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380
PROBLEMS
P12–1
1. FIVE STAR
Proposal to Operate Warehouse
Differential revenue from alternatives:
Revenue from operating warehouse ......................... $ 4,800,0001
Revenue from investment in bonds .......................... (540,000)2
Differential revenue from operating warehouse .... $ 4,260,000
Differential cost of alternatives:
2. The proposal should be accepted.
3. Total estimated revenue from operating warehouse ... $4,800,000
Total estimated expenses to operate warehouse:
Costs to operate warehouse, excluding
381
P12–2
1. CATALINA TOOLING COMPANY
Proposal to Replace Machine
Annual manufacturing costs associated
with old machine ...................................................... $ 33,150
Annual manufacturing costs associated
with new machine ..................................................... (18,200)
2. Other factors to be considered include the following:
a. Are there any improvements in the quality of work turned out by the new
machine?
After considering such factors as those listed above, the net cost reduction antic-
ipated over the eight-year period may not be sufficient to justify the replacement.
For example, if there is an opportunity to invest the $66,000 ($90,000 – $24,000) of
382
P12–3
1. WEDGE SHOE COMPANY
Proposals for Sales Promotion Campaign
Differential Analysis Report
Closed-Toe Open-Toe
Shoe Shoe
Differential revenue from proposals ................. $ 1,760,0001 $ 1,980,0006
Differential cost of proposals:
Direct materials ............................................... $ (440,000)2 $ (504,000)7
Direct labor ...................................................... (160,000)3 (108,000)8
1 20,000 shoes × $88 = $1,760,000
2 20,000 shoes × $22 = $440,000
3 20,000 shoes × $8 = $160,000
4 20,000 shoes × $4 = $80,000
5 20,000 shoes × $10 = $200,000
2. The sales manager’s tentative decision should be opposed. The sales manag-
er erroneously considered the full unit costs instead of the differential (addi-
tional) revenue and differential (additional) costs. An analysis similar to that
383
P12–4
1. DORSCH ALUMINUM CO.
Proposal to Process Aluminum Ingot Further
Differential revenue from further processing per batch:
Revenue from sale of rolled aluminum
[(80 tons ÷ 1.25 tons) × $4,100] ............................. $262,400
Revenue from sale of aluminum ingot
(80 tons × $2,400) ................................................... (192,000)
2. Dorsch Aluminum Co. should decide to further process aluminum ingot to
produce rolled aluminum since profits will increase by $10,400 per batch.
384
P12–5
1. $240,000 ($1,200,000 × 20%)
2. a. Total costs:
Variable ($50.00 × 20,000 units) .................................................... $1,000,000
Fixed ($340,000 + $160,000) .......................................................... 500,000
Total costs ................................................................................. $1,500,000
Cost amount per unit: $1,500,000 ÷ 20,000 units ........................ $75.00
3. a. Total manufacturing costs:
Variable manufacturing costs ($46.00 × 20,000 units) ................ $ 920,000
Fixed factory overhead ................................................................. 340,000
Total manufacturing costs ........................................................ $1,260,000
Cost amount per unit: $1,260,000 ÷ 20,000 units ........................ $63.00
c. Cost amount per unit ................................................ $63.00
Markup ($63.00 × 38.10%) ........................................ 24.00 (rounded)
Selling price .............................................................. $87.00
385
P12–5, Concluded
4. a. Variable cost amount per unit: $50.00
Total variable costs: $50 × 20,000 units = $1,000,000
5. The cost-plus approach price of $87 should be viewed as a general guideline
for establishing long-run normal prices. Other considerations, such as the
price of competing products and general economic conditions of the market-
place, could lead management to establish a short-run price that is more or
less than $87.
6. a. TWILIGHT LUMINA COMPANY
Proposal to Sell to Contech Inc.
Differential revenue from accepting offer:
Revenue from sale of 3,000 additional units at $52.00 ........... $156,000
386
METRIC-BASED ANALYSIS
MBA 12–1
Determine the contribution margin per furnace hour as follows:
Type A1 Type B3 Type E6
Revenue ...................................................... $ 400,000 $ 578,000 $ 300,000
Variable cost .............................................. (250,000) (380,000) (270,000)
Contribution margin .................................. $ 150,000 $ 198,000 $ 30,000
Divide by number of units ......................... ÷ 15,000 units ÷ 16,500 units ÷ 5,000 units
Unit contribution margin ........................... $ 10.00 $ 12.00 $ 6.00
MBA 12–2
a. Mirror Laminated Regular Total
Budgeted units of
production ......................... 10,000 10,000 10,000
Revenues ............................... $ 900,000 $ 750,000 $ 600,000 $ 2,250,000
b. The Regular glass product is the most profitable in a bottleneck operation,
demonstrated as follows:
Mirror Laminated Regular
Unit contribution margin ............................. $18.00 $10.00 $5.00
387
MBA 12–3
1.
