978-1260153132 Chapter 12 Part 3

Solutions Manual, Chapter 12 21

Exercise 12-6 (20 minutes)

1. The value of relaxing the constraint can be determined by computing

the contribution margin per unit of the constrained resource:

Sofa

Sellin

g

price per unit ………………………………………..… $1,800

Variable cost per unit ……………………….………..………. 1,200

2. To answer this question, it is desirable to compute the contribution

margin per unit of the constrained resource for the Love Seat:

Love Seat

Sellin

g

price per unit ………………………………………...

.

$1,500

Variable cost per unit ……………………….………..……..

.

1,000

Contribution mar

g

in per unit (a)…………………………..

.

$ 500

g

3. The offer by the nearby upholstering company to upholster furniture for

$45 per hour should be accepted. The time would be used to upholster

Loveseats. If this increases the total production and sales of Loveseats,

the time would be worth $100 per hour—a net gain of $55 per hour. If

g

22 Managerial Accounting, 16th Edition

Exercise 12-7 (10 minutes)

1. The financial advantage (disadvantage) of further processing each

product is calculated as follows:

A B C

Sellin

g

price after further processin

g

… $20 $13 $32

Sellin

g

price at the split-off point …….. 16 8 25

Incremental revenue per pound or

2. Products A and C should be sold at the split-off point. Only product B

Solutions Manual, Chapter 12 23

Exercise 12-8 (30 minutes)

1.

A B C

(1) Contribution mar

g

in per unit……………………… $54 $100 $60

(2) Direct material cost per unit ……………………… $24 $80 $32

2. If the company has unlimited demand for all three products, it should

concentrate all of its available material on product A, which would yield the

highest total contribution margin of $108,000 computed as follows:

A B C

g

3. If customer demand is limited to 500 units per product the maximum

contribution margin of $82,000 is computed as follows:

A B C Total

Contribution mar

g

in per pound

Product A would be produced first because it earns the highest

contribution margin per pound. Since Product A has customer demand

of 500 units, it would consume 1,500 pounds of material (= 500 units ×

3 pounds per unit). Product C, which also has customer demand of 500

g

24 Managerial Accounting, 16th Edition

Exercise 12-8 (continued)

4. Assuming Barlow has customer demand of 500 units per product line

and that it has already used its 6,000 pounds in an optimal fashion, any

additional raw materials would have to be used to make more of

Solutions Manual, Chapter 12 25

Exercise 12-9 (15 minutes)

1. The financial advantage is computed as follows:

Per Unit

15,000

Units

Incremental sales …………………………. $14.00 $210,000

Incremental costs:

Direct materials ………………………….. 5.10 76,500

Direct labor ……………………………….. 3.80 57,000

2. The relevant cost is $1.50 (the variable selling and administrative

expenses). All other variable costs are sunk because the units have

26 Managerial Accounting, 16th Edition

Exercise 12-10 (15 minutes)

The financial advantage per unit and in total is computed as follows:

“Cost”

Per

Differential

Costs

Unit Make Buy Explanation

Direct materials ….. $3.10 $3.10 Can be avoided by buyin

g

Direct labor ……….. 2.70 2.70 Can be avoided by buyin

g

V

ariable

manufacturing

—

A

T

The company should make the starters, rather than continuing to buy

from the outside supplier. Making the starters provides a per unit

financial advantage of $0.50 per starter ($8.40 per unit – $7.90 per unit

g

Solutions Manual, Chapter 12 27

Exercise 12-11 (20 minutes)

The costs that can be avoided as a result of purchasing from the outside

are relevant in a make-or-buy decision. The analysis is:

Per Unit

Differential

Costs 30,000 Units

Make Buy Make Buy

Cost of purchasin

g

………………. $21.00 $630,000

Cost of makin

g

:

T

*

T

he remainin

g

$6 of fixed overhead cost ($9 per unit × 2/3 = $6

per unit) would not be relevant, because it will continue re

g

ardless

of whether the company makes or buys the parts.

The $80,000 rental value of the space being used to produce part S-6 is an

opportunity cost of continuing to produce the part internally. Thus, the

complete analysis is:

Make Buy

T

otal cost, as above …………………………………. $570,000 $630,000

Rental value of the space (opportunity cost)….. 80,000

T

g

28 Managerial Accounting, 16th Edition

Exercise 12-12 (15 minutes)

1. The contribution margin per pound of the constraining resource for each

product is computed as follows:

Product

A

Product

B

Product

C

(1) Direct materials required per unit …… $24 $15 $9

(2) Cost per pound ………………………….. $3 $3 $3

g

2. The company should accept orders first for Product C, second for

Product A, and third for Product B.

Because Product C uses the least amount of material per unit of the

three products, and because it is the most profitable of the three in

terms of its use of materials, some students will immediately assume

that this is an infallible relationship. That is, they will assume that the

3. If customer demand is limited to 800 units per product the maximum

contribution margin of $27,200 is computed as follows:

A B C Total

Contribution mar

g

in per pound

g

Solutions Manual, Chapter 12 29

Exercise 12-12 (continued)

3. Product C would be produced first because it earns the highest

contribution margin per pound. Given that Product C has customer

demand of 800 units, it would consume 2,400 pounds of material (=

800 units × 3 pounds per unit). Product A, which also has customer

30 Managerial Accounting, 16th Edition

Exercise 12-13 (10 minutes)

1. The financial advantage of further processing X15 is computed as

follows:

Sales value after further processin

g

(7,000 units × $12 per unit) ……………………. $84,000

Sales value at the split-off point

g