Solutions Manual, Chapter 7 51
Problem 7-26 (continued)
2. Based on the data in (1), the North Store should not be closed. If the
cause an even greater decline in the company’s overall net income. If
3. Under these circumstances, the North Store should be closed. The
computations are as follows:
Gross margin lost if the North Store is closed (part 1) …..
$(316,800)
Gross margin gained from the East Store: $720,000 ×
1/4 = $180,000; $180,000 × 45%* = $81,000 …………
81,000
Net operating loss in gross margin …………………………...
(235,800)
Less costs that can be avoided if the North Store is
closed (part 1) …………………………………………………..
287,000
Net advantage of closing the North Store …………………..
$ 51,200
*The East Store’s gross margin percentage is:
52 Managerial Accounting for Managers, 4th Edition
Problem 7-27 (60 minutes)
1. A product should be processed further if the incremental revenue from
the further processing exceeds the incremental costs. The incremental
Selling price of the silver polish, per jar ……………..
$4.00
Selling price of 1/4 pound of Grit 337 ($2.00 ÷ 4) .
0.50
Incremental revenue per jar …………………………...
$3.50
The incremental variable costs are:
Other ingredients …………………………………………
$0.65
Direct labor …………………………………………………
1.48
Variable manufacturing overhead (25% × $1.48) ..
0.37
Variable selling costs (7.5% × $4) ……………………
0.30
Incremental variable cost per jar ……………………..
$2.80
silver polish or sold outright.
Solutions Manual, Chapter 7 53
Problem 7-27 (continued)
2. Only the cost of advertising and the cost of the production supervisor
are avoidable if production of the silver polish is discontinued.
Therefore, the number of jars of silver polish that must be sold each
month to justify continued processing of the Grit 337 into silver polish
is:
Production supervisor ……….
$3,000
Advertising—direct……………
4,000
Avoidable fixed costs ………..
$7,000
= 10,000 jars per month
than 10,000 jars per month, then continued processing of the Grit 337
powder, etc.):
Problem 7-27 (continued)
9,000
Jars of
Polish;
or 2,250
pounds
of Grit
337
10,000
Jars of
Polish;
or 2,500
pounds
of Grit
337
11,000
Jars of
Polish;
or 2,750
pounds
of Grit
337
Sales of Silver Polish:
Sales @ $4.00 per jar …………………….
$36,000
$40,000
$44,000
Variable expenses:
Production cost of Grit 337 @ $1.60
per pound …………………………………
3,600
*
4,000
*
4,400
*
Further processing and selling costs of
the polish @ $2.80 per jar …………….
25,200
28,000
30,800
Total variable expenses …………………….
28,800
32,000
35,200
Contribution margin …………………………
7,200
8,000
8,800
Avoidable fixed costs:
Production supervisor …………………….
3,000
3,000
3,000
Advertising ………………………………….
4,000
4,000
4,000
Total avoidable fixed costs …………………
7,000
7,000
7,000
Total contribution to common fixed
costs and to profits………………………..
$ 200
$ 1,000
$ 1,800
Sales of Grit 337:
Sales @ $2.00 per pound ………………..
$ 4,500
$ 5,000
$ 5,500
Variable expenses:
Production cost of Grit 337 @ $1.60
per pound …………………………………
3,600
*
4,000
*
4,400
*
Contribution to common fixed costs and
to profits …………………………………….
$ 900
$ 1,000
$ 1,100
*
This cost will be incurred regardless of whether the Grit 337 is further
processed into silver polish or sold outright as cleaning powder;
therefore, it is not relevant to the decision, as stated earlier. It is
included in the computation above for the specific purpose of showing
that it will be incurred under either alternative. The same thing could
have been done with the depreciation on the mixing equipment.
Solutions Manual, Chapter 7 55
Problem 7-28 (60 minutes)
1. The $2.80 per drum general overhead cost is not relevant to the
decision because this cost will be the same regardless of whether the
Differential Costs
Per Drum
Total Differential Costs—
60,000 Drums
Make
Buy
Make
Buy
Outside supplier’s price .
