11.

19
1.
Operating income =
Revenue(1 Variable cost ratio) Fixed cost
(0.20)Revenue = Revenue(1 0.40) $24,000
(0.20)Revenue = (0.60)Revenue $24,000
(0.40)Revenue = $24,000
Revenue = $60,000
Sales ................................................................................ $ 60,000
Variable expenses ($60,000 0.40) .............................. 24,000
Contribution margin ....................................................... $ 36,000
Fixed expenses .............................................................. 24,000
Operating income ..................................................... $ 12,000
*$12,000 = $60,000 20%
2.
If revenue of $60,000 produces a profit equal to 20 percent of sales and if
the price per unit is $10, then 6,000 units must be sold. Let X equal number of
units, then:
Operating income = (Price Variable cost) Fixed cost
0.20($10)X
= ($10 $4)X $24,000
$2X
= $6X $24,000
$4X
= $24,000
X
= 6,000 buckets
0.25($10)X
= $6X $24,000
$2.50X
= $6X $24,000
$3.50X
= $24,000
X
= 6,857 buckets
Sales (6,857 $10) ......................................................... $68,570
Variable expenses (6,857 $4) ..................................... 27,428
Contribution margin ....................................................... $41,142
Fixed expenses .............................................................. 24,000
Operating income ..................................................... $17,142
*$17,142* = 0.25 $68,570 as claimed
*Rounded down.
Note: Some may prefer to round up to 6,858 units. If this is done, the
operating income will be slightly different due to rounding.
3.

Net income = 0.20Revenue/(1 0.40)

= 0.3333Revenue
0.3333Revenue = Revenue(1 0.40) $24,000
0.3333Revenue = 0.60Revenue $24,000
0.2667Revenue = $24,000
Revenue
= $89,989

11.20

1.

Unit contribution margin = $1,060,000/50,000

Break-even units
= $816,412/$21.20
Operating income
= 30,000 $21.20

= $21.20
= 38,510 units
= $636,000

2.
CM ratio
= $1,060,000/$2,500,000
= 0.424 or
42.4%
Break-even point = $816,412/0.424
= $1,925,500
Operating income = ($200,000 0.424) + $243,588
= $328,388
3.

Margin of safety

4.

$1,060,000/$243,588
4.352 20%
0.8704 $243,588
New operating income level

5.

Let X
0.10($50)X
$5X
$16.20X
X

6.

Before-tax income = $180,000/(1 0.40) = $300,000

X
= ($816,412 + $300,000)/$21.20 = 52,661 units

=
=
=
=
=

= $2,500,000 $1,925,500 = $574,500

= 4.352 (operating leverage)
= 0.8704
= $212,019
= $212,019 + $243,588 = $455,607

Units
$50.00X $28.80X $816,412
$21.20X $816,412
$816,412
50,396 units

11.26
1.
One package, X, contains three Grade I and seven Grade II cabinets.
0.3X($3,400) + 0.7X($1,600)
= $1,600,000
X
= 748 packages
Grade I: 0.3 748 = 224 units
Grade II: 0.7 748 = 524 units
2.

Product
Grade I
$2,142
Grade II
Package

P
1,600

V
$3,400

1,328

PV
$2,686

Mix = Total CM
$714
272

Direct fixed costsGrade I

$ 95,000
Direct fixed costsGrade II
95,000
Common fixed costs
35,000
Total fixed costs
$ 225,000
$225,000/$4,046 = 56 packages
Grade I: 3 56
= 168;
Grade II: 7 56
3.

