le incremental cost per "nit f Total fixed costR"nits prod"ced fixed cost per "nit g Total costR"nits prod"ced average cost per "nit $
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=3GB7 14-*; 9C0TI0(B &.
ther the r consi conside dera rati tion ons s that that Cathy Cathy Senn Senna a sho"l sho"ld d incl" incl"de de in her analysis of the special order incl"de the following: •
•
=ossi$le pro$lems with other c"stomers who press"re the company for similar treatment. The f"t"re c"stomer potential of the $"yer of the special order% generating additional reven"es. 4. Cath Cathy y Senn Senna a co"l co"ld d try try to reso resolv lve e the the ethi ethica call conf confli lict ct arisin arising g o"t of the contro controlle ller#s r#s insist insistenc ence e that that the comp compan any y avoi avoid d comp compet etit itiv ive e $idd $iddin ing g $y taki taking ng the the following steps:
•
•
•
•
•
She sho"ld follow the company#s esta$lished policies on s"ch matters. If s"ch policies do not exist% or if they do not resolve the conf confli lic ct% she she sho sho"ld "ld disc" isc"s ss the the sit sit"atio ation n with ith her manager "nless% as in this case% the manager is involved in the conflict. Then% she sho"ld disc"ss the sit"ation with the manager#s s"pervisor. If this this appr approa oach ch does does not not help help her her reso resolv lve e the the matt matter er%% then then she sho" sho"ld ld cont contin in"e "e goi going to the the next next-h -hig ighe her r manage manageria riall level% level% incl"d incl"ding ing the a"dit a"dit commit committee tee of the $oard of directors% if necessary. Senna Senna sho"ld sho"ld clarif clarify y releva relevant nt concep concepts ts $y confid confident ential ial dis disc"s c"ssion sions s with ith an o$5e o$5ect ctiv ive e adv advisor isor to o$tai $tain n an "nderstanding of possi$le co"rses of action. If the ethica ethicall confli conflict ct still still exists exists after after exha"s exha"stin ting g all of these aven"es of internal review% she may have to resign from the company and s"$mit an informative memorand"m to the $oard of directors.
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=3GB7 14-*< 94* 7I0(TBS 1. 7achine 7achine ho"r ho"r re)"irement re)"irements: s:
=rod"ct 1 7/8 ................................. *// T!;................................... 4// 1< .................................. !%/// Total re re)"ired .. .................. !%
epartment ! & *// 1%/// 4// Y !%/// 1%/// !%
4 1%/// ;// 1%/// !%;// &%&// *//
irect-la$or ho"r re)"irements:
=rod"ct 7/8 ................................. T!;................................... 1< .................................. Total re re)"ired .. .................. Total av availa$le .................. Bxcess 9deficiency ...........
1 1%/// 4// !%/// &%4// &%8// &//
epartment ! & 4 1%*// 1%*// *// ;// Y ;// !%/// !%/// 1%/// 4%&// &%*// !%&// 4%*// !%8*/ !%2// !// 98*/ &//
The monthly sales demand cannot $e met for all three prod"cts as a res"lt of the la$or shortage in epartment &. !. The The goal goal is to maxi maximi mi>e >e cont contri ri$" $"ti tion on marg margin in.. ixe ixed d costs are not relevant. relevant. The scarce reso"rce is directdirectla$or ho"rs 9G6 in epartment &. >ark sho"ld first prod prod"c "ce e the the prod prod"c "ctt that that maxi maximi mi>e >es s cont contri ri$" $"ti tion on margin per "nit of the scarce reso"rce 9G6. In this case two prod"cts% 7/8 and 1<% re)"ire direct-la$or ho"rs in epartment &. 7/8 Sales pr price .. ................................... 1<2 Faria$le costs irect material .......................... 8 irect la$or ............................... 22 McGraw-Hill/Irwin Inc. 14"'% 14"'%
