379
E12–21
a.
Large Medium Small Total
Units produced …………………… 5,000 5,000 5,000
Revenues …………………………... $ 900,0001 $750,0002 $675,0003 $ 2,325,000
b. The Small glass product is the most profitable in a bottleneck operation, demon-
strated as follows:
Large Medium Small
380
E12–22
Small is the highest profit item, since it produces more contribution margin per auto-
clave hour. The prices of Large and Medium would need to be increased in order to
match Small’s profitability. The two calculations are as follows:
Revised price of Large:
Small of
Hour Bottleneck per
Revised price of Medium:
Small of
Hour Bottleneck per
Margin onContributiUnit
=
Medium of Unit per Hours Bottleneck
Medium of Medium of
Cost VariableUnit _ Price Revised
PROBLEMS
P12–1
1. FIVE STAR
Proposal to Operate Warehouse
Differential revenue from alternatives:
Revenue from operating warehouse …………………….. $ 4,800,0001
2. The proposal should be accepted.
3. Total estimated revenue from operating
warehouse ………………………………………………………….. $4,800,000
Total estimated expenses to operate warehouse:
P12–2
1. CATALINA TOOLING COMPANY
Proposal to Replace Machine
Annual manufacturing costs associated with present machine ……. $ 33,150
Annual manufacturing costs associated with proposed
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 ma-
chine?
b. What effect does the federal income tax have on the decision?
c. What opportunities are available for the use of the $66,000 of funds ($90,000
less $24,000 sales price of old machine) that are required to purchase the new
machine?
383
P12–3
1. ROCKET SHOE COMPANY
Proposals for Sales Promotion Campaign
Cross-Trainer Running
Shoe Shoe
Differential revenue from proposals ……………… $2,250,0001 $ 2,016,0006
2. The sales manager’s tentative decision should be opposed. The sales manager
erroneously considered the full unit costs instead of the differential (additional)
revenue and differential (additional) costs. An analysis similar to that presented in
384
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
2. Dorsch Aluminum Co. should decide to further process aluminum ingot to pro-
duce rolled aluminum, since profits would be increased by $10,400 per batch.
385
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
3. a. Total manufacturing costs:
Variable manufacturing costs ($46 × 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
b. Markup Percentage =
Costs ingManufactur Total
Expenses ative Administrand Selling Total +Profit Desired
c. Cost amount per unit …………………………………………………. $63.00
Markup ($63.00 × 38.10%) …………………………………………… 24.00 (rounded)
Selling price ……………………………………………………………… $87.00
P12–5, Concluded
4. a. Variable cost amount per unit: $50.00
Total variable costs: $50 × 20,000 units = $1,000,000
c. Cost amount per unit …………………………………………………………… $50.00
Markup ($50.00 × 74%) …………………………………………………………. 37.00
Selling price ………………………………………………………………………… $87.00
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 marketplace, could
lead management to establish a short-run price more or less than $87.
6. a. TWILIGHT LUMINA COMPANY
Proposal to Sell to Contech Inc.
Differential revenue from accepting offer:
387
P12–6
1.
Ethylene Butane Ester
Selling price …………………………..………………. $400 $350 $250
Variable conversion cost per unit ……………. $1201 $1201 $ 802
Direct materials cost per unit ………………….. 180 130 90
$300 $ 250 $170
2. The contribution margin per unit may give false signals when an organization has
production bottlenecks. Instead, Chavez Chemical Company should use the con-
tribution margin per bottleneck hour to determine relative product profitability as
follows:
Ethylene Butane Ester
388
P12–6, Concluded
3. One way to revise the pricing would be to increase the price to the point where all
three products produce profitability equal to the highest profit product. This would
be determined as follows:
Revised Price of Ethylene:
Reactor per Margin
onContributi Unit
Ethylene of Ethylene of
Cost VariableUnit _ Price Revised
Ethylene would require a revised price of $460 in order to deliver the same unit
contribution margin per bottleneck hour as does ester.
Revised Price of Butane:
Reactor per Margin
onContributi Unit
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 con-
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. How-
ever, there are some additional considerations the manager must consider before ac-
cepting this order.
1. Have we ever done business overseas? Exports require additional administrative
2. Will the customer sell the golf balls overseas, or will they relabel the golf balls and
have them imported back into the United States? Such a situation would cause
3. Is it likely that other customers will learn of the “special deal” the overseas com-
pany received and demand equal treatment? That is, is there a risk that we’ll spoil
the pricing structure in the domestic market?
4. Will the overseas customer want to do business in the future, or is this just a sin-
gle sale? If the overseas customer is expected to purchase more golf balls in the
5. Is there a possibility of another customer being willing to purchase the golf balls
at the $24 price? If so, Coastal Sporting Goods may not want to commit capacity
6. Will Coastal Sporting Goods help the overseas customer establish a presence in
the overseas golf ball market where we may wish to compete in the future?
390
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 assumes
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
either sunk (depreciation) or mostly fixed to the number of room nights. Therefore,
they are not variable to accepting this business. The total variable costs are $42 per
night, so the $90 customer bid should be accepted.
391
Case 12–4
1. Dean believes that the fixed costs should be treated as a sunk cost and ignored in
the pricing decision. In essence, Dean is suggesting that the new computer model
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), which is $280
lower than the present product cost. The new target cost should be established as
392
Case 12–5
1. This activity is designed to have students access a number of products and ser-
vices 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
Landing fees ………………………………………………………… V
Amazon.com—Books Fixed or Variable?
Cost of books (purchased for resale) …………………….. V
Web page design and programming ………………………. F
Dell Inc.—Personal computers Fixed or Variable?
Cost of computers (DL, DM, and FOH) …………………… V (mostly)
Web page design and programming ………………………. F
Advertising …………………………………………………………… F
Case 12–5, Concluded
2. The product with the largest markup on variable cost is the airline ticket. The por-
tion of variable cost to total cost for an airline flight will be much smaller (more