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Chapter 13 Relevant Information for Special Decisions
Problem 13-28
a.
Decision
Division B
Sales
$ 600,000
Unit-level manufacturing costs
(400,000)
Rent on manufacturing facility
(150,000)
Unit-level selling and admin. expenses
(28,000)
Division-level fixed selling and admin. expenses
(40,000)
Contribution to profit
$ (18,000)
Problem 13-28 (continued)
Since Division B’s contribution to profit is negative, the division should be eliminated.
The following companywide income statements support this conclusion.
Companywide Income Statements If:
Keep
Division B
Eliminate
Division B
Sales
$ 5,100,000
$4,500,000
Less: Cost of goods sold
Unit-level manufacturing costs
(3,100,000)
(2,700,000)
Rent on manufacturing facility
(620,000)
(470,000)
Gross margin
1,380,000
1,330,000
Less: Operating expenses
Unit-level selling and admin. expenses
(309,000)
(281,000)
Division-level fixed selling and admin. exp.
(400,000)
(360,000)
Headquarters facility-level costs
(300,000)
(300,000)
Net income (loss)
$ 371,000
$ 389,000
b. Begin by determining the sales price per unit and the cost per unit for the costs that
Division B
÷ No. of
Units
Per Unit
Amounts
Sales
$600,000
÷ 20,000
$30.00
Unit-level manufacturing costs
(400,000)
÷ 20,000
20.00
Rent on manufacturing facility
(150,000)
Fixed
Unit-level selling and admin. expenses
(28,000)
÷ 20,000
1.40
Division-level fixed selling and admin. exp.
(40,000)
Fixed
Chapter 13 Relevant Information for Special Decisions
Problem 13-28 (continued)
Next, compare differential revenues with avoidable cost.
Division B
Sales revenue (30,000 units x $30.00)
$900,000
Avoidable costs:
Unit-level manufacturing costs (30,000 units x $20.00)
(600,000)
Rent on manufacturing facility
(150,000)
Unit-level selling and admin. exp. (30,000 units x $1.40)
(42,000)
Division-level fixed selling and admin. expenses
(40,000)
Contribution to profit
$ 68,000
c. Given that Borris is paying $150,000 to lease the manufacturing facility for Division B,
the company could earn $170,000 by subleasing the manufacturing facility ($320,000 –
Problem 13-29
a. Since Lang doesn’t have to pay sales commissions in this situation, the company should
remove that item from consideration. All of the fixed expenses must be eliminated
from consideration because they cannot be avoided regardless of whether the special
order is accepted or rejected. The differential revenue and relevant (i.e., avoidable)
costs are shown below:
Revenue (5,000 units x $5.50)
$27,500
Variable costs:
Materials cost (5,000 x $2.25)
(11,250)
Labor cost (5,000 x $1.00)
(5,000)
Manufacturing overhead (5,000 x $1.00)
(5,000)
Shipping and handling (5,000 x $0.25)
(1,250)
Contribution margin
$ 5,000
Chapter 13 Relevant Information for Special Decisions
b. The revenue, shipping and handling, sales commissions, advertising costs, and general
company expenses must be eliminated from consideration because they do not differ
between the alternatives. The relevant information is as follows:
Decision
Make
Buy
Unit-level costs
Purchase price (40,000 x $5.60)
$224,000
Materials cost (40,000 x $2.25)
$ 90,000
0
Labor cost (40,000 x $1.00)
40,000
0
Manufacturing overhead (40,000 x $1.00)
40,000
0
Fixed expenses
Salary of production supervisor
60,000
0
Total cost
$230,000
$224,000
At 40,000 units, Lang should buy the calculators.
Problem 13-29 (continued)
Relevant data at 60,000 units of product:
Decision
Make
Buy
Unit-level costs
Purchase price (60,000 x $5.60)
$336,000
Materials cost (60,000 x $2.25)
$135,000
0
Labor cost (60,000 x $1.00)
60,000
0
Manufacturing overhead (60,000 x $1.00)
60,000
0
Fixed expenses
Salary of production supervisor
60,000
0
Total cost
$315,000
$336,000
At a volume of 60,000 units, it becomes cheaper to make the units than to buy them.
