1. Tactical decisions are short run in nature; they involve choosing among alternatives with an
immediate or limited end in view. Strategic decisions involve selecting strategies that yield a
long-term competitive advantage.
5. The salary of the supervisor of an assembly line with excess capacity is an example of an
irrelevant future cost for an accept-or-reject decision.
6. Yes. Suppose, for example, that sufficient materials are on hand for producing a part for 2 years.
After 2 years, the part will be replaced by a newly engineered part. If there is no alternative use
for the materials, then the cost of the materials is a sunk cost and not relevant in a make-or-buy
decision.
10. Yes. The incremental revenue is $1,400, and the incremental cost is only $1,000, creating a
net benefit of $400.
13
DISCUSSION QUESTIONS
SHORT-RUN DECISION MAKING:
RELEVANT COSTING
13-1
CHAPTER 13 Short-Run Decision Making
13-1. e
13-2. b
13-8. b
MULTIPLE-CHOICE QUESTIONS
13-2
CHAPTER 13 Short-Run Decision Making
CE 13-13
1. There are two alternatives: make the ingredient in-house or purchase it externally.
2. Relevant costs of making the ingredient in-house include direct materials, direct labor,
3.
Make Buy
Direct materials……………………………
…
$25,000 — $ 25,000
V
V
4.
Make Buy
Direct materials……………………………
…
$25,000 — $ 25,000
V
V
CORNERSTONE EXERCISES
Cost to Make
A
lternatives Differential
Cost to Make
A
lternatives Differential
13-3
CHAPTER 13 Short-Run Decision Making
CE 13-14
1. Relevant costs and benefits of accepting the special order include the sales price of
2. If the problem is analyzed on a unit basis:
A
ccept Reject
Price……………………………………
…
$ 5.00 — $ 5.00
V
…
—
CE 13-15
1. The two alternatives are to keep the parquet flooring line or to drop it.
2. The relevant benefits and costs of keeping the parquet flooring line to include sales
of $300,000, variable costs of $250,000, machine rent cost of $40,000*, and
3.
Keep Drop
Sales……………………………………
…
$ 300,000 —$ 300,000
Less: Variable expenses……………
…
(250,000) — (250,000)
…
—
Amount to
Accept
Differential
Benefit to
Accept
Differential
13-4
CHAPTER 13 Short-Run Decision Making
CE 13-16
1. Previous contribution margin of the strip line was $175,000. A 10% decrease in
sales implies a 10% percent decrease in total variable costs, so the contribution
2.
Keep Drop
Contribution margin…………… $305,000 $233,500 $ 71,500
Less: Machine rent……………
…
(75,000) (35,000) (40,000)
CE 13-17
1. Revenue from Logs = (8,000 × $495) = $3,960,000
Differential
Amount to Keep
*
13-5
CHAPTER 13 Short-Run Decision Making
CE 13-18
1. Swoop Rufus
Contribution margin per unit……………………………… $ 5.00 $15.00
2. Since the Swoop sweatshirt yields $50 of contribution margin per hour of machine
time (which is higher than the $45 contribution margin per hour of machine time
3. Total Contribution Margin of Optimal Mix = 70,000 units Swoop × $5
= $350,000
Note: Cornerstone Exercise 13-18 (as well as Cornerstone 13-6) clearly illustrates
a fundamentally important point involving relevant decision making with a
CHAPTER 13 Short-Run Decision Making
CE 13-19
1. Swoop Rufus
Contribution margin per unit………………………………… $ 5.00 15.00$
2. Since Swoop yields $50 of contribution margin per hour of machine time,
the first priority is to produce all of the Swoop sweatshirts that the the
market will take (i.e., demands). Machine time required for maximum amount
of Swoop = 40,000 maximum units × 0.10 hours of machine time required per
3. Total Contribution Margin of Optimal Mix = (40,000 units Swoop × $5) +
(9,091 units Rufus × $15)
= $336,365
CE 13-20
Price = Cost + Markup Percentage × Cost
CE 13-21
1. Desired Profit = 0.25 × Target Price
60 minutes
60 minutes
13-7
CHAPTER 13 Short-Run Decision Making
E 13-22
E 13-23
Steps in Austin’s decision:
Step 1: Define the problem. The problem is whether to continue studying at his
present university or to study at a university with a nationally recognized
engineering program.
Step 4: Total the relevant costs and benefits for each feasible alternative. No specific
event is listed for this step, although we can assume that it was done, and
that three schools were selected as feasible since Event j mentions that two
of three applications met with success.
EXERCISES
13-8
CHAPTER 13 Short-Run Decision Making
E 13-24
1. The two alternatives are to make the component in-house or to buy it from Bryce.
2.
Make Buy
Direct materials………………………
…
$12.00 — $ 12.00
Direct labor……………………………
…
8.25 — 8.25
E 13-25
1.
Make Buy
Direct materials………………………
…
$12.00 — $ 12.00
Direct labor……………………………
…
8.25 — 8.25
V
…
A
lternatives Differential
A
lternatives Differential
Cost to Make
Cost to Make
13-9
V
CHAPTER 13 Short-Run Decision Making
E 13-25 (Continued)
2. As the percentage of avoidable fixed cost increases (above 75%), total relevant
costs of making the component increases, causing the “purchase” decision to
be more financially appealing (compared to the “make” option) than it was when
3. Total relevant avoidable fixed cost would need to decrease by $12,500. Total
relevant make costs of $262,500 need to decrease to $250,000 to equal the total
relevant buy costs. Holding all other relevant make costs constant, this decrease
of $12,500 ($262,500 – $250,000) in fixed cost would reduce the total relevant
13-10
CHAPTER 13 Short-Run Decision Making
E 13-26
1. The two alternatives are:
2. Direct materials…………………
…
$3.10
Direct labor………………………
…
2.25
3. The statement that “existing sales will not be affected” indicates that there will be
E 13-27
In this case, it may be easier to deal with the total costs and revenues of the special
order:
E 13-28
If Petoskey drops Conway, overall profit will decrease by $75,000 as a result of the
CHAPTER 13 Short-Run Decision Making
E 13-29
If Petoskey drops Conway, overall profit will increase by $5,000. Contribution margin will
decrease by $75,000 as a result of the lost contribution margin ($300,000 – $225,000).
E 13-30
If Petoskey drops Conway, profit will decrease by $28,000. There will be a decrease of
$75,000 as a result of the lost Conway contribution margin ($300,000 – $225,000). Note
that the direct fixed expense for depreciation is a sunk cost and not relevant to the
E 13-31
1. Contribution Margin if HS Is Sold at Split-Off = $9 × 14,000 pounds
= $126,000
2. Contribution margin if HS is processed into CS
Revenue ($45 × 4,000)……………………………
…
$180,000
13-12
CHAPTER 13 Short-Run Decision Making
E 13-32
1. Reno Tahoe
2. Assuming no other constraints, the optimal mix is zero units of Reno and 820
units of Tahoe. Total painting department time is 2,460 hours per year; if all of
E 13-33
1. If 500 units of each product can be sold, then the company will first make and
sell 500 units of Tahoe (the product with the higher contribution margin per hour