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Faria$le overhead ..................... !8 Faria$le selling .......................... & Total varia$le costs ...................... 1/& Contri$"tion margin ..................... <&
!/ ! 8& */
!* 4 <8 <8 8/
=3GB7 14-*< 9C0TI0(B
=rod"ct 7/8 1<
Contri$"tion Contri$"tion epartment & 7argin 7argin G6 per G6 <& & &1 8/ ! &*
(nits 7axim"m G6 availa$le in epartment & =rod"ct 1< first =rod"ct 7/8 second
epartment & G6 3e)"ired alance 9 9G6
1%///
!%///
!*/
8*/
!%8*/ 8*/ -/-
3BS(GTI0L =3(CTI0 SC6B(GB =rod"ct (nits Comments 7/8 !*/ =rod"ce as m"ch as the constraint allows 98*/ K & G6 per "nit. 3ed"ced prod"ction is $ased on its lower contri$"tion margin per direct-la$or ho"r. T!; 4// =rod"ce "p to monthly sales demand@ "naffected $y epartment &. 1< 1%/// =rod"ce as m"ch as possi$le to maximi>e contri$"tion margin per 6G. SC6B(GB C0T3I(TI0 7'3LI0 D =3(CT Contri$"tion Contri$"tion 7argin per (nits to =rofit =rod"ct (nit =rod"ced 7/8 <& !*/ !&%!*/ McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
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T!; */ 1< 8/ Total contri$"tion margin
4// 1%///
!/%/// 8/%/// 11&%!*/
&. To s"pp s"pply ly the the addi additi tion onal al )"an )"anti titi ties es of 7/8 7/8 that that are are re)"ired% >ark sho"ld consider: •
s"$contracting the additional "nits.
•
operating on an overtime $asis.
•
ac)"iring la$or from o"tside the comm"nity.
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=3GB7 14-2/ 9&/ 7I0(TBS 1. Costs sts to $e analysis:
avo avoided ided
$y
p"rch "rcha asing sing
9con 9conve ven ntiona ionall
irect material .............. .................... ............. .............. .............. .............. ......... .. &//%/// irect la$or ....... .......... ....... .......... ............ ........... ........... ............ ........... ........... ...... 1;/%/// 1;/%/// Faria$le Faria$le overhead ........ ........... ....... ....... ...... ....... ....... ....... ....... ...... ......... ........ 1!/%/// 1!/%/// ixed overhead: MS"per MS"pervis visory ory salari salaries es ..... ....... .... ..... ..... .... .... ..... ...... ...... ...... ...... ...... ...... ... ;/%/// ;/%/// M7achinery M7achinery depreciati depreciation on ....... ............. ........... .......... ........... ........... ..... !;%/// !;%/// Total ............ ......................... .................................................... ....................................... 8/;%///
!.
Cost Costs s to to $e $e avo avoid ided ed $y p"rc p"rcha hasi sing ng 9'C 9'C anal analys ysis is: : irect material .............. .................... ............. .............. .............. .............. ......... .. &//%/// irect la$or ....... .......... ....... .......... ............ ........... ........... ............ ........... ........... ...... 1;/%/// 1;/%/// verhead: M=rod"ct development ............... 2//H 1/ 2%/// MS"pervisory salaries ................. 4/ !%/// ;/%/// M7aterial handling ..................... ; 2% 2 %/// 4;%/// M="rchasing ............................... !*/ ** ** 1&%8*/ MInspection ............. ........................ ................... ........ &// &/ &/ <%/// MSet"p ....................................... 4// 1* 1* 2%/// MBlectricity ................................ 1.4/ 8/%/// <;%/// Mil and l"$rication .................... .................... .!4 8/%/// 12%;// MB)"ipment maintenance maintenance ........... ......... .. .&2 8/%/// !*%!// M7achinery depreciation ............ .4/ 8/%/// !;%/// Total ........................................ ;1/%8*/ H=ool rates for the Savannah plant from Bxhi$it 14-!/.
Gevels of cost drivers associated with canister prod"ction 9from the information given in the pro$lem.
