Problem 10-18B (30 minutes)
1.
Contribution margin lost if the tour is discontinued ..
$(2,640)
Less tour costs that can be avoided if the tour is
discontinued:
Tour promotion …………………………………………
$680
Fee, tour guide …………………………………………
720
Fuel for bus ……………………………………………..
160
Overnight parking fee, bus…………………………..
80
Room & meals, bus driver and tour guide ……….
190
1,830
Net decrease in profits if the tour is discontinued ….
$ (810)
The following costs are not relevant to the decision:
Cost
Reason
Salary of bus driver
The drivers are all on salary and there
would be no change in the number of
drivers on the payroll.
Depreciation of bus
Depreciation due to wear and tear is
negligible and there would be no
change in the number of buses in the
fleet.
Liability insurance, bus
There would be no change in the
number of buses in the fleet.
Bus maintenance & preparation
There would be no change in the size
of the maintenance & preparation staff.
Problem 10-18B (continued)
Alternative Solution:
Keep
the
Tour
Drop
the Tour
Difference:
Net
Operating
Income
Increase or
(Decrease)
$3,300
$ 0
$(3,300)
660
0
660
2,640
0
(2,640)
680
0
680
360
360
0
720
0
720
160
0
160
360
360
0
210
210
0
80
0
80
190
0
190
230
230
0
2,990
1,160
1,830
$ (350)
$(1,160)
$ (810)
2. The goal of increasing average seat occupancy could be accomplished
by dropping tours like the Historic Mansions tour with lower-than-
average seat occupancies. This could reduce profits in at least two ways.
tours.
Problem 10-19B (15 minutes)
1.
Per 16-
Ounce T–
Bone
Revenue from further processing:
Selling price of one filet mignon (6 ounces × $3.60
per pound/16 ounces per pound) ……………………..
$1.35
Selling price of one New York cut (8 ounces × $3.20
per pound/16 ounces per pound) ……………………..
1.60
Total revenue from further processing ……………………
2.95
Less revenue from one T-bone steak ……………………..
2.40
Incremental revenue from further processing …………..
0.55
Less cost of further processing ……………………………..
0.15
Profit per pound from further processing ………………..
$0.40
2. The T-bone steaks should be processed further into filet mignon and the
New York cuts. This will yield $.40 per pound in added profit for the
Problem 10-20B (45 minutes)
1. Product MJ-7 has a contribution margin of $16 per gallon ($36 – $20 =
$16). If the plant closes, this contribution margin will be lost on the
28,000 gallons (14,000 gallons per month × 2 = 28,000 gallons) that
could have been sold during the two-month period. However, the
company will be able to avoid some fixed costs as a result of closing
down. The analysis is:
Contribution margin lost by closing the plant for
two months ($16 per gallon × 28,000 gallons) .
$(448,000)
Costs avoided by closing the plant for two months:
Fixed manufacturing overhead cost
($60,000 × 2 months = $120,000) …………….
$120,000
Fixed selling costs
($320,000 × 12% × 2 months) …………………
76,800
196,800
Net disadvantage of closing, before start-up
costs ……………………………………………………..
(251,200)
Add start-up costs ………………………………………
(12,000)
Disadvantage of closing the plant …………………..
$(263,200)
No, the company should not close the plant; it should continue to
operate at the reduced level of 14,000 gallons produced and sold each
month. Closing will result in a $263,200 greater loss over the two-month
period than if the company continues to operate. Additional factors are
the potential loss of goodwill among the customers who need the
14,000 gallons of MJ-7 each month and the adverse effect on employee
morale. By closing down, the needs of customers will not be met (no
inventories are on hand), and their business may be permanently lost to
another supplier.
Problem 10-20B (continued)
Alternative Solution:
Plant Kept
Open
Plant
Closed
Difference—
Net
Operating
Income
Increase
(Decrease)
Sales (14,000 gallons × $36 per
gallon × 2) …………………………...
$1,008,000
$ 0
$(1,008,000)
Less variable expenses (14,000
gallons × $20 per gallon × 2) ……
560,000
0
560,000
Contribution margin …………………..
448,000
0
(448,000)
Less fixed costs:
Fixed manufacturing overhead
cost ($221,000 × 2;
$161,000 × 2) …………………….
