Professional Documents
Culture Documents
711
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Item
Case 1
Not
Relevant Relevant
X
X
X
Case 2
Not
Relevant Relevant
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
713
$(80,000)
52,000
$(28,000)
Depreciation on the van is a sunk cost and the van has no salvage value
since it would be donated to another organization. The general administrative overhead is allocated and none of it would be avoided if the program were dropped; thus it is not relevant to the decision.
The same result can be obtained with the alternative analysis below:
Current
Total
Difference:
Total If
Net OperatHouseing Income
keeping Is Increase or
Dropped (Decrease)
$660,000
330,000
330,000
$(240,000)
160,000
(80,000)
68,000
27,000
78,000
180,000
353,000
$(23,000)
0
15,000
37,000
0
52,000
$ (28,000)
Total
Home
Nursing
Meals on
Wheels
Housekeeping
715
2.
$20
2
0
$17
15,000 units
Make
Buy
$ 90,000
120,000
15,000
$300,000
30,000
0
$20
0
0
$255,000 $300,000
$3
$45,000
Only the supervisory salaries can be avoided if the parts are purchased. The remaining book value of the special equipment is a sunk
cost; hence, the $3 per unit depreciation expense is not relevant to
this decision. Based on these data, the company should reject the
offer and should continue to produce the parts internally.
Make
Buy
$255,000
$300,000
65,000
$320,000 $300,000
$20,000
Thus, the company should accept the offer and purchase the parts from
the outside supplier.
Per
Unit
$349.95
143.00
86.00
7.00
6.00
$242.00
Total
10 bracelets
$3,499.50
1,430.00
860.00
70.00
60.00
2,420.00
465.00
2,885.00
$ 614.50
Even though the price for the special order is below the company's regular
price for such an item, the special order would add to the company's net
operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of
bracelets or if it required the use of a constrained resource.
717
(1)
(2)
(3)
(4)
$18
$12
8
1.5
$12
$36
$32
8
4.0
$ 9
$20
$16
8
2.0
$10
719
$150,000
90,000
60,000
40,000
20,000
$75,000
60,000
15,000
12,000
3,000
(a)
(b)
(c)
(d)
Product
X
$24.00
$3.00
8
$32.00
$4.00
Product
Y
Product
Z
$2.80
$7.00
$15.00
$3.00
5
$14.00
$9.00
$3.00
3
$21.00
Since Product Z uses the least amount of material per unit of the three
products, and since it is the most profitable of the three in terms of its use
of this constrained resource, some students will immediately assume that
this is an infallible relationship. That is, they will assume that the way to
spot the most profitable product is to find the one using the least amount
of the constrained resource. The way to dispel this notion is to point out
that Product X uses more material (the constrained resource) than does
Product Y, but yet it is preferred over Product Y. The key factor is not how
much of a constrained resource a product uses, but rather how much contribution margin the product generates per unit of the constrained resource.
721
Per Unit
Differential
Costs
Make
Buy
Cost of purchasing.......................
$23.50
Cost of making:
Direct materials ........................ $ 4.80
Direct labor ..............................
7.00
Variable manufacturing overhead
3.20
Fixed manufacturing overhead ...
4.00 *
Total cost ................................. $19.00 $23.50
20,000 Units
Make
Buy
$470,000
$ 96,000
140,000
64,000
80,000
$380,000 $470,000
Make
Buy
$380,000 $470,000
150,000
$530,000 $470,000
$60,000
Per 16-Ounce
T-Bone
$1.35
1.45
2.80
2.25
0.55
0.20
$0.35
2. The T-bone steaks should be processed further into the filet mignon and
the New York cut. This will yield $0.35 per pound in added profit for the
company. The $0.55 profit per pound for T-bone steak mentioned in
the problem statement is not relevant to the decision, since it contains
allocated joint costs. The company will incur the allocated joint costs regardless of whether the T-bone steaks are sold outright or processed
further; thus, this cost should be ignored in the decision.
723
40,000
210,000
250,000
160,000
90,000
320,000
250,000
70,000
20,000
50,000
*This assumes that the sales through regular channels can be recovered
after the special order has been fulfilled. This may not happen if regular
customers who are turned away to fill the special order are permanently
lost to competitors.