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=3GB7 14-2/ 9C0TI0(B &.
7akeake-o or-$" r-$"y y ana anallysis ysis "s "sing ing 'C 'C data data:: Cost savings if canisters are p"rchased 9'C analysis .............. ................................................. ................................... ;1/%8*/ Cost to p"rchase p"rchase canisters canisters ........ ............. ........... ........... ........... ........ .. 82/%/// 82/%/// 0et advant advantage age to p"rch p"rchasing asing ............ .......................... ................ .. */%8*/ */%8*/ International Chocolate Company will save over */%/// if it accepts Cataw$a#s offer. The final decision% however% sho"ld take )"alitative factors into acco"nt also. Iss"es s"ch as s"pplier relia$ility% prod"ct )"ality% and employee morale sho"ld $e considered. The releva relevant nt costin costing g approa approach ch remain remains s valid valid when when 'C data are "sed. The o$5ective is to determine what costs will $e avoided if the canisters are p"rchased. The 'C analysis analysis is a$le to more acc"rately acc"rately identify identify the avoida$le avoida$le costs. Costs that are ass"med to $e fixed and "navoida$le "nder "nder the conven conventio tional nal analys analysis is are shown shown $y the 'C analysis to vary with the appropriate cost drivers. In this light% many of these costs are seen to $e avoida$le if the canisters are p"rchased.
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=3GB7 14-21 94/ 7I0(TBS 1.
In orde order r to maxi maxim mi>e i>e cont ontri$ ri$"tio "tion n marg margin in%% the o$5e o$5ect ctiv ive e f"nction and constraint f"nctions wo"ld $e form"lated as follows: 0otation: F n" n"m$er of of $a $atches of of Fe Fen"s ca candy $a $ars C n"m$er of of $a $atches of of Co Comet ca candy $a $ars TC7 total total contri$" contri$"tion tion margin margin The contri$"tion margin is the selling price less varia$le cost for each each prod"ct. Th"s% for the Comet Comet candy $ar% $ar% the contri$"ti contri$"tion on margin is 1!* 9&*/ less !!*% !!*% and for the Fen"s Fen"s candy $ar% $ar% it is !// !// 9&// less less 1//. 1//. Therefore% Therefore% the o$5ective f"nction is as follows: 7aximi>e TC7 1!*C U !//F S"$5ect to the following constraints: 7ixing epartment: 1.*F U 1.*C *!* Coating epartment: !./F U 1./C *// 7aterials: C &// 0onnegativity: F / and C /
!.
The The n"m$ n"m$er er of $at $atc ches hes of eac each can candy $ar $ar tha thatt sho sho"ld "ld $e prod"ced prod"ced to maximi>e contri$"tion contri$"tion can $e determined determined $y graphing the linear program% as shown on the following page. The optimal optimal sol"tio sol"tion n is to prod"ce prod"ce !// $atches $atches of Comet $ars and 1*/ $atches of Fen"s $ars.
&.
The The tota totall cont contri ri$ $"tio "tion n marg margin in%% the then% is * **%/// %/// N9! N9!// 1!* U 91*/ !//P.
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=3GB7 14-21 9C0TI0(B Lraph of linear program: Fen"s 2//
*//
4//
7ixin ing departmentcon onstra rain int
7aterial rial constrai constraint nt
$5ectivef"nction
&//
ptimal sol"tion sol"tion9C S!//% FS1*/: !//
1//
Coa oating departmentcon onstrain int
easi$le region
1//
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!//
&//
4//
*//
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=3GB7 14-2! 94* 7I0(TBS 1. The o$5ectiv o$5ective e f"ncti f"nction on and constrai constraints nts that 7eals 7eals for =rofessionals% Inc. sho"ld "se to maximi>e profits are as follows: 7axim aximi> i>e e 1!/= U
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=3GB7 14-2! 9C0TI0(B &. Z 4. Corner =oints in easi$le 3egion = / 6 / = / 6 4/ = 1* = &/
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=3GB7 14-2! 9C0TI0(B *.
