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Solutions Manual, Chapter 7 61
Case 7-30 (90 minutes)
1. The original cost of the facilities at Clayton is a sunk cost and should be
ignored in any decision. The decision being considered here is whether to
despite what the financial performance report indicates. Indeed, it might
be a better idea to consider shutting down the other facilities because the
rent on those facilities might be avoided.
The costs that are relevant in the decision to shut down the Clayton
facility are:
Increase in rent at Billings and Great Falls .................
$600,000
Decrease in local administrative expenses ..................
(90,000)
Net increase in costs ................................................
$510,000
decline in BSC’s profits.
Even though closing down the Clayton facility would result in a decline
customers).
62 Managerial Accounting for Managers, 4th Edition
Case 7-30 (continued)
Financial Performance
After Shutting Down the Clayton Facility
Rocky Mountain Region
Total
Sales .............................................................
$50,000,000
Selling and administrative expenses:
Direct labor .................................................
32,000,000
Variable overhead........................................
850,000
Equipment depreciation ...............................
3,900,000
Facility expense* .........................................
2,300,000
Local administrative expense** ....................
360,000
Regional administrative expense ...................
1,500,000
Corporate administrative expense .................
4,750,000
Total operating expense .................................
45,660,000
Net operating income .....................................
$ 4,340,000
* $2,800,000 – $1,100,000 + $600,000 = $2,300,000
** $450,000 – $90,000 = $360,000
2. If the Clayton facility is shut down, BSC’s profits will decline, employees
performance report look better.
recommendation. Presumably, if the corporate board were fully informed
of the consequences of this action, they would disapprove.
In sum, it is difficult to describe the recommendation to close the
Solutions Manual, Chapter 7 63
Case 7-30 (continued)
compounded by using an irrelevant facilities expense figure on the
performance report.
3. Prices should be set ignoring the depreciation on the Clayton facility. As
less business and lower profits.
64 Managerial Accounting for Managers, 4th Edition
Case 7-31 (90 minutes)
1. The lowest price Wesco could bid for the one-time special order of
shown below:
Direct materials:
AG-5: 300 pounds per lot × 20 lots = 6,000 pounds.
Substitute BH-3 on a one-for-one basis to its total of 3,500
pounds. If BH-3 is not used in this order, it will be salvaged
for $600. Therefore, the relevant cost is ............................
$ 600
The remaining 2,500 pounds would be AG-5 at a cost of
$1.20 per pound ..............................................................
3,000
KL-2: 200 pounds per lot × 20 lots = 4,000 pounds at $1.05
per pound .......................................................................
4,200
CW-7: 150 pounds per lot × 20 lots = 3,000 pounds at
$1.35 per pound ..............................................................
4,050
DF-6: 175 pounds per lot × 20 lots = 3,500 pounds. Use
3,000 pounds in inventory at $0.60 per pound ($0.70
market price – $0.10 handling charge), and purchase the
remaining 500 pounds at $0.70 per pound ........................
2,150
Total direct materials cost ...................................................
14,000
400 DLHs × $14.00 per DLH ...............................................
5,600
100 DLHs × $21.00 per DLH ...............................................
2,100
Total direct labor cost .........................................................
7,700
500 DLHs × $3.00 per DLH .................................................
1,500
Total relevant cost of the special order...................................
$23,200
Solutions Manual, Chapter 7 65
Case 7-31 (continued)
2. In this part, we calculate the price for recurring orders of 20,000 pounds
practice in business.
Direct materials: Because the initial order will exhaust existing
AG-5: 6,000 pounds × $1.20 per pound ............................
$ 7,200
KL-2: 4,000 pounds × $1.05 per pound .............................
4,200
CW-7: 3,000 pounds × $1.35 per pound ............................
4,050
DF-6: 3,500 pounds × $0.70 per pound .............................
2,450
Total direct materials cost .................................................
17,900
be done on overtime.
Regular time 450 DLHs × $14.00 per DLH .........................
6,300
Overtime premium 50 DLHs × $21.00 per DLH ..................
1,050
Total direct labor cost .......................................................
7,350
manufacturing overhead.
Manufacturing overhead applied:
500 DLHs × $13.50 per DLH ..........................................
6,750
Full manufacturing cost ......................................................
32,000
Markup (40% × $32,000) ...................................................
12,800
Selling price (full manufacturing cost plus markup) ...............
$44,800
66 Managerial Accounting for Managers, 4th Edition
Case 7-32 (120 minutes)
1. The product margins computed by the accounting department for the
drums and bike frames should not be used in the decision of which
to the amount of the constrained resource—welding time—that they
use. A product with a very low margin may be desirable if it uses very
making this decision.
2. Students may have answered this question assuming that direct labor is
a variable cost, even though the case strongly hints that direct labor is a
fixed cost. The solution is shown here assuming that direct labor is
fixed. The solution assuming that direct labor is variable will be shown in
part (4).
Solution assuming direct labor is fixed
Manufactured
Purchased
WVD
Drums
WVD
Drums
Bike
Frames
Selling price .....................................
$149.00
$149.00
$239.00
Variable costs:
Direct materials .............................
138.00
52.10
99.40
Variable manufacturing overhead ....
0.00
1.35
1.90
Variable selling and administrative ..
0.75
0.75
1.30
Total variable cost ............................
138.75
54.20
102.60
Contribution margin ..........................
$ 10.25
$ 94.80
$136.40
Solutions Manual, Chapter 7 67
Case 7-32 (continued)
3. Because the demand for the welding machine exceeds the 2,000 hours
that are available, products that use the machine should be prioritized
based on their contribution margin
per welding hour
. The computations
are carried out below under the assumption that direct labor is a fixed
cost and then under the assumption that it is a variable cost.
Solution assuming direct labor is fixed
Manufactured
WVD
Drums
Bike
Frames
Contribution margin per unit (above) (a) ............
$94.80
$136.40
Welding hours per unit (b) .................................
0.4 hour
0.5 hour
Contribution margin per welding hour (a) ÷ (b) ..
$237.00
per hour
$272.80
per hour
68 Managerial Accounting for Managers, 4th Edition
Case 7-32 (continued)
Analysis assuming direct labor is a fixed cost
(a)
(b)
(c)
(a) × (c)
(a) × (b)
Quantity
Unit
Contri-
bution
Margin
Welding
Time
per Unit
Total
Welding
Time
Balance
of
Welding
Time
Total
Contri-
bution
Total hours available ...................
2,000
Bike frames produced .................
1,600
$136.40
0.5
800
1,200
$218,240
WVD Drums—make ....................
3,000
$94.80
0.4
1,200
0
284,400
WVD Drums—buy ......................
3,000
$10.25
30,750
Total contribution margin ............
533,390
Less: Contribution margin from
present operations: 5,000
drums × $94.80 CM per drum ..
474,000
Increased contribution margin
and net operating income ........
$ 59,390
