Chapter 8 Relevant Costs for Short-Term Decisions
Copyright © 2015 Pearson Education, Inc.
8-1
Chapter 8
Relevant Costs for Short-Term Decisions
Quick Check
Answers:
QC-1. c
QC-3. d
QC-5. a
QC-7. b
QC– 9. b
QC-2. c
QC-4. b
QC-6. c
QC-8. d
QC-10. a
(5 min.) S8-1
a. The trade-in value of the old printer is relevant.
b. Paper costs are irrelevant because these costs will be the same with either the old printer or the new printer.
c. The difference between the toner cartridges is relevant.
Managerial Accounting 4e Solutions Manual
(10 min.) S8-3
Req. 1
Mount Snows should emphasize a cost-plus approach to pricing because it has been able to differentiate its ski resort
from others in the area. Because of its favorable reputation, managers will have some control over pricing. Of course,
$ 89
(10-15 min.) S8-4
Req. 1
If Mount Snows is a price-taker, projected income is as follows:
Revenue at market price (775,000 × $66)………………..
$51,150,000
Less: Total costs…………………………………………………….
(49,425,000)a
Operating income……………………………………………
$ 1,725,000
vs. Desired operating income ($115 million × 17%)……
$19,550,000
Expected profit shortfall…………………………………..
$ 17,825,000
a Previous problem
As a percentage of assets, Mount Snows’ projected profit is 1.50% ($1,725,000/$115,000,000). Investors will not be
happy with this profit level, because the expected return on assets is less than the desired return on assets. Stock
prices may decline as a result.
Req. 2
If Mount Snows is able to reduce its fixed costs to $28.5 million, its new target variable cost per skier/snowboarder is:
TOTAL
Revenue at market price ($66 × 775,000)
$51,150,000
Less: Desired profit ($115 million × 17%)
(19,550,000)
Target total cost
$31,600,000
Less: Reduced level of fixed costs
(28,500,000)
Target total variable costs
$ 3,100,000
Divided by number of skiers and snowboarders
÷775,000
Target variable cost per skiers and snowboarders
$ 4.00
This target variable cost is less than 60% of the current variable cost of $7.00. Mount Snows may have a difficult time
achieving this target since it is so much lower than the current variable cost.
(5-10 min.) S8-5
The Men’s and Women’s Departments are earning income. While the Accessories Department appears to be losing
(10 min.) S8-6
Expected decrease in revenues…………….
$98,000
Expected decrease in expenses:
Variable expenses…………………………..
$90,000
Fixed expenses……………………………
25,000
Total expenses………………………………
115,000
Expected increase in operating income……
$ 17,000
Decision: Mila Fashions should drop the Accessories Department.
(10 min.) S8-7
Expected revenues…………………………..
$81,000
Expected expenses:
Variable expenses………………………
$52,000
Fixed expenses ($6,800 x 4)……………
27,200
Total expenses…………………………
79,200
Expected operating income from shoe department………………………………
$1,800
Compare this potential profit with the contribution margins from the other departments:
Department (sales − variable costs)
Contribution margin
Men ‘s ($109,000 − $59,000)………………….
$50,000
Women’s ($56,000 − $30,000)………………
$26,000
Accessories ($98,000 − $90,000)…………
$8,000
The company should not consider replacing the Accessories Department with a Shoe Department because even though
the Shoe Department has a higher contribution margin than the Accessories Department, the Shoe Department will
incur an additional $27,200 in fixed costs.
Managerial Accounting 4e Solutions Manual
(15 min.) S8-8
Req. 1
StoreAway production is constrained by the machine hours available for producing the bins. StoreAway needs to
determine its most profitable product mix by considering each size bin’s contribution margin per machine hour:
Regular
Large
Sales price per unit
$ 8.40
$10.20
Less: Variable cost per unit
(3.00)
(4.40)
Contribution margin per unit
$ 5.40
$ 5.80
× Units per machine hour
× 16
× 12
Contribution margin per machine hour
$86.40
$69.60
Machine hours available………………………………
2,800
Number of regular bins per machine hour…………..
× 16
Maximum production of regular size bins……………
44,800
StoreAway should spend all 2,800 machine hours making regular size bins, resulting in 44,800 regular size bins and 0
machine hours making large size bins.
Req. 3
Given this product mix, StoreAway’s operating income for the period is projected to be:
Number of regular size bins……………………
44,800
Contribution margin per regular size bin………
× $5.40
Total contribution margin………………………
$ 241,920*
Less: Fixed expenses……………………………
(120,000)
Operating income…………………………………
$ 121,920
*Total contribution margin can also be found by multiplying
2,800 hours by the regular size bin contribution margin per
hour of $86.40 (2,800 hours × $86.40/ hour = $241,920).