$18.00
$1,080,000
Direct materials …………
$10.35
$621,000
Direct labor
($6.00 × 70%) ……….
4.20
252,000
Variable overhead
($1.50 × 70%) ……….
1.05
63,000
Supervision ………………
0.75
45,000
Equipment rental* ……..
2.25
*
135,000
Total cost …………………
$18.60
$18.00
$1,116,000
$1,080,000
Difference in favor of buying ..…………………………
$0.60
$36,000
*
$135,000 per year ÷ 60,000 drums = $2.25 per drum.
Difference …………………..
Problem 7-28 (continued)
spread over more units.
Differential
Cost Per Drum
Total Differential Cost—
75,000 Drums
Make
Buy
Make
Buy
Outside supplier’s price ….
$18.00
$1,350,000
Direct materials ……………
$10.35
$776,250
Direct labor …………………
4.20
315,000
Variable overhead …………
1.05
78,750
Supervision ($45,000 ÷
75,000 drums) …………..
0.60
45,000
Equipment rental
($135,000 ÷ 75,000
drums) …………………….
1.80
135,000
Total cost ……………………
$18.00
$18.00
$1,350,000
$1,350,000
Problem 7-28 (continued)
Differential
Costs Per Drum
Total Differential Cost—
90,000 Drums
Make
Buy
Make
Buy
Outside supplier’s price ….
$18.00
$1,620,000
Direct materials ……………
$10.35
$931,500
Direct labor …………………
4.20
378,000
Variable overhead …………
1.05
94,500
Supervision ($45,000 ÷
90,000 drums) …………..
0.50
45,000
Equipment rental
($135,000 ÷ 90,000
drums) …………………….
1.50
135,000
Total cost ……………………
$17.60
$18.00
$1,584,000
$1,620,000
58 Managerial Accounting for Managers, 4th Edition
Problem 7-28 (continued)
a. Will volume in future years increase, or will it remain constant at
equipment becomes more desirable, as shown in the computations
above.)
the outside supplier?
c. Will costs for materials and labor increase in future years?
d. Will the outside supplier dependably meet shipping schedules?
f. What is the labor outlook in the supplier’s industry (e.g., are frequent
labor strikes likely)?
g. If the outside supplier’s offer is accepted and the need for drums
provide more than 60,000 drums per year?
h. Will the rental cost of the equipment change in the future?
Solutions Manual, Chapter 7 59
Case 7-29 (45 minutes)
revenues and costs are:
Per Sweater
Added revenue ($30.00 – $20.00) …….
$10.00
Added costs:
Buttons, thread, lining ………………….
$2.00
Direct labor ……………………………….
5.80
7.80
Added contribution margin ………………
$ 2.20
Thus, the company will gain $2.20 in contribution margin for each
spindle of yarn that is further processed into a sweater. The fixed
2. The lowest price the company should accept is $27.80 per sweater. The
simplest approach to this answer is:
Present selling price per sweater ………
$30.00
Less added contribution margin being
realized on each sweater sold ………..
2.20
Minimum selling price per sweater …….
$27.80
If the wool yarn is sold outright, then the company will realize a
contribution margin of $9.40 per spindle:
Per Spindle
Selling price ……………………..
$20.00
Variable expenses:
Raw wool ………………………
$7.00
Direct labor ……………………
3.60
10.60
Contribution margin ……………
$ 9.40
60 Managerial Accounting for Managers, 4th Edition
Case 7-29 (continued)
price is:
Variable costs of producing a spindle of yarn:
Raw wool ……………………………………………
$7.00
Direct labor …………………………………………
3.60
$10.60
Added variable costs of producing a sweater:
Buttons, etc. ………………………………………..
2.00
Direct labor …………………………………………
5.80
7.80
Total variable costs ………………………………….
18.40
Opportunity cost—contribution margin if the
yarn is sold outright ………………………………
9.40
Minimum selling price per sweater ………………
$27.80