Accounting Chapter 21 Homework Sunk Costs The 100000 Incurred Manufacturing The

a. Schedule showing contribution margin per machine-hour for each product:

Sales price per unit 200$ 215$

Less variable costs and

expenses:

Direct materials 51$ 38$

Direct labor 33 30

b.

Recommendation as to which product should be discontinued:

Model 101 should be discontinued because the contribution margin per machine-hour (the

30 Minutes, Medium

Model 100

Model 101

PROBLEM 21.4A

INSITEFUL INSTRUMENTS

a. Sell to

Mail-Order Convert Incremental

Firm to New Model Analysis

(2)

If the company is already operating at full capacity, it probably should sell the old

models to the mail-order firm. If we assume that rebuilding the old models reduces by

25 Minutes, Medium

PROBLEM 21.5A

LOUIE OPTICS

PROBLEM 21.6A

SILENT SENTRY

a. Incremental benefit of each option, in total and on a per-unit basis:

Repair Repackage Sell to

and Sell and Sell Foreign Buyer

Incremental revenue per unit 25$ 24$ 22$

b.

(1)

(2)

There are legal and ethical issues regarding the option to sell the inferior units to the

Based solely on this analysis, Silent Sentry should sell the detectors to the foreign buyer.

25 Minutes, Medium

There are several nonfinancial issues that management should consider:

If the packaging of each unit was changed to inform buyers that the sensory cells have

PROBLEM 21.7A

KELP COMPANY

a.

Sea Tea Sea Paste Sea Powder

Sales value if sold at the split-off point 60,000$ 80,000$ 70,000$

b. Minimum price per pound needed to sell Sea Paste at the split-off point:

Incremental proceeds if processed further ($160,000 – $50,000) 110,000$

Sales value at split-off point 80,000

Divided by: Number of pounds ÷ 4,000

Add: Current price per pound at split-off point ($80,000 ÷ 4,000 pounds) 20.00

Minimum price per pound needed to sell at split-off point 27.50$

There is an incremental benefit associated with the further processing of Sea Paste and Sea

Powder, as shown above.

25 Minutes, Medium

PROBLEM 21.8A

PAY OFF OR PAY UP?

•

b.

a.

The incremental analysis is deficient in numerous respects.

Ladies and gentlemen of the Board, I am addressing you today on a most important matter. It

has come to my attention that for over two decades, our company has been illegally dumping

toxic waste in a manner hazardous to public health.

But no one is going to have an opportunity to blow the whistle on us, because we are going

to blow it ourselves. I have contacted the Nightline television show and will be appearing on

that program tomorrow night. I will announce the changes in our disposal procedures and our

35 Minutes, Strong

The first option is not a viable alternative. It is illegal and unethical, and bribing this

SOLUTIONS TO PROBLEMS SET B

PROBLEM 21.1B

SWIRL INCORPORATED

a.

$ 990,000

b.

(1)

(3)

A low-priced skirt that is identical to Swirl skirts but that is sold through discount

(4)

(5)

Accepting the special order may allow Swirl to maintain a consistent size labor force by

25 Minutes, Easy

Note to instructor: Part b is intended to be open-ended with no “correct” solution. Its objective

Relevant considerations other than expected effect on operating income may include:

Discount Fashions may sell the skirts to customers who otherwise would buy regular

Accepting the special order will place Swirl’s scheduled production (68,000) very close

to capacity (70,000). Therefore, if the regular skirts sell better than anticipated, Swirl

Effect of accepting the special order:

Incremental revenue ($55 × 18,000 units) ……………………………….

Less: Incremental costs:

Variable manufacturing costs ($40 × 18,000 units) ……………

Variable selling expenses ($5 × 18,000 units) ………………….

PROBLEM 21.2B

MATCHLESS CORP.

a.

Make the Buy the Incremental

Radios Radios Analysis

Manufacturing costs for 20,000 radios:

Direct materials 400,000$ 400,000$

b. Effect of alternative use of factory space:

Incremental benefit of buying radios from an outside source (see part a)185,000$

Add: Contribution margin of alternative use of factory space

30 Minutes, Medium

Based upon the above analysis, management will save $185,000 if it buys the radios from an

outside source.

Cost to purchase 20,000 radios at $50 each 0 1,000,000 (1,000,000)

a.

Make the Buy the Incremental

Switches Switches Analysis

Manufacturing costs for 100,000 switches:

Direct materials 150,000$ 150,000$

Direct labor 100,000 100,000

b. Effect of alternative use of factory space:

Incremental benefit (cost) of buying switches from outside source 9,000$

(see part a)

Based upon the above analysis, management will save $9,000 by purchasing the switches from an

outside source rather than making them.

30 Minutes, Medium

PROBLEM 21.3B

JAMES LIGHTING

$4 per unit: 400,000 (400,000)

a. Schedule showing contribution margin per machine-hour for each product:

Sales price per unit 300$ 150$

Less variable costs and

expenses:

Direct materials 60$ 50

b.