442,000
322,000
$120,000
Fixed selling cost ($320,000 × 2;
$320,000 × 88% × 2) …………..
640,000
563,200
76,800
Total fixed cost …………………………
1,082,000
885,200
196,800
Net operating loss before start-up
costs ……………………………………
(634,000)
(885,200)
(251,200)
Start-up costs …………………………..
(12,000)
(12,000)
Net operating loss ……………………..
$ (634,000)
$(897,200)
$(263,200)
Problem 10-20B (continued)
2. Ignoring the additional factors cited in part (1) above, the company
should be indifferent between closing down or continuing to operate if
the level of sales drops to 11,550 gallons (5,775 gallons per month)
over the two-month period. The computations are:
Cost avoided by closing the plant for two months
(see above) …………………………………………………
$196,800
Less start-up costs ………………………………………….
12,000
Net avoidable costs …………………………………………
$184,800
Sales (11,550 gallons × $36 per gallon) …….
Less variable expenses (11,550 gallons ×
Contribution margin ………………………………
Less fixed expenses:
Total fixed expenses ………………………………
Start-up costs ………………………………………
Total costs …………………………………………..
Net operating loss …………………………..…….
Problem 10-21B (30 minutes)
1.
Incremental revenue:
Fixed fee (9,300 pairs × €5 per pair) ……………
€ 46,500
Reimbursement for costs of production:
(Variable production cost of €14 plus fixed
overhead cost of €4 equals €18 per pair;
9,300 pairs × €18 per pair) ………………………
167,400
Total incremental revenue ………………………….
213,900
Incremental costs:
Variable production costs (9,300 pairs × €14
per pair) ………………………………………………
130,200
Increase in net operating income …………………..
€ 83,700
2.
Sales revenue through regular channels
(9,300 pairs × €34 per pair)* ……………………..
€316,200
Sales revenue from the army (above) ……………..
213,900
Decrease in revenue received ………………………..
102,300
Less variable selling expenses avoided if the
army’s offer is accepted (9,300 pairs × €2 per
pair) ……………………………………………………..
18,600
Net decrease in net operating income with the
army’s offer …………………………………………….
€ 83,700
*This assumes that the sales through regular channels can be recovered
after the special order has been fulfilled. This may not happen if regular
customers who are turned away to fill the special order are permanently
lost to competitors.
Problem 10-22B (60 minutes)
1. The fixed overhead costs are common and will remain the same
regardless of whether the cartridges are produced internally or
purchased outside. Hence, they are not relevant. The variable
manufacturing overhead cost per box of pens is $0.30, as shown below:
Total manufacturing overhead cost per box of pens …
$0.60
Less fixed manufacturing overhead ($30,000 ÷
100,000 boxes) …………………………..…………………
0.30
Variable manufacturing overhead cost per box ………..
$0.30
Direct materials ……………………………………………….
$1.30
Direct labor …………………………………………………….
1.10
Variable manufacturing overhead …………………………
0.30
Total variable cost per box ………………………………….
$2.70
Direct materials ($1.30 × 80%) …………………………..
$1.04
Direct labor ($1.10 × 90%) ………………………………..
0.99
Variable manufacturing overhead ($0.30 × 90%) …….
0.27
Purchase of cartridges ……………………………………….
0.60
Total variable cost per box ………………………………….
$2.90
Cost avoided by purchasing the cartridges:
Direct materials ($1.30 × 20%) …………………………
$0.26
Direct labor ($1.10 × 10%) ………………………………
0.11
Variable manufacturing overhead ($0.30 × 10%) ….
0.03
Total costs avoided …………………………………………
$0.40
Cost of purchasing the cartridges …………………………
$0.60
Cost savings per box by making cartridges internally ..
$0.20
Problem 10-22B (continued)
2. The company would not want to pay any more than $0.40 per box
3. The company has three alternatives for obtaining the necessary
cartridges. It can:
#1
Produce all cartridges internally.
#2
Purchase all cartridges externally.
#3
Produce the cartridges for 100,000 boxes internally and purchase
the cartridges for 50,000 boxes externally.
The costs under the three alternatives are:
Alternative #1—Produce all cartridges internally:
Variable costs (150,000 boxes × $0.40 per box) ……….
