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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 - $50,000) 110,000$
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)
(4)
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 ($55 × 18,000 units) ……………………………….
PROBLEM 21.2B
MATCHLESS CORP.
a.
Make the Buy the Incremental
Radios Radios Analysis
Manufacturing costs for 20,000 radios:
Direct materials 400,000$ 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 $185,000 if it buys the radios from an
outside source.
a.
Make the Buy the Incremental
Switches Switches Analysis
Manufacturing costs for 100,000 switches:
Direct materials 150,000$ 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 $9,000 by purchasing the switches from an
outside source rather than making them.
30 Minutes, Medium
PROBLEM 21.3B
JAMES LIGHTING
a. Schedule showing contribution margin per machine-hour for each product:
Sales price per unit 300$ 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
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 $100,000 incurred in manufacturing the standard definition TVs (400 units
PROBLEM 21.6B
FIRE CODE
a. Incremental benefit of each option, in total and on a per-unit basis:
Sell as Repackage Sell to
Scrap and Sell Foreign Buyer
Incremental revenue per unit 20$ 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
There is an incremental benefit associated with the further processing of B1 and B3, as
shown above.
25 Minutes, Medium
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
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