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=3GB7 14-2& 9*/ 7I0(TBS 1. Ginear Ginear programming programming 9G= is designed designed to determine determine the optim"m mix when reso"rces are limited and can $e switched or allocated among prod"cts. G= wo"ld $e appr approp opri riat ate e fo for r Colo Coloni nial al Corp Corpor orat atio ion n $eca $eca"s "se e the the compan company y has limite limited d facili facilitie ties s 9machi 9machine ne capaci capacity ty%% limited reso"rces 9la$or% and contract"al o$ligations 9minim"m )"antities to $e sold that m"st $e considered in order to maximi>e profit. !. 0ota 0otati tion on:: 3G 3' G '
3eg"la 3eg"lar r model model in Ga$or Ga$or 'ssem$ 'ssem$ly ly 3eg"lar 3eg"lar model model in '"tomated '"tomated 'ssem$ly 'ssem$ly el"x el"xe e model model in Ga$o Ga$or r 'ssem$ 'ssem$ly ly el"xe el"xe model model in in '"tom '"tomated ated 'ssem$ly 'ssem$ly
a. $5ective $5ective f"nction f"nction:: H 7aximi>e 1/.&/ 3G U 11.2* 3' U 1;.** G U 1<.
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=3GB7 14-2& 9C0TI0(B $. Constr Constrain aints: ts: irect la$or 9plating: .! 3G U .! 3' U .! G U .! ' &/%/// ho"rs irect la$or 9assem$ly: .!* 3G U ./* 3' U .!* G U ./* ' 4/%/// ho"rs 7achine ho"rs 9plating: .1* 3 G U .1* 3' U .1* G U .1* ' !*%/// ho"rs 7achine ho"rs 9la$or assem$ly: ./! 3G U./! G 1%*// ho"rs 7achine ho"rs 9a"tomated assem$ly: ./* 3' U ./* ' *%/// ho"rs Sales contract 9reg"lar: 3G U 3'
&*%/// "nits
Sales contract 9del"xe: G U '
&*%/// "nits
'll varia$les nonnegative: 3G% 3'% G% '
/
HS"pporting calc"lations 9direct-la$or time re)"irements: =lat lating ing.... ...... ........ ...... .... .... .... .... .... ........ ...... .... ho"rs 'ssem$ly: Ga$ Ga$or. or.... ............ .......... ...... .... .... .... .. ho"rs '"tomated....................
!. !.//R //R1/ 1/..// .!/ .!/
&. &.//R //R1! 1!..// .!* .!* .2/R1!.// ./*
ho"rs
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SO*TIONS TO CASES C'SB 14-24 94* 7I0(TBS In order order to maximi maximi>e >e the compan company#s y#s profit profita$i a$ilit lity% y% Sportw Sportway ay Corpo Corporat ration ion sho"ld sho"ld p"rcha p"rchase se <%/// <%/// tackle tackle $oxes $oxes from from 7aple 7aple =rod"cts% man"fact"re 18%*// skate$oards% and man"fact"re 1%/// /// tac tackle kle $oxe $oxes. s. This This com$ com$in inat atio ion n of p"rc "rchased ased and and man"f man"fact act"re "red d goods goods maximi maximi>es >es the contri contri$"t $"tion ion per direct direct-la$or ho"r availa$le. The analysis s"pporting this concl"sion follows: 1. Calc"late Calc"late "nit contri$"ti contri$"tion on margins: margins: ="rcha s ed Tackle oxes
7an"fact"red SkateTackle $oard oxes s ;2. ;2.// // 4*. 4*.// //
Sell Sellin ing g pric price e .... ...... .... .... .... .... .... .... .... .... .... .... .... .. ;2. ;2.// // Gess: M7ater M7aterial ial ..... ........ ...... ...... ...... ...... ...... ...... ...... ...... ... 92;./ 92;.// / 918.// 918.// 91!.*/ irect la la$or .. ........................... Y 91;.8* 98.*/ 7an"fact"ring overheadH .....H Y 92.!* 9!.*/ MSelling and administrative 94.// 911.// cost ............. .............................. ........................... .......... 9&.// Cont Co ntri ri$" $"ti tion on marg ma rgin in .... ...... .... .... .... .... .... .... 14 1 4.// .// && & &.// .// 1< 1 <.*/ .*/ irect-la$or ho"rs per "nit ..... .. Contri$" i$"tion per ho"r .... ...... .... .... .... .... ..