$60,000
Fixed costs of adding capacity ………………………………
39,000
Total cost …………………………………………………………
$99,000
Alternative #2—Purchase all cartridges externally:
Variable costs (150,000 boxes × $0.60 per box) …………
$90,000
Alternative #3—Produce 100,000 boxes internally, and
purchase 50,000 boxes externally:
Variable costs:
100,000 boxes × $0.40 per box …………………………
$40,000
50,000 boxes × $0.60 per box ………………………….
30,000
Total cost …………………………………………………………
$70,000
Problem 10-22B (continued)
Or, in terms of total cost per box of pens, the answer would be:
Alternative #1—Produce all cartridges internally:
Variable costs (150,000 boxes × $2.70 per box) ……….
$405,000
Fixed costs of adding capacity ………………………………
39,000
Total cost …………………………………………………………
$444,000
Alternative #2—Purchase all cartridges externally:
Variable costs (150,000 boxes × $2.90 per box) ……….
$435,000
Alternative #3—Produce the cartridges for 100,000
boxes internally, and purchase the cartridges for
50,000 boxes externally:
Variable costs:
100,000 boxes × $2.70 per box ……………………….
$270,000
50,000 boxes × $2.90 per box …………………………
145,000
Total cost ……………………………………………………….
$415,000
Thus, the company should accept the outside supplier’s offer, but only
for the cartridges for 50,000 boxes.
4. In addition to cost considerations, the company should take into account
the following factors:
a) The ability of the supplier to meet required delivery schedules.
Problem 10-23B (60 minutes)
1. The simplest approach to the solution is:
Gross margin lost if the store is closed …….
$(241,000)
Less costs that can be avoided:
Direct advertising ……………………………..
$42,000
Sales salaries …………………………………..
42,000
Delivery salaries ……………………………….
9,500
Store rent ……………………………………….
63,000
Store management salaries (new
employee would not be hired to fill
vacant position at another store) ……….
21,000
General office salaries ……………………….
9,000
Utilities …………………………………………..
32,000
Insurance on inventories (0.67 × $8,800)
5,867
Employment taxes* …………………………..
12,225
236,592
Decrease in company net operating income
if the Downtown Store is closed …………..
$ (4,408)
*Salaries avoided by closing the store:
Sales salaries ……………………………………………….
$42,000
Delivery salaries ……………………………………………
9,500
Store management salaries ……………………………..
21,000
General office salaries …………………………………….
9,000
Total salaries ………………………………………………..
81,500
Employment tax rate ……………………………………..
× 15%
Employment taxes avoided ………………………………
$12,225
2. The Downtown Store should not be closed. If the store is closed, overall
Problem 10-23B (continued)
3. The Downtown Store should be closed if $400,000 of its sales are picked
up by the Uptown Store. The net effect of the closure will be an increase
in overall company net operating income by $171,592 per quarter:
Gross margin lost if the Downtown Store is closed …………..
$(241,000)
Gross margin gained at the Uptown Store:
$400,000 × 44% …………………………………………………..
176,000
Net loss in gross margin …………………………………………….
(65,000)
Costs that can be avoided if the Downtown Store is closed
(part 1) …………………………..…………………………………..
236,592
Net advantage of closing the Downtown Store ……………….
$171,592
Problem 10-24B (60 minutes)
1.
Selling price per unit …………………..
$40
Variable expenses per unit* …………
29
Contribution margin per unit ………..
$11
Increased unit sales (87,000 × 30%) ………………..
26,100
Contribution margin per unit …………………………..
× $11
Incremental contribution margin ………………………
$287,100
Less added fixed selling expense ……………………..
130,000
Incremental net operating income ……………………
$157,100
2.
Variable production cost per unit ……………………..
$24.30
Import duties, etc. ($13,050 ÷ 26,100 units) ……..
0.50
Shipping cost per unit ……………………………………
1.30
Break-even price per unit ……………………………….
$26.10
3. If the plant operates at 25% of normal levels, then only 5,438 units will
be produced and sold during the three-month period:
87,000 units per year × 3/12 = 21,750 units.
21,750 units × 25% = 5,438 units produced and sold.
Fixed costs that can be avoided if the plant is closed:
Net disadvantage of closing the plant ……………