Professional Documents
Culture Documents
6-1
Balakrishnan/Managerial Accounting, 2e
10.In general, analysis that considers only controllable or relevant costs is less
efficient when decision options differ only with respect to a few benefit and cost
items.
11.
LO2 False In general, analysis that considers only controllable or
relevant costs is more efficient when decision options differ only with
respect to a few benefit and cost items.
12.
13.Price gouging occurs when a firm exploits temporary excess demand to raise
prices to unreasonable levels.
14.LO3 True
15.
16.Our ultimate decision will differ when we use incremental analysis versus
construct a contribution margin statement for each option.
17.LO3 False We get the same answer with both approaches.
18.
19.Using the gross approach to choose the best decision option is preferable to the
incremental method when the decision option involves many costs and benefits.
20.
LO3 True.
21.
22.A sunk cost is a relevant cost in decision making under the gross approach.
23.LO3 False A sunk cost is not a relevant cost in decision making under the
gross approach.
24.
25.A differential approach is an approach for framing and solving decisions that
involves expressing the benefits and costs of the various decision options
relative to one of the options.
26.LO3 True
27.
28.When demand is high and a scarce resource is in short supply, a company should
decide how much of each product to produce by ranking products by the
contribution margin per unit of the product.
29.
LO4 False When demand is high and a resource is in short supply, a
company should decide how much of each product to produce by
ranking products by the contribution margin per unit of the resource.
30.
31.For a resource in short supply, the opportunity cost of the resource is positive.
32.LO4 True
33.
34.To maximize profit when capacity is in short supply, minimize the contribution
margin per unit of capacity.
35.
LO4 False To maximize profit when capacity is in short supply,
maximize the contribution margin per unit of capacity.
36.
37.When faced with a situation where supply is limited for multiple resources
managers use linear and integer programming to evaluate decision options.
38.LO4 True
39.
40.When demand is high and a resource is in short supply, the contribution margin
per unit of the resource from its best possible use should exceed that forgone by
putting it to the next best use.
6-2
6-3
Balakrishnan/Managerial Accounting, 2e
73.Managers should not rely on income statements that allocate common costs to
product lines or sections to evaluate the effect on short-term profit because such
statements mingle controllable and non-controllable costs.
74.Appendix B True
75.
76.Avoidable fixed costs are costs that need not be incurred if an option is not
chosen.
77.
Appendix B True
78.
79.Avoidable fixed costs are also referred to as non-controllable fixed costs.
80.Appendix B False Avoidable fixed costs are also referred to as controllable
fixed costs.
6-4
6-5
Balakrishnan/Managerial Accounting, 2e
88.
MULTIPLE CHOICE
6-6
6-7
Balakrishnan/Managerial Accounting, 2e
116. The Huffman Tire Company has 3,000 tires in its inventory which are
considered obsolete. Each unit originally cost the company $35. Management
is considering options to reduce these inventory levels. Units can be sold
directly to car dealerships for $30 per tire as opposed to the normal selling price
of $45 per tire. The other option is to offer their current customers a $10 per tire
rebate on their purchase. In addition to the $10 rebate, the program would cost
the company approximately $24,000 to manage. They predict that either option
will rid them completely of their excess inventory. The decision to sell directly to
the car dealerships over offering the rebate will result in:
A. A $21,000 increase in profits.
B. A $9,000 increase in profits.
C. A $15,000 decrease in profits.
D. A $24,000 decrease in profits.
117.
LO1 Self-test B
118.
119. Which of the following short-term decisions deal with excess capacity?
a. Special order.
b. Product mix.
c. Make or buy.
d. Increasing prices.
120.
LO1 Post-test A
121.
122. Beach Surf Boards is making a decision on whether to add long boards as a
new product line to complement its short boards. A recent analysis determined
that the average long board can be sold for $300.00 with unit variable costs of
$225. Fixed costs are currently $51,000 per month but would be increased to
$69,000 if long boards are added. How much is incremental profit or (loss) if long
boards are added and its sales volume is expected to be 250?
a. $750
b. $18,750
c. ($32,250)
d. ($50,250)
123.
LO1 Post-test A
124.
125. Which of the following options might a consultant choose when making a
decision to accept or reject a new client when capacity is limited? (That is, the
consultant already has all the clients her present circumstances can handle.)