Recommendation as to which product should be discontinued:

Model A should be discontinued because the contribution margin per machine-hour (the

30 Minutes, Medium

Model A

Model B

PROBLEM 21.4B

SUPERIOR INSTRUMENTS

Direct labor 40 20

Variable manufacturing

Variable selling expense 62 25

Contribution margin per unit 90$ 39$

Machine-hours required

Contribution margin per

a. Sell to

Convert mail order Incremental

to High Def. firm Analysis

480,000$ 36,000$ 444,000$

b.

(2)

25 Minutes, Medium

PROBLEM 21.5B

TOOPS

Incremental sales revenue

If Toops is already operating at full capacity, it probably should sell the standard

Sunk costs: The $100,000 incurred in manufacturing the standard definition TVs (400 units

Incremental profit (loss)

Incremental costs

PROBLEM 21.6B

FIRE CODE

a. Incremental benefit of each option, in total and on a per-unit basis:

Sell as Repackage Sell to

Scrap and Sell Foreign Buyer

Incremental revenue per unit 20$ 18$ 17$

b.

(1)

Based solely on this analysis, Fire Code should sell the detectors to the foreign buyer.

25 Minutes, Medium

Note: The unit costs given in the problem are not relevant because they are sunk costs.

There are several nonfinancial issues that management should consider:

If the packaging of each unit was changed to inform buyers that the sensory cells have a

PROBLEM 21.7B

VITAMIN BITS COMPANY

a.

B1B3B15

Sales value if sold at the split-off point 110,000$ 100,000$ 90,000$

b.

Minimum price per pound needed to sell B3 at the split-off point:

Final sales value if processed further 120,000$

Sales value at split-off point 100,000

Divided by: Number of pounds ÷ 5,000

Add: Current price per pound at split-off point ($100,000 ÷ 5,000 pounds) 20.00

Minimum price per pound needed to sell at split-off point 24.00$

There is an incremental benefit associated with the further processing of B1 and B3, as

shown above.

25 Minutes, Medium

Sales value if processed further 200,000 180,000 110,000

Incremental benefit (cost)

PROBLEM 21.8B

HOME RUN CORPORATION

a.

Bats Gloves Balls

Selling price 48$ 80$ 12$

Direct labor 8 24 4

b.

The least profitable product (balls) may, to a limited extent, create a demand for bats and

gloves. Since the company is at full capacity, it is not interested in further support of its

20 Minutes, Medium

To maximize operating income, the company should produce those products that provide the

Direct materials 14 10 1

Direct labor hours per unit (direct labor cost

per unit ÷ $8 per hour) 1 3 0.50

Contribution margin per direct labor hour 25$ 15$ 12$

Total hours required to meet demand of

SOLUTIONS TO CRITICAL THINKING CASES

CASE 21.1

I KNEW THAT

1.

2.

3.

With today’s computerized checkout stands, there is almost no limit to the number of

Seating capacity is the factor that limits restaurants’ potential output. One means of

increasing contribution margin per seat (or table) is to promote sales of the highest-margin

35 Minutes, Medium

The doctor’s or dentist’s time (direct labor) is the limiting factor. (This is why most doctors

no longer make “house calls.”)

To increase contribution margin per hour, the practitioner tries to see as many patients as

CASE 21.1

I KNEW THAT (continued)

4.

5.

Note to instructor: Many garages charge customers for “standard” labor hours, published in an

industry guidebook, rather than for actual labor hours. The published standard hours do not

assume that the mechanic is a specialist with respect to the make of car or specific type of

The output of many residential builders is limited by available land. Contribution margin

per acre is increased by building higher density projects, meaning more housing units per

In the service department of an auto dealership, skilled labor hours (mechanics’ time)

usually is the factor limiting potential. Output per hour can be increased by providing

CASE 21.2

MCFRIENDLY SOFTWARE

b. (1)

c.

d.

The $10 million opportunity cost of not accepting Jupiter’s offer is known to McFriendly’s

There are unlimited opportunity costs, just as there are unlimited alternative possible

15 Minutes, Medium

if they are not sold, it will not be forthcoming.

If McFriendly accepts Jupiter’s offer, its opportunity cost will be the profit that it

opportunity costs are not recorded in the accounting records.

CASE 21.3

INTERNET

a.

Specific incremental decisions may vary by product line, but would likely include special

20 Minutes, Easy

THE DOW CORPORATION

20 Minutes, Medium CASE 21.4

SEC ENFORCEMENT FINES

Answers among groups will vary significantly. However, some of the relevant costs and

earnings that should be mentioned include the impact that reported financial statements will

have on the manager’s future out-of-pocket costs and future earnings potential. For example, if

the manager has stock options or bonuses tied to reported earnings these type of incentive

ETHICS, FRAUD & CORPORATE GOVERNANCE