17–16
Exercise 17.16
1. Number of lawns for LStar = 5 months × 2 weeks × 20 houses
= 200 lawn mowings over the five months
Accept Reject
Revenue ($20 × 200 lawn mowings) …………. $ 4,000 $0
Payments to two-man team ($6 × 2 × 200) … (2,400) 0
2. While each rental lawn will take less time than a regular lawn, they will take
time and add to the time Jason must spend on his part-time job. It is summer-
Exercise 17.17
1. Special
Corporate Wedding Occasion Total
Revenues ……………………… $ 55,300 $195,000 $168,000 $ 418,300
Less variable costs ……….. (22,120) (97,500) (50,400) (170,020)
Contribution margin …. $ 33,180 $ 97,500 $117,600 $ 248,280
Less direct fixed exp.:
17–17
Exercise 17.17 (Concluded)
2. Special
Corporate Wedding Occasion Total
Revenues …………………….. $ 41,475 $224,250 $184,800 $ 450,525
Less variable costs ………. (17,696) (97,500) (55,440) (170,636)
Contribution margin ….. $ 23,779 $126,750 $129,360 $ 279,889
Less direct fixed exp.:
17–18
CPA-TYPE EXERCISES
Exercise 17.18
Exercise 17.19
Exercise 17.20
Exercise 17.21
d.
Exercise 17.22
17–19
PROBLEMS
Problem 17.23
1. Problem: How to obtain additional space needed for warehousing, offices,
2. Alternatives identified by Norton’s managers:
a. Build its own facility with sufficient capacity to handle current and imme-
diate foreseeable needs.
b. Lease a larger facility and sublease its current facility.
c. Lease an additional, similar facility.
d. Lease an additional building that would be used for warehousing only,
thereby freeing up space for expanded production.
e. Buy shafts and bushings externally and use the space made available
(previously used for producing these parts) to solve the space problem.
Not feasible:
a. Investment too risky at this stage of company’s development.
3. Potential costs and benefits: lease payment, cost of materials and labor to
produce the parts, materials handling, inspection of shafts and bushings,
17–20
Problem 17.24
1. If the property insurance line is kept, the income statement is identical to the
one given in the text. If it is dropped, only the amounts relating to automobile
insurance are relevant. Sales, variable expenses, and contribution margin for
the automobile insurance will decrease by 12 percent. Direct fixed expenses
for automobile insurance will remain unchanged. The analysis is given below.
Keep Drop
Sales ……………………………………….. $ 16,200,000 $ 10,560,000
2. Property Automobile
Insurance Insurance Total
Sales ………………………………….. $ 4,620,000 $ 12,960,000 $ 17,580,000
Less variable costs …………….. 4,213,000 10,368,000 14,581,000
Problem 17.25
1. Refined Top Quality
Oil Oil Total
2. If the order is accepted, Fiorello must manufacture two additional standard
production runs (2 × 15,000 gallons = 30,000 gallons requested). The two add-
ed production runs will also generate 60,000 gallons of Refined Oil.
Refined Top Quality
Oil Oil Total
Revenues …………………………………. $186,000 $240,000 $426,000
Problem 17.26
1. Committed resources: Cardiac catheterization equipment and technicians
2. Activity costs:
Technician salaries …………………………………………… $180,000
Depreciation …………………………………………………….. 50,000
Supplies and other ……………………………………………. 50,000
less than unused capacity).
3. If the offer is accepted, SJMC receives $550 per procedure and will spend
4. Jerold is thinking about the long-term effects. If demand for cardiac
catheterization testing remains at 4,200 units, then the current charge of $850
will not provide the same amount of revenue. To provide the same revenues,
17–23
Problem 17.26 (Concluded)
5. Chandra has been able to change units of purchase of the cardiac catheteri-
zation activity—from 1,000 to 1,050. Thus, in one stroke, the unused activity
capacity for the short-term technician resource has been wiped out. SJMC
6. The charge to receive the same revenues as before less the resource spend-
ing reduction is computed as follows:
Problem 17.27
1. The company would save $49,625 per year by making the blades:
Make Buy
Prime costs …………………………………………….. $500,000 $ 0
Setupsa …………………………………………………… 145,000 0
Machiningb ………………………………………………. 155,000 0
2. The ABC resource usage model provides insight concerning activity supply,
activity excess capacity, and the need to acquire more capacity. ABC offers a
17–25
Problem 17.28
1. Cost Item Make Buy
Direct materialsa ………………………………………….. $555,000 $ 0
Direct laborb ………………………………………………… 145,000 0
Variable overheadc ………………………………………. 67,500 0
3. It reduces the cost of making the crowns to $797,500, which is $10,000 less
than the cost of buying.
4. Cost Item Make Buy
Direct materials …………………………………………… $1,110,000 $ 0
Direct labor …………………………………………………. 290,000 0
17–26
Problem 17.29
1. Differential
Sell at Amount to
@ 2,000 gals. Process Further Split-Off Process Further
Revenuesa ……….. $216,000 $68,000 $148,000
Containersb ……… 0 (840) 840
2. $17,600/2,000 = $8.80 additional income per gallon
17–27
Problem 17.30
1. First year (in thousands):
Cost Item Make Buy
Materials ……………………… $12,000 $ 2,160 (penalty)
Labor …………………………... 21,850 1,000
Following years (in thousands):
Cost Item Make Buy
Materials ……………………… $12,000 $ 0
2. Qualitative factors include the quality of purchased parts, reliability of the
supplier, KarlAuto’s responsibility to society (the employees losing their
jobs), and the effect it could have on the feeling of job security of other
17–28
Problem 17.31
1. Cost Item Lease and Make Buy
Purchase cost ………………………….. $ 0 $ 50,000
Variable manufacturing costs* ….. 14,000 0
Drop Thickness
Gauge and Make
Purchase cost ………………………….. $ 0
Variable manufacturing costs …… 14,000
2. Analysis with complementary effect:
Make Buy
Lost sales for density gaugea ……………… $15,000 $ 0
Cost of making componentb ……………….. 12,600 0
a0.10 × $150,000
b(0.90 × 2,000) × $7.00
17–29
Problem 17.31 (Concluded)
3. Lease and Make Buy
Variable manufacturing costs ……. $19,600 $ 0
Lease expenses ……………………….. 27,000 0
Drop Thickness
Gauge and Make
Lost sales from density gauge ……………… $15,000
Variable manufacturing costs* ……………… 17,640
Problem 17.32
Alternative 1:
Advantages include working with a well understood process in a well understood
environment. Beryl is completely familiar with the legal and social environment in
Minnesota. Morale may increase since all workers will receive the higher wages.
The factory is already set up, suppliers are in line, and the company knows just
how long it takes to produce the fax machines.
Alternative 2:
An advantage is that wages are much lower in Mexico. The burgeoning Mexican
market provides demand for Paladin’s product. Production in Mexico would
satisfy Mexican demands for locally produced goods.
17–30
Alternative 3:
Advantages: Location of a new plant in a foreign trade zone would save on duty–
related costs on parts imported from Asia. There is no language difference in
CYBER RESEARCH CASE
17.33
Answers will vary.
The following problems can be assigned within CengageNOW and are auto–
graded. See the last page of each chapter for descriptions of these new assign-
ments.
• Analyzing Relationships—Practice assigning Relevant and Irrelevant Costs to
various Decision Options.
The Collaborative Learning Exercise Solutions can be found on the in-