A. Refer the client to a competitor, but charge a referral fee to the competitor.
B. Reject the client.
C. Accept the client knowing that the consulting job cannot be completed.
D. A and B only.
E. A, B and C.
126.
LO2 D
127.
6-8
6-9
Balakrishnan/Managerial Accounting, 2e
160.
6-10
6-11
Balakrishnan/Managerial Accounting, 2e
228. Which of the following is not a short-term decision that is a reaction to excess
capacity?
a. Management makes the decision to emphasize sales in a particular market to
boost poor sales.
b. Management makes the decision to issue a rebate, offering customers a
rebate of $0.50 for every widget sold, because inventory is too large.
c. Management makes the decision to close a plant because of increased
competition.
d. Management accepts a special order at a reduced selling price since the
orders relevant costs will be less than the special orders sales price.
e. All of the above are short-term decisions that are reactions to excess
capacity.
229.
LO3 C
230.
231. Which of the following is a short-term decision that is a reaction to excess
demand?
a. Management makes the decision to emphasize sales in a certain market to
boost poor sales.
b. Management makes the decision to close a plant because of increased
competition.
c. Management makes the decision to buy parts rather than make them after
calculating a positive opportunity cost for capacity.
d. Management makes the decision to make parts rather than buy them after
calculating a positive opportunity cost for capacity.
e. All of the above a short-term decisions that are reactions to excess demand.
232.
LO3 C
233.
234. Hobbs Electronics makes and sells portable DVD players. Each DVD player
has a selling price of $100. The following cost data per DVD player is based on a
capacity of 5,000 DVD players per period.
235.
Direct Material
$30
236.
Direct Labor
$20
237.
Manufacturing Overhead
238.
(70% variable; 30% fixed)
$10
239.
Hobbs receives a special order for 100 DVD players. The only
additional costs Hobbs will incur are $2 shipping charges per item. Hobbs has
sufficient idle capacity to produce the additional DVD players. What is the
minimum price Hobbs should charge per DVD player for the special order?
a. $60
b. $59
c. $57
d. $55
e. $62
240.
LO3 B
241.
6-12
6-13
Balakrishnan/Managerial Accounting, 2e
of the component. The company has received a special, one-time-only order for
200 units of the speaker. There would be no selling expenses on this special
order and the total fixed manufacturing overhead and fixed selling and
administrative expenses of the company would not be affected by the order.
Assuming that Augusta Company has excess capacity and can fill the order
without any production disruptions, what is the minimum price per unit on the
special order the company should charge?
A. $50.00
B. $19.60
C. $17.60
D. $22.30
270.
LO3 Self-test C
271.
272. Shickman Company makes the widgets it uses in one of its products at a cost
of $8 per unit. This cost includes $2 of fixed overhead. The company needs
10,000 of these plugs annually, and Orlando Company has offered to sell them
at $5 per unit. If Shickman Company purchases the plugs, the company would:
a. Increase profits by $30,000.
b. Decrease profits by $10,000.
c. Increase profits by $10,000.
d. Decrease profits by $30,000.
273.
LO3 Self-test C
274.
275. Little Toy Company makes and sells miniature doll houses. Little produces
two kinds of houses: Standard and Deluxe. The demand for doll houses is
highest in November and December. Expecting this trend to continue Little is
interested in how to best utilize available capacity. Given the following
information, what combination of doll houses should Little produce?
276.
277. S 278. D
tandar
eluxe
d
279. Demand
280. 8, 281. 3
000
,000
282. Unit Price
283. $ 284. $
60
80
285. Unit variable cost
286. $ 287. $
25
35
288. Unit contribution
289. $ 290. $
margin
35
45
291. Production rate (units
292. 2 293. 1
per hour)
294. Available production
295.
296. 5
hours
,000
hrs
297. Total fixed costs
298.
299. $
40,000
6-14
6-15
Balakrishnan/Managerial Accounting, 2e
340. When capacity is limited, which of the following are alternative courses of
action to consider?
a. Produce the items with the largest contribution margin per unit of capacity.
b. Purchase some components from outside suppliers.
c. Produce the items with the largest selling price to maximize revenue.
d. A and B only.
e. A, B and C.
341.
LO4 D
342.
