6-38 (10 min.)
1. Answer (a): $6,000 ÷ 6,000 = $1.00
6-39 (5-10 min.)
rejected.
2. The amount paid for the calendars is irrelevant. Even if $1 million had been paid for the
6-40 (15-20 min.)
1. The difference in total costs over the five years is $2,000 in favor of replacing,
computed as follows:
Five Years Together
2. The loss on disposal of the old machine combines the lump-sum write-off (an irrelevant
item) with the disposal value (a relevant item), $7,000 – $2,500 = $4,500 loss on
6-41 (10 min.)
1. Variable cost $ 80,000
2. Variable cost $160,000
3. The two unit costs are equally accurate (or, more appropriately, equally inaccurate).
6-42 (10 min.)
The original investment is the “cash equivalent” cost. “Excess” trade-in allowances,
such as the $2,800 in this instance, are really reductions in the “list price.” The $1,620 sales tax
is added to the original cost. The problem is silent regarding how the sales tax is computed. The
6-43 (10 min.)
The $9 million is gone. It is irrelevant for decision purposes. The relevant comparison
is whether to invest $5 million in the division or to invest it elsewhere:
6-44 (10-15 min.)
1. The difference in annual income is $434,700 – $398,475 = $36,225:
(a) (b)
2. The calculation in (1) seems awkward and unnecessary. The opportunity cost is the
maximum amount forgone by not working on every other Saturday, which is $1,575 × 1
3. If she has already decided to take the day off, her opportunity cost is zero because in any
case she would not see patients. Note that opportunity cost is a “situation-specific”
6-45 (15-25 min.)
1. With American Without American
Airlines Personnel Airlines Personnel
Contribution margin
2. The simplest approach is:
Let X = % of occupancy
Then $110 × X = $70
X = $70 ÷ $110 = 63.636%
6-46 (10-15 min.)
1. Contribution margin from airlines:
($70 – $10) × 50 × 365 = $1,095,000
2. Let X = occupancy rate
6-47 (10-20 min.)
1. Make Buy
Total Per Unit Total Per Unit
Purchase cost $1,820,000 $28
2. Buy and
Buy and Leave Buy Use Facilities
Make Facilities Idle and Rent for Oil Filters
6-48 (35-50 min.)
1. There are several ways to approach this problem. The easiest is probably to concentrate
on the difference in the total contribution margin. The total fixed costs of $780,000,
before considering the increase in advertising, will be unaffected and may be ignored.
Production and sales will decline by 10%, from 60,000 to 54,000 units:
2. If the total fixed costs do not change, the company will need a total contribution margin
of $1,200,000 from the two products together. How many units of the new product can
be sold? The clue to the production capacity of the plant is in how fixed factory
overhead was unitized: $300,000 ÷ $6 per unit = 50,000 units of expected sales.
New product budget @ 50,000 Units:
Therefore, the needed contribution margin on the old product is $1,200,000 – $500,000,
or $700,000.
If students do not accept the above analysis, the following proof may be helpful (in
thousands):
New
Old Difference Product 1 Product 2
6-49 (15-25 min.)
1. Alternative
Without With
Contract Contract
2. Let X = contribution margin per room
(40 × 365 × X) + $4,105,520 = $4,591,700
6-50 (10-20 min.)
1. Without With
Discount Discount
Revenue, 75 @ $.12 $9.00
Revenue
2. Let X = number of passengers who switch
Revenue with discount = Revenue without discount
50 × .60 × $.12 = X × $.12
50 × $.072 = $.12 × X
6-51 (15-20 min.)
Moderately
1. Designer Priced
Items that can be displayed in 8,000 square feet 300 400
Contribution margin per item $120 $65
Contribution margin per turnover of inventory $36,000 $26,000
2. The solution in requirement 1 assumes that moderately priced items can outsell designer
items 2 to 1 and that the store will be 100% full of such items. Interdependencies
between the items are ignored. If these factors do not hold, some combination of the
two items may be preferable.
Additional considerations include the investment in inventories, the number of sales
6-52 (15 min.)
The standard line should be produced. The major lesson here is that gross profit per unit
of product is not necessarily indicative of the relative profitability of products. In this case the
limiting factor (scarce resource) is production capacity. The most desirable product is the one
that maximizes the contribution to profit for the given production capacity. In this case, the
6-53 (30-50 min.)
1. The total amount of fixed overhead is common to all alternatives. Therefore, it is
irrelevant to this analysis. The scarce resource is hours of capacity. The objective is to
maximize the contribution per hour:
Plug-in
Subcomponents Assemblies Difference
assembly.
2. The lowest price must yield a contribution of $28,800,000. The contribution per unit
would be $28,800,000 divided by the number of units produced in one year, or:
$28,800,000 ÷ (600,000 hours × 20 unit per hour)
= $28,800,000 ÷ 12,000,000 units = $2.40 per unit
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
259
To double check, consider the following:
100% of Capacity
To Subcomponents To Plug-in
Assemblies
Sales in units 36,000,000 12,000,000
Sales at $2.20 and $5.70 $79,200,000 $68,400,000
Variable costs at $1.40 and $3.30 50,400,000 39,600,000
Contribution margin $28,800,000 $28,800,000
Fixed costs* 21,600,000 21,600,000
Operating income $ 7,200,000 $ 7,200,000
* 36,000,000 × Unit fixed overhead rate of $.60, and 12,000,000 × Unit fixed overhead
rate of ($1.20 + the $.60 transferred-in), respectively.
3. Note that this increase in variable cost per hour is common to both alternatives. That is,
the variable processing cost would rise by $14.40 per hour:
Variable overhead = 40% of old fixed overhead
= .4 × $21,600,000 = $8,640,000
Variable overhead rate per hour = $8,640,000 ÷ 600,000 = $14.40
In short, the answer here is the same as the answers to (1) and (2). The lowest acceptable
price is still $5.70. To prove this, use the same format as in (2):
100% of Capacity
To Subcom- To Plug-in
ponents Assemblies
6-54 (25-40 min.)
1. Sets result in a 15% sales increase: 1,000 × 1.15 = 1,150 dresses.
Total Number of
Percent
of Total Dresses Capes Handbags Total
Complete sets 72% 828 828 828
2. Nonquantitative factors that could influence management in its decision to manufacture
matching capes and handbags include: