Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Solutions Manual, Chapter 7 11
Exercise 7-2 (continued)
2. The segmented report can be improved by eliminating the allocation of
the common fixed expenses. Following the format introduced in Chapter
12 for a segmented income statement, a better report would be:
Total
Dirt
Bikes
Mountain
Bikes
Racing
Bikes
Sales ...................................
$300,000
$90,000
$150,000
$60,000
Variable manufacturing and
selling expenses ................
120,000
27,000
60,000
33,000
Contribution margin .............
180,000
63,000
90,000
27,000
Traceable fixed expenses:
Advertising ........................
30,000
10,000
14,000
6,000
Depreciation of special
equipment ......................
23,000
6,000
9,000
8,000
Salaries of the product line
managers .......................
35,000
12,000
13,000
10,000
Total traceable fixed
expenses...........................
88,000
28,000
36,000
24,000
Product line segment margin
92,000
$35,000
$ 54,000
$ 3,000
Common fixed expenses .......
60,000
Net operating income ...........
$ 32,000
Exercise 7-3 (30 minutes)
1.
Per Unit
Differential
Costs
15,000 units
Make
Buy
Make
Buy
Cost of purchasing .......................
$35
$525,000
Direct materials ...........................
$14
$210,000
Direct labor .................................
10
150,000
Variable manufacturing overhead .
3
45,000
Fixed manufacturing overhead,
traceable1 .................................
2
30,000
Fixed manufacturing overhead,
common ...................................
Total costs ..................................
$29
$35
$435,000
$525,000
Difference in favor of continuing to
make the carburetors ................
$6
$90,000
1
Only the supervisory salaries can be avoided if the carburetors are
purchased. The remaining book value of the special equipment is a
sunk cost; hence, the $4 per unit depreciation expense is not
relevant to this decision.
Based on these data, the company should reject the offer and should
continue to produce the carburetors internally.
2.
Make
Buy
Cost of purchasing (part 1) ............................
$525,000
Cost of making (part 1) .................................
$435,000
Opportunity cost—segment margin foregone
on a potential new product line ...................
150,000
Total cost ......................................................
$585,000
$525,000
Difference in favor of purchasing from the
outside supplier ..........................................
$60,000
carburetors from the outside supplier.
Solutions Manual, Chapter 7 13
Exercise 7-4 (15 minutes)
Per Unit
Total
for 20
Bracelets
Incremental revenue .............................
$169.95
$3,399.00
Incremental costs:
Variable costs:
Direct materials ...............................
$ 84.00
1,680.00
Direct labor .....................................
45.00
900.00
Variable manufacturing overhead .....
4.00
80.00
Special filigree .................................
2.00
40.00
Total variable cost ..............................
$135.00
2,700.00
Fixed costs:
Purchase of special tool ....................
250.00
Total incremental cost ...........................
2,950.00
Incremental net operating income .........
$ 449.00
14 Managerial Accounting for Managers, 4th Edition
Exercise 7-5 (20 minutes)
1. The most profitable use of the constrained resource is determined by
the contribution margin per unit of the constrained resource. In part 1,
the constrained resource is time on the plastic injection molding
machine. Therefore, the analysis would proceed as follows:
Ski
Golf
Fishing
Guard
Guard
Guard
Selling price per unit ..................
$200
$300
$255
Variable cost per unit ................
60
140
55
Contribution margin per unit (a) .
$140
$160
$200
Plastic injection molding machine
processing time required to
produce one unit (b) ...............
2 minutes
5 minutes
4 minutes
Contribution margin per unit of
the constrained resource
(a) ÷ (b) ................................
$70 per
minute
$32 per
minute
$50 per
minute
2. In this part, the constraint is the available pounds of plastic pellets.
Ski
Golf
Fishing
Guard
Guard
Guard
Selling price per unit ..................
$200
$300
$255
Variable cost per unit ................
60
140
55
Contribution margin per unit (a) .
$140
$160
$200
Pounds of plastic pellets required
to produce one unit (b) ...........