343. The Southeast Company makes three products in one manufacturing facility.
Data regarding these products are as follows:
344. A
B
C
345. Direct Materials
$5.70
$6.20
$8.90
346. Direct Labor
2.05
1.90
2.20
347. Variable Overhead
.70
.80
.90
348. Fixed Overhead
1.10
1.40
1.60
349. Unit Product Cost
$9.55
$10.30
$13.60
350.
351. Machine Hours Per Unit
.5
1
.25
352. Selling Price per Unit
$16.00
$18.00
$20.00
353. Demand (units)
1,200
1,400
800
354.
How many machine hours would be required to meet the demand for
all products?
A. 3,400
B. 2,200
C. 1,700
D. 850
355.
LO4 Self-test B
356.
357. The Southeast Company makes three products in one manufacturing facility.
Data regarding these products are as follows:
358. A
B
C
359. Direct Materials
$5.70
$6.20
$8.90
360. Direct Labor
2.05
1.90
2.20
361. Variable Overhead
.70
.80
.90
362. Fixed Overhead
1.10
1.40
1.60
363. Unit Product Cost
$9.55
$10.30
$13.60
364.
365. Machine Hours Per Unit
.5
1
.25
366. Selling Price per Unit
$16.00
$18.00
$20.00
367. Demand (units)
1,200
1,400
800
368.
If there are only 2,000 machine hours available, which is the MOST
profitable product?
A. Product A
B. Product B
C. Product C
D. Cannot be determined
369.
LO4 Self-test C
370.
6-16
6-17
Balakrishnan/Managerial Accounting, 2e
409.
410. The production of two products has the same selling prices per unit. If total
fixed costs will be $5,000 for product A and $4,500 for product B, what factors
are relevant in determining which of the two products to produce and sell?
a. Selling and variable costs per unit, and the fixed cost savings.
b. Variable costs per unit and total fixed costs.
c. Total variable and fixed costs and total sales revenue
d. .Variable costs per unit and the fixed cost savings
411.
LO4 Post-test D
412.
413. Which of the following is in the context of a short-term decision?
a. Special order.
b. Product promotion.
c. Product mix.
d. A and B only.
e. A, B and C.
414.
LO4 E
415.
416. Which of the following statements is not true?
a. Quantifying longer-term implications of short-term actions is relatively simple.
b. It is important to consider longer-term implications of short term decisions
because of potential tradeoffs between short-term and long-term interests.
c. Many managers follow a peel the onion approach to assessing decision
effects, first by estimating the short-term effects, and then expanding the
range of considered factors.
d. For longer-term actions, in many cases, qualitative assessments are the only
ones possible, and large estimations errors accompany such assessments.
e. All of the above statements are true.
417.
LO5 A
418.
419. Quantifying the longer-term implications of short-term actions is difficult.
Consequently:
a. It is impossible to make an informed decision.
b. Frequently, only qualitative assessments are possible.
c. Long-term implications should be ignored in the decision-making process.
d. A and B only.
e. A, B, and C are consequences.
420.
LO5 B
421.
422. Which consideration is most relevant for a startup manufacturing company?
a. Short-term decisions regarding production.
b. Implications that arise from people outside the firm such as customers,
suppliers, and suppliers.
c. Qualitative aspects of decisions.
d. Decisions that cause profit to be highest in the short-run
423.
LO5 Post-test B
424.
6-18
6-19
Balakrishnan/Managerial Accounting, 2e
440. Which of the following statements is not true?
a. Common costs are not relevant in determining whether to drop a product
line.
b. If a segment of a company has been losing money for several periods
because a competitor has opened in the area, the segment should be
dropped.
c. Neither of the above statements if true.
d. Both of the above statements are true.
441.
Appendix B B
6-20
6-21
Balakrishnan/Managerial Accounting, 2e
2. Trisha Hardin owns Ice Flavors, a small business selling fruit-flavored slush
drinks. Each drink sells for $2.50. Trisha derived her price as follows:
458.
459. Drink mixture and crushed
460. $
ice
0.60
461. Labor per drink ($8 per hour 462. $
20 drinks per hour)
0.40
463. Variable overhead per drink
464. $
(cups, etc)
0.35
465. Fixed overhead per drink
466. $
0.40
467. Total cost per drink
468. $
1.75
469.
470.
