CHAPTER 13 Short-Run Decision Making
E 13-34
1. Price of Carved Bear Candle = $12.00 + (0.80 × $12) = $21.60
3. The financial manager might encounter one or more common challenges to using
cost-plus (or markup) pricing. One challenge might be identifying the most
appropriate percentage by which to markup gift shop costs. For example, if the
percentage is too high (and 80% seems high), the manager risks setting prices
too high, thereby causing some customers to decide not to buy the gift shop’s
E 13-35
1. Desired Profit = 0.20 × Target Price
E 13-36
1. The amounts Heather has spent on purchasing and improving the Grand Am are
irrelevant because these are sunk costs.
2.
Restore
Cost Item Grand Am
Transmission…………………………………………
…
$2,000 $ 0
Water pump……………………………………………
…
400 0
E 13-37
1. If the analysis is done using total costs, each variable cost as well as the purchase
price will be the unit cost multiplied by 35,000 units. The direct fixed overhead of
$77,000 is avoidable if the part is purchased.
Make Buy
Direct materials………………………………………
…
$210,000 $ 0
2. Maximum Price = $409,500/35,000 = $11.70 per unit
Alternatives
Buy Neon
CHAPTER 13 Short-Run Decision Making
E 13-38
Make Buy
1. Direct materialsa……………………………
…
$210,000 $ 0
Direct laborb…………………………………
…
70,000 0
2. Maximum Price = $332,500/35,000 = $9.50 per unit
3. Income would decrease by $52,500 ($332,500 – $385,000).
a$6.00 × 35,000 = $210,000
13-16
…
CHAPTER 13 Short-Run Decision Making
P 13-39
1. If the special order is accepted:
Revenues ($7 × 100,000)……………………………………….……………
…
$ 700,000
Direct materials ($2 × 100,000)………………………………….…………… (200,000)
2. The qualitative factors are those that cannot be easily quantified. The company is
faced with a problem of idle capacity. Accepting the special order would bring
production up to near capacity and allow the company to avoid laying off
P 13-40
1. Cost Item Make Buy
Raw materialsa…………………………………………………
…
$218,000 $ 0
Direct labor
b
……………………………………………………
…
70,200 0
Variable overheadc……………………………………………
…
20,800 0
d
…
PROBLEMS
CHAPTER 13 Short-Run Decision Making
P 13-40 (Continued)
2. Qualitative factors that Hetrick should consider include quality of crowns, reliability
and promptness of producer, and reduction of workforce.
3. It reduces the cost of making the crowns to $335,000, which is less than the cost
4. Cost Item Make Buy
Raw materialsa………………………………………………
…
$372,000 $ 0
Direct labor
b
…………………………………………………
…
129,600 0
…
d
…
P 13-41
Process
@ 600 lbs. Furthe
r
Sell Difference
Revenuesa…………………………………… $24,000 $7,200 $16,800
b
d
a600 × 10 × $4 = $24,000;
$12 × 600 = $7,200
b$1.30 × (600/20)
c[(10 × 600)/25] × $1.60 = $384;
13-18
CHAPTER 13 Short-Run Decision Making
P 13-42
1. System
A
System B Headset Total
Sales……………………………………
…
$45,000 $32,500 $8,000 $85,500
V
ariable expenses……………………
…
20,000 25,500 3,200 48,700
Contribution margin…………………
…
$25,000 $ 7,000 $4,800 $36,800
2. System
A
Headset Total
Sales……………………………………
…
$58,500 $6,000 $64,500
V
ariable expenses……………………
…
26,000 2,400 28,400
…
3. System
A
System C Headset Total
Sales……………………………………
…
$45,000 $26,000 $7,200 $78,200
V
ariable expenses……………………
…
20,000 13,000 2,880 35,880
…
13-19
CHAPTER 13 Short-Run Decision Making
P 13-43
1. Steve should consider selling the part for $1.85 because his division’s profits would
increase $12,800:
A
ccept Reject
