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Solutions Manual, Chapter 12 71
Case 12-32 (continued)
7. Assuming direct labor is a variable cost, the optimal product mix and increase in net operating income
is computed as follows:
(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
T
otal hours available ………………. 2,000
T
—
—
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72 Managerial Accounting, 16th Edition
Case 12-32 (continued)
8. The case strongly suggests that direct labor is fixed: “The bike frames
could be produced with existing equipment and personnel.”
Nevertheless, it would be a good idea to examine how much labor time
is really needed under the two opposing plans.
Production
Direct Labor–
Hours Per Unit
Total Direct
Labor-Hours
Plan 1:
Some caution is advised. Plan 1 assumes that direct labor is a fixed cost.
However, this plan requires 2,160 more direct labor-hours than Plan 2
and the present situation (3,160 DLHs – 1,000 DLHs = 2,160 DLHs). At
40 hours per week a typical full-time employee works about 1,900 hours
a year, so the added workload is equivalent to more than one full-time
employee. Does the plant really have that much idle time at present? If
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Solutions Manual, Chapter 12 73
Case 12-32 (continued)
Contribution mar
g
in 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
—
—
T
g
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74 Managerial Accounting, 16th Edition
Case 12-33 (75 minutes)
1. Continuing to obtain covers from its own Denver Cover Plant would
allow QualSupport to maintain its current level of control over the
quality of the covers and the timing of their delivery. Keeping the Denver
Cover Plant open also allows QualSupport more flexibility than
2. a. The following costs can be avoided by closing the plant, and
therefore are relevant to the decision:
Materials …………………………….. $14,000,000
Labor:
Direct ………………………………. $13,100,000
T
b. The following costs can’t be avoided by closing the plant, and
therefore are not relevant to the decision:
Depreciation
—
equipment ……………………………….. $ 3,200,000
Depreciation
—
buildin
g
…………………………………… 7,000,000
–
T
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Solutions Manual, Chapter 12 75
Case 12-33 (continued)
Depreciation is not relevant because it is a sunk cost. The annual
pension expense of $3,000,000 is not relevant because it would
continue whether or not the plant is closed. The amount for 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:
T
ermination char
g
es on canceled material orders
($14,000,000 × 20%) ………………………………….. $2,800,000
T
3. No, the plant should not be closed. The computations are:
First Year Other Years
Cost of purchasin
g
the covers outside…... $(35,000,000) $(35,000,000)
Costs avoided by closin
g
the plant
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76 Managerial Accounting, 16th Edition
Case 12-33 (continued)
4. Factors that should be considered by QualSupport before making a
decision include:
Alternative uses of the building and equipment.
Any tax implications.
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Solutions Manual, Chapter 12 77
Appendix 12A
Pricing Decisions
Exercise 12A-1 (10 minutes)
1.
(
)
Required ROI Sellin
g
and administraive
+
× Investment expenses
Markup percentage =
on absorption cost Unit sales × Unit product cost
2. Unit product cost ………….. $25
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78 Managerial Accounting, 16th Edition
Exercise 12A-2 (10 minutes)
1. Maria’s profit during the first week is computed as follows:
Profit = (P
–
V) × Q − Fixed expenses
2. The percentage increase in the selling price and the percentage
decrease in unit sales are computed as follows:
Pric
e
V
olum
e
Revised price/volume …………………………….
.
$4.00 1,400
3. Maria’s profit during the second week is computed as follows:
Profit = (P
–
V) × Q − Fixed expenses
4. The decrease in profits is computed as follows:
Net operatin
g
income in the second week ………
.
$1,805
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Solutions Manual, Chapter 12 79
Exercise 12A-3 (20 minutes)
2. The differentiation value has two components. First, customers who
purchase an IC-75 rather than the competing alternative would avoid
the need to buy a second component part for $1,200 to achieve 4,000
Competin
g
Equipment IC-75
Preventive maintenance cost for 4,000 hours:
3. The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value
4. The range of possible prices is as follows:
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80 Managerial Accounting, 16th Edition
Exercise 12A-4 (10 minutes)
Sales (300,000 units × $15 per unit)…….. $4,500,000