Trisha is considering a special order for a sale of 100 drinks for a local
birthday party. The hostess is willing to pay $1.50 per drink. The party will
be in the evening, which is not during Trishas regular business hours. Trisha
will provide the drink mixture, ice and labor. Her only additional expense will
be one employee for two hours ($8 per hour), travel to and from the party
location (estimated to be $15). Since the party is not at Trishas business, her
fixed overhead will not change. The party hostess will furnish all cups,
napkins and other variable cost items.
471.
472.
Required:
a. What is the incremental cost associated with accepting the special order?
473.
474.
475.
b. List the costs that are not relevant to the decision.
476.
477.
478.
c. Should Trisha accept the special order? Why?
479.
6-22
6-23
Balakrishnan/Managerial Accounting, 2e
4. The Gant Company produces three items in its manufacturing plant. The plant
has a total capacity of 9,600 minutes per month for production. The following
information is provided for the products:
502.
503. Products
504.
505.
506. 507.
X
Y
Z
508. Direct material
509.
510. 511.
$16 $10 $14
512. Direct labor (all
513.
514. 515.
variable)
15
14
15
516. Variable overhead
517.
518. 519.
2
3
4
520. Fixed overhead
521.
522. 523.
20
23
30
524. Unit cost
525.
526. 527.
$53 $50 $63
528.
529.
530. 531.
532. Minutes required per 533.
534. 535.
unit
5
4
6
536. Selling price per unit 537.
538. 539.
$70 $65 $80
540. Variable selling
541.
542. 543.
expense per unit
$5
$4
$2
544. Monthly demand in
545.
546. 547.
units
2,200 1,00 800
0
548.
549.
Required:
a. How many minutes would be required to meet the demand for all three
products?
550.
551.
552.
553.
b. How many units of each product should Gant product to maximize profit?
Show your calculations.
554.
6-24
6-25
Balakrishnan/Managerial Accounting, 2e
625.
626.
Creatives owner is pleased with the overall profit, but is concerned
about the loss on the Obelisks line and is considering eliminating it. The
owner believes that if the Obelisk sales are discontinued he will be able to
display more Fountains and increase the revenues by 5% without increasing
any fixed costs. If the Obelisk line is discontinued, all of its traceable fixed
costs will be avoided, but its common fixed costs will be allocated to the
Fountains.
627.
628.
Required:
629.
Evaluate whether Creative Lawn Ornaments should discontinue
its line of Obelisk structures. Show all calculations.
630.
631.
632.
633.
634.
6-26
Solutions to Problems
6-27
Balakrishnan/Managerial Accounting, 2e
658.
Total Incremental costs: $60 + $16 + $15 = $91
659.
b. Non-relevant costs:
660.
Fixed overhead
$0.40 per drink
661.
Variable overhead $0.35 per drink
662.
c. Trisha should accept the order:
663. Incremental
664.
Revenue
$15
0
665. Incremental
666.
Costs
$
91
667. Incremental
668.
profit
$
59
669.
670.
671.
Because Trishas incremental revenue exceeds her incremental
costs and she has the capacity to accept the order (it does not interfere
with regular business), it would be profitable to accept the special order.
672.
673.
3. Make or buy decision (LO2, LO3, LO5))
674.
a. Relevant unit product cost:
675.
$12 + $5 + $2 + $6 = $25
676.
b. Net total dollar advantage (disadvantage) of purchasing:
677.
678. Relevant cost
679. $1
25,000
680. Additional contribution
681. 42
margin
,000
682. Cost of purchasing
683. (1
50,000)
684. Net advantage
685. $
17,000
686.
c. Qualitative considerations:
Will the supplier continue to sell the ignition systems at the $30 price?
Over the long run, will the company be able to absorb all the
employees from the ignition system into other areas of the company?
What are the alternatives if the purchased ignition systems turn out to
be a lower quality than expected?
Does the high-demand item expected to use the space formerly used
for making the ignition systems have a long-range high demand?
687.
688.
689.
6-28
6-29
Balakrishnan/Managerial Accounting, 2e
5.
Process Further:
Sales volume
772.
Revenues
776. Traceable
processing cost
780. Segment Margin
784.
788.
792.
Sell at Split-Off
Revenue
796. Traceable
processing costs
800. Segment Margin
761. Pr
762. Pro 763. T
oduct X
duct Y
otal
765.
766.
767.
769. 28, 770. 16,0
771.
000 units
00 units
773. $4 774. $18, 775. $
2,000
400 60,400
777.
1 778.
5, 779.
2,000
000 17,000
781. $3 782. $13, 783. $
0,000
400 43,400
785.
