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Problem 13-12 (60 minutes)

By Victor Webb,2014-05-06 10:49
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Problem 13-12 (60 minutes)

Problem 13-12 (60 minutes)

    1. Contribution margin lost if the Bath Department is dropped:

     Lost from the Bath Department ......................................... $700,000

     Lost from the Kitchen Department (10% × $2,400,000) ...... 240,000

     Total lost contribution margin .............................................. 940,000

     Less avoidable fixed costs ($900,000 $370,000) ................. 530,000

     Decrease in overall net operating income .............................. $410,000

    2. Merifulon should be processed further:

     Sales value after further processing ............................. $60,000

     Sales value at the split-off point................................... 40,000

     Incremental revenue from further processing ................ 20,000

     Cost of further processing ........................................... 13,000

     Profit from further processing ..................................... $ 7,000

     The $10,000 in allocated common costs (1/3 × $30,000) will be

    the same regardless of which alternative is selected, and hence is

    not relevant to the decision.

3. The company should accept orders first for Z, second for X, and

    third for Y. The computations are:

     X Y Z

    (a) Direct materials required per unit ................................$24.00 $15.00 ... $9.00

    (b) Cost per pound .............................................................$3.00 $3.00 $3.00

    (c) Pounds required per unit (a) ? (b) ................................8 5 .. 3

    (d) Contribution margin per unit ................................$32.00 $14.00.......... $21.00

     Contribution margin per pound of

    materials used (d) ? (c) ................................$4.00 ..............$2.80 $7.00

Problem 13-12 (continued)

     Since 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

    The key factor is product Y, but yet it is preferred over product Y.

    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.

    4. Relevant Costs

    Item Make Buy

     Direct materials (60,000 @ $4.00) ................................$240,000 ..

     Direct labor (60,000 @ $2.75) ................................165,000.......

    Variable manufacturing overhead

     (60,000 @ $0.50) ......................................................30,000

    Fixed manufacturing overhead, traceable

     (1/3 of $180,000) ......................................................60,000

    Cost of purchasing from outside supplier

     (60,000 @ $10) ......................................................... $600,000

     Total cost ................................................................$495,000..... $600,000

     The two-thirds of the traceable fixed manufacturing overhead

    costs that cannot be eliminated, and all of the common fixed

    manufacturing overhead costs, are irrelevant.

     The company would save $105,000 per year by continuing to

    make the parts itself.

    Problem 13-12 (continued)

    5. Monthly profits would be increased by $9,000:

    Total for

    Per Unit 2,000 Units

    Incremental revenue .....................................................$12.00 $24,000 Incremental costs:

    Variable costs:

    Direct materials .......................................................2.50 5,000

    Direct labor .............................................................3.00 6,000

    Variable manufacturing overhead...............................0.50 1,000

    Variable selling and administrative ............................. 1.50 3,000

    Total variable cost ......................................................$ 7.50 15,000

    Fixed costs:

    None affected by the special order............................. 0 Total incremental cost ................................................... 15,000 Incremental net operating income .................................. $ 9,000

    6. The relevant cost is $1.50 (the variable selling and administrative

    costs). All other variable costs are sunk, since the units have

    already been produced. The fixed costs would not be relevant,

    since they would not be affected by the sale of leftover units.

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