7
1,904
$4,046

= 392

Product
P

V
=
PV
Mix = Total CM
Grade I
$3,400
$2,444
$956
3
$2,868
Grade II
1,600
1,208
392
7
2,744
Package
$5,612
Package CM
= 3($3,400) + 7($1,600)

Package CM
$21,400X
X

= $21,400
= $1,600,000 $600,000
= 47 packages remaining

141 Grade I (3 47) and 329 Grade II (7 47)

Additional contribution margin:
141($956 $714) + 329($392 $272)
Increase in fixed costs
Increase in operating income

$73,602
44,000
$29,602

Break-even: ($225,000 + $44,000)/$5,612

= 48 packages
144 Grade I (3 48) and 336 Grade II (7 48)
The new break-even point is a revised break-even for 2004. Total fixed
costs must be reduced by the contribution margin already earned (through
the first five months) to obtain the units that must be sold for the last
seven months. These units are then be added to those sold during the first
five months:
CM earned = $600,000 (83* $2,686) (195* $1,328) = $118,102
*224 141 = 83; 524 329 = 195
X = ($225,000 + $44,000 $118,102)/$5,612 = 27 packages
In the first five months, 28 packages were sold (83/3 or 195/7). Thus, the
revised break-even point is 55 packages (27 + 28)in units, 165 of Grade
I and 385 of Grade II.

4.

Product
Grade I
$714
Grade II

V
$3,400
1,600

PV
$2,686

1,328

Mix = Total CM
$714
1
272

272
Package

$986

New sales revenue $1,000,000 130% = $1,300,000

Package CM
$5,000X
X
Thus, 260 units of

= $3,400 + $1,600
= $1,300,000
= 260 packages
each cabinet will be sold during the rest of the year.

Effect on profits:
Change in contribution margin [$714(260 141) $272(329 260)]
$66,198
Increase in fixed costs [$70,000(7/12)]
40,833
Increase in operating income
$25,365
X

= F/(P V)
= $295,000/$986
= 299 packages (or 299 of each cabinet)
The break-even point for 2006 is computed as follows:
X
= ($295,000 $118,102)/$986

= $176,898/$986
= 179 packages (179 of each)
To this, add the units already sold, yielding the revised break-even point:
Grade I: 83 + 179 = 262
Grade II: 195 + 179 = 374

12.24
1.

System A
System B
Headset
Total
Sales
$45,000
$ 32,500
$8,000
$
85,500
Less: Variable expenses
20,000
25,500
3,200
48,700
Contribution margin
$25,000
$ 7,000
$4,800
$ 36,800
Less: Direct fixed costs*
526
11,158
1,016
12,700
Segment margin (loss)
$24,474
$ (4,158)
$3,784
$ 24,100
Less: Common fixed costs
18,000
Operating income
$ 6,100

*$45,000/$85,500 $18,000
$32,500/$85,500 $18,000
$8,000/$85,500 $18,000
2.

= $9,474; $10,000 $9,474

= $6,842; $18,000 $6,842
= $1,684; $2,700 $1,684

= $526
= $11,158
= $1,016

System A
Headset
Total
Sales
$58,500
$6,000
$64,500
Less: Variable expenses
26,000
2,400
28,400
Contribution margin
$32,500
$3,600
$36,100
Less: Direct fixed costs
526
1,016
1,542
Segment margin
$31,974
$2,584
$34,558
Less: Common fixed costs
18,000
Operating income
$16,558
System B should be dropped.

3.
Sales
$78,200
Less: Variable expenses
35,880
Contribution margin
$42,320
Less: Direct fixed costs
12,700
Segment margin
$29,620

System A
$45,000

System C
$ 26,000

Headset
$7,200

Total

20,000

13,000

2,880

$25,000

$ 13,000

$4,320

11,158

1,016

526
$24,474

$ 1,842

$3,304

Less: Common fixed costs

18,000
Operating income

$11,620

Replacing B with C is better than keeping B, but not as good as dropping B

without replacement with C.

12.25
1.
Steve should consider selling the part for $1.85 because his divisions
profits would increase by $12,800:
Accept
Reject
Revenues (2 $1.85 8,000)
$29,600
$0
Variable expenses
16,800
0
Total
$12,800
$0
Pats divisional profits would increase by $18,400:
Accept
Reject
Revenues ($32 8,000)
$ 256,000 $0
Variable expenses:
Direct materials ($17 8,000)
(136,000)
0
Direct labor ($7 8,000)
(56,000)
0
Variable overhead ($2 8,000)
(16,000)
0
Component (2 $1.85 8,000)
(29,600)
0
Total relevant benefits
$ 18,400
$0
2.

