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Solutions Manual, Chapter 7 69
Case 7-32 (continued)
4. The computation of the contribution margins and the analysis of the
best product mix are repeated here under the assumption that direct
labor costs are variable.
Solution assuming direct labor is a variable cost
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
Direct labor .................................
0.00
3.60
28.80
Variable manufacturing overhead ..
0.00
1.35
1.90
Variable selling and administrative
0.75
0.75
1.30
Total variable cost ..........................
138.75
57.80
131.40
Contribution margin ........................
$ 10.25
$ 91.20
$107.60
Solution assuming direct labor is a variable cost
Manufactured
WVD
Drums
Bike
Frames
Contribution margin per unit (above) (a) ..........
$91.20
$107.60
Welding hours per unit (b) ...............................
0.4 hour
0.5 hour
Contribution margin per welding hour (a) ÷ (b)
$228.00
per hour
$215.20
per hour
When direct labor is assumed to be a variable cost, the conclusion is
really does matter.
70 Managerial Accounting for Managers, 4th Edition
Case 7-32 (continued)
Solution assuming direct labor is a variable 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
WVD Drums—make .....................
5,000
$91.20
0.4
2,000
0
$456,000
Bike frames produced ..................
0
$107.60
0.5
0
0
0
WVD Drums—buy .......................
1,000
$10.25
10,250
Total contribution margin .............
466,250
Less: Contribution margin from
present operations: 5,000
drums × $91.20 CM per drum ...
456,000
Increased contribution margin
and net operating income .........
$ 10,250
Solutions Manual, Chapter 7 71
Case 7-32 (continued)
Production
Direct Labor-
Hours Per Unit
Total Direct
Labor-Hours
Plan 1:
Bike frames .................
1,600
1.6*
2,560
WVD drums ................
3,000
0.2**
600
3,160
Plan 2:
WVD drums ................
5,000
0.2**
1,000
* $28.80 ÷ $18.00 per hour = 1.6 hour
** $3.60 ÷ $18.00 per hour = 0.2 hour
to making bike frames would not jeopardize operations elsewhere, then
Plan 1 is indeed the better plan. However, if taking on the bike frame as
a new product would lead to pressure to hire another worker, more
analysis is in order. It is still best to view direct labor as a fixed cost, but
72 Managerial Accounting for Managers, 4th Edition
Case 7-32 (continued)
Contribution margin from Plan 1:
Bike frames produced (1,600 × $136.40) ............
218,240
WVD Drums—make (3,000 × $94.80) .................
284,400
WVD Drums—buy (3,000 × $10.25) ...................
30,750
Total contribution margin ...................................
533,390
Less: Additional fixed labor costs ..........................
34,200
Net effect of Plan 1 on net operating income .........
$499,190
Contribution margin from Plan 2: ..........................
WVD Drums—make (5,000 × $94.80) .................
$474,000
WVD Drums—buy (1,000 × $10.25) ...................
10,250
Net effect of Plan 2 on net operating income .........
$484,250
still optimal.
Solutions Manual, Chapter 7 75
Case 7-33 (75 minutes)
produced, especially if long-term contracts are required with outside
suppliers. QualSupport should also consider the economic impact that
closing Denver Cover will have on the community and how this might
affect QualSupport’s other operations in the region.
therefore are relevant to the decision:
Materials ...................................
$14,000,000
Labor:
Direct .....................................
$13,100,000
Supervision .............................
900,000
Indirect plant ..........................
4,000,000
18,000,000
Differential pension cost
($5,000,000 – $3,000,000) ......
2,000,000
Total annual relevant costs .........
$34,000,000
Depreciation—equipment .......................................
$ 3,200,000
Depreciation—building ...........................................
7,000,000
Continuing pension cost ($5,000,000 – $2,000,000).
3,000,000
Plant manager and staff .........................................
800,000
Corporate expenses ...............................................
4,000,000
Total annual continuing costs ..................................
$18,000,000
74 Managerial Accounting for Managers, 4th Edition
Case 7-33 (continued)
represents costs incurred outside Denver Cover and assigned to the
plant.
c. The following nonrecurring costs would arise in the year that the
plant is closed, but would not be incurred in any other year:
Termination charges on canceled material orders
($14,000,000 × 20%) ..........................................
$2,800,000
Employment assistance ...........................................
1,500,000
Total recurring costs ...............................................
$4,300,000
3. No, the plant should not be closed. The computations are:
First Year
Other Years
Cost of purchasing the covers outside .....
$(35,000,000)
$(35,000,000)
Costs avoided by closing the plant
(Part 2a) .............................................
34,000,000
34,000,000
Cost of closing the plant (first year only) .
(4,300,000)
Salvage value of equipment and building .
3,200,000
Net advantage (disadvantage) of closing
the plant .............................................
$ (2,100,000)
$ (1,000,000)
Solutions Manual, Chapter 7 75
Case 7-33 (continued)
decision include:
a. Alternative uses of the building and equipment.
b. Any tax implications.
future years.
e. The value of the time Vosilo and his staff would have spent managing
matters.
f. The morale of QualSupport employees at remaining plants.