(15 min.) S8-9
Req. 1
StoreAway should emphasize the production of regular size bins, since they are more profitable than the large size
bins. StoreAway should make as many regular bins as it can sell and then use the remaining machine hours to produce
large bins:
Number of machine hours available………………………..
2,800 hours
Number of regular bins demanded………………………….
38,400
Divided by number of regular bins produced per hour….
÷ 16
Number of hours used to produce regular bins…………..
2,400 hours
Number of hours still available………………………………
400 hours
Multiplied by number of large bins produced per hour…
× 12
Number of large bins to produce……………………………
4,800
StoreAway should produce 38,400 regular size bins and 4,800 large size bins.
Chapter 8 Relevant Costs for Short-Term Decisions
(continued) S8-9
Req. 2
Given this product mix, StoreAway’s operating income will be:
Regular
Large
Total
Number of bins
38,400
4,800
Contribution margin per bin
×$5.40
×$5.80
Total contribution margin
$207,360*
$27,840**
$235,200
Less: Fixed expenses
(120,000)
Operating income
$115,200
*Regular bin contribution margin can also be found by multiplying 2,400 hours by the regular size bin contribution
margin per hour of $86.40 (2,400 hours × $86.40/ hour = $207,360).
** Large bin contribution margin can also be found by multiplying 400 hours by the large size bin contribution margin
per hour of $69.60 (400 hours × $69.60/ hour = $27,840).
Req. 3
Operating income is less than it was when StoreAway was producing its optimal product mix because the company had
to produce less regular size bins to match demand for these bins. The company had to give up some of the regular bin
contribution margin per machine hour in order to produce large bins.
(10 min.) S8–10
Req. 1
The absorption unit cost of making the bread is $2.39 per loaf:
Direct material………………………………..
$0.46
Direct labor……………………………………
0.75
Variable overhead……………………………
0.22
Variable cost per unit…………………….
$1.43
Plus: Fixed overhead per unit……………….
.96
Full (absorption) cost per unit……………….
$2.39
Req. 2
Decision: The company should bake the bread in-house since the variable cost of making each loaf is less than the cost
of outsourcing each loaf.
Req. 3
The company should consider the following qualitative factors before making a final decision:
Will the local bakery meet its delivery time requirements? If labor and oven time were not devoted to bread making,
could another more profitable product be made in its place? How does the quality and freshness of the local bakery
bread compare to the bread baked in-house?
(5-10 min.) S8–11
The book value of Wheeler Food’s trucks is irrelevant, because it will be the same whether the fleet management is
Managerial Accounting 4e Solutions Manual
(continued) S8–11
Wheeler Food
Outsourcing Decision Analysis
Retain In-House
Outsource to Fleet
Management
Services
Difference
Annual leasing fee for software
$ 8,000
$ –
$ 8,000
Annual maintenance of trucks
154,000
–
154,000
Total annual salaries of five other
fleet management employees
145,000
–
145,000
Fleet Management Services’
–
annual fee
–
276,000
(276,000)
Total cost
$307,000
$276,000
Cost savings from outsourcing
$ 31,000
Operating income for Wheeler Food will increase by $31,000 by outsourcing the fleet-management function.
(5-10 min.) S8–12
In addition to the quantitative analysis, Riley should consider the following qualitative factors before making a final
decision:
(5-10 min.) S8–13
The $78,720 inventoriable cost (book value) of the inventory is a sunk cost that will be the same whether the remote
entry keys are sold as is or processed further. Consequently, the book value of the inventory is not relevant to the
(5-10 min.) S8–14
Sell as Cocoa
Powder
Sell as Chocolate
Syrup
Sell as Boxed Assorted
Chocolates
Revenue
$15,000
$101,000
$200,000
Less: Additional processing costs
0
(69,000)
(180,000)
Net benefit to operating income
$15,000
$ 32,000
$ 20,000
The company president made the wrong decision. First, the cost of processing the cocoa beans is irrelevant since it will
be incurred no matter which of the three products is sold. Second, in addition to the revenues, the additional costs of
transforming the cocoa powder into other products needs to be considered.
(5-10 min.) S8-15
1.
Stanley does not know how to categorize fixed costs as
unavoidable or avoidable so he guesses on the
categorization of each fixed cost.
Competence – Perform professional duties in
accordance with relevant laws, regulations, and
technical standards.
2.
Connor Advertising Agency is looking at whether to
continue to do its own payroll in-house or to outsource
it to a payroll firm (a classic “make or buy” decision.)
Elsie, an accountant at Connor, does not tell
management that the payroll firm bidding on the work
is owned and managed by her mother.
Integrity – Mitigate actual conflicts of interest,
regularly communicate with business associates
to avoid apparent conflicts of interest. Advise all
parties of any potential conflicts.
3.