Y Y
1.!* .* !2.4/ &<.//
HCalc"lation of varia$le overhead per "nit:
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Tackle $oxes: irect irect-la -la$or $or ho"r ho"rs s .......... 1;.8* 1;.8* K 1*. 1*.// // 1.!* 1.!* ho"rs ho"rs verhead per direct-la$or 1!.*/ K 1.!* 1/.// ho"r ............................... Capacity ......................... ;%/// $oxes 1.!* 1/%/// ho"rs Total overhead ............... 1/%/// ho"rs 1/ per ho"r 1//%/// Total Total vari varia$l a$le e overh overhead ead . . 1//%/ 1//%/// // O */% */%/// /// */%/// Faria$le overhead per */%/// K 1/%/// *.// ho"r ............................... Faria$le overhead per *.// 1.!* 2.!* $ox ................................ Skate$oards: irect irect-la -la$or $or ho"rs ho"rs .......... 8.*/ 8.*/ K 1* 1*.// .// .* ho" ho"rs rs Faria$le overhead .......... *.// .* !.*/ In calc"lating the contri$"tion margin% 2.// of fixed overhead cost per "nit for distri$"tion m"st $e ded"cted from the selling and administrative cost. C'SB 14-24 9C0TI0(B 9C0TI0(B The The opti optima mall "se "se of Spor Sportw tway ay#s #s scar scarce ce reso reso"r "rce ce 9dire 9direct ct la$or is to man"fact"re skate$oards% "p to the n"m$er of skate$oards that the company can sell 918%*//. ?ith its remaining la$or time% Sportway can prod"ce 1%/// tackle $oxes. !. The The fo foll llow owin ing g ta$l ta$le e show shows s the the impr improv ovem emen entt in the the company#s total contri$"tion margin if it man"fact"res 18%*// skate$oards and 1%/// tackle $ox $oxes% es% rath rathe er tha than man man"fact" act"ri ring ng ;%// ;%/// / tack ackle $oxes. The optimal "se of Sportway#s availa$le direct-la$or ho"rs 9G6:
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G6 per (nit Item
E"ant ity
Total G6
Total ho"rs ho"rs .. . Skate$oards .
18%*/ /
.* .*/
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alan ce of G6 1/%// /
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1%!*/
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<%///
Y
MContri$"tion from man"fact"ring ;%/// $oxes M9;%/// &&.// ............. ..................................... ................................ ........ Improvement in contri$"tion margin .................... ....................
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C'SB 14-2* 92/ 7I0(TBS 1 .
7emorand"m
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Today
To:
'lice Ca Carlo% =re =res sident% 'l$ 'l$e erta La La"ge Co Company% Gtd.