7 pounds
4 pounds
8 pounds
Contribution margin per unit of
the constrained resource
(a) ÷ (b) ................................
$20 per
pound
$40 per
pound
$25 per
pound
other two products.
Solutions Manual, Chapter 7 15
Exercise 7-5 (continued)
3. The Fishing Guard product has the largest unit contribution margin, but
it is not the most profitable use of the constrained resource in either
than makes up for their lower contribution margins.
16 Managerial Accounting for Managers, 4th Edition
Exercise 7-6 (20 minutes)
1. The value of relaxing the constraint can be determined by computing
the contribution margin per unit of the constrained resource:
Sofa
Selling price per unit ...................................................
$1,800
Variable cost per unit .................................................
1,200
Contribution margin per unit (a) ..................................
$ 600
Upholstery shop time required to produce one unit (b) .
10 hours
Contribution margin per unit of the constrained
resource (a) ÷ (b) ...................................................
$60 per hour
2. To answer this question, it is desirable to compute the contribution
margin per unit of the constrained resource for all three products:
Recliner
Sofa
Loveseat
Selling price per unit ..................
$1,400
$1,800
$1,500
Variable cost per unit ................
800
1,200
1,000
Contribution margin per unit (a) .
$ 600
$ 600
$ 500
Upholstery shop time required to
produce one unit (b) ...............
8 hours
10 hours
5 hours
Contribution margin per unit of
the constrained resource
(a) ÷ (b) ................................
$75 per
hour
$60 per
hour
$100 per
hour
other two chairs. In both cases, the additional time is worth more
than $45 per hour.
Solutions Manual, Chapter 7 17
Exercise 7-7 (10 minutes)
A
B
C
Selling price after further processing ....
$20
$13
$32
Selling price at the split-off point .........
16
8
25
Incremental revenue per pound or
gallon ..............................................
$ 4
$ 5
$ 7
Total quarterly output in pounds or
gallons ............................................
×15,000
×20,000
×4,000
Total incremental revenue ...................
$60,000
$100,000
$28,000
Total incremental processing costs .......
63,000
80,000
36,000
Total incremental profit or loss ............
$(3,000)
$ 20,000
$(8,000)
18 Managerial Accounting for Managers, 4th Edition
Exercise 7-8 (30 minutes)
1.
A
B
C
(1)
Contribution margin per unit ...........................
$54
$108
$60
(2)
Direct material cost per unit ...........................
$24
$72
$32
(3)
Direct material cost per pound ........................
$8
$8
$8
(4)
Pounds of material required per unit (2) ÷ (3) .
3
9
4
(5)
Contribution margin per pound (1) ÷ (4) .........
$18
$12
$15
2. The company should concentrate its available material on product A:
A
B
C
Contribution margin per pound (above) .
$ 18
$ 12
$ 15
Pounds of material available ..................
× 5,000
× 5,000
× 5,000
Total contribution margin ......................
$90,000
$60,000
$75,000
resource.
3. The price Barlow Company would be willing to pay per pound for
additional raw materials depends on how the materials would be used.
If there are unfilled orders for all of the products, Barlow would
presumably use the additional raw materials to make more of product A.
how valuable additional raw materials are to the company.
If all of the orders for product A have been filled, Barlow Company
would then use additional raw materials to manufacture product C. The
Solutions Manual, Chapter 7 19
Exercise 7-8 (continued)
Likewise, if all the demand for both products A and C has been satisfied,
product B.
20 Managerial Accounting for Managers, 4th Edition
Exercise 7-9 (15 minutes)
1. Annual profits will increase by $39,000:
Per Unit
15,000
Units
Incremental sales ................................
$14.00
$210,000
Incremental costs:
Direct materials ................................
5.10
76,500
Direct labor ......................................
3.80
57,000
Variable manufacturing overhead .......
1.00
15,000
Variable selling and administrative .....
1.50
22,500
Total incremental costs ........................
11.40
171,000
Incremental profits ..............................
$ 2.60
$ 39,000
2. The relevant cost is $1.50 (the variable selling and administrative
expenses). All other variable costs are sunk because the units have
left-over units.