Sarah is a management accountant at a large
electronics firm. She is instructed to prepare an analysis
of the performance of an underperforming company
division. Since Sarah is afraid that many employees
could lose their jobs if that division appears to be
underperforming, Sarah underestimates the amount of
expenses generated by that division. Sarah hopes that
the division is not discontinued.
Credibility – Disclose all relevant information
that could reasonably be expected to influence
an intended user’s understanding of the
reports, analyses, or recommendations.
4.
Latoya, a CPA and a CMA, makes a YouTube video
bragging about loopholes she has found to avoid taxes.
These loopholes are questionable at best.
Integrity – Abstain from engaging in or
supporting any activity that might discredit the
profession.
5.
Seymour is the controller for a small manufacturer. He
mentions to a close friend that his company is going to
start offshoring production to decrease labor costs.
Confidentiality – Keep information confidential
except when disclosure is authorized or legally
required.
(5-10 min.) E8-16A
Item
Relevant
Irrelevant
a.
Book value of old machine
X
b.
Maintenance cost of new machine
X
c.
Maintenance cost of old machine
X
d.
Installation cost of new machine
X
e.
Accumulated depreciation on old machine
X
f.
Cost per pound of food to be processed
X
g.
Installation cost of old machine
X
h.
Cost of the new machine
X
i.
Cost of the old machine
X
j.
Added profits from the increase in production resulting
from the new machine
X
k.
Fixed selling costs
X
l.
Variable selling costs
X
m.
Trade-in value of old machine
X
n.
Interest expense on new machine
X
o.
Sales tax paid on old machine
X
Chapter 8 Relevant Costs for Short-Term Decisions
(10-15 min.) E8-17A
Req. 1
Hobby Memorabilia & More
Incremental Analysis of Special Sales Order
Revenue from special order:
Sale of 58,000 packs × $0.43 each
$ 24,940
Less expenses associated with the order:
Variable manufacturing cost: 58,000 packs × $0.33 each ($0.14 + $0.08 + $0.11)
(19,140)
Increase in operating income from the order
$ 5,800
__________
Decision: Accept the special sales order.
Req. 2
Hobby Memorabilia & More
Incremental Analysis of Special Sales Order
Revenue from special order
(Sale of 58,000 packs × $0.43 each)
$ 24,940
Less variable expenses associated with the order:
Variable manufacturing cost: (58,000 × $0.33)
19,140
Contribution margin
5,800
Less: Additional fixed manufacturing costs associated with order
5,500
Increase in operating income from order
$ 300
Decision: Accept the special sales order.
(10-15 min.) E8-18A
Req. 1
(000s omitted)
Bid price
$ 34,500
Less scrap value
$ 32,800
Net cost of recycling
$ 1,700
Versus: Cost to sink
$ 700
Net difference in favor of sinking
$ 1,000
Financially, it is $1,000,000 more advantageous to sink the ship rather than recycle it.
Req. 2
From a sustainability standpoint, the decommissioned aircraft carrier should be dismantled and recycled.
The following qualitative factors should be considered into this analysis:
1. Jobs creation in record-high unemployment rates geographic region.
2. Materials are recycled and used for a different purpose
3. Toxins are not released into the ocean.
Chapter 8 Relevant Costs for Short-Term Decisions
(10-15 min) E8-20A
Req. 1
Preston will need to emphasize a target-costing approach to pricing. Because the tract homes are not unique and face
stiff competition, Preston will not have much control over pricing.
Managerial Accounting 4e Solutions Manual
(continued) E8-21A
Req. 3
Family Tyme Movies
Analysis of Dropping the DVD Product Line
Expected decrease in DVD revenue
$126,000
Expected decrease in DVD expenses:
Variable expenses
$80,000
Fixed expenses
74,000
154,000
Expected increase in operating income
28,000
Lost contribution margin on Blu-ray Discs (10% × $146,000)
(14,600)
Net expected increase in operating income
$ 13,400
Decision: Consider dropping DVDs because, assuming that all $74,000 of fixed costs assigned to the DVD product line
can be avoided but that Blu-ray production and sales would decline 10%, the product’s incremental revenues is now
less than its incremental costs.
(10-15 min.) E8-22A
First, we need to separate the fixed and variable costs:
Cost of goods sold:
$6,450,000 × 40% = $2,580,000 fixed manufacturing costs
Expected decrease in revenue
Expected decrease in expenses:
4,920,000
Expected decrease in total expenses
Expected increase (decrease) in operating income
Chapter 8 Relevant Costs for Short-Term Decisions
(15 min.) E8-23A
TreadLight
Product Mix Analysis
Deluxe
Regular
Sale price per unit
$1,020
$580
Less: Variable costs per unit
689a
449b
Contribution margin per unit
331
131
Units produced with equivalent number of machine hours
× 1
× 2
Contribution margin for equivalent number of machine hours
$ 331
$262
a ($320 + $ 88 + $168 + $113)
b ($110 + $186 + $ 84 + $ 69)
This is a product mix decision. TreadLight should produce the product with the highest contribution margin per unit of
the constraint.
