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PROBLEM 21.6B
FIRE CODE
a. Incremental benefit of each option, in total and on a per-unit basis:
Sell as Repackage Sell to
Scrap and Sell Foreign Buyer
Incremental revenue per unit 20$ 18$ 17$
b.
Based solely on this analysis, Fire Code should sell the detectors to the foreign buyer.
25 Minutes, Medium
Note: The unit costs given in the problem are not relevant because they are sunk costs.
There are several nonfinancial issues that management should consider:
PROBLEM 21.8B
HOME RUN CORPORATION
a.
Bats Gloves Balls
Sellin
g
p
rice 48$ 80$ 12$
Direct labo
r
8 24 4
Direct materials 14 10 1
V
ariable overhead 1 1 1
Contribution margin per uni
t
25$ 45$ 6$
Direct labor hours
p
er unit
(
direct labor cos
t
p
er unit ÷ $8
p
er hour
)
1 3 0.50
Contribution mar
g
in
p
er direct labor hou
r
25$ 15$ 12$
Total hours re
q
uired to meet demand o
f
60,000 units, 20,000 units, and 100,000
units for bats, gloves, and balls, respectivel
y
60,000 60,000 50,000
20 Minutes, Medium
To maximize operating income, the company should produce those products that provide
SOLUTIONS TO CRITICAL THINKING CASE
S
CASE 21.1
I KNEW THA
T
1.
35 Minutes, Medium
The doctor’s or dentist’s time (direct labor) is the limiting factor. (This is why most doctors
no longer make “house calls.”)
To increase contribution margin per hour, the practitioner tries to see as many patients as
CASE 21.1
I KNEW THAT (continued)
4.
5.
Also, the contribution margin per acre is increased by building “upscale” projects, which
provide higher contribution margins. (This explains why “affordable housing”
developments tend to be built only in areas in which land is readily available.)
For a market of any given size, there are several strategies for increasing contribution
margin per square foot of shelf space. An obvious strategy is to sell more of those products
with the highest profit margins. These products might be placed at the front of each aisle,
The output of many residential builders is limited by available land. Contribution margin
per acre is increased by building higher density projects, meaning more housing units per
In the service department of an auto dealership, skilled labor hours (mechanics’ time)
usually is the factor limiting potential. Output per hour can be increased by providing
mechanics with highly automated equipment, such as impact tools and computer
diagnostic equipment. In addition, time can be saved by simply replacing nonfunctional
CASE 21.2
MCFRIENDLY SOFTWARE
a.
(2)
c.
d.
The $10 million opportunity cost of not accepting Jupiter’s offer is known to McFriendly’s
management at the time of making the decision. However, the opportunity cost of accepting
the offer—that is, the profits foregone by not producing and marketing the software—can
only be estimated.
There are unlimited opportunity costs, just as there are unlimited alternative possible
courses of action. For example, McFriendly’s management might consider such alternatives
as developing and marketing the software in a joint venture with Jupiter, licensing the
software to Jupiter for a percentage of Jupiter’s sales of the product, selling the software
rights to someone other than Jupiter, or marketing the software through channels other than
mail order. Every possible alternative course of action has its own opportunity costs. Thus,
management wants to be sure that it is aware of the most profitable alternatives.
15 Minutes, Medium
Yes, the $10 million is “relevant” because it represents revenue that varies between
If McFriendly turns down the offer, its opportunity cost is the $10 million that it could
have received by selling the rights to the software.
Opportunity costs relate to the action not taken, rather than the action that is taken. Thus,
opportunity costs are not recorded in the accounting records.
CASE 21.3
INTERNET
a.
Specific incremental decisions may vary by product line, but would likely include special
order
,
make or bu
y,
and
j
oint
p
roduct decisions.
20 Minutes, Easy
THE DOW CORPORATION
20 Minutes, Medium CASE 21.
4
SEC ENFORCEMENT FINES
Answers among groups will vary significantly. However, some of the relevant costs and
earnings that should be mentioned include the impact that reported financial statements will
have on the manager’s future out-of-pocket costs and future earnings potential. For example, if
ETHICS, FRAUD & CORPORATE GOVERNANCE