Pat should accept the $2 price. This price will increase the cost of the
component from $29,600 to $32,000 (2 $2 8,000) and yield an
incremental benefit of $16,000 ($18,400 $2,400).
Steves division will see an increase in profit of $15,200 (8,000 units 2
components per unit $0.95 contribution margin per component).

3.
Yes. At full price, the total cost of the component is $36,800 (2 $2.30
8,000), an increase of $7,200 (= 2 8,000 0.45) over the original offer. This
still leaves an increase in profits of $11,200 ($18,400 $7,200). (See the answer
to Requirement 1.)

12.27
1.
Napkins:
Tissues:

CM/machine hour = ($2.50 $1.50)/1 = $1.00

CM/machine hour = ($3.00 $2.25)/0.5 = $1.50

Tissues provide the greatest contribution per machine hour, so the

company should produce 400,000 packages of tissues (200,000 machine
hours times 2 packages per hour) and zero napkins.
2.

Let X = Boxes of napkins; Y = Boxes of tissues

a. Z = $1.00X + $0.75Y (objective function)
X + 0.5Y 200,000 (machine constraint)
X 150,000 (demand constraint)
Y 300,000 (demand constraint)
X0
Y0

14.16
1. The production rate is 600 regular bows per day and 200 deluxe bows per
day. The rate is set by the molding process. It is the drummer process
since it is the only one with a buffer inventory in front of it.

2. Goicoechea has 0.5 day of buffer inventory (400 bows/800 bows per day).
This time buffer is determined by how long it takes the plant to correct
problems that create production interruptions.
3. A is the rope, B is the time buffer, and C is the drummer constraint. The
rope ties the production rate of the drummer constraint to the release of
raw materials to the first process. The time buffer is used to protect
throughput. Sufficient inventory is needed to keep the bottleneck
operating if the first process goes down. The drummer sets the production
rate.

14.19
1.

EOQ

=
=

= 144,000,000
= 12,000 (batch size)
Genevas response was correct given its current production environment.
The setup time is two working days. The production rate possible is 750 units per
day after setup. Thus, the time required to produce the additional 9,000 units
would be 14 working days [2 + (9,000/750)].
2.
To have met the orders requirements, Geneva could have produced 3,750
units within the 7-work-day window [(7 2)750] and would have needed 8,250
units in stock5,250 more than available. Solving delivery problems like the one
described would likely require much more inventory than is currently carried. If
the maximum demand is predictable, then safety stock could be used.
The demand can be as much as 9,000 units per year above the expected
demand. If it is common for all of this extra demand to occur from one or a few
large orders, then protecting against lost sales could demand a sizable increase
in inventory, an approach that could be quite costly. Perhaps some
safety stock with expediting and overtime would be more practical. Or, perhaps
Geneva should explore alternative inventory management approaches such as
those associated with JIT or TOC.
3.

EOQ

=
=

= 2,256,000
1,502 (batch size)
The new lead time = (1.5 hours) + [(1,502/2,000) 8 hours]
7.5 hours, or about one work day

At a production rate of 2,000 units per day, Geneva could have satisfied
the customers time requirements in less than seven days, even without any
finished goods inventory. This illustrates very forcefully that inventory may not
be the solution to meeting customer needs or dealing with demand uncertainty.
Perhaps paying attention to setup, moving, and waiting activities offers more
benefits. JIT tends to produce smaller batches and shorter cycle times than
conventional manufacturing environments. As the EOQ batch size computation
revealed, by focusing on improving the way production is done, the batch size
could be reduced to about 12.5 percent of what it was before the improvements.
4.

EOQ

=
=

490 (batch size)

This further reduction in setup time and cost reduces the batch size even
more. As the setup time is reduced to even lower levels and the cost is reduced,
the batch size becomes even smaller.
If the cost is $0.864, the batch size is 144:
EOQ

=
=

144 (batch

size)

Furthermore, with the ability to produce 2,000 units per day or 250 units
per hour, the days demand (36,000/250 = 144) can be produced in less than an
hour. This provides the ability to produce on demand. The key to this outcome
was the decrease in setup time and the reduction of wait and move timeall
nonvalue-added activities. This illustrates what is meant by referring to inventory
management as an ancillary benefit of JIT.

