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RELEVANCE:

Consider All
Alternative 1: Alternative 2:
Present
New
Structure
Machines
$ 2,016,000 $ 2,016,000

Revenues:
Cost of Goods Sold:
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Gross Margin
Operating Expenses:
Variable Marketing
Fixed Administrative
Operating Income
$
$

24,000
Consider Relevant
Alternative 1:
Present
Structure
$
-

288,000
624,000
216,000
300,000
588,000

288,000
528,000
240,000
350,000
610,000

624,000
216,000
300,000
(1,140,000)

288,000
140,000
160,000 $

288,000
140,000
182,000

$ (1,140,000)

22,000 Difference

22,000

units
Consider Relevant
Alternative 2:
New Machines
$
-

Consider Diferrence

528,000
240,000
350,000
(1,118,000)

(96,000)
24,000
50,000
22,000

###
$ (1,118,000)

22,000

Difference

Present Structure
Per Unit
Totals
Amounts
$ 3,360,000 $
96.00

Traditional Format:
Revenues:
Cost of Goods Sold:
Direct Materials
385,000
Direct Labor
805,000
Variable Manufacturing Overhead
420,000
Fixed Manufacturing Overhead
910,000
Cost of Goods Sold
2,520,000
Gross Margin
840,000
Operating Expenses:
Variable Marketing
280,000
Fixed Administrative
175,000
Total Operating Expenses
455,000
Operating Income
$
385,000 $
You are offerred the opportunity to sell:

11.00
23.00
12.00
26.00
72.00
24.00
8.00
5.00
13.00
11.00
1,000 @

Present Structure
Per Unit
Totals
Amounts
$ 3,360,000 $
96.00

Contribution-Margin Format:
Revenues:
Variable Expenses:
Direct Materials
385,000
Direct Labor
805,000
Variable Manufacturing Overhead
420,000
Variable Marketing
280,000
Total Variable Costs
1,890,000
Contribution Margin
1,470,000
Fixed Expenses:
Fixed Manufacturing Overhead
910,000
Fixed Administrative
175,000
Total Fixed Costs
1,085,000
Operating Income
$
385,000 $

11.00
23.00
12.00
8.00
54.00
42.00
26.00
5.00
31.00
11.00

35,000

$70.00
With Special Order

Difference

Totals
3,430,000

Totals
$ 70,000

396,000
828,000
432,000
288,000
1,944,000
1,486,000

11,000
23,000
12,000
8,000
54,000
16,000

910,000
175,000
1,085,000
401,000

$ 16,000

Here are Larson Company's "cost" of producing item #341B


Per Unit
Direct Materials
$
12.00
Direct Labor
8.00
Variable Manu. OH
4.00
Supervisor's Salary
2.00
Special Equipment Costs
7.00
Allocated Overhead
5.00
Units Produced
Possible Outside Price

15,000
30.00 per unit

If Special Equip. is not avoidable:


Make
Direct Materials
Direct Labor
Variable Manu. OH
Supervisor's Salary
Special Equipment Costs
Allocated Overhead
Outside Purchase Price
Better Option
Per Unit

Buy

180,000
120,000
60,000
30,000

$
$ 390,000 $
^^^^^^
$
26.00 $

450,000
450,000
30.00

If Special Equip. is avoidable:


Make
Direct Materials
Direct Labor
Variable Manu. OH
Supervisor's Salary
Special Equipment Costs
Allocated Overhead
Outside Purchase Price

$
Better Option
Per Unit

Buy

180,000
120,000
60,000
30,000
105,000
$
495,000 $

450,000
450,000
^^^^^^
33.00 $
30.00

Chris Hogan, a college professor has the ooportunity to visit the University Of Auckland for the next 12 months:
Hogan provides the following:
OSU
Auckland
Salary
$ 100,000 $ 120,000
Food
$ (10,000) $ (13,000)
Rent
$ (24,000)
Transportation
$ (4,000) $ (9,000)
$ 86,000 $ 74,000
However, Hogan has negelcted on item, she can rent her house in Columbus for $18,000.

Salary
Food
Rent
Lease Columbus House
Transportation

OSU
Auckland
$ 100,000 $ 120,000
$ (10,000) $ (13,000)
$ (24,000)
$ 18,000
$ (4,000) $ (9,000)
$ 86,000 $ 92,000

OR:
Salary
Food
Rent
Lease Columbus House
Transportation

OSU
Auckland
$ 100,000 $ 120,000
$ (10,000) $ (13,000)
$ (24,000)
$ (18,000)
$ (4,000) $ (9,000)
$ 68,000 $ 74,000

kland for the next 12 months:

Consider the following:

Sales
Variable Expenses
Contribution Margin
Fixed Costs
Net Operating Income

Smith
Food
Company Service
$
700 $ 250
410
210
290
40
150
54
140 $ (14)

Consumer
Markets
$
450
200
250
96
$
154

The firm above allocated fixed costs in proportion to sales.