c. The general company expenses must be eliminated from consideration because they do
not differ between the alternatives. The differential revenue and avoidable costs are
shown below:
Decision
Chapter 13 Relevant Information for Special Decisions
Revenue (40,000 units x $9.00)
$360,000
Variable costs:
Materials cost (40,000 x $2.25)
(90,000)
Labor cost (40,000 x $1.00)
(40,000)
Manufacturing overhead (40,000 x $1.00)
(40,000)
Shipping and handling (40,000 x $0.25)
(10,000)
Sales commissions (40,000 x $1.00)
(40,000)
Contribution margin
140,000
Fixed expenses
Advertising costs
(20,000)
Salary of production supervisor
(60,000)
Impact on profitability
$ 60,000
Problem 13-29 (continued)
The analysis shows that the production and sale of calculators is contributing $60,000 toward
Problem 13-30
a. The historical cost of the old machine is a sunk cost and therefore is irrelevant. The
relevant (avoidable) costs for each alternative are shown below:
Decision
Keep Old
Replace With New
Opportunity cost of old machine
$200,000
Purchase price of the new machine
$240,000
Operating expense1
360,000
270,000
Total avoidable costs
$560,000
$510,000
1Operating expense of old $90,000 x 4 years = $360,000.
Operating expense of new $360,000 x .75 = $270,000.
The analysis suggests that the old machine should be replaced because Schulze Timber
b.
2015
2016
2017
2018
Total
Revenue
$224,000
$224,000
$224,000
$224,000
$896,000
Depreciation exp.
(80,000)
(80,000)
(80,000)
(80,000)
(320,000)
Operating exp.
(90,000)
(90,000)
(90,000)
(90,000)
(360,000)
Net income
$ 54,000
$ 54,000
$ 54,000
$ 54,000
$216,000
Chapter 13 Relevant Information for Special Decisions
c.
2015
2016
2017
2018
Total
Revenue
$224,000
$224,000
$224,000
$224,000
$896,000
Depreciation exp.
(60,000)
(60,000)
(60,000)
(60,000)
(240,000)
Operating exp.
(67,500)
(67,500)
(67,500)
(67,500)
(270,000)
Loss on disposal*
(120,000)
(120,000)
Net income (loss)
$(23,500)
$ 96,500
$ 96,500
$ 96,500
$266,000
Problem 13-30 (continued)
d. The computations shown in requirements b and c support the avoidable cost analysis
in Requirement a. The company will earn $50,000 more over the four years by replac-
ing the machine. However, the loss on disposal causes net income in 2015 to be lower
ATC 13-1
a. By eliminating 25 percent of its inventory items, Supervalu can reduce its costs by:
• Reducing the amount of warehouse space it needs to stock its inventory. The
• Reducing the record-keeping cost of keeping track of its inventory.
• Reducing the number of errors related to pricing its products. Having to price
multiple sizes of the same product can result in errors.
b. Per unit data must be calculated for sales and unit-level costs. These are (remember,
dollar amounts are in thousands):
Oat Flakes:
Sales $900,000 ÷ 450,000 = $2.0000
Chapter 13 Relevant Information for Special Decisions
Miscellaneous 6,750 ÷ 450,000 = $ .0150
Fiber Squares:
Sales $900,000 ÷ 450,000 = $2.0000
Cost of production 85,500 ÷ 450,000 = $ .1900
ATC 13-1 continued
Revised Product-line Earnings Statements
Annual Costs of Operating Each Product Line
Oat Flakes
Fiber
Squares
Total
Sales in units
500,000
500,000
1,000,000
Sales in dollars (1)
$1,000,000
$1,000,000
$2,000,000
Unit-level costs:
Cost of production
95,000
95,000
190,000
Sales commissions
13,000
13,000
26,000
Shipping and handling
22,500
20,000
42,500
Miscellaneous
7,500
5,000
12,500
Total unit-level costs
138,000
133,000
271,000
Product-level costs:
Supervisors salaries
9,600
7,200
16,800
Facility-level costs:
Rent (2)
125,000
125,000
250,000
Utilities (3)
120,625
120,625
241,250
Depreciation on equipment (4)
450,000
450,000
900,000
Allocated company-wide expenses (5)
28,125
28,125
56,250
Total facility-level costs
723,750
723,750
1,447,500
Total product cost
871,350
863,950
1,735,300
Profit on products
$128,650
$136,050
264,700
Sale of Corn Clusters equipment
60,000
Segment earnings
$324,700
Chapter 13 Relevant Information for Special Decisions
ATC 13-2
a. Task 1 The fixed costs are not relevant because they will remain the same regard-
less of whether the special order is accepted. The total unit-level incremental
costs that will be incurred if the special order is accepted are $592 (product
Task 2 The costs that could be avoided if the manufacturing process were to be
outsourced are the following:
Unit-level variable costs
Product materials cost (12,000 x $60)
$ (720,000)
Manufacturing overhead (12,000 x $2)
(24,000)
Fixed expenses
Research and development
(2,700,000)
Legal fees to assure product protection
(780,000)
Rental cost of manufacturing facility
(600,000)
Other manufacturing cost (salaries, utilities, etc.)
