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Solutions Manual, Chapter 7 31
Problem 7-18 (continued)
Given this information, the simplest approach to the solution is:
Contribution margin lost if the plant is closed
(3,000 units × $14 per unit*) ..........................
$(42,000)
Fixed costs that can be avoided if the plant is
closed:
Fixed manufacturing overhead cost ($300,000
× 2/12 = $50,000; $50,000 × 40%) .............
$20,000
Fixed selling cost ($210,000 × 2/12 =
$35,000; $35,000 × 20%) ............................
7,000
27,000
Net disadvantage of closing the plant .................
$(15,000)
*$32.00 – ($10.00 + $4.50 + $2.30 + $1.20) = $14.00
Continue
to
Operate
Close the
Plant
Sales (3,000 units × $32 per unit) ...............
$ 96,000
$ 0
Variable expenses (3,000 units × $18 per
unit) ........................................................
54,000
0
Contribution margin ....................................
42,000
0
Fixed expenses:
Fixed manufacturing overhead cost:
$300,000 × 2/12 ...................................
50,000
$300,000 × 2/12 × 60% .......................
30,000
Fixed selling expense:
$210,000 × 2/12 ...................................
35,000
$210,000 × 2/12 × 80% .......................
28,000
Total fixed expenses ...................................
85,000
58,000
Net operating income (loss) ........................
$(43,000)
$(58,000)
32 Managerial Accounting for Managers, 4th Edition
Problem 7-18 (continued)
5. The relevant costs are those that can be avoided by purchasing from the
outside manufacturer. These costs are:
Variable manufacturing costs .......................................
$16.80
Fixed manufacturing overhead cost ($300,000 × 75%
= $225,000; $225,000 ÷ 60,000 units) .....................
3.75
Variable selling expense ($1.20 × 1/3) .........................
0.40
Total costs avoided .....................................................
$20.95
To be acceptable, the outside manufacturer’s quotation must be
less
Solutions Manual, Chapter 7 33
Problem 7-19 (60 minutes)
1. No, the Housekeeping program should not be discontinued. It is actually
generating a positive program segment margin and is, of course,
providing a valuable service to seniors. Computations to support this
conclusion follow:
Contribution margin lost if the Housekeeping
program is dropped ..........................................
$(80,000)
Fixed costs that can be avoided:
Liability insurance .............................................
$15,000
Program administrator’s salary ...........................
37,000
52,000
Decrease in net operating income for the
organization as a whole.....................................
$(28,000)
The same result can be obtained with the alternative analysis below:
Current
Total
Total If
House-
keeping Is
Dropped
Difference:
Net
Operating
Income
Increase or
(Decrease)
Revenues ....................................
$900,000
$660,000
$(240,000)
Variable expenses ........................
490,000
330,000
160,000
Contribution margin .....................
410,000
330,000
(80,000)
Fixed expenses:
Depreciation* ...........................
68,000
68,000
0
Liability insurance .....................
42,000
27,000
15,000
Program administrators’ salaries
115,000
78,000
37,000
General administrative overhead
180,000
180,000
0
Total fixed expenses ....................
405,000
353,000
52,000
Net operating income (loss) .........
$ 5,000
$(23,000)
$ (28,000)
charity.
34 Managerial Accounting for Managers, 4th Edition
Problem 7-19 (continued)
2. To give the administrator of the entire organization a clearer picture of
the financial viability of each of the organization’s programs, the general
administrative overhead should not be allocated. It is a common cost
that should be deducted from the total program segment margin. A
better income statement would be:
Home
Nursing
Meals On
Wheels
House-
keeping
Total
Revenues .............................
$260,000
$400,000
$240,000
$900,000
Variable expenses .................
120,000
210,000
160,000
490,000
Contribution margin ..............
140,000
190,000
80,000
410,000
Traceable fixed expenses:
Depreciation ......................
8,000
40,000
20,000
68,000
Liability insurance ..............
20,000
7,000
15,000
42,000
Program administrators’
salaries ...........................
40,000
38,000
37,000
115,000
Total traceable fixed
expenses ...........................
68,000
85,000
72,000
225,000
Program segment margins ....
$ 72,000
$105,000
$ 8,000
185,000
General administrative
overhead ...........................
180,000
Net operating income ...........
$ 5,000
Solutions Manual, Chapter 7 35
Problem 7-20 (15 minutes)
1.
Per 16-Ounce
T-Bone
Sales from further processing:
Sales price of one filet mignon (6 ounces ×
$4.00 per pound ÷ 16 ounces per pound) .....
$1.50
Sales price of one New York cut (8 ounces ×
$2.80 per pound ÷ 16 ounces per pound) .....
1.40
Total revenue from further processing ................
2.90
Less sales revenue from one T-bone steak ..........
2.25
Incremental revenue from further processing ......
0.65
Less cost of further processing ...........................
0.25
Profit per pound from further processing ............
$0.40
2. The T-bone steaks should be processed further into the filet mignon and
sold outright or processed further; thus, this cost should be ignored in
the decision.
36 Managerial Accounting for Managers, 4th Edition
Problem 7-21 (30 minutes)
1.