We discover than the cost traceab;e and avoidable are:

Sales
Variable Expenses
Contribution Margin
Traceable Fixed Costs
Division Segment
Common Fixed Costs
Net Operating Income

Smith
Food Consumer
Company Service Markets
$
700 $ 250 $
450
410
210
200
290
40
250
110
30
80
180 $
10 $
170
40
$
140

Thus, they'd be $10 worse off not $14 better off by dropping
Food Service.

Consider the following three products:

Sales Price
Variable Exp. Per unit
C/M per unit

X
$ 100.00 $
80.00
$ 20.00 $

Number of DL hours

You have:
Compute:
C/M per DL hour
Ranking

Y
70.00 $
40.00
30.00 $

Z
40.00
30.00
10.00

80,000 DL hours available

$
4.00 $
3.75 $
5.00
middle
worst
best

Solution:
Manufacturing only product Z
Now, consider:
Maximum demand
Make
Then
Then
Total Production

X
8,000

Y
5,000

Z
15,000

Hours Used

15,000

30,000
40,000
10,000
80,000

8,000
8,000

1,250
1,250

15,000

Original Cost
Useful Life
Current Age
Remaining Life
Accumulated Depreciation
Book Value
Current Cash Disposal Value
Terminal Disposal Value (at end of remianing life)
Annual Cash Operating Costs

Current Machine
$
800,000
8 years
3 years
5 years
$
300,000
$
500,000
$
75,000
$
$
190,000

Proposed
Replacement
$
550,000
5 years
- years
5 years
n/a
n/a
n/a
###
$
80,000

Remaining Years Together


Revenues
Operating Costs:
Annual Cash Operating costs (over remianing life)
Current Machine:
Depreciation (if kept)
Loss on Sale (if replaced)
New Machine Depreciation
Total Operating Costs
Operating Income

Keep
$ 2,000,000

Replace
$ 2,000,000

950,000

400,000

500,000

1,450,000
$
550,000

425,000
550,000
1,375,000
$
625,000
Remaining Years Together

Annual Cash Operating costs (over remianing life)


Incremental Investment:
New Machine Cost
Old Machine Disposal Value
Incremental Investment
All Revlevant Outflows

Keep
950,000

Replace
$
400,000

950,000

550,000
75,000
475,000
875,000

Together
Difference
$
-

Keep 1
$ 400,000

550,000

190,000
100,000

(425,000)
(550,000)
75,000
$ (75,000)

290,000
$ 110,000

Difference
$ 550,000

Keep 1
$ 190,000

(475,000)
$
75,000

$ 190,000

Together

Keep 2, 3, 4, 5

$ 400,000

Repl 1
Repl 2, 3, 4, 5
$ 400,000 $ 400,000

190,000

80,000

80,000

100,000

290,000
$ 110,000

Keep 2, 3, 4, 5

$ 190,000

$ 190,000

425,000
110,000
110,000
615,000
190,000
$ (215,000) $ 210,000

Repl 1
Repl 2, 3, 4, 5
$
80,000 $ 80,000

475,000
555,000 $

80,000

Monthly Needs
Cost Per Unit
Discount Available if purchase one year's needs
Interest Rate
Part A.
Purchase each
Purchase Amount
Cost per Unit
Cost Per Order
Orders Per Year
Cost of Units
Opportunity Cost:
Cost Per Order
Divide by 2
Average Investment in Inventory
Interest Rate
Lost Interest
Annual Cost

5,000
12.00
5%
12%

Year
$
$

Month
60,000
11.40
684,000
1

$
$
$

$
$

684,000

684,000
2
342,000
12%

$
$

5,000
12.00
60,000
12

41,040
725,040

60,000
2
30,000
12%

720,000

3,600
723,600

1.

Revenue from Special Order


Variable Manufacturing Costs
Direct Materials
Direct Labor
Variable Manu. OH

25 X

10,000

$ 250,000

12
3
1
16 X

10,000

160,000
$ 90,000

25 X

10,000

$ 250,000

12
3
1
16 X

10,000

160,000

32 X

10,000

$ 320,000

Increase in operating income


2.

