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Solutions Manual, Chapter 7 21
Exercise 7-10 (15 minutes)
“Cost”
Per
Differential
Costs
Unit
Make
Buy
Explanation
Direct materials ......
$3.10
$3.10
Can be avoided by buying
Direct labor ............
2.70
2.70
Can be avoided by buying
Variable
manufacturing
overhead .............
0.60
0.60
Can be avoided by buying
Supervision ............
1.50
1.50
Can be avoided by buying
Depreciation
1.00
—
Sunk Cost
Rent ......................
0.30
—
Allocated Cost
Outside purchase
price ...................
$8.40
Total cost ...............
$9.20
$7.90
$8.40
22 Managerial Accounting for Managers, 4th Edition
Exercise 7-11 (20 minutes)
Per Unit
Differential
Costs
30,000 Units
Make
Buy
Make
Buy
Cost of purchasing ...................
$21.00
$630,000
Cost of making:
Direct materials .....................
$ 3.60
$108,000
Direct labor ...........................
10.00
300,000
Variable overhead .................
2.40
72,000
Fixed overhead .....................
3.00
*
90,000
Total cost ................................
$19.00
$21.00
$570,000
$630,000
*
The remaining $6 of fixed overhead cost would not be relevant,
because it will continue regardless of whether the company makes
or buys the parts.
complete analysis is:
Make
Buy
Total cost, as above ........................................
$570,000
$630,000
Rental value of the space (opportunity cost) .....
80,000
Total cost, including opportunity cost ...............
$650,000
$630,000
Net advantage in favor of buying .....................
$20,000
Solutions Manual, Chapter 7 23
Exercise 7-12 (15 minutes)
The company should accept orders first for Product C, second for Product
A, and third for Product B. The computations are:
Product
A
Product
B
Product
C
(1)
Direct materials required per unit ......
$24
$15
$9
(2)
Cost per pound ................................
$3
$3
$3
(3)
Pounds required per unit (1) ÷ (2) ....
8
5
3
(4)
Contribution margin per unit .............
$32
$14
$21
(5)
Contribution margin per pound of
materials used (4) ÷ (3) ................
$4.00
$2.80
$7.00
Product A uses more material (the constrained resource) than Product B,
24 Managerial Accounting for Managers, 4th Edition
Exercise 7-13 (10 minutes)
Sales value after further processing
(7,000 units × $12 per unit) ..........................
$84,000
Sales value at the split-off point
(7,000 units × $9 per unit) ...........................
63,000
Incremental revenue from further processing ...
21,000
Cost of further processing ...............................
9,500
Profit from further processing ..........................
$11,500
Solutions Manual, Chapter 7 25
Exercise 7-14 (20 minutes)
1.
Fixed cost per mile ($3,200* ÷ 10,000 miles) ...
$0.32
Variable operating cost per mile .......................
0.14
Average cost per mile ......................................
$0.46
*
Depreciation ..............................
$1,600
Insurance ..................................
1,200
Garage rent ...............................
360
Automobile tax and license .........
40
Total .........................................
$3,200
result of the trip, so they are irrelevant as well. The garage rent is
relevant only if she could avoid paying part of it if she drives her own
car.
are inclined to think that variable costs are always relevant and fixed
costs are always irrelevant in decisions. This requirement helps to dispel
that notion.)
26 Managerial Accounting for Managers, 4th Edition
Exercise 7-15 (30 minutes)
No, the bilge pump product line should not be discontinued. The
computations are:
Contribution margin lost if the line is dropped .....
$(460,000)
Fixed costs that can be avoided:
Advertising .....................................................
$270,000
Salary of the product line manager ..................
32,000
Insurance on inventories .................................
8,000
310,000
Net disadvantage of dropping the line .................
$(150,000)
The same solution can be obtained by preparing comparative income
statements:
Keep
Product
Line
Drop
Product
Line
Difference:
Net
Operating
Income
Increase or
(Decrease)
Sales ...............................................
$850,000
$ 0
$(850,000)
Variable expenses:
Variable manufacturing expenses ...
330,000
0
330,000
Sales commissions ........................
42,000
0
42,000
Shipping .......................................
18,000
0
18,000
Total variable expenses ....................
390,000
0
390,000
Contribution margin .........................
460,000
0
(460,000)
Fixed expenses:
Advertising ...................................
270,000
0
270,000
Depreciation of equipment .............
80,000
80,000
0
General factory overhead ...............
105,000
105,000
0
Salary of product line manager ......
32,000
0
32,000
Insurance on inventories................
8,000
0
8,000
Purchasing department ..................
45,000
45,000
0
Total fixed expenses .........................
540,000
230,000
310,000
Net operating loss ............................
$ (80,000)
$(230,000)
$(150,000)
Solutions Manual, Chapter 7 27
Exercise 7-16 (30 minutes)
1. The relevant costs of a hunting trip would be:
Travel expense (100 miles @ $0.21 per mile) .
$21
Shotgun shells .............................................
20
One bottle of whiskey ...................................
15
Total ............................................................
$56
The money lost in the poker game is not relevant because Bill would
have played poker even if he did not go hunting. He plays poker every
weekend.
go on another hunting trip.
2. If Bill gets lucky and bags another two ducks, all of his costs are likely to
be about the same as they were on his last trip. Therefore, it really
doesn’t cost him anything to shoot the last two ducks—except possibly
hunting trip.
3. In a decision of whether to give up hunting entirely, more of the costs
listed by John are relevant. If Bill did not hunt, he would not need to
pay for: gas, oil, and tires; shotgun shells; the hunting license; and the
28 Managerial Accounting for Managers, 4th Edition
Exercise 7-16 (continued)
These three requirements illustrate the slippery nature of costs. A cost
Solutions Manual, Chapter 7 29
Exercise 7-17 (10 minutes)
Contribution margin lost if the Linens Department is dropped:
Lost from the Linens Department ..........................................
$(600,000)
Lost from the Hardware Department (10% × $2,100,000) ......
(210,000)
Total lost contribution margin ..................................................
(810,000)
Fixed costs that can be avoided ($800,000 – $340,000) ............
460,000
Decrease in profits for the company as a whole ........................
$(350,000)
Problem 7-18 (60 minutes)
1.
Selling price per unit ............................................
$32
Variable expenses per unit ...................................
18
*
Contribution margin per unit ................................
$14