rom:
I.7. St"dent
S"$5e ct:
S"ggested revision of prod"ct-line income statement
a. The prod"ct prod"ct-li -line ne income income statemen statementt is presen presented ted on an a$sorption-costing $asis and% th"s% is not s"ita$le for analysis and decision making. The statement does not distin disting"i g"ish sh $etwee $etween n varia$ varia$le le and fixed fixed costs% costs% which which hinders any analysis on the impact of vol"me changes on profit. In addition% the statement does not dist distin ing" g"is ish h $etw $etwee een n cost costs s that that are are dire direct ctly ly rela relate ted d 9tracea$le to a prod"ct line from those that are shared among all prod"cts. $. 'n altern alternati ative ve income income statem statement ent format format that that wo"ld wo"ld $e more more s"ita$ s"ita$le le for analys analysis is and decisi decision on making making wo"l wo "ld d incor ncorpo pora rate te the con contri$ tri$"t "tio ion n app approac roach h. Bxpenses wo"ld $e classified in terms of varia$ility and controlla$ility s"ch as: varia$le man"fact"ring% vari varia$ a$le le sell sellin ing g and and admi admini nist stra rati tive ve%% dire direct ct fixe fixed d controlla$ controlla$le le $y segment% segment% direct direct fixed controlla$le controlla$le $y others% and common fixed. The common fixed costs wo"ld not $e assigned to the prod"ct lines $eca"se s"ch an allocation wo"ld $e ar$itrary. The contri$"tion approach is more s"ita$le for analysis and decision making $eca"se there is a meaningf"l assignment of costs to prod"ct lines. !.
a. The s"gg s"gges estted disc disco ontin ntin"a "an nce of the the 3-ga -ga"ges ges wo wo" "ld $e cost cost effe effect ctiv ive% e% $"t $"t the the s"gg s"gges esti tion ons s rela relati ting ng to Bga"g ga"ges es and and E-ga E-ga"g "ges es wo wo"l "ld d not not $e cost cost effe effect ctiv ive. e.
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These concl"sions are $ased on the following )"arterly analysis.
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C'SB 14-2* 9C0TI0(B 9C0TI0(B
(nit selling price .......... (nit varia$le costs 3aw material ............. irect la$or ............... MFaria$le man"fact"ring M overhead ................. Shipping expenses . . . . Total ...................... (nit contri$"tion margin Increase 9decrease in "nitsH MB-ga"ge:M1/%/// */X ............................. ............................. ME-ga"ge:M;%/// 1*X .................................... M3-ga"ge:M*%/// 1//X ........................... Increase 9decrease in total contri$"tion margin . . . . ecrease 9increase in fixed costs Increase 9decrease in segment contri$"tion ................
B-La"ge
E-La"ge !//
3-La"ge 1;/
18 !/
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2/ 1/
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9*%///
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;/%///
91// 91 //%/ %/// //
91*%///
911%!//
/
4/%///
4/%///
H(nit sales sales dollars K "nit sales price
1//%/// O !/%/// $. Des% Des% the the presid president ent was correc correctt in elimin eliminati ating ng the 3-ga"ges. The 3-ga"ge sales price covers only its varia$le cost and does not contri$"te anything to man"fact"ring overhead or promotion costs. Th"s% the 3-ga"ge has a >ero contri$"tion margin.
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c. Des% the preside president nt was correct correct in promoting promoting the the Ega"ge line rather than the B-ga"ge line% $eca"se the "nit contri$"tion margin and contri$"tion per la$o la$or r doll dollar ar is grea greate ter r fo for r the the E-ga E-ga"g "ge e line line as follows: B-L B-La"g a"ge E-L E-La"ge a"ge (nit (nit cont contri ri$" $"ti tion on .... ...... .... .... .... .... .... .... .... .... .... .... .... 1<. 1<.// // 84. 84.// // Contri$"tion per direct-la$or dollar .<* 1.;*
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C'SB 14-2* 9C0TI0(B 9C0TI0(B 6owever% the president#s decisions regarding promot promotion ion expens expense e do not seem seem well well concei conceived ved.. The decr decrea ease sed d prom promot otio ion n on the the B-ga B-ga"g "ge e line line and and the the incr increa ease sed d prom promot otio ion n on the the E-ga E-ga" "ge line line do not prod"ce s"fficient contri$"tion to offset the promotional costs. c. 0o. The propos proposed ed co"rse co"rse of action action does does not make make effective "se of capacity. The 1* percent increase in prod"ction vol"me on the E-ga"ge line will not re)"ire all of the capacity that has $een released $y discontin"ing the 3-ga"ge line or red"cing the B-ga"ge line $y */ percent. !. Des. Des. The )"alitat )"alitative ive factor factors s that that manage managemen mentt sho"ld sho"ld cons consid ider er $efo $efore re it deci decide des s whet whethe her r to drop drop the the 3ga"ge line incl"de: •
•
Custom Customer er relati relation ons. s. The sale of B-ga"ges and E-ga"ges may $e related to the sale of 3-ga"ges. !abor relations. relations. 3ed"cing employment may create la$or pro$lems.
