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Solutions Manual, Chapter 7 41
Problem 7-23 (continued)
3. At a volume of 120,000 boxes, the company should buy the tubes. The
computations are:
Cost of making 120,000 boxes:
120,000 boxes × $1.15 per box ...................
$138,000
Rental cost of equipment .............................
40,000
Total cost ......................................................
$178,000
Cost of buying 120,000 boxes:
120,000 boxes × $1.35 per box ...................
$162,000
Or, on a total cost basis, the computations are:
Cost of making 120,000 boxes:
120,000 boxes × $6.10 per box ...................
$732,000
Rental cost of equipment .............................
40,000
Total cost ......................................................
$772,000
Cost of buying 120,000 boxes:
120,000 boxes × $6.30 per box ...................
$756,000
42 Managerial Accounting for Managers, 4th Edition
Problem 7-23 (continued)
4. Under these circumstances, the company should make the 100,000
boxes of tubes and purchase the remaining 20,000 boxes from the
outside supplier. The costs would:
Cost of making: 100,000 boxes × $1.15 per box .....
$115,000
Cost of buying: 20,000 boxes × $1.35 per box ........
27,000
Total cost ..............................................................
$142,000
Cost of making: 100,000 boxes × $6.10 per box .....
$610,000
Cost of buying: 20,000 boxes × $6.30 per box ........
126,000
Total cost ..............................................................
$736,000
from the outside supplier.
5. Management should take into account at least the following additional
factors:
future years.
e) The problem of finding an alternative source of supply if the supplier
proves to be undependable.
Solutions Manual, Chapter 7 43
Problem 7-24 (45 minutes)
1. Product RG-6 has a contribution margin of $8 per unit ($22 – $14 = $8).
If the plant closes, this contribution margin will be lost on the 16,000
units (8,000 units per month × 2 months) that could have been sold
during the two-month period. However, the company will be able to
avoid some fixed costs as a result of closing down. The analysis is:
Contribution margin lost by closing the plant for
two months ($8 per unit × 16,000 units) ..........
$(128,000)
Costs avoided by closing the plant for two months:
Fixed manufacturing overhead cost ($45,000
per month × 2 months = $90,000) ................
$90,000
Fixed selling costs ($30,000 per month × 10%
× 2 months) ................................................
6,000
96,000
Net disadvantage of closing, before start-up
costs ..............................................................
(32,000)
Add start-up costs .............................................
8,000
Disadvantage of closing the plant .......................
$ (40,000)
customers will not be met (no inventories are on hand), and their
business may be permanently lost to another supplier.
44 Managerial Accounting for Managers, 4th Edition
Problem 7-24 (continued)
Alternative Solution:
Plant
Kept
Open
Plant
Closed
Difference:
Net
Operating
Income
Increase or
(Decrease)
Sales (8,000 units × $22 per
unit × 2).............................
$ 352,000
$ 0
$(352,000)
Variable expenses (8,000 units
× $14 per unit × 2) .............
224,000
0
224,000
Contribution margin ...............
128,000
0
(128,000)
Less fixed costs:
Fixed manufacturing
overhead costs ($150,000
× 2) .................................
300,000
210,000
90,000
Fixed selling costs
($30,000 × 2) ..................
60,000
54,000
*
6,000
Total fixed costs .....................
360,000
264,000
96,000
Net operating loss before
start-up costs ......................
(232,000)
(264,000)
(32,000)
Start-up costs ........................
0
(8,000)
(8,000)
Net operating loss ..................
$(232,000)
$(272,000)
$ (40,000)
*
$30,000 × 90% = $27,000 × 2 = $54,000
Solutions Manual, Chapter 7 45
Problem 7-24 (continued)
2. Birch Company will not be affected at a level of 11,000 total units sold
over the two-month period. The computations are:
Cost avoided by closing the plant for two months
(see above) .........................................................
$96,000
Less start-up costs .................................................
8,000
Net avoidable costs ................................................
$88,000
Net avoidable costs $88,000
=
Per unit contribution margin $8 per unit
= 11,000 units
Verification:
Operate at
11,000
Units for
Two
Months
Close for
Two
Months
Sales (11,000 units × $22 per unit) ..........
$ 242,000
$ 0
Variable expenses (11,000 units × $14
per unit) ..............................................
154,000
0
Contribution margin .................................
88,000
0
Fixed expenses:
Manufacturing overhead ($150,000 and
$105,000, × 2) ..................................
300,000
210,000
Selling ($30,000 and $27,000, × 2)........
60,000
54,000
Total fixed expenses ................................
360,000
264,000
Start-up costs .........................................
0
8,000
Total costs ..............................................
360,000
272,000
Net operating loss ...................................
$(272,000)
$(272,000)
46 Managerial Accounting for Managers, 4th Edition
Problem 7-25 (60 minutes)
1.
Debbie
Trish
Sarah
Mike
Sewing
Kit
Direct labor cost per unit ..
$ 3.20
$2.00
$ 5.60
$ 4.00
$ 1.60
Direct labor hours per
unit* (a) .......................
0.40
0.25
0.70
0.50
0.20
Selling price .....................
$13.50
$5.50
$21.00
$10.00
$ 8.00
Variable costs:
Direct materials .............
