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Problem 25-5B (55 minutes)
Part 1
Product R
Product T
Selling price per unit .....................................................
$ 60
$ 80
Variable costs per unit ..................................................
20
45
Contribution margin per unit ........................................
$ 40
$ 35
Machine hours to produce 1 unit ................................
0.4
1.0
Contribution per machine hour
(or contribution/[hours per unit]) ..............................
$100
$ 35
Part 2
Sales Mix Recommendation To the extent allowed by production and
market constraints, the company should produce as much of Product R as
possible. With a single shift yielding 176 hours per month (8 x 22), the
company can produce these units of Product R:
Contribution Margin at Recommended Sales Mix
Problem 25-5B (Continued)
Part 3
Sales Mix Recommendation with Second Shift If the second shift is added,
the maximum possible output of R will double:
However, this level of output exceeds the company’s market constraint of
550 units of Product R per month. This means the company should
produce 550 units of Product R, and commit the remainder of the
productive capacity to Product T. This is computed as follows:
Units of Product R ............................................................
= 550 units per month
Hours per unit ...................................................................
0.4
Hours used for Product R ................................................
220
hours
Hours available for Product T (352 hrs - 220 hrs) .........................
132
hours
The output of Product T with 132 production hours is
Contribution Margin at This Sales Mix
Units
Contr./unit
Total
From R ................................................................
550
$40
$22,000
From T ................................................................
132
35
4,620
Less extra shift costs ..........................................
(3,250)
Total contribution margin ................................
$23,370
Management decision This amount of $23,370 exceeds the contribution
0.4 hrs. per unit
Problem 25-5B (Continued)
Part 4
Sales Mix Recommendation By incurring additional marketing cost, the
company can relax the market constraint for sales of Product R up to the
point where 675 units can be sold. This means the company can produce
675 units of Product R, and commit the remainder of its productive
capacity to Product T. These computations are:
Units of Product R ............................................................
= 675 units per month
Hours per unit ...................................................................
0.4
Hours used for Product R ................................................
270
hours
Hours available for Product T
(352 hrs less 270 hrs) ....................................................
82
hours
The output of Product T with 82 production hours is
Contribution Margin with This Sales Mix
Units
Contr./unit
Total
From R ................................................................
675
$40
$27,000
From T ................................................................
82
35
2,870
Less extra shift costs ..........................................
(3,250)
Less extra marketing costs ................................
(4,500)
Total contribution margin ................................
$22,120
Fundamental Accounting Principles, 21st Edition
1510
Problem 25-6B (60 minutes)
Part 1
ESME COMPANY
Analysis of Expenses under Elimination of Department Z
Total
Eliminated
Continuing
Expenses
Expenses
Expenses
Cost of goods sold ..............................................
$586,400
$125,100
$461,300
Direct expenses
Advertising .........................................................
30,000
3,000
27,000
Store supplies used ...........................................
7,000
1,400
5,600
Depreciation of store equip. .............................
21,000
21,000
Allocated expenses
Sales salaries* ....................................................
93,600
46,800
46,800
Rent expense......................................................
27,600
27,600
Bad debts expense ............................................
25,000
4,000
21,000
Office salary* ......................................................
26,000
26,000
Insurance expense* ...........................................
5,600
910
4,690
Miscellaneous office expenses* .......................
4,200
750
3,450
Total expenses .....................................................
$826,400
$181,960
$644,440
Problem 25-6B (Continued)
Part 2
ESME COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department Z
Sales ......................................................................................................
$700,000
Cost of goods sold ..............................................................................
461,300
Gross profit from sales .......................................................................
238,700
Operating expenses
Advertising .........................................................................................
27,000
Store supplies used ..........................................................................
5,600
Depreciation of store equipment .....................................................
21,000
Sales salaries .....................................................................................
59,800*
Rent expense .....................................................................................
27,600
Bad debts expense ............................................................................
21,000
Office salary .......................................................................................
13,000*
Insurance expense ............................................................................
4,690
Miscellaneous office expenses ........................................................
3,450
Total operating expenses ...................................................................
183,140
Net income ............................................................................................
$ 55,560
* Office salary reassignment
Total
Sales
Office
Salaries
Salaries
Salary
Sales clerks ................................................................
$46,800
$46,800
Office clerk ................................................................
26,000
$26,000
Reassign office clerk to sales ................................
0
13,000
(13,000)
Revised salaries................................................................
$72,800
$59,800
$13,000
Fundamental Accounting Principles, 21st Edition
1512
Problem 25-6B (Continued)
Part 3
ESME COMPANY
Reconciliation of Combined Income with Forecasted Income
Combined net income ...........................................................................
$ 48,600
Less Dept. Z's lost sales ........................................................................
(175,000)
Plus Dept. Z’s eliminated expenses ......................................................
181,960
Forecasted net income ...........................................................................
$ 55,560
ANALYSIS
Department Z's avoidable expenses of $181,960 are $6,960 greater than its
SERIAL PROBLEM — SP 25
Serial Problem, Success Systems (50 minutes)
COMPUTING NET CASH FLOWS FROM NET INCOME
Net income
Cash flows
Sales ................................................................................