Revenues (2 × $1.85 × 8,000)…………………………………
…
$29,600 $0
2. Pat should accept the $2 price. This price will increase the cost of the component
from $29,600 to $32,000 (2 × $2 × 8,000) and yield an incremental benefit of $16,000
3. Yes. At full price, the total cost of the component is $36,800 (2 × $2.30 × 8,000), an
P 13-44
1. Markup = ($46,300 + $35,600)/$130,000 = 0.63, or 63%
2. Direct materials………………………………
…
$1,800
Direct labor……………………………………
…
1,600
V
…
A
CHAPTER 13 Short-Run Decision Making
P 13-45
Basic Standard Deluxe
1. Price………………………………………………
…
$ 9.00 $30.00 $35.00
V
ariable cost……………………………………
…
6.00 20.00 10.00
Contribution margin……………………………
…
$ 3.00 $10.00 $25.00
2. First, produce and sell 12,000 deluxe units, which would use 9,000 machine
hours. Then, produce and sell 50,000 basic units, which would use 5,000
P 13-46
1. The company should not accept the offer because the additional revenue is
less than the additional costs (assuming fixed overhead is allocated and will
2. Costs associated with the layoff:
Increase state UI premiums (0.01 × $1,460,000)…………………………
…
$14,600
13-21
CHAPTER 13 Short-Run Decision Making
P 13-47
1. Sales………………………………………………………………………………… $263,000
Process
2. Sell Furthe
r
Difference
Revenues…………………………………
…
$40,000 $75,000 $35,000
P 13-48
1. ($30 × 2,000) + ($60 × 4,000) = $300,000
2. Juno Hera
Contribution margin…………………………………………
…
$30 $60
÷ Pounds of material………………………………………… 25
P 13-49
1. Process
Sell Furthe
r
Revenues…………………
…
$24,000 $33,000 $ 9,000
…
2. Process
Sell Furthe
r
Revenues…………………
…
$24,000 $33,000 $ 9,000
Processing cost…………
…
— (4,100) (4,100)
P 13-50
1. Monthly cost for FirstBank:
Checking accounts:
Maintenance fees ($5 × 6)………………………….…… $ 30
Differential Amount
to Process Furthe
r
Differential Amount
to Process Furthe
r
13-23
CHAPTER 13 Short-Run Decision Making
P 13-50 (Continued)
Monthly cost for Community Bank:
Checking accounts: Returned checks ($2 × 25)…….…………
…
$50
Credit card fees
Per item ($0.50 × 4,000)…………………………………………… $2,000
Batch processing ($7 × 20)………………………………………
…
140 2,140
Wire transfers ($30 × 100)…….……………………………………… 3,000
2. If the full online banking access were crucial, Community Bank would be eliminated
immediately. This leaves FirstBank and RegionalOne Bank. The two sets of monthly
13-24
…
CHAPTER 13 Short-Run Decision Making
Case 13-51
1. Pamela should not have told Roger about the deliberations concerning the power
department because this is confidential information. She had been explicitly told
2. The romantic relationship between Pamela and Roger sets up a conflict of interest
for this particular decision. Pamela should have withdrawn from any active role in it.
(Standard III: 1) However, she should definitely provide the information she currently
has about the cost of eliminating the power department. To not do so would be active
CASES
13-25
CHAPTER 13 Short-Run Decision Making
Case 13-52
1. Salesa………………………………………………………
…
$3,751,500
Less: Variable expenses
b
……………………………… 2,004,900
Contribution margin……………………………………
…
$1,746,600
aBased on sales of 41,000 units
Let X = Units sold
$83X/2 + $100X/2 = $3,751,500
$183X = $7,503,000
X = 41,000 units
b$83X/125.0% $66.40 Manufacturing cost
2. Keep Drop
Sales………………………………………………………
…
$ 3,751,500 $—
V
ariable costs……………………………………………
…
(2,004,900) (2,050,000)
Case 13-53
Answers will vary.
*