Revenue from Special Order


Variable Manufacturing Costs
Direct Materials
Direct Labor
Variable Manu. OH

$
Increase in C/M from Special Order
Revenue from Regular Sales

Variable Manufacturing Costs


Direct Materials
Direct Labor
Variable Manu. OH
Variable Selling Expenses

12
3
1
2
18 X

$
10,000
180,000
C/M from Regular Sales
Increase (Decrease) in operating income from accepting Special Order

Spec:
Reg:

10,000 @ (25-16)
- @ (32-18)

=
=

$
$

Spec:
Reg:

20,000 @ (25-16)
(12,857) @ (32-18)

12,857 =
20,000

0.642857

=
=

90,000
90,000

$ 180,000
(180,000)
$
-

90,000

140,000
$ (50,000)

1.

2.

Purchase cost =

IDR 27,300
IDR 9,100 per $

= $

3.00 per figurine

Cost to purchase:

400,000 figurines at

$ 3.00 =

Cost to Manufacture:
Variable
Incremental Fixed

400,000 figurines at

$ 2.85 =

Purchase cost =

locked in future price

3.40 per figurine

Cost to purchase:

400,000 figurines at

$ 3.40 =

Cost to Manufacture:
Variable
Incremental Fixed

400,000 figurines at

$ 2.85 =

1,200,000

$
$

1,140,000
200,000
1,340,000

1,360,000

1,140,000
200,000
1,340,000

Relevant Costs and Revenues:


Easyspread 1.0
Easyspread 2.0
$
160 $
195

Revenue
Costs:
Variable cost of CDs, etc.
Development
Market/Admin
Relevant increase (decrease) per unit on
operating income
$

(30)
-

160 $

165

1.
Revenue from Regular Sales
Variable Manufacturing Costs
Direct Materials
Direct Labor
Variable Manu. OH
Variable Marketing Expenses

26 X

3,500

5
1
4
2
12 X

3,500

$
Lost C/M from Regular Sales
This is the opportunity cost
2.
Selling Price per unit:
Variable Costs per unit:
Purchase Cost
Direct Materials
Direct Labor
Variable Manu. OH
Variable Marketing Expenses
Variable Costs per unit:
Contribution Margin per unit
Units
C/M

91,000

42,000
49,000

Orangebo
$
20

Rosebo
$
26

5
1
4
1
11
9

18
2
20
6

$
X

3,500
$ 31,500

$
X

3,500
$ 21,000

Opportunity Cost to give up 3,500 Rosebo:


Net increase (decrease) in operating profit
3.
Capacity
Current Production
Excess Capacity

Special Order
Regular Sales

13,000
13,000
-

units
units
units

$
$

Price
20 26 -

Var. Costs
11
12

note "Wolverine" should read "Wild Boar"

52,500

49,000
3,500

C/M per unit


$
9 X
$
14 X

Units
Effect on C/M
3,500 $
31,500
(3,500)
(49,000)
$
(17,500)

1.
Selling Price
Variable Costs:
Manufacturing
Marketing
Total Variable Costs
C/M per unit

R3

Hours of constrained resource (regular machine)


C/M per hour of constrained resource

Sell Only R3:

100

60
15
75
25

1.0
25

50,000 max hours


$ 1,250,000

Sell Only HP6:

Less: Lease cost of high-precision machine


$ 1,250,000

2.
C/M per hour of constrained resource (see above)
Sell Only R3:

R3
$
X

25

65,000 max hours


$ 1,625,000

Sell Only HP6:

Less: Lease cost of high-precision machine


Less: Cost of increased capacity

150,000
$ 1,475,000

1.
Selling Price
Variable Costs:
Manufacturing
Marketing
Total Variable Costs
C/M per unit
Hours of constrained resource (regular machine)
C/M per hour of constrained resource
Step One: Make and sell 20,000 S3
Note: 20,000 units equals 20,000 hours

R3
$

100

60
15
75
25

1.0
25

Step Two: Determine if use remaining hours for R3 or HP6

Sell Only R3:

45,000 max hours


$ 1,125,000

Sell Only HP6:


Less: Lease cost of high-precision machine
$ 1,125,000
Relevant benefit from S3/R3 combination:
Less: Cost of increased capacity
C/M based on increased capicity and best product mix
Relevant benefit original option (just HP6 with 65,000 hours)
Net advantage (disadvantage) of accepting S3 order

HP6
$

150

100
35
135
15

0.5
30

50,000 max hours


$ 1,500,000
300,000
$ 1,200,000

HP6
$

30

65,000 max hours


$ 1,950,000
300,000
150,000
$ 1,500,000

HP6

S3

150

100
35
135
15

0.5
30

120

70
15
85
35

1.0
35

20,000 hours
700,000 from S3

45,000
$ 1,350,000
300,000
$ 1,050,000

1,125,000 (max of two at left)


$ 1,825,000
150,000
$ 1,675,000
1,500,000 from above
$
175,000

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