$375,000
$375,000
Materials, labor & overhead ..........................................
(200,000)
(200,000)
Depreciation* ................................................................
(50,000)
Selling and administrative ............................................
(37,500)
(37,500)
Pretax income ................................................................
87,500
Income taxes (30%) .......................................................
(26,250)
(26,250)
Net income ................................................................
$ 61,250
Net cash flows ................................................................
$111,250**
* Depreciation expense = $300,000 / 6 years = $50,000
** This equals the net income plus the depreciation expense ($61,250 + $50,000 = $111,250).
2. Accounting rate of return = = 40.8%
$111,250
$61,250
$150,000*
Reporting in Action — BTN 25-1
1. The internal rate of return (given here as 10%) is the rate which yields a
net present value of zero for an investment. The annuity factor for 10
periods and a discount rate of 10% is 6.1446. This means we can solve
for the amount of annual cash flows as follows:
of $345,018.39 per year for 10 years.
2. Answer depends on the information obtained.
Comparative Analysis — BTN 25-2
1. Answer depends on the newspaper selected and its price for advertising
2. If we assume that the average product of Polaris and Arctic Cat sells for
around $12,000, then the contribution margin per product is about
$2,400 (using the 20% stated assumption in the problem). This would
3.
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Primary points for discussion of the importance of effective
advertising:
(a) Students need to recognize that advertising is very expensive
and crucial to most merchandisers.
(b) The students should also recognize that an advertisement
must be effective to justify its cost and the related product mix
decision of managers.
(c) In most cases the advertisement must generate several
thousand dollars in sales to pay for the advertisement.
Ethics Challenge — BTN 25-3
1. Present value of $100 to be received in 10 years assuming a 12%
discount rate is approximately $32. This is computed as $100 x 0.322.
2. We need to be concerned about any project with expected long-term
cash inflows. This is especially the case if the larger cash inflows are
Communicating in Practice — BTN 25-4
Instructor note: Answers will vary, but responses should address the questions
asked and include some discussion of the following points for each method.
Payback Period
Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Measurement
basis
• Cash flows
• Accrual income
• Cash flows
• Profitability
• Cash flows
• Profitability
Measurement
unit
• Periods
• Percent
• Dollars
• Percent
Strengths
• Easy to
understand
• Allows
comparison of
projects
• Easy to
understand
• Allows
comparison of
projects
• Reflects
time value
of money
• Reflects
different
risk levels
over
project’s life
• Reflects
time value
of money
• Allows
compari-
sons of
dissimilar
projects
Limitations
• Ignores time
value of money
• Ignores cash
flows after
payback period
• Ignores time
value of
money
• Ignores annual
rates over life
of project
• Difficult to
compare
dissimilar
projects
• Ignores
varying
risk levels
over life of
project
Taking It to the Net — BTN 25-5
1. According to Bizbrim, the business processes typically outsourced are
2. Companies who are outsourcing their business processes are able to
Teamwork in Action — BTN 25-6
Instructor note: Answers will vary across students. Yet the examples, while
different, should capture similar qualitative factors.
SAMPLE SOLUTION
Qualitative Factors
• Competition has a new, more efficient and effective system.
• Need to replace old system.
Entrepreneurial Decision — BTN 25-7
1. Charlie could use payback period, accounting rate of return, net present
2. For these tools, Charlie needs estimates of how much the bakery and
warehousing center will cost, both upfront and for recurring (e.g.
3.
Payback Period
Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Advantages
• Easy to
understand
• Allows
comparison of
projects
• Easy to
understand
• Allows
comparison of
projects
• Reflects
time value
of money
• Reflects
different
risk levels
over
project’s life
• Reflects
time value
of money
• Allows
compari-
sons of
dissimilar
projects
Disadvantages
• Ignores time
value of money
• Ignores cash
flows after
payback period
• Ignores time
value of
money
• Ignores annual
rates over life
of project
• Difficult to
compare
dissimilar
projects
• Ignores
varying
risk levels
over life of
project
Hitting the Road — BTN 25-8
1. Answers will vary among students.
Sample Example
For illustrative purposes, one sample solution would appear as follows:
Lease terms—$400 per month for 35 months; plus $10,000 final
payment at the end of 35 months; 12% annual interest rate.
To compute the present value of the lease payments
PV of 35 payments of $400 per month discounted
at 1% (12%/12 months) ................................................................
$11,763*
PV of $10,000 final payment at end of 35 months
discounted at 1% ............................................................................
7,059**
Total PV of lease ................................................................................
$18,822
* $400 x 29.4086 (from Table B.3)
** $10,000 x 0.7059 (from Table B.1)
Purchase terms—$16,500
2. In most cases the students will find it more costly to lease an
automobile than to purchase it outright. Also, getting the salesperson
Global Decision — BTN 25-9
There are probably several reasons why KTM would take on this project.
One reason is that the lower ongoing packaging costs can generate some