786.
787.
789.
790.
791.
793. $3 794. $12, 795. $
0,800
800 43,600
797.
798.
799.
0
0
0
801. $3 802. $12, 803. $
0,800
800 43,600
804.
a. The disadvantage of processing Product X further is $800.
805. ($30,000 - $30,800)
806.
b. The advantage of processing Product Y further is $600.
807.
($13,400 - $12,800)
808.
809.
6. Dropping product line (Appendix B
810.
811.
812.
813. Fo 814. Hou 815. Ob 816. Tot
untains
ses
elisks
al
817. Revenue
818. $1 819. $14
820. $9
821. $4
75,000
5,000
5,000
15,000
822. Variable
823.
824.
4 825.
4
826.
1
costs
85,000
3,000
5,000
73,000
827. Contribution 828. $9 829. $10
830. $5
831. $2
margin
0,000
2,000
0,000
42,000
832. Traceable
833.
834.
3
835.
3
836.
fixed costs
30,000
3,000
0,000
93,000
837. Segment
838. $
839. $ 840. $2 841. $1
Profit
60,000
69,000
0,000
49,000
842. Increased
843.
844.
845.
846.
revenue if Obelisk
847.
848.
849.
850.
851.
852.
853.
854. Continue
855. Discontinue
856.
857. F 858. O 859. T 860. F 861. O 862. T
6-30
863.
Revenue
870. Variable
costs
877. Traceable
fixed costs
884. Common
fixed costs
891. Net
Income
ountain
864. $
175,000
belisk
865. $
95,000
871. 8
5,000
878. 3
0,000
885.
35,000
892. $
25,000
872. 4
5,000
879. 3
0,000
886. 3
5,000
893. (
$15,00
0)
otal
ountain belisk
otal
866. $ 867. $ 868. 0 869. $
270,000 183,750
183,75
0
873. 1 874. 8 875. 0 876. 8
30,000
9,250
9,250
880. 6 881. 3 882. 0 883. 3
0,000
0,000
0,000
887.
888. 7 889. 0 890.
70,000
0,000
70,000
894. $ 895. ($ 896. 0 897. (
10,000
5,500)
$5,500)
898.
899.
Creatives owner should not discontinue its Obelisk line of products.
The increase in revenue from the additional fountain sales does not offset the
portion of common fixed costs that the Obelisk absorbs.
6-31
Balakrishnan/Managerial Accounting, 2e
900.
901.
Short Answer
6-32
1. (LO1)
The temporary gaps between the demand and supply of available
capacity.
915.
2. (LO-1)
The maximum volume of activity that a company can sustain with
available resources.
916.
3. (LO-1)
Because organizations make capacity decisions based on the expected
volume of operations over a horizon spanning many years. They build plants,
buy equipment, rent office space, and hire salaried personnel in anticipation of
the demand for their products and services.
917.
4. (LO-1)
(1) Decisions that deal with excess supply. Examples include reducing
prices to stimulate demand, running special promotions, processing special
orders, and using extra capacity to make production inputs in-house; (2)
Decisions that deal with excess demand. Examples include increasing prices to
take advantage of favorable demand conditions, meeting additional demand by
outsourcing production, and altering the product mix to focus on the most
profitable ones.
918.
5. (LO-2)
This method focuses only on those costs and revenues that differ from
the benchmark option.
919.
6. (LO-2)
This method considers the gross revenues and costs associated with
each option, rather than the incremental amounts relative to the benchmark
option.
920.
7. (LO-2)
The totals approach requires more computations because it includes
some noncontrollable benefits and costs.
921.
8. (LO-2)
In decisions involving many costs and benefits it helps us ensure that
we do not forget to include a relevant cost or benefit.
922.
9. (LO-3)
Excess supply usually, the firm cuts prices to stimulate demand.
923.
10.(LO-3)
In a make or buy decision, the firm is deciding whether to make a
product, or piece thereof, internally or outsource and buy them from a supplier.
924.
11.(LO-4)
When demand is high and a resource is in short supply.
925.
12.(LO-4)
To maximize profit when capacity is in short supply, maximize the
contribution margin per unit of capacity.
926.
13.(LO-5)
Typically on a qualitative basis by considering how customers,
suppliers, and competitors might respond to the decision being made.
6-33
Balakrishnan/Managerial Accounting, 2e
927.
