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Problem 10-24B (continued)
Alternative approach:
Keep the
Plant Open
Close the
Plant
Sales (5,438 units × $40 per unit) .........
$ 217,520
$ 0
Variable expenses
(5,438 units × $29 per unit) ...............
157,702
0
Contribution margin ..............................
59,818
0
Fixed expenses:
Fixed manufacturing overhead cost:
$522,000 × 3/12 .............................
130,500
$522,000 × 3/12 × 70% .................
91,350
Fixed selling expense:
$391,500 × 3/12 .............................
97,875
$391,500 × 3/12 × 2/3 ...................
65,250
Total fixed expenses .............................
228,375
156,600
Net operating income (loss) ..................
$(168,557)
$(156,600)
4. The relevant cost is $4.70 per unit, which is the variable selling expense
per Wim. Since the blemished units have already been produced, all
5. The costs that can be avoided by purchasing from the outside supplier are
relevant. These costs are:
Variable production costs ..............................................
$24.30
Fixed manufacturing overhead cost ($522,000 × 70% =
$365,400; $365,400 ÷ 87,000 units) ...........................
4.20
Variable selling expense ($4.70 × 60%) .........................
2.82
Total avoidable cost ......................................................
$31.32
Problem 10-25B (75 minutes)
1. The $2.00 per unit general overhead cost is not relevant to the decision
because the total general company overhead cost will be the same
regardless of whether the company decides to make or buy the
subassemblies. Also, the depreciation on the old equipment is not a
relevant cost because it represents a sunk cost and the old equipment is
Problem 10-25B (continued)
2. a. Note that unit costs for both supervision and equipment rental will
change if the company needs 60,000 subassemblies each year. These
fixed costs will be spread over a larger number of units, thereby
decreasing the cost per unit.
Differential
Costs Per Unit
Total Differential
Costs—60,000 Units
Make
Buy
Make
Buy
Outside supplier’s price ..........
$7.00
$420,000
Direct materials .....................
$1.57
$ 94,200
Direct labor ...........................
2.80
168,000
Variable overhead ..................
0.63
37,800
Supervision
($30,000 ÷ 60,000 units) ....
0.50
30,000
Equipment rental
($90,000 ÷ 60,000 units) ....
1.50
90,000
Total .....................................
$7.00
$7.00
$420,000
$420,000
Difference .............................
$0
$0
The company would be indifferent between the two alternatives if
60,000 subassemblies were needed each year.
Problem 10-25B (continued)
b. Again, notice that the unit costs for both supervision and equipment
rental decrease with the greater volume of units.
Differential
Costs Per
Unit
Total Differential
Costs—70,000 Units
Make
Buy
Make
Buy
Outside supplier’s price ..........
$7.00
$490,000
Direct materials.....................
$1.57
$109,900
Direct labor...........................
2.80
196,000
Variable overhead .................
0.63
44,100
Supervision
($30,000 ÷ 70,000 units) ....
0.43
30,000
Equipment rental
($90,000 ÷ 70,000 units) ....
1.29
90,000
Total ....................................
$6.71
$7.00
$470,000
$490,000
Difference in favor of making ................................
$0.29
$20,000
The company should rent the new equipment and make the
subassemblies if 70,000 units per year are needed.
Problem 10-25B (continued)
3. Other factors that the company should consider include:
a. Will volume in future years increase, or will it remain constant at
50,000 units per year? (If volume increases, then renting the new
equipment becomes more desirable, as shown in the computations
above.)
Problem 10-26B (45 minutes)
1. Only the avoidable costs are relevant in a decision to drop the Model C3
lawn chair product. The avoidable costs are:
Direct materials .....................................................
R122,800
Direct labor ...........................................................
72,800
Fringe benefits (20% of direct labor) ......................
14,560
Variable manufacturing overhead ...........................
4,400
Product manager’s salary .......................................
10,000
Sales commissions (5% of sales) ...........................
15,400
Fringe benefits (15% of salaries and commissions) .
3,810
Shipping ...............................................................
14,130
Total avoidable cost ...............................................