Revised Selling Price Unit Variable Cost
Unit Contribution
–
for Mirror Glass for Mirror Glass
=
per Constraint for Furnace Hours for Mirror Glass
2.
Selling Price Reduced Unit Variable
Unit Contribution
–
for Mirror Glass Cost for Mirror Glass
=
per Constraint for Furnace Hours for Mirror Glass
Regular Glass
3.
Selling Price Reduced Unit Variable
Unit Contribution
–
for Mirror Glass Cost for Mirror Glass
=
per Constraint for Reduced Furnace Hours for Mirror Glass
Regular Glass
$90 – $72
$5 per hr. = Reduced Furnace Hours for Mirror Glass
388
MBA 12–4
1.
Revised Selling Price Unit Variable Cost
Unit Contribution
–
for Laminated Glass for Laminated Glass
=
per Constraint for Furnace Hours for Laminated Glass
2.
Selling Price Reduced Unit Variable
Unit Contribution
–
for Laminated Glass Cost for Laminated Glass
=
per Constraint for Furnace Hours for Laminated Glass
3.
Selling Price Unit Variable Cost for
Unit Contribution
–
for Laminated Glass Laminated Glass
=
per Constraint for Reduced Furnace Hours for Laminated Glass
Regular Glass
$75 – $65
$5 per hr. = Reduced Furnace Hours for Laminated Glass
389
MBA 12–5
1.
Ethylene Butane Ester
Selling price .................................................... $ 400 $ 350 $ 250
Variable conversion cost per unit ................. $(120)1 $(120)1 $ (80)2
2. The contribution margin per unit may give false signals when an organization
has production bottlenecks. Instead, Chavez Chemical Company should use
the contribution margin per bottleneck hour to determine relative product
profitability as follows:
Ethylene Butane Ester
390
Revised Price of Butane:
Ester for Hour
Reactor per Margin
onContributi Unit
= Unit per Butane of Hours Reactor
Butane of Butane of
Cost VariableUnit _ Price Revised
CASES
Case 12–1
No, it would be unethical for Bev to attend the meeting. Such a meeting would be
considered price fixing and would be a violation of federal law. Thus, Bev’s at-
Case 12–2
The contribution margin is $3 ($12 – $9) per dozen on the special order. Thus,
Coastal Sporting Goods’ manager can contribute to fixed costs by accepting the
order. However, there are some additional considerations the manager must con-
sider before accepting this order.
1. Have we ever done business overseas? Exports require additional adminis-
trative activities. Have these additional administrative costs been considered
in the differential analysis?
4. Will the overseas customer want to do business in the future, or is this just a
single sale? If the overseas customer is expected to purchase more golf balls
in the future, then will the customer likely come to expect the $12 price in the
future.
392
Case 12–3
First, Marriott has excess capacity for this day. Thus, it should not be concerned
about using its capacity to accept business from the Priceline.com customer. The
Priceline.com customer is incremental revenue that will not crowd out other
business. Given this, however, the price must at least cover variable cost, or else
Marriott would lose money. The variable cost per room night is shown below.
These costs are mostly avoidable or variable to room nights. This answer as-
sumes that the maid and laundry staff hours are highly flexible and can be staffed
to demand. Likewise, the air conditioning and lights can be turned off if the room
is not rented for the night, saving most of the utility cost. The desk staff and hotel
depreciation are fixed. Therefore, they are not affected by accepting business
from the Priceline.com customer. The total variable costs are $42 per night, so
the $90 customer bid should be accepted.
393
Case 12–4
1. Dean believes that the fixed costs should be treated as a sunk cost and ig-
nored in the pricing decision. In essence, Dean is suggesting that the new
computer model be treated as an incremental decision. However, the new
2. Target costing provides a different perspective to the pricing issue. Under
target costing, Redwood Computer Company should begin with the price the
market is willing to pay, which is $900. This price should then be reduced by
the required profit markup. This would yield a target cost of $720 ($900/1.25),
394
Case 12–5
1. This activity is designed to have students access a number of products and
services on the Internet to see their commercial potential. Each of the listed
sites will provide product descriptions and pricing.
The list of costs in the products will not be determined at the Internet site but
must be assumed. Some examples include:
Delta Air Lines—Airline tickets Fixed or Variable?
Fuel ................................................................................. V
Crew salaries .................................................................. F
Plane depreciation ......................................................... F
Amazon.com—Books Fixed or Variable?
Cost of books (purchased for resale) .......................... V
Web page design and programming ............................ F
Computer depreciation .................................................. F
2. The product with the largest markup on variable cost is the airline ticket. The
portion of variable cost to total cost for an airline ticket will be much smaller
than the ratio for a book. Thus, the markup on variable cost will be a greater