Short Essay
6-34
6-35
Balakrishnan/Managerial Accounting, 2e
940.
1. (LO-1)
Yes, the definition of what is short-term and what is long-term depends
on the business context. For General Motors anywhere from few weeks to a few
months may be considered short-term, as pricing and promotion decisions
depend on how fast different models of cars and trucks are moving from the
dealers inventories. For a baker, a day or two days may be too long as baked
goods do not retain their freshness for long. Thus, product characteristics
often play a critical role in determining how long the short-term horizon is.
941.
2. (LO-1)
The reason why the lots are overflowing is that vehicles are not being
sold at the expected rate. Unsold vehicles occupy space in the lot. Thus, it is not
correct to define capacity in terms of the lot space available. Rather, capacity
should be defined in terms the number of vehicles that can potentially be sold
per day. When demand falls short of supply based on the anticipated number of
vehicles to be sold per day, lots overflow, and price-cutting and other promotions
become necessary to move the vehicles.
942.
3. (LO-1)
Most of us drive to work, and so the demand for gasoline is fairly
stable. One way to economize on gasoline consumption is to car pool.
943.
4. LO-2)
Yes, it is. The gross method considers all cash inflows and cash
outflows that are associated with the options being considered in the context of
a particular decision, even though some of them may be non-controllable. But, it
does not consider cash flows associated with many other decisions that the
companies may be considering. From an overall organizational standpoint, each
decision has an incremental effect, and, therefore, the gross method is also
incremental when viewed in this context.
944.
5. (LO-3, LO-5)
Increasing prices is a natural way of decreasing demand. In fact,
in most market settings, demand for a product decreases as its price increases.
When a firm does not have enough capacity to meet a sudden spurt in demand,
it can reduce the demand by increasing prices and turning away some
customers to a point where the demand can be met. The airline industry is a
good example. In peak times, an increase in airfare induces some travelers to
seek other means of travel or postpone their travels. Only those that are able to
afford the higher prices, or have rigid and noncancelable schedules, will continue
to travel. Airline companies usually face no long-term adverse implications from
increasing prices to deal with peak demand situations. Air travelers usually
understand this behavior and plan their travel accordingly. On the other hand,
consulting companies rely on longstanding relationships with their customers.
Raising their rates when their business is good usually backfires because it hurts
reputation and goodwill in the long-run.
945.
6. (LO-3)
Yes, it does. This is typically referred to as production smoothing and
makes good business sense as long the product is storable for sale in the future
period, and as long as inventory carrying costs are manageable. The toy industry
and the apparels industry are good examples.
946.
6-36
6-37
Balakrishnan/Managerial Accounting, 2e
company may lose talented and experienced personnel, who may prefer jobs
elsewhere to being fired. Managers therefore have to be clear about the impact
of outsourcing on employee morale so that they can make the appropriate tradeoff between immediate cost savings from outsourcing and longer-term adverse
impact of a loss in morale. Certain critical activities are better done in-house for
strategic reasons, while others can be outsourced. However, decision making
with respect to outsourcing has to be clearly communicated to the employees to
avoid disgruntlement.
6-38
Exercises
1. Ajay Singh offers gift-wrapping services at the local mall. Ajay wraps each
package, regardless of size, in the customers choice of wrapping paper and bow
for a price of $3. Ajays variable costs total $1 per package wrapped, and his
fixed costs amount to $600 per month. Due to the anticipated increase in
demand over the holiday season, Ajay is considering hiring a helper, at a cost of
$8.50 per hour, to help him wrap packages. With the helper, Ajay estimates that
he can wrap 110 packages in a 10-hour day. Without the helper, Ajay estimates
that he can wrap 60 packages in a 10-hour day. Ajay plans on operating his
business for thirty 10-hour days during the holiday season.
953.
954.
Required:
955.
a. Does Ajays decision deal with excess supply or excess demand?
956.
957.
b. Using the gross approach, determine whether Ajay should hire the
helper.
958.
959.
c. Using controllable cost analysis, determine whether Ajay should hire
the helper.
960.
961.
d. Assume Ajays fixed costs were $1,000 rather than $600. Would this
affect Ajays decision
962.
to hire a helper?
963.
964.
965.
966.
967.
968.
