978-0077733773 Chapter 11 Solution Manual Part 2

subject Type Homework Help
subject Pages 9
subject Words 1692
subject Authors David Stout, Edward Blocher, Gary Cokins, Paul Juras

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page-pf1
11-22 (Continued)
4. Opportunity cost incurred if sales of 5,000 units to regular customers are
lost by accepting the special sales order:
Lost contribution margin, sales to regular customers:
Selling price per unit = $20.00
Variable cost per unit:
Direct materials = $2.00
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11-23 Special Order (60 minutes)
1. Current Special Order
Revenue per unit $ 45 $ 35
Variable costs per unit:
Direct materials $ 9 $ 9
Direct labor $ 8 $ 8
Variable factory overhead $ 4 $ 4
Variable nonmanufacturing costs $ 8 29 $ 4 25
Alternatively, the following relevant cost analysis can be used:
to produce the special order is based on the comparison of current
and special-order production. If there were additional capacity, the
proper decision would be to accept the special order since it has a
positive contribution of $50,000.
so Alton should try to reduce or delay 1,000 units of the SHC order to
get an order for 4,000 units. Then the special order could be
accepted without a loss of regular sales.
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11-23 (Continued-1)
If SHC insists on the full order of 5,000 units, then Alton must figure
the contribution margin on lost sales ($16.00 × 1,000 units =
The minimum price would be $28.20 per unit, the total variable cost
per unit ($25.00) plus the contribution margin of lost sales, allocated
In general, the minimum selling price = relevant cost = out-of-
pocket costs + opportunity cost, as shown below:
Out-of-Pocket Costs:
Direct materials $9.00
Direct labor $8.00
Variable manufacturing overhead $4.00
Variable nonmanufacturing costs $4.00 $25.00
Opportunity Cost:
No. units of lost sales 1,000
CM per unit--regular sales
3. Goal Seek Solution:
Step One: Set up the Equation
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11-23 (Continued-2)
Cell D99 contains the appropriate equation: =D89-D94-D97
Step #2: Run Goal Seek (i.e., change the selling price per unit, cell
C89) until the value in Cell D99 equals zero)
Step #3: Results
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11-24 Special Order; Use of Opportunity Cost Information (30 minutes)
1. The special order should have been accepted since the relevant cost is
$3.50 − $1.50 = $2.00 per cap, or $2.00 × 15,000 = $30,000 total cost.
2. Research studies have consistently found that decision makers often
ignore opportunity costs. For this reason, it is particularly important that the
development of decision-making skills place particular emphasis on
identifying and incorporating opportunity costs. Interestingly, a recent study
found that decision makers with greater expertise in developing
comparative income statements appeared to ignore fixed costs more than
costs.
Other studies have shown that the decision maker’s cognitive style, the
presence of unused capacity, or the relative amount of the opportunity cost
can affect the use of opportunity cost information by the decision makers in
experimental studies. Overall, these results show that in practice, decision
makers have a difficult time using opportunity cost information properly and
consistently.
References: Sandra C. Vera-Munoz, “The Effects of Accounting
Knowledge and Context on the Omission of Opportunity Costs in Resource
Allocation Decisions,” The Accounting Review, January 1998, pp. 47–72.
Steve Buchheit, “Reporting the Cost of Capacity,” Accounting,
Organizations and Society, August 2003, p. 549; Robert E. Hoskin,
“Opportunity Cost and Behavior,” Journal of Accounting Research, Spring
1983, p. 78; Robert Chenhall and Deigan Morris,” The Effect of Cognitive
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11-25 Special Order (25 minutes)
To begin the analysis, Fred Stanley, the Earth Baby CFO, should recognize
that the $3.00 full cost for its product includes $1.00 of irrelevant fixed
overhead. Only the variable costs of $2.00 per unit are relevant. From this
standpoint, GDI’s proposal makes sense, since there would be a
However, the agreement with GDI could be a potentially serious strategic
liability for Earth Baby. Earth Baby’s reputation is built upon differentiation
and product superiority, features which make it attractive to a small, but
important segment of the baby products market. To sell its products through
a discount retailer, even under another brand name, could harm the
differentiated image of Earth Baby’s product line, and cause it to lose
market share in its usual distribution channels (the high-end grocery stores
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11-26 Make or Buy; Continuation of Exercise 9-22 (50 minutes)
1. This requirement assumes that Machine A has not yet been purchased.
We compare the relevant cost of purchasing from an external supplier to
the relevant cost of producing the switches internally using Machine A.
As indicated below, if annual volume is at least 100,000 units, Vista
should purchase and use Machine A to produce the switches:
External Machine A
$2.00Q = $0.65Q + $135,000
Alternatively, we can define the breakeven volume (point of indifference)
as the difference in fixed costs for the two decision alternatives divided
by the difference in variable cost per unit, as follows :
Fixed cost/year, if Vista makes = $135,000
Fixed cost/year, if Vista buys = $0
Machine A to make the switches is preferable to purchasing the switches
from an external supplier.
2. Unlike #1 above, here we are assuming that Machine A has already
been purchased. Is it now preferable to use Machine A to make the
switches or to purchase the switches from an external supplier? The
annual fixed (depreciation) cost of Machine A is now a sunk cost and
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11-26 (Continued-1)
3. Here we use an approach similar to that used in 9-22, except that the
$135,000 annual (depreciation) cost of Machine A is irrelevant—
threshold to moving up to Machine B is now much higher because the
purchase cost of Machine A is sunk and therefore irrelevant, while the
purchase price and therefore annual depreciation expense are relevant
since Machine B has not yet been purchased.
Annual Cost of Using A = Annual Cost of Using B
4. Using Goal Seek to Calculate the Above Volume-Indifference Level
Step #1: Set Up the Problem (i.e., define the cost-differential
equation, in cell C84):
Assumed Data Inputs:
Determining Annual Cost Differential (cell C84)
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11-26 (Continued-2)
Note: cell C84 contains the annual cost-differential formula (i.e., the
difference in total costs between the decision alternatives)
=(C79+C80)−(C82+C83)
cellC80 =C65*C77 (where C65 contains the variable cost per
unit for Machine A)
cell C82 =E12 (where E12 contains the fixed cost per year for
Machine B)
cell C83 =C68*C77 (where C77 contains the variable cost per
unit for Machine B)
Step #2: Run Goal Seek (cell C62 contains the annual volume, in
units)
Step #3: Results (the indifference volume is 582,857, the same as
calculated above in Part 3)
page-pfa
11-27 Product-Line Profitability Analysis (45 minutes)
Note that variable selling and administrative costs should be included in
calculating contribution margin, so that the contribution margin
presented in the problem is incorrect and requires this adjustment.
1. T-1
Last year's contribution = $200,000 − $70,000 − $20,000 = $110,000
Last year's contribution margin ratio = $110,000 ÷ $200,000 = 55%
T-2
Last year's contribution = $260,000 − $130,000 − $50,000 = $80,000
The effect of discontinuing T-2 is the contribution margin less variable
selling costs less the incremental contribution for T-1:
2. Required % increase in sales of T-1 to compensate for lost margin from
T-2:
Loss of CM, T-2 = Gain in CM, T-1
$80,000 = X% × $110,000
3. Required % increase in sales from T-1 to compensate for lost margin
from T-2 if total fixed costs can be reduced by $45,000.
Loss of CM, T-2 = Gain in CM, T-1
$80,000 − $45,000 = X% × $110,000

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