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CRRENT ISSES IN MANA/ERIA* ACCONTIN/ ACCONTIN/ ISS(B 14-22 +B-QS 6'FB ' IL (T(3B% (T IT[S (0GIQBGD T C7B '0DT '0DTI7 I7B B S S0 0%\ %\ "#$ "#$ %&!! %&!! '"R$ '"R$$" $" (O)R (O)RN& N&! ! % CT CTB B3 3 !% !///% 7'TT6B? 3SB. 1. =ro5 =ro5ec ecte ted d sale sales s reve reven" n"e% e% vari varia$ a$le le cost costs% s% cont contri ri$" $"ti tion on margin% and any additional fixed costs relating to a new prod prod"c "ctt line line wo wo"l "ld d $e "sef "sef"l "l mana manage geri rial al acco acco"n "nti ting ng info inform rmat atio ion n when when maki making ng a deci decisi sion on rega regard rdin ing g a new new prod"ct line. !.
=ricing any any new new pro prod"ct is di diffic"lt% sin since management has has litt little le to go on from from ex expe perie rienc nce e with with simi simila lar r prod prod"c "cts ts.. 7arket research into likely cons"mer demand and prices that cons cons"m "mer ers s wo wo"l "ld d pay pay is impo import rtan antt info inform rmat atio ion n fo for r s"ch s"ch a decision.
ISS(B 14-28 +='3TS S63T'LBS =G'L(B BGBCT30IC 7'QB3S%\ "#$ %&!! '"R$$" (O)RN&!% (O)RN&!% CTB3 1/% !///% =(I?I0L T'7. The advantage to o"tso"rcing parts and services is the a$ility to cont contra ract ct with with many many diff differ eren entt vend vendor ors s and and incr increa ease se the the availa$le so"rces. The disadvantage is not directly controlling the so"rce and having to rely on third party vendors.
ISS(B 14-2; +I0TBL3'TI0L 'C '0 '7 'T ? C6B7IC'G%\ *&N&+$*$N *&N&+$*$N" " &CCO)N" &CCO)N"IN+ IN+ ,)&R"$R! ,)&R"$R! % ?I0T ?I0TB3 B3 !/// !///%% V'7BS ?. '7ITI% L'3D ?. 6'DBS% '0 =6IGI= G. QI0TBGB. 1. 'ctivity-$ased costing foc"ses foc"ses on the the activities "ndertaken to design% prod"ce% sell and deliver a company[s prod"cts McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
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or serv servic ices es.. 'C 'C syst system ems s acc" acc"m" m"la late te man" man"fa fact ct"r "rin ing g overhead costs for each of the activities of an organi>ation% and then assign the costs of activities to the prod"cts or services "sing activity cost drivers.
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!. ne challe challenge nge facin facing g ow Chemical Chemical was was the coordi coordinatio nation n of 'CR 'CR' '7 7 acro across ss a glo$ glo$al ally ly disp disper erse sed d orga organi ni>a >ati tion on.. 'not 'nothe her r chal challe leng nge e of 'CR 'CR' '7 7 invo involv lved ed capt capt"r "rin ing g cost cost driver metrics witho"t adding work. ow has has learned that larg large e comp compan anie ies s like like itse itself lf pro$ pro$a$ a$ly ly sho" sho"ld ld not not $rea $reak k activities down to task levels% $"t instead sho"ld stay at the activity activity level. level. 'ctivitie 'ctivities s can $e diced into into component component levels that are too small and too n"mero"s to $e "sef"l for cost management and decision making.
