Ex. 21.5
(continued) With the special order, monthly profits would be:
($26 – $19.50) × 30,000 crates + ($22.00 – $20.00) × 5,000 – $122,000 = $83,000.
The difference between these monthly operating profit numbers ($105,500 –
Ex. 21.8
Ex. 21.9
Android Bio-Mutant Cyclops
Ex. 21.10 a.
In addition to contributing $2,800 to profitability, scrapping the defective units
To maximize its total contribution margin, the company should produce and sell the
product with the highest contribution margin per direct labor hour. As shown
below, this product is Bio-Mutant.
It is $100 more profitable to sell Amoxiphore at the split-off point than it is to
process it further ($2,700 versus $2,600). It is also $100 more profitable to sell
Benidrate at the split-off point ($2,400 versus $2,300). Supporting calculations
Ex. 21.10
(continued) b.
Ex. 21.11 a.
Molecue: $22 × 3,000 $ 66,000
Borphue: $15 × 10,000 150,000
Polygard: $5.50 × 1,000 5,500
The profitability of the entire joint process can be determined as follows:
The primary nonfinancial issue in this problem is an ethical consideration.
If Amoxiphore is sold at the split-off point, users of the drug suffer from
nausea and headaches. Even with these side effects, demand for the drug is
Revenues:
Ex. 21.12 a.
Less: Direct Materials ………………………… $ 6
Direct labor ………………………………… 4
Ex. 21.13
$ 960,000
At a current operating level of 100,000 units, the company will not have to turn
away any of its regular customers in order to fill the special order. If it wishes
to increase operating income by $2 per unit included in the special order, it
only needs to generate a contribution margin per unit of $2. Thus, the selling
Estimated increase in operating income:
(10,000 units × 12 mo. × $8.00) …………………
Incremental costs:
Incremental revenue
Ex. 21.14
a.
Life Vests Tow Ropes Water Skis
Selling price 58$ 25$ 175$
Direct labo
r
20 10 80
Direct materials 12 3 75
V
ariable overhead 6 2 4
Contribution margin per uni
t
20$ 10$ 16$
Direct labor hours per unit (direct labor cos
t
per unit ÷ $10 per hour) 2 1 8
Contribution margin per direct labor hou
r
10$ 10$ 2$
Total hours required to meet demand o
f
25,000 units, 15,000 units, and 5,000
units for vests, ropes, and skis, respectivel
y
50,000 15,000 40,000
b.
To maximize operating income, the company should produce those products that provide
the greatest contribution margin per unit of scarce resource (direct labor hours). Thus, as
shown above, it would have to produce life vests and tow ropes, each of which have a
contribution margin per direct labor hour of $10. However, to do so would use the entire
65,000 hours of direct labor available (50,000 + 15,000), leaving no labor hours for the
production of skis.
The least profitable product (skis) may, to a limited extent, create a demand for life vests
and ropes. However, due to the large number of vests and ropes the company anticipates
Ex. 21.15 Home Depot’s management evaluates many relevant costs and revenues before
taking part in a particular Team Depot service project. For instance, they
probably consider any out-of-pocket wage expenses for employees who spend time
planning and organizing volunteer activities during work hours. In addition,
SOLUTIONS TO PROBLEMS SET
A
PROBLEM 21.1
A
D. LAWRANC
E
a. $ 800,000
b.
A low-priced jacket that is identical to D. Lawrance jackets but that is sold through
discount stores may lessen D. Lawrance’s reputation for quality goods.
Relevant considerations other than expected effect on operating income may include:
(2)
25 Minutes, Easy
Effect of accepting the special order:
Less: Incremental costs:
Incremental revenue ($80 × 10,000 units) …………………
a. Make the Buy the Incremental
Motors Motors Analysi
s
Manufacturing costs for 12,000 motors: 96,000$ 96,000$
120,000 120,000
30 Minutes, Medium
Factory overhead:
PROBLEM 21.2A
EASY USE TOOL CO.
Direct materials
Direct labor
a. Make the Buy the Incremental
Thermostats Thermostats Analysis
(1) $168,000 – ($168,000 × 60%) = $67,200
(2) $144,000 – $9,200 = $134,800
b. Effect of alternative use of factory space:
Introducing the alternative use of factory space changes the initial conclusion reached in part a.
If management can use the factory space to generate an additional $108,000 of contribution
margin by producing additional heat-flow regulators, a net benefit of $26,000 per year will
result from buying thermostats from the outside source and using the factory space to produce
heat-flow regulators.
30 Minutes, Medium
Based upon the above analysis, management will save $82,000 by continuing to manufacture
thermostats rather than buying them from an outside source.
PROBLEM 21.3A
PARSONS PLUMBING & HEATING
a. Schedule showing contribution margin per machine-hour for each product:
Contribution margin per 31$ 21$
30 Minutes, Medium
Model 100 Model 101
PROBLEM 21.4A
INSITEFUL INSTRUMENTS