Contribution margin lost if the flight is
discontinued .....................................................
$(12,950)
Flight costs that can be avoided if the flight is
discontinued:
Flight promotion ...............................................
$ 750
Fuel for aircraft .................................................
5,800
Liability insurance (1/3 × $4,200) ......................
1,400
Salaries, flight assistants ...................................
1,500
Overnight costs for flight crew and assistants .....
300
9,750
Net decrease in profits if the flight is discontinued .
$ (3,200)
The following costs are not relevant to the decision:
Cost
Reason
Salaries, flight crew
Fixed annual salaries, which will
not change.
Depreciation of aircraft
Sunk cost.
Liability insurance (two-thirds)
Two-thirds of the liability insurance
is unaffected by this decision.
Baggage loading and flight
preparation
This is an allocated cost that will
continue even if the flight is
discontinued.
Solutions Manual, Chapter 7 37
Problem 7-21 (continued)
Alternative Solution:
Keep the
Flight
Drop the
Flight
Difference:
Net
Operating
Income
Increase or
(Decrease)
Ticket revenue ......................................
$14,000
$ 0
$(14,000)
Variable expenses ..................................
1,050
0
1,050
Contribution margin ...............................
12,950
0
(12,950)
Less flight expenses:
Salaries, flight crew .............................
1,800
1,800
0
Flight promotion .................................
750
0
750
Depreciation of aircraft ........................
1,550
1,550
0
Fuel for aircraft ...................................
5,800
0
5,800
Liability insurance ...............................
4,200
2,800
1,400
Salaries, flight assistants .....................
1,500
0
1,500
Baggage loading and flight preparation
1,700
1,700
0
Overnight costs for flight crew and
assistants at destination....................
300
0
300
Total flight expenses ..............................
17,600
7,850
9,750
Net operating loss .................................
$ (4,650)
$ (7,850)
$ (3,200)
contribution margins that exceed their avoidable costs (such as in the
reduce total costs, and profits would decline. Second, these flights might
38 Managerial Accounting for Managers, 4th Edition
Problem 7-22 (30 minutes)
Unit
Total—
5,000 units
Sales from the order ($50 × 84%) ......................
$42
$210,000
Less costs associated with the order:
Direct materials ...............................................
15
75,000
Direct labor .....................................................
8
40,000
Variable manufacturing overhead ......................
3
15,000
Variable selling expense ($4 × 25%) .................
1
5,000
Special machine ($10,000 ÷ 5,000 units) ..........
2
10,000
Total costs .........................................................
29
145,000
Net increase in profits .........................................
$13
$ 65,000
2.
Sales from the order:
Reimbursement for costs of production (variable
production costs of $26 plus fixed manufacturing
overhead cost of $9 = $35 per unit; $35 per unit ×
5,000 units) ...........................................................
$175,000
Fixed fee ($1.80 per unit × 5,000 units) .....................
9,000
Total revenue ..............................................................
184,000
Less incremental costs—variable production costs
($26 per unit × 5,000 units) ......................................
130,000
Net increase in profits ..................................................
$ 54,000
3.
Sales:
From the U.S. Army (above) ......................................
$184,000
From regular channels ($50 per unit × 5,000 units) ....
250,000
Net decrease in revenue ..............................................
(66,000)
Less variable selling expenses avoided if the Army’s
order is accepted ($4 per unit × 5,000 units) .............
20,000
Net decrease in profits if the Army’s order is accepted ...
$(46,000)
Note: This answer assumes that regular customers will return after this
one-time special order rather than buy from a competitor in the future.
Solutions Manual, Chapter 7 39
Problem 7-23 (60 minutes)
as shown below:
Total manufacturing overhead cost per box of Chap-Off ..
$1.40
Less fixed portion ($90,000 ÷ 100,000 boxes) ................
0.90
Variable overhead cost per box ......................................
$0.50
Direct materials ............................................................
$3.60
Direct labor ..................................................................
2.00
Variable manufacturing overhead ..................................
0.50
Total variable cost per box ............................................
$6.10
Direct materials ($3.60 × 75%) .....................................
$2.70
Direct labor ($2.00 × 90%) ...........................................
1.80
Variable manufacturing overhead ($0.50 × 90%) ...........
0.45
Cost of tube from outside .............................................
1.35
Total variable cost per box ............................................
$6.30
tubes internally.
40 Managerial Accounting for Managers, 4th Edition
Problem 7-23 (continued)
Another approach to the solution would be:
Cost avoided by purchasing the tubes:
Direct materials ($3.60 × 25%) ...........................
$0.90
Direct labor ($2.00 × 10%) .................................
0.20
Variable manufacturing overhead ($0.50 × 10%) ..
0.05
Total costs avoided ................................................
$1.15
*
Cost of purchasing the tubes from the outside ........
$1.35
Cost savings per box by making internally ...............
$0.20
*
This $1.15 is the cost of making one box of tubes internally
because it represents the overall cost savings that will be
realized per box of Chap-Off by purchasing the tubes from the
supplier.
2. The maximum purchase price would be $1.15 per box. The company
purchase price should be
less than
$1.15 per box.
