Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
1397
Chapter 23
Relevant Costs for
Managerial Decisions
QUICK STUDIES
Quick Study 23-1 (5 minutes)
Item
Relevant
Not relevant
a.
Selling price of $6.00 per unit …………………………
X
b.
Direct materials of $1.00 per unit ……………………
X
c.
X
d.
Variable overhead of $1.50 per unit ………………..
X
e.
Fixed overhead of $0.75 per unit …………………….
f.
Quick Study 23-2 (15 minutes)
SPECIAL OFFER ANALYSIS
Per unit
Total
Sales (2,000 units) ……………………………………………….
$6.00
$12,000
Variable costs
Direct materials …………………………………………………
1.00
2,000
Direct labor ……………………………………………………….
2.00
4,000
Variable overhead ……………………………………………..
1.50
3,000
1.50
Fixed general and administrative ……………………….
Quick Study 23-3 (5 minutes)
Item
Relevant
Not relevant
a.
$15,000 cost already incurred to produce milk …
X
$20,000 selling price for milk as is …………………..
$35,000 revenue from further processing ……………
Quick Study 23-4 (5 minutes)
1.
Item
Sunk
Cost
Relevant
Cost
Relevant
Revenue
$50,000 book value of old machine ………..
x
$55,000 selling price of old machine ……..
$100,000 price of new machine ……………..
2.
Item
Sunk
Cost
Relevant
Cost
Relevant
Revenue
$2,000 already spent to make shirts ………
x
$6,000 cost to rework shirts ………………….
$10,000 selling price of reworked shirts …
Quick Study 23-5 (15 minutes)
a.
Make or Buy Analysis
Make
Buy
Direct materials ………………………………………..
$3
–
Direct labor ………………………………………………
2
–
Overhead (incremental) …………………………….
Cost to buy …………………………..…………………..
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Quick Study 23-6 (10 minutes)
a.
Make or Buy Analysis
Make
Buy
Direct materials ………………………………………..
$2.25
—
Direct labor ………………………………………………
1.00
—
Overhead (incremental) …………………………….
Cost to buy …………………………..…………………..
Quick Study 23-7 (15 minutes)
a.
Sell or Process Analysis
Sell As Is
Process Further
Revenue ………………………………………………..
$67,500
$468,750
Costs …………………………………………………….
—
312,500
Quick Study 23-8 (10 minutes)
a.
Sell or Process Analysis
Sell As Is
Process Further
Revenue …………………………………………………..
$90,000
$126,000
Costs ……………………………………………………….
—
48,000
Quick Study 23-9 (10 minutes)
a.
Scrap or Rework Analysis
Scrap
Rework
Revenue from scrapped/reworked units ………
$20,000
$50,000
Decision: Incremental income to Scrap ………..
Quick Study 23–10 (15 minutes)
a.
Scrap or Rework Analysis
Scrap
Rework
Revenue from scrapped/reworked units ………
$30,000
$120,000
Cost of reworked units ………………………………..
—
80,000
Quick Study 23–11 (10 minutes)
Product Contribution Margin
Skateboards
Scooters
Selling price per unit ……………………………..
$200
$400
Variable costs per unit …………………………..
120
310
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Quick Study 23-12 (15 minutes)
a.
Glide
Ultra
Contribution margin per unit ………………………
$200
$300
b. Sales mix analysis with Unlimited Demand: Because the company can
sell all it can produce of both models, it should use all of its direct labor
hours to make the Glide model as Glide has the highest contribution
margin per DLH.
Quick Study 23-13 (15 minutes)
a.
Segment Elimination Analysis
Continue
Eliminate
Income Increase
(Decrease)
Sales …………………………..………….
$60,000
$ 0
Variable costs …………………………
20,000
0
b. Do Not Eliminate. The segment should not be eliminated because
income decreases by $4,000 from segment elimination.
Quick Study 23-14 (15 minutes)
a.
Segment Elimination Analysis
Continue
Eliminate
Income Increase
(Decrease)
Sales ………………………………………
$200,000
$ 0
Variable costs…………………………
140,000
0
Quick Study 23-15 (15 minutes)
a.
Keep or Replace Analysis
Keep
Replace
Income Increase
(Decrease)
Revenues
Sale of existing machine ………..
$ 60,000
Costs
Purchase of new machine ………
(90,000)
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Quick Study 23–16 (25 minutes)
❶ Determine total cost per unit
Product costs
Direct materials ($100 x 10,000) ……..
$1,000,000
Direct labor ($30 x 10,000) ……………..
300,000
Variable overhead ($45 x 10,000) ……
450,000
Fixed overhead ……………………………..
Variable ($3 x 10,000) …………………….
Fixed …………………………..………………..
