Chapter 8 Relevant Costs for Short-Term Decisions
(10 min.) E8–34B
Req. 1
Analysis of Discontinuing the DVD Product Line
Expected decrease in revenues
Expected decrease in expenses:
Variable expenses
Fixed expenses
Expected decrease in total expenses
Expected decrease in operating income if DVD product line dropped
California Video
Analysis of Discontinuing the DVD Product Line
Expected decrease in VCR revenue
Expected decrease in VCR expenses:
Variable expenses
Fixed expenses
Expected increase in operating income
California Video
Analysis of Discontinuing the DVD Product Line
Expected decrease in revenues—Discontinuing DVDs
$136,000
Expected decrease in expenses—Discontinuing DVDs
80,000
Expected decrease in operating income
$ (56,000)
Managerial Accounting 4e Solutions Manual
(10-15 min.) E8-35B
First, we need to separate the fixed and variable costs:
Cost of goods sold:
$6,550,000 × 40% = $2,620,000 fixed manufacturing costs
Chapter 8 Relevant Costs for Short-Term Decisions
(15 min.) E8–36B
This is a product mix decision. AllTreads should produce the product with the highest contribution margin per unit of
the constraint. (Fixed costs are irrelevant because they will be the same, in total, whichever product AllTreads
produces.) TreadMile’s constraint is machine hours.
Chapter 8 Relevant Costs for Short-Term Decisions
(10-15 min.) E8-38B
Req. 1
GlobalSystems
Incremental Analysis for Outsourcing Decision
Make Unit
Buy Unit
Difference
Variable cost per unit:
Direct materials
$ 11.00a
$ —
$ 11.00
Direct labor
2.00b
—
2.00
Variable overhead
1.00c
—
1.00
Purchase price from outsider
—
16.50
(16.50)
Variable cost per unit
$14.00
$16.50
$(2.50)
a $759,000 / 69,000 = $11.00/unit
b $138,000 / 69,000 = $2.00/unit
c $69,000 / 69,000 = $1.00/unit
Decision: Make the optical switch because the variable 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)
$ 14.00
$ 16.50
Multiply by: Units needed
74,000
74,000
Total variable costs
$1,036,000
1,221,000
Plus: Fixed costs
448,500
353,500*
Total relevant costs
$1,484,500
$1,574,500
*($448,500 − $95,000 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
($14.00 × 74,000) + $448,500
=
(x)* (74,000) + $353,500
$1,036,000 + $448,500
=
74,000x + $353,500
$1,131,000
=
74,000x
$15.28 (rounded)
=
x
* Where x = outsourcing cost per switch
switch.
Chapter 8 Relevant Costs for Short-Term Decisions
Problems (Group A)
(15-20 min.) P8-42A
Req. 1
Marine Supply
Incremental Analysis of Special Sales Order
Revenues from special order (4,900 vests × $11 each )
$ 53,900
Less expenses associated with order: variable manufacturing expenses (4,900 vests × $7 each*)
(34,300)
Increase in operating income from special order
$ 19,600
_________
*Variable manufacturing expense per unit = $210,000 / 30,000 =
$7 per vest.
Decision: Accept the special sales order.
Req. 2
In addition to determining the special order’s effect on operating profits, the company’s managers also should consider
the following: (D, All of the above):
• Will Marine supply’s customers find out about the lower sale price Buoy accepted from Overton’s?
• Will lowering the sale price tarnish Marine Supply’s image as a quality brand?
• How will Marine Supply’s competitors react? Will they retaliate by cutting their prices and starting a price
war?
Chapter 8 Relevant Costs for Short-Term Decisions
(20-25 min.) P8-44A
Req. 1
Adobe Security
Incremental Analysis of Discontinuing a Product Line
Expected decrease in revenues—
Dropping industrial systems sales
$330,000
Expected decrease in expenses:
Variable expenses:
Cost of goods sold
$33,000
Marketing and administrative expenses
63,000
Fixed expenses:
Cost of goods sold
84,000
Marketing and administrative expenses
12,000
Expected decrease in total expenses
192,000
Expected decrease in operating income
$138,000
Decision: Do not discontinue Industrial Systems.
Req. 2
Adobe Security
Total Analysis of Discontinuing a Product Line
Totals With
Industrial Systems
Totals Without
Industrial Systems
Decrease if
Industrial Systems
Is Discontinuedc
Sales revenue
$710,000
$380,000
$330,000
Less Variable expenses:
Cost of goods sold
79,000
46,000
33,000
Marketing and administrative expenses
140,000
77,000
63,000
Total variable expenses
219,000
123,000
96,000
Contribution margin
491,000
257,000
234,000
Less Fixed expenses:
Cost of goods sold
318,000
234,000a
84,000
Marketing and administrative expenses
67,000
55,000b
12,000
Total fixed expenses
385,000
289,000
96,000
Operating income (loss)
$ 106,000
$ (32,000)
$138,000
__________
a $318,000 − $84,000
Chapter 8 Relevant Costs for Short-Term Decisions
(20-30 min) P8–46A
Req. 1
Cool Boards
Outsourcing Analysis
Make Bindings
Buy Bindings
Difference
Total cost:
Direct materials
$25,000
−
$25,000
Direct labor
83,000
−
83,000
Variable overhead
50,000
−
50,000
Fixed overhead
83,000
$ 80,800a
2,200
Purchase price from outsider
(30,125 × $17)
–
512,125
(512,125)
Transportation (30,125 × $1.00)
–
30,125
(30,125)
Logo (30,125 x $0.50)
–
15,063*
(15,063)
Total cost of bindings
$241,000
$638,113
$ (397,113)
__________
a $83,000 − $2,200 = $80,800
*Rounded
Decision: Make the bindings.
Make
Direct materials
Direct labor
Variable overhead
Fixed overhead
Purchase price from outsider (1,890 × $13)
Transportation (1,890 × $2.00)
30,125
30,125
Logo (1,890 × $0.40)
15,063
15,063
Expected profit from other product
Expected net cost of obtaining
Managerial Accounting 4e Solutions Manual
(20-25 min.) P8-47A
Req. 1
The $241,000 spent to refine the acetone is a sunk cost that does not differ between the alternatives of selling as is or
processing further. Consequently, this sunk cost is irrelevant to the sell–or-process-further decision.