978-0077733773 Chapter 11 Solution Manual Part 3

subject Type Homework Help
subject Pages 9
subject Words 1594
subject Authors David Stout, Edward Blocher, Gary Cokins, Paul Juras

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11-27 (Continued)
Check:
4. The following strategic factors should be considered.
What will be the effect on the firm’s image if T-2 is dropped?
Will this result in an unfavorable reaction from key customers of T-1
and of other product lines?
Can the production capacity released by T-2 be used for new
products or in some other value-creating activity?
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11-28 Sell or Process Further; Product Mix (50 minutes)
1. The key is to identify the relevant costs and revenues associated with
any GR37 diverted for production of SilPol (silver polish).
Incremental Fixed Costs (SilPol) = $5,600
Incremental Contribution Margin/Unit Sold:
Selling price per unit = $4.00
Less: Relevant Costs:
Opportunity cost: lost revenue from GR37:
GR37 selling price/pound = $2.00
Conversion rate = 0.25 $0.50
Out-of-Pocket Costs:
2. Comparative Income Statements—Three Different Product Mixes
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11-28 (Continued)
Note that at volume levels below 8,000 units, it is not worthwhile to incur
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11-29 Constrained Optimization Analysis—Product-Mix Decision (50
minutes)
Note that the above profitability measures are not pertinent to the short-
term product-mix decision because they include an allocated portion of
fixed costs which, in this example, are not relevant—they are "sunk" (i.e., in
total, they are independent of product mix).
Note that the above profitability measures are not relevant/useful for
determining the optimum short-term product mix because they do not
relate to the relevant demands of the two products in terms of the scare
resource (labor hours).
11-29 (Continued)
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4. Conceptual Lesson
The primary conceptual lesson is that neither of the profit measures
reported in 1 or 2 are useful for determining the short-term optimum
product mix in the presence of resource constraints (labor hours in the
present example). For this purpose it is necessary to allocate available
labor hours on the basis of the contribution margins expressed on a per-
labor-hour basis. In the present case, the residential-grade carpet is the
more profitable of the two product lines when measured on this basis.
Thus, labor hours should be devoted to the production of this product up
5. Primary Role of the Management Accountant
The primary role of the management accountant in this context is to
develop accurate estimates of the contribution margins for each product
11-30 Relevant Cost Exercises (90 minutes)
a. Make or Buy:
The relevant cost for producing the product is as follows:
Cost Per Unit
Direct Materials $28
Direct Labor 18
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The key question here is whether any of the fixed overhead is
avoidable (and therefore a relevant cost of producing internally).
Qualitative Considerations:
a. How does the quality of product compare, insourcing vs.
outsourcing?
b. Reliability (i.e., on-time delivery performance)?
c. Financial condition of the supplier? (With the supplier be in
business?)
d. Are there alternative (i.e., better) uses of the available capacity?
e. Will outsourcing allow “information leakage” regarding your
product (a negative if eventually in the hands of your
competitors)?
f. Will outsourcing cause an increase in unemployment? Attendant
costs: increased payroll taxes; negative goodwill.
b. Disposal of Assets
Re-machine Scrap
Future Revenues $30,000 $2,500
Deduct future costs 25,000
Difference $5,000 $2,500
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11-30 (Continued-1)
The difference is in favor of re-machining. The $50,000 inventory cost
is irrelevant.
Alternative presentation format:
Incremental Revenues from Further Processing:
Estimated sales value of re-machined parts $30,000
Current disposal value of parts $2,500
Incremental revenue from re-machining $27,500
Qualitative Considerations:
1. Any other (better) use of the capacity devoted to this task?
2. Perception in the market—will consumers matter that re-machined
parts make their way into the market?
3. Reliability/quality of re-machined parts (in the minds of the
consumer)?
c. Replacement of an Asset
Replace Rebuild
New boat $92,000 -
Deduct current disposal price $ 9,000
Alternative presentation format:
Cost to buy a replacement boat = $92,000
Total cost of refurbishing:
Out-of-pocket cost = $75,000
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11-30 (continued-2)
Qualitative Considerations:
1. Personal preference (utility function) for new vs. refurbished asset?
2. Safety/reliability of refurbished boat vs. new boat
Other Quantitative Considerations:
1. Disposal values of each option, at the end of useful life?
2. Income tax consequences (e.g., casualty loss deduction), if any?
d. Profit from Processing Further (“Sell or Process Further”)
The main point of this exercise is that joint costs should be ignored when
addressing the “sell-or-process further” decision (see also coverage of
this point in Chapter 7).
1. Definitions:
a. joint production process: process in which more than output
b. joint costs: in a joint production process, these are costs incurred
c. separable processing costs: in a joint production process these are
d. split-off point: point in a joint production process where products
point are called separable processing costs
The situation for Deaton Corporation is depicted in the diagram that
follows.
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11-30 (continued-3)
2. Which products, if any, should be processed further (rather than being
sold at the split-off point)?
ABC
Addt’l costs of further process $28,000 20,000 12,000
Increase in sales value* 40,000 20,000 10,000
Differential benefit (loss) $12,000 $0 ($2,000)
respect to the decision regarding whether any of the outputs should be
sold at the split-off point or processed further.
3. For financial reporting and tax purposes, accountants need to value
inventory on a "full cost" basis. Thus, in the present case for income-
statement preparation purposes and for purposes of preparing an end-
of-period balance sheet, a portion of the joint production cost of
$240,000 must be assigned to each unit sold during the period and each
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11-30 (continued-4)
e. Make or Buy (sourcing decision)
The relevant fixed overhead is $12 per unit ($20 × 60%) because that
$87, is less than the cost to buy, $90; there is a $3 per-unit savings to
make.
Nonfinancial Factors that Might Be Relevant
a. Are there alternative (better) uses for the available capacity?
b. Quality of the supplier's product: how does it compare to the quality of
internal production?
c. Reliability--on-time delivery performance of the supplier?
d. Future price trends: is the supplier price likely to be lower (or greater)
in the long run?
e. Outsourcing may allow information about the design of the product to
leak out to competitors.
f. Employment-related considerations: if we outsource, what happens to
our labor force and costs such as unemployment insurance, goodwill,
etc.?
f. Selection of More Profitable Product
1. The comment "Flash and Clash are processed through the same
production departments" can be taken to mean that capacity-related
2. Selection of the more profitable product:
Flash Clash
Selling price per unit $250.00 $140.00
Variable cost per unit* 200.00 100.00

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