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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

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

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

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

(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

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 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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