Two times as much overhead cost is allocated to each Deluxe model as to each Regular model. Thus, it takes two times
as many machine hours to produce a Deluxe model.
For each unit of the Deluxe model produced (contributing $331 to operating income), TreadLight can produce two units
of the Regular model (contributing $262 to operating income).
Therefore, TreadLight should produce only the Deluxe model (if it has unlimited demand for the Deluxe model).
Chapter 8 Relevant Costs for Short-Term Decisions
(10-15 min.) E8-25A
Req. 1
TechSystems
Incremental Analysis for Outsourcing Decision
Make Unit
Buy Unit
Difference
Variable cost per unit:
Direct materials
$ 9.00a
$ —
$ 9.00
Direct labor
2.00b
—
2.00
Variable overhead
1.00c
—
1.00
Purchase price from outsider
—
13.50
(13.50)
Variable cost per unit
$12.00
$13.50
$ (1.50)
a $612,000 / 68,000 = $9.00/unit
b $136,000 / 68,000 = $2.00/unit
c $68,000 / 68,000 = $1.00/unit
Decision: Make the optical switch because the cost per unit to make the switch is less than the variable cost per unit to
buy the switch.
Req. 2
Make switches
Buy switches
Variable cost per unit (from part 1)
$ 12.00
$ 13.50
Multiply by: Units needed
73,000
73,000
Total variable costs
$ 876,000
985,500
Plus: Fixed costs
408,000
311,000*
Total relevant costs
$1,284,000
$1,296,500
*($408,000 − $97,000 avoidable)
Decision: Make the optical switch because the total relevant costs to make the switches are less than the total relevant
costs to buy the switches.
Req. 3
Cost if making switches
=
Cost of outsourcing switches
Variable costs + fixed costs
=
Variable costs + fixed costs
($12.00 × 73,000) + $408,000
=
(x)* (73,000) + $311,000
$876,000 + $408,000
=
73,000x + $311,000
$973,000
=
73,000x
$13.33 (rounded)
=
x
* Where x = outsourcing cost per switch
Chapter 8 Relevant Costs for Short-Term Decisions
Exercises (Group B)
(5-10 min.) E8–29B
Item
Relevant
Not Relevant
a.
Cost of the new machine
X
b.
Cost of the old machine
X
c.
Added profits from increase in production resulting
from the new machine
X
d.
Fixed selling costs
X
e.
Variable selling costs
X
f.
Sales value of old machine
X
g.
Interest expense on new machine
X
h.
Interest expense on old machine
X
i.
Book value of old machine
X
j.
Maintenance cost of new machine
X
k.
Repairs and maintenance costs of old machine
X*
l.
Installation costs of new machine
X
m.
Accumulated depreciation on old machine
X
n.
Cost per pound of hamburger
X
o.
Installation cost of old machine
X
*Considered as future repairs and maintenance costs of the old machine.
Chapter 8 Relevant Costs for Short-Term Decisions
(20-25 min.) E8-32B
Req. 1
Bradford Stenback
Incremental Analysis of Special Sales Order
Revenue from special order (19,000 × $68)
$1,292,000
Less: variable expenses associated with order (19,000 × $57)*
(1,083,000)
Contribution margin
$209,000
Less: Additional fixed costs associated with order
0
Increase in operating income from special order
$ 209,000
*Incremental expenses of special order, per pair of sunglasses:
Direct materials…………………………………….
$38
Direct labor………………………………………….
10
Variable manufacturing overhead………………
9
Total incremental expense……………………….
$57
In addition to determining the special order’s effect on operating profits, Bradford Stenback’s managers should also
consider the following:
• How will Bradford Stenback’s competitors react? Will they retaliate by cutting their prices and starting a price
war?
• Will Bradford Stenback’s other customers find out about the lower sale price Bradford Stenback offered to
Snodgrass Opticians? If so, will these other customers demand lower sale prices?
• Will lowering the sale price tarnish Bradford Stenback’s image as a high-quality brand?
Req. 2
When deciding whether to accept a special order, we should compare the extra revenues we will receive against the
extra costs we will incur to fill the order. Costs that we will incur whether or not we fill the order are irrelevant to our
decision. This is why comparing the $68 price Snodgrass Opticians offered us with our $80 total cost of making the
sunglasses is misleading.
Managerial Accounting 4e Solutions Manual
(10-15 min) E8–33B
Req. 1
Bennett will need to emphasize a target-costing approach to pricing. Because the tract homes are not unique and face
stiff competition, Bennett will not have much control over pricing.