4.30
1.10
6.44
2.00
3.20
Direct labor ...................
3.20
2.00
5.60
4.00
1.60
Variable overhead ..........
0.80
0.50
1.40
1.00
0.40
Total variable costs ...........
8.30
3.60
13.44
7.00
5.20
Contribution margin (b) ....
$ 5.20
$1.90
$ 7.56
$ 3.00
$ 2.80
Contribution margin per
DLH (b) ÷ (a) ................
$13.00
$7.60
$10.80
$ 6.00
$14.00
* Direct labor cost per unit ÷ 8 direct labor hours.
2.
Product
DLH Per
Unit
Estimated
Sales
(units)
Total
Hours
Debbie........................
0.40
hours
50,000
20,000
Trish ...........................
0.25
hours
42,000
10,500
Sarah .........................
0.70
hours
35,000
24,500
Mike ...........................
0.50
hours
40,000
20,000
Sewing Kit ..................
0.20
hours
325,000
65,000
Total hours required ....
140,000
3. Because the Mike doll has the lowest contribution margin per labor hour,
Solutions Manual, Chapter 7 47
Problem 7-25 (continued)
An alternative means of deriving this solution is as follows:
Amount of constrained resource available ................
130,000 hours
Less: Constrained resource required for production
of 325,000 units of the Sewing Kit .......................
65,000 hours
Remaining constrained resource available ................
65,000 hours
Less: Constrained resource required for production
of 50,000 units of the Debbie doll .......................
20,000 hours
Remaining constrained resource available ................
45,000 hours
Less: Constrained resource required for production
of 35,000 units of the Sarah doll .........................
24,500 hours
Remaining constrained resource available ................
20,500 hours
Less: Constrained resource required for production
of 42,000 units of the Trish doll ...........................
10,500 hours
Remaining constrained resource available ................
10,000 hours
Less: Constrained resource required for production
of 20,000 units of the Mike doll ...........................
10,000 hours
Remaining constrained resource available ................
0 hours
Sewing
Kit
Debbie
Sarah
Trish
Mike
Unit contribution
margin (a) ..........
$2.80
$5.20
$7.56
$1.90
$3.00
Optimal production
plan (b) ..............
325,000
50,000
35,000
42,000
20,000
Total contribution
margin (a) × (b) .
$910,000
$260,000
$264,600
$79,800
$60,000
48 Managerial Accounting for Managers, 4th Edition
Problem 7-25 (continued)
profit.
6. Additional output could be obtained in a number of ways including
Note: Some would argue that direct labor is a fixed cost in this situation
done by misclassifying a fixed cost as a variable cost—providing that the
The products will be
ranked
exactly the same—in terms of the
Solutions Manual, Chapter 7 49
Problem 7-26 (60 minutes)
1. The simplest approach to the solution is:
Gross margin lost if the store is closed ............
$(316,800)
Costs that can be avoided:
Sales salaries ...........................................
$70,000
Direct advertising .....................................
51,000
Store rent ................................................
85,000
Delivery salaries .......................................
4,000
Store management salaries
($21,000 – $12,000) ..............................
9,000
Salary of new manager ............................
11,000
General office compensation .....................
6,000
Insurance on inventories ($7,500 × 2/3) ...
5,000
Utilities ....................................................
31,000
Employment taxes ...................................
15,000
*
287,000
Decrease in company profits if the North
Store is closed .........................................
$ (29,800)
*Salaries avoided by closing the store:
Sales salaries ..........................................
$70,000
Delivery salaries ......................................
4,000
Store management salaries ......................
9,000
Salary of new manager ............................
11,000
General office compensation ....................
6,000
Total avoided .............................................
100,000
Employment tax rate ..................................
× 15%
Employment taxes avoided .........................
$15,000
50 Managerial Accounting for Managers, 4th Edition
Problem 7-26 (continued)
Alternative Solution:
North
Store
Kept
Open
North
Store
Closed
Difference:
Net
Operating
Income
Increase or
(Decrease)
Sales ...........................................
$720,000
$ 0
$(720,000)
Cost of goods sold .......................
403,200
0
403,200
Gross margin ...............................
316,800
0
(316,800)
Selling and administrative
expenses:
Selling expenses:
Sales salaries ..........................
70,000
0
70,000
Direct advertising ...................
51,000
0
51,000
General advertising .................
10,800
10,800
0
Store rent ..............................
85,000
0
85,000
Depreciation of store fixtures ...
4,600
4,600
0
Delivery salaries .....................
7,000
3,000
4,000
Depreciation of delivery
equipment ...........................
3,000
3,000
0
Total selling expenses ................
231,400
21,400
210,000
Administrative expenses:
Store management salaries .....
21,000
12,000
9,000
Salary of new manager ...........
11,000
0
11,000
General office compensation ...
12,000
6,000
6,000
Insurance on fixtures and
inventory .............................
7,500
2,500
5,000
Utilities ..................................
31,000
0
31,000
Employment taxes ..................
18,150
3,150
15,000
*
General office—other ..............
18,000
18,000
0
Total administrative expenses ....
118,650
41,650
77,000
Total operating expenses ..............
350,050
63,050
287,000
Net operating income (loss) ..........
$(33,250)
$(63,050)
$ (29,800)
*See the computation on the prior page.