R257,900
The following costs are not relevant in this decision:
Cost
Reason not relevant
Building rent and maintenance
All products use the same
facilities; no space would be
freed if a product were
dropped.
Depreciation
All products use the same
equipment so no equipment
can be sold. Furthermore, the
equipment does not wear out
through use.
General administrative expenses
Dropping the Model C3 lawn
chair would have no effect on
total general administrative
expenses.
Sales revenue lost if the Model C3 lawn chair is dropped .
R308,000
Less costs that can be avoided (see above) ....................
257,900
Decrease in overall company net operating income if
the Model C3 lawn chair is dropped .............................
R 50,100
Problem 10-26B (continued)
2. To determine the minimum acceptable level of sales, we must first
classify the avoidable costs into variable and fixed costs as follows:
Variable
Fixed
Direct materials
R122,800
Direct labor
72,800
Fringe benefits (20% of direct labor)
14,560
Variable manufacturing overhead
4,400
Product managers' salaries
R10,000
Sales commissions (5% of sales)
15,400
Fringe benefits (15% of salaries and
commissions)
2,310
1,500
Shipping
14,130
Total costs
R246,400
R11,500
The Model C3 lawn chair should be retained as long as its contribution
margin covers its avoidable fixed costs. Break-even analysis can be used
to find the sales volume where the contribution margin just equals the
avoidable fixed costs.
The contribution margin ratio is computed as follows:
CM ratio
=
Contribution margin
Sales
=
R308,000 − R246,400
= 20.00%
R308,000
Problem 10-26B (continued)
The break-even sales volume can be found using the break-even
formula:
Break-even point
=
Fixed costs
CM ratio
=
R11,500
= R57,500
0.20
Therefore, as long as the sales revenue from the Model C3 lawn chair
Problem 10-27B (60 minutes)
1.
Marcy
Tina
Cari
Lenny
Sewing
Kit
Direct labor cost per unit ..
$ 5.40
$ 2.40
$ 9.60
$ 6.00
$ 1.20
Direct labor-hours per
unit* (a) .......................
0.45
0.20
0.80
0.50
0.10
Selling price .....................
35.00
20.00
25.00
18.00
11.00
Variable costs:
Direct materials .............
2.80
2.70
3.80
3.50
1.40
Direct labor ...................
5.40
2.40
9.60
6.00
1.20
Variable overhead ..........
0.90
0.40
1.60
1.00
0.20
Total variable costs ...........
9.10
5.50
15.00
10.50
2.80
Contribution margin (b) ....
$25.90
$14.50
$10.00
$ 7.50
$ 8.20
Contribution margin per
DLH (b) ÷ (a) ................
$57.56
$72.50
$12.50
$15.00
$82.00
* Direct labor cost per unit ÷ $12.00 per direct labor-hour
2.
Product
DLH
Per Unit
Estimated
Sales
(units)
Total
DLHs
Marcy .........................
0.45
31,000
13,950
Tina ...........................
0.20
49,000
9,800
Cari ............................
0.80
47,000
37,600
Lenny .........................
0.50
38,000
19,000
Sewing Kit ..................
0.10
540,000
54,000
Total DLHs required .....
134,350
3. Because the Cari doll has the lowest contribution margin per labor hour,
its production should be reduced by 15,750 dolls [12,600 excess DLHs
year.
Problem 10-27B (continued)
4. Because the additional capacity would be used to produce the Cari doll,
the company should be willing to pay up to $24.50 per DLH ($12 usual
5. Additional output could be obtained in a number of ways including
working overtime, adding another shift, expanding the workforce,
contracting out some work to outside suppliers, and eliminating wasted
labor time in the production process. The first four methods are costly,
Problem 10-28B (60 minutes)
1. A product should be processed further if the incremental revenue from
the further processing exceeds the incremental costs. The incremental
Problem 10-28B (continued)
If the company can sell more than 4,634 containers of the candies each
month, then profits will be higher than if the honey were simply sold
outright. If the company cannot sell at least 4,634 containers of the