ISS(B 14-2< +0[T LBT T3'==B%\ '"R&"$+IC IN&NC$% IN&NC$ % 0FB7B3 1<<<% '=60B 7'I0 '0 C'3GD0 G. G(STB'(. Bntrapment is the ina$ility to eliminate an al$atross pro5ect. Ther There e are are fo fo"r "r psyc psycho holo logi gica call reas reason ons s that that can can lead lead to entrapment. They are over-optimismRill"sion of control% self 5"stification% framing% framing% and s"nk costs. ver-optimism occ"rs when managers feel the need to sell their pro5ect. 's a res"lt% the pro5ections are almost always rosy rosy%% whic which h lead lead to infl inflat ated ed ex expe pect ctat atio ions ns fo for r a pro5 pro5ec ect. t. 3esearch has shown that people consistently overestimate reven"e reven"e and "nder "nder estimat estimate e costs. =eople =eople also think think they they can control what happens to their decisions once they are in plac place. e. Bx Bxte tern rnal al facto factors rs%% s"ch s"ch as weat weathe her r or chang changes es in econ econom omic ic cond condit itio ions ns%% are are $eyo $eyond nd the the cont contro roll of pro5 pro5ec ectt managers. 7anagers tend to commit more reso"rces to a losing pro5ect in order order to 5"stif 5"stify y thei their r init initia iall inve invest stme ment nt.. They They tend to sear search ch fo for r evid eviden ence ce that that s"gg s"gges ests ts the the pro5 pro5ec ectt sho" sho"ld ld $e contin"ed $"t disregard evidence to the contrary. This self 5"stification leads to entrapment. 6ow a decision is perceived or framed can lead to entr entrap apm ment. ent. ?hen hen thin thinki kin ng in term terms s of sav saving ing 5o$ 5o$s managers tend to $e more conservative in decision making% while if a decision is framed in terms of losing ing 5o$s% managers tend to $e more likely to make risky decisions. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e
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?hen 5"stifying the decision to contin"e a pro5ect% managers tend to arg"e that they sho"ld not waste money already s"nk s"nk into into a pro5 pro5ec ect. t. In fact% fact% money money alrea already dy spent spent on a pro5ect sho"ld not infl"ence decisions if entrapment is to $e avoided. The The fo fo"r "r psyc psycho holo logi gica call reas reason ons s lead leadin ing g to entr entrap apme ment nt sho"ld $e avoided when making so"nd $"siness decisions concerning pro5ect contin"ance.
ISS(B 14-8/ +?6'T ' =B C'0 3 D(%\ (O)RN&! O &CCO)N"&NC &CCO)N"&NC % V(GD 1<<<% 3(CB 3(CB B. Q'T. The I3S recogni>es =Bs as employers. =Bs# responsi$ilities incl"de the general aspects of the emp employe loyer[ r[s s role role s"c s"ch as payin aying g empl employ oyee ee wages ages and associ associate ated d withho withholdi lding ng taxes. taxes. The =B is respons responsi$l i$le e for paying these taxes whether or not the client act"ally pays the the =B. =B. It also also m"st m"st prov provid ide e empl employ oyee ees s with with wo work rker ers[ s[ compen compensat sation ion%% federa federall and state state "nempl "nemploym oyment ent $enefi $enefits% ts% and stat"to stat"tory ry disa$ilit disa$ility y coverage. coverage. ' =B admin administers isters any any empl employ oyee ee $ene $enefit fit prog progra rams ms%% incl incl"d "din ing g reti retire reme ment nt plan plans% s% cafeteria cafeteria and health care plans% life% disa$ility% disa$ility% accidental accidental death and dismem$erment ins"rance% credit "nions% fitness cl"$ cl"$ mem$er mem$ershi ships% ps% child child care care and t"itio t"ition n reim$" reim$"rse rsemen mentt prog progra rams ms.. It ass"me ass"mes s fid" fid"ci ciar ary y resp respon onsi si$i $ili lity ty fo for r plan plan compliance with applica$le federal and state laws when it sponsors employee $enefit plans.
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