14.24
1.

Dept. A
Dept. B
Dept. C
Total
Component 12-L (1,000 units)
Test hours(a)
2,000
3,000
3,000
8,000
Machine hours(b) 1,000
1,000
2,000
4,000
Component 14-M (800 units)
Test hours (c)
800
1,600

2,400
Machine hours (d) 800
800

1,600
Component 40-S (2,000 units)
Test hourse
4,000
4,000
4,000
12,000

Machine hours(f)
4,000
4,000
2,000
10,000
Total test hours
6,800
8,600
7,000
22,400
Total machine hours
5,800
5,800
4,000
15,600
(a)2 1,000; 3 1,000; 3 1,000
(d)1 800; 1 800
(b)1 1,000; 1 1,000; 2 1,000
(e)2 2,000; 2 2,000; 2 2,000
(c)1 800; 2 800
(f)2 2,000; 2 2,000; 1 2,000
The demand can be met in all departments except for Department C. Production
requires 7,000 test hours in Department C, but only 5,500 hours are available.
2.

Component 12-L:

CM per unit = $203 $110 = $93

CM per test hour = $93/3 = $31
Test hours needed (Dept. C): 3 1,000 = 3,000
Component 14-M: CM per unit = $136 $86 = $50
Requires no hours in Department C
Component 40-S: CM per unit = $184 $114 = $70
CM per test hour = $70/2 = $35
Test hours needed (Dept. C): 2 2,000 = 4,000
Production should be equal to demand for Component 40-S because it has
the highest contribution margin per unit of scarce resource. After meeting
demand, any additional labor hours in Department C should be used to
produce Component 12-L (5,500 4,000 = 1,500; 1,500/3 = 500 units of
12-L).
Contribution to profits:
Component 12-L
: 500 $93
= $ 46,500
Component 14-M : 800 $50
= 40,000
Component 40-S : 2,000
$70
= 140,000
Total contribution margin
$226,500

16.19
1.

Current cost per unit

= $12,800,000/20,000
= $640
Current profit per unit
= $720 $640
= $80
Target cost (C) to maintain current profit and expand market share: $624
C = $80
C = $544
2.

Nonvalue-added costs:
Materials (400,000 380,000)$21
$ 420,000
Labor (96,000 91,200)$12.50
60,000
Setups (6,400 0)$75
480,000
Materials handling (16,000 0)$70
1,120,000
Warranties (16,000 0)$100
1,600,000
Total
$3,680,000
Units produced and sold
20,000
Unit nonvalue-added cost
$ 184
Current cost less nonvalue-added cost: $640 $184 = $456

This is much less than the target cost of $544 Thus, achieving target cost is
possible. How quickly the cost reductions can be achieved is another matter. As
CEO, I would attempt to reduce the nonvalue-added costs quickly by
implementing lean manufacturing methodologies. I would also lower the price to
$624 by year end and seek to take advantage of the increased market share
even if it meant a short-term reduction in profits.

2. In 2006, the cost reductions were less than the design cost. However, in the
following year, the cost reduction achieved matched the design cost, and
the reductions achieved in the prior year are costs avoided in 2007 as well.
Thus, the total savings are $1,600,000, the sum of last years ($960,000)
plus this years ($640,000). In 2006, the design costs are $80,000, and the
pollution costs are reduced by an additional $960,000. Thus, the total
savings per year now amount to $2,560,000 (the sum of the current-year
savings plus the costs avoided from improvements of prior years). How
much is an annuity of $2,560,000 worth? Certainly more than the
$2,160,000 paid for engineering design activity in 2005, 2006, 2007, and
2008! This seems to support ecoefficiency: improving environmental
performance improves economic efficiency.

1717
1. i
2. d
3. m
4. a
5. k
6. e
7. b
8. j
9. c
10. n
11. f
12. h
13. g
14. l