Chapter 8 Relevant Costs for Short-Term Decisions
Problems (Group B)
(15-20 min.) P8-48B
Req. 1
Sailor Products
Incremental Analysis of Special Sales Order
Revenues from special order ( 5,500 vests × $4 each)
$ 22,000
Less expenses associated with order: variable manufacturing expenses(5,500 vests × $3 each*)
(16,500)
Increase in operating income from special order
$ 5,500
Decision: Accept the special sales order.
__________
*Variable manufacturing expense per unit = $99,000 / 33,000 =
$3 per vest.
Req. 2
In addition to the effect of the special sale on operating income, Sailor Products should consider (D) All of the above:
• Will lowering the sale price tarnish Sailor Products’ image as a quality brand?
• Will the company’s other customers find out about the lower sale price it accepted from Parker
Cruiselines? If so, will these other customers demand lower sale prices?
• How will the company’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.) P8–50B
Req. 1
Locktight Systems
Incremental Analysis of Discontinuing a Product Line
Expected decrease in revenues—
Dropping industrial systems sales
$310,000
Expected decrease in expenses:
Variable expenses:
Cost of goods sold
$37,000
Marketing and administrative expenses
69,000
Fixed expenses:
Cost of goods sold
85,000
Marketing and administrative expenses
8,000
Expected decrease in total expenses
199,000
Expected decrease in operating income
$111,000
Decision: Do not drop Industrial Systems.
Req. 2
Locktight Systems
Total Analysis of Discontinuing a Product Line
Totals With
Industrial Systems
Totals Without
Industrial Systems
Decrease if
Industrial Systems
Is Discontinuedc
Sales revenue
$640,000
$330,000
$310,000
Less Variable expenses:
Cost of goods sold
82,000
45,000
37,000
Marketing and administrative expenses
145,000
76,000
69,000
Total variable expenses
227,000
121,000
106,000
Contribution margin
413,000
209,000
204,000
Less Fixed expenses:
Cost of goods sold
303,000
218,000a
85,000
Marketing and administrative expenses
62,000
54,000b
8,000
Total fixed expenses
365,000
272,000
93,000
Operating income (loss)
$ 48,000
$ (63,000)
$ 111,000
__________
a $303,000 − $85,000
Chapter 8 Relevant Costs for Short-Term Decisions
(20-30 min) P8–52B
Req. 1
WildRide
Outsourcing Analysis
Make Bindings
Buy Bindings
Difference
Total cost:
Direct materials
$27,000
−
$27,000
Direct labor
84,000
−
84,000
Variable overhead
54,000
−
54,000
Fixed overhead
84,000
$ 81,700a
2,300
Purchase price from outsider
(24,900 × $14)
–
348,600
(348,600)
Transportation (24,900 × $3.00)
–
74,700
(74,700)
Logo (24,900 × $0.70)
–
17,430
(17,430)
Total cost of 24,900 bindings
$249,000
$522,430
$ (273,430)
__________
a $84,000 − $2,300 = $81,700
Decision: Make the bindings.
Req. 2
WildRide
Best Use of Facilities Analysis
Buy
Make
Leave Facilities
Idle
Make Another
Product
Direct materials
$27,000
–
–
Direct labor
84,000
–
–
Variable overhead
54,000
–
–
Fixed overhead
84,000
$ 81,700a
$ 84,000
Purchase price from outsider (24,900 × $14)
348,600
348,600
Transportation (24,900 × $3.00)
–
74,700
74,700
Logo (24,900 × $0.70)
–
17,430
17,430
Expected profit from other product
–
–
(3,000)
Expected net cost of obtaining
24,900 bindings
$249,000
$522,430
$521,730
__________
a$84,000 − $2,300
Managerial Accounting 4e Solutions Manual
(20-25 min.) P8-53B
Req. 1
The $240,000 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 $240,000 sunk cost is irrelevant to the sell-or-process-further decision.
Copyright © 2015 Pearson Education, Inc.
8-39
A8–54
1. A beverage company is considering whether to discontinue its line of grape soda. What factors will affect the
company’s decision? What is a qualitative factor? Which of the factors you listed are qualitative?
• Will fixed costs continue to exist if the product is discontinued?
2. What factors would be relevant to a restaurant that is considering whether to make its own dinner rolls or to
purchase dinner rolls from a local bakery?
3. How would outsourcing change a company’s cost structure? How might this change in cost structure help or
harm a company’s competitive position?
4. What is an opportunity cost? List possible opportunity costs associated with a make–or-buy decision.
5. What undesirable result can arise from allocating common fixed costs to product lines?
6. Why could a manager be justified in ignoring fixed costs when making a decision about a special order? When
would fixed costs be relevant when making a decision about a special order?
7. What is the difference between segment margin and contribution margin? When would each be used?
Managerial Accounting 4e Solutions Manual
Copyright © 2015 Pearson Education, Inc.
8-40
costs of the company. Contribution margin can be used if the fixed costs do not change among the alternatives. If
the fixed costs change, then segment margin should be used.
9. How can “make–or–buy” concepts be applied to decisions at a service organization? What types of “make–or–
buy” decisions might a service organization face?
10. Oscar Company builds outdoor furniture using a variety of woods and plastics. What is a constraint? List at least
four possible constraints at Oscar Company.
11. Do a web search on the terms “carbon offset” and “carbon footprint.” What is a carbon footprint? What is a
carbon offset? Why would carbon offsets be of interest to a company? What are some companies that offer
12. A computer manufacturer is considering outsourcing its technical support call center to India. Its current
technical support call center is located in Dellroy, Ohio. The current call center is one of the top employers in
Dellroy and employs about 10% of the townspeople in Dellroy. The town has experienced high unemployment
rates in the past two decades and oftentimes the call center employees are the sole breadwinners in their
Chapter 8 Relevant Costs for Short-Term Decisions
Application & Analysis
A8–55
1. Describe the company that is making the decision to outsource. What area of the business is the company either
looking to outsource or did it already outsource?
3. List the revenues and costs that might be impacted by this outsourcing decision. The article will not list many, if
any, of these revenues and costs; you should make reasonable guesses about what revenues and/or costs would
4. List the qualitative factors that could influence the company’s decision whether to outsource this business
operation or not. Again, you need to make reasonable guesses about the qualitative factors that might influence
A8-56
Ethics Mini-Case
1.
a. The ethical issues in this situation are:
Managerial Accounting 4e Solutions Manual
2. There are some other factors that should be considered when outsourcing the dough. These factors include quality
1. For each of the disposal options for day-old pastries, answer the following questions:
a. What revenue (if any) would be generated by this option?
b. What cost reductions could Starbucks realize from this option?
c. What costs would Starbucks incur for this option?
d. What qualitative factors would Starbucks need to consider before choosing this option?
c. Cost of transporting pastries to the charity
d. It is an ethical thing to do to donate to charities. This could also be good for marketing.
e. Advantages: Starbucks is being philanthropic at a fairly low cost to itself with little or no waste. Disadvantage:
There is a cost to it.
Sell the day-old pastries in its retail stores for 50% off:
2. For each of the disposal options for coffee grounds, answer the following questions:
a. What revenue (if any) would be generated by this option?
option?
Chapter 8 Relevant Costs for Short-Term Decisions
Discard in trash:
a. No revenue to be gained
b. No cost reductions
c. Perhaps an increase in trash disposal
3. For both day-old pastries and coffee grounds, are there any options that are particularly attractive in your
viewpoint? Are there any options that would not be acceptable in your viewpoint?