(744,000)
Total avoidable costs
$(5,568,000)
Task 3 If the division were eliminated, all costs except the allocated companywide
facility-level cost and the depreciation on production equipment (sunk cost)
ATC 13-2 (continued)
Revenue (12,000 units x $1,200)
$14,400,000
Unit-level variable costs
Product materials cost (12,000 x $60)
(720,000)
Installation labor cost (12,000 x $200)
(2,400,000)
Manufacturing overhead (12,000 x $2)
(24,000)
Shipping and handling (12,000 x $25)
(300,000)
Chapter 13 Relevant Information for Special Decisions
Sales commissions (12,000 x $300)
(3,600,000)
Nonmanufacturing miscellaneous costs (12,000 x $5)
(60,000)
Contribution margin (12,000 x $608)
7,296,000
Fixed costs
Research and development
(2,700,000)
Legal Fees to assure product protection
(780,000)
Advertising costs
(1,200,000)
Rental cost of manufacturing facility
(600,000)
Other manufacturing cost (salaries, utilities, etc.)
(744,000)
Division-level facility sustaining cost
(1,730,000)
Net income (loss)
$ (458,000)
Since the avoidable costs exceed the incremental revenue, the division should be
eliminated.
ATC 13-2 (continued)
Revenue (13,000 units x $1,200)
$15,600,000
Unit-level variable costs
Product materials cost (13,000 x $60)
(780,000)
Installation labor cost (13,000 x $200)
(2,600,000)
Manufacturing overhead (13,000 x $2)
(26,000)
Shipping and handling (13,000 x $25)
(325,000)
Sales commissions (13,000 x $300)
(3,900,000)
Nonmanufacturing miscellaneous costs (13,000 x $5)
(65,000)
Contribution margin (13,000 x $608)
7,904,000
Fixed costs
Research and development
(2,700,000)
Legal Fees to assure product protection
(780,000)
Advertising costs
(1,200,000)
Rental cost of manufacturing facility
(600,000)
Other manufacturing cost (salaries, utilities, etc.)
(744,000)
Division-level facility sustaining cost
(1,730,000)
Net income
$150,000
b.
Chapter 13 Relevant Information for Special Decisions
(1) All variable costs are not always relevant. For example, assume that the special
order customer approaches management directly, thereby eliminating the need to
Chapter 13 Relevant Information for Special Decisions
ATC 13-2 (continued)
(2) Research and development costs are relevant because they are not incurred if the
oriented.
(3) Increases in volume cause the total contribution margin to increase. Accordingly,
more margin is available to cover fixed costs or to contribute to profitability.
ATC 13-3
a.
• Declining volume of mail.
• Inability to raise prices beyond inflation rate.
b. In 2011, first class mail comprised 43.8% of volume and 66.8% of profit.
these costs are fixed.
d. A 1% increase in volume is estimated to increase revenue by $0.6 billion and profit by
$0.2 billion, while a 1% increase in price revenue by $0.3 billion and profit by $0.4 bil-
volume.
e. Changes proposed by the USPS management include:
The proposed changes are estimated to produce cost savings of $20 billion per year, but $10
billion of these savings depend on changes that require legislative approval.
Chapter 13 Relevant Information for Special Decisions
ATC 13-4
Each memo will be different. The instructor should evaluate responses on the basis of
logic. Some representative arguments for each requirement are listed below as examples.
a. It is the incompetence of the state that causes the full cost of providing collection
b. The State Department of Revenue is required to incur costs on behalf of the state.
ATC 13-5
b. The $110,000 purchase price is a sunk cost. The current market price of $75,000 is an
c. Mr. Dillworth’s conclusion is not supported by quantitative analysis. The opportunity
cost of holding on to the old site is $75,000 while the cost of acquiring the new lot is
d. While interpretations may vary, there are at least three standards that could be
considered to be violated by Mr. Dillworth’s refusal to disclose the alternative site