❷ Determine dollar markup per unit
Total cost per unit …………………………..
$ 250
Markup percentage (given) ……………..
❸ Determine selling price per unit
Total cost per unit …………………………..
$ 250
Quick Study 23–17 (10 minutes)
a. Determine selling price per unit from total cost
Total cost per unit …………………………………………….
$200
Quick Study 23–18 (20 minutes)
① Determine markup percentage
Target profit …………………………..…………………………...
$ 200,000
Fixed costs
Overhead …………………………………………………………..
265,000
Selling, general and administrative ……………………….
Variable cost per unit ($110 + $35 + $45 + $10) …….
$ 200
Markup percentage ($800,000/$2,000,000) …………….
② Determine dollar markup per unit
Variable cost per unit ($110+$35+$45+$10) ……………
$ 200
Markup percentage ………………………………………………
x 40%
Markup per unit ……………………………………………………
$ 80
③ Determine selling price per unit
Variable cost per unit …………………………………………..
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Quick Study 23–19 (10 minutes)
Target cost = Expected selling price – Target profit
Quick Study 23–20 (10 minutes)
a.
SPECIAL OFFER ANALYSIS
PER UNIT
TOTAL
Sales (750 units) …………………….
$250
$187,500
Fixed costs (incremental) ……….
b. Accept Special Offer. The company should accept the special offer
because we expect income to increase by $30,000.
Quick Study 23-21 (10 minutes)
Time and materials price
Direct labor (80 hours x $55 per DLH) ………….
$4,400
$9,340
Quick Study 23-22 (10 minutes)
a.
Time charge per hour of direct labor
Direct labor rate per direct labor hour …………………………...
$ 50
Non-materials related overhead per direct labor hour…….
30
Total hourly conversion cost ………………………………………..
Target profit ($80 x 30%) ……………………………………………….
b.
Materials markup per dollar of direct materials cost
Materials-related overhead ……………………………………………
7%
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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EXERCISES
Exercise 23-1 (10 minutes)
a.
Make or Buy Analysis
Make
Buy
Direct materials ………………………………………………
$1.20
—
Direct labor …………………………………………………….
1.00
—
—
Cost to buy …………………………………………………….
Decision: Cost savings to Buy ………………………..
b. Buy Part. The company should buy the part because its cost is less than
the cost to make it.
Exercise 23-2 (10 minutes)
a.
Make or Buy Analysis
Make
Buy
Direct materials ……………………………………………..
$1.20
—-
Direct labor ……………………………………………………
0.75
—-
1.40
—-
Decision: Cost savings to Make ……………………..
Exercise 23-3 (10 minutes)
a.
Sell or Process Analysis
Sell As Is
Process Further
Revenue ………………………………………………….
$60,000
$80,000
$60,000
$68,000
b. Process Further. The company should process further as income is higher.
Exercise 23-4 (10 minutes)
a.
Scrap or Rework Analysis
Scrap
Rework
Revenue from scrapped/reworked units ……….
$78,000
$187,000
b. Rework Units. The company should rework the units because income is
higher.
Exercise 23–5 (10 minutes)
a.
Sell or Process Analysis
Sell As Is
Process Further
Revenue ……………………………………………………….
$56,000
$175,000
$56,000
$ 50,000
Decision: Incremental income to Sell As Is …….
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Exercise 23–6 (30 minutes)
a.
Product Contribution Margin
Hero
Flip
Selling price per unit ………………………………………
$150
$ 95
Variable costs per unit ……………………………………
50
55
Machine hours per unit …………………………………..
b. SALES MIX ANALYSIS WITH LIMITED DEMAND: The company should produce
as much of Hero as possible, up to the market demand of 500 units.
Then, remaining capacity should be used to produce as much of Flip
as possible, up to the market demand of 900 units. Note: 1,600 machine
hours are available.
For HERO
Maximum production and sales* …………………………….
500
Units
Hours needed per unit ……………………………………………
Hours needed per unit ……………………………………………
1
Total hours used (600 x 1) …………………………………….
C. CONTRIBUTION MARGIN FROM SALES MIX
Units
Contribution Margin
per Unit
Total Contribution
Margin
Hero ………………..
500
$100
$50,000
600
Exercise 23-7 (20 minutes)
a.
Product Contribution Margin
Kin
Ike
Bix
Selling price per unit ………………………………
$160
$112
$210
Variable costs per unit …………………………...
96
85
144
Pounds of material per unit …………………….
b. SALES MIX ANALYSIS WITH LIMITED DEMAND: The company should produce
and fulfill demand in the following order based on which product has the
highest contribution margin per pound of material.
Exercise 23-8 (15 minutes)
a.
Segment Elimination Analysis
Continue
Eliminate
Income Increase