2. The Dj Vu Card Company offers greeting cards for every occasion at
unmatched prices. The following information comes from Dj Vus accounting
records for December of the most recent year: Greeting cards sold 100,000 cards
Selling price $1.00 per card Fixed costs:
969. Manufacturing $0.30 per card
970. Marketing & administrative $0.21 per card
971. Variable costs:
972. Manufacturing $0.15 per card
973. Marketing & administrative $0.08 per card
974.
975.
Required:
976.
Dj Vu has an extra stock of 5,000 holiday greeting cards. The
company is considering two options: (1) holding a 50% off sale and (2) holding
an 80% off sale. Dj Vu expects to sell 1,500 cards if it holds a 50% off sale and
4,000 cards if it holds an 80% off sale. The remaining cards would be discarded.
Which option should Dj Vu pursue?
977.
6-39
Balakrishnan/Managerial Accounting, 2e
3. Myers Quarry produces coarse gravel and sand in an 8:2 ratio. Joint costs for a
month (volume 5 9,000 tons of rocks input) amount to $225,000. Values at the
split-off point are $30 per ton for gravel and $40 per ton for sand.
978.
979.
Required:
980.
a. Allocate joint costs to the two products using the relative sales value
at split off as the allocation basis.
981.
982.
b. Suppose Myers can run the sand through a sieve to remove small
rocks and make fine sand used to fill sandboxes. The process will, however,
reduce the yield of sand from 1,800 tons to 900 tons. This superior grade of sand
(sandbox quality) retails for $160 per ton. However, Myers will incur $18,000
to process the sand into sandbox quality. Should Myers sell the coarse sand as
is or process it further into sandbox quality sand?
6-40
Solutions to Exercises
1. (LO1, LO2)
a. Ajays decision deals with excess demand. Due to the holidays, Ajay expects
a surge in gift-wrapping needs. To handle this surge, Ajay is considering hiring
a helper. This is akin to a manufacturing firm outsourcing some production in
periods of high demand.
984.
b. We can construct the entire CVP model for Ajay. We then compare the profit
under each option, selecting the option with the higher profit. With the
information provided, we have:
985.
986.
989.
990.
991.
994.
Dail
y revenue
995.
($3
60; $3
110)
998.
Dail
y variable
costs
1002.
Dail
y pay for
help
1006.
Dail
y
contributio
n
1010.
Total
contributio
n
999.
($1
60; $1
110)
1003.
(0;
$8.50 10)
1011.
30
Row 4
1014.
Total
fixed costs
1015.
Given
1018.
t
1019.
Profi
1007.
Row
1 rows 2 &
3
987.
W
988.
W
ithout
ith
Helper
Helper
992.
60
993. 110
packag
packages
es per
per day
day
996.
997.
$33
$18
0.00
0.0
0
1000. 1001. 110.
60.
00
00
1004. 1005. 85.0
0.0
0
0
1008.
1009. $13
$12
5.00
0.0
0
1012. 1013. $4,0
$3,
50.00
600
.00
1016. 1017. 600.
600
00
.00
1020.
1021. $3,
$3,
450.00
000
.00
1022.
1023. Ajays profit increases by $450 ($3,450 $3,000) for the season, if he
hires the helper. Accordingly, if he wishes to maximize profit then Ajay
should hire the helper.
6-41
Balakrishnan/Managerial Accounting, 2e
1024. In constructing the income statement for each option, we could leave
out the non-controllable fixed costs of $600. While the absolute profit
numbers would change, the difference in profit would be preserved. Thus, the
gross approach provides decision makers some flexibility in terms of what is
included and excluded from the income statement.
c. We compute only the incremental revenues and costs associated with a
particular decision option relative to the status quo. Since operating without
the helper is the status quo, we have:
1025.
1028.
Incremental
revenue
1026.
1029.
50
packages per
day $3
1032.
50
packages per
day $1
1035.
$8.50
10 hours
1027.
1030.
$
1037.
Incremental profit
per day
1038.
1039.
$
1040.
Value of hiring
helper
1041.
$15
30days
1042.
$
1031.
Incremental
variable cost (packages)
1034.
Incremental cost
(helper)
1033.
5
1036.
8
6-42
6-43
Balakrishnan/Managerial Accounting, 2e
3. (Appendix A)
a. Let us begin by calculating relative sales values.
1057.
Gravel:
$30
$216,000
1058.
Sand:
$40
$72,000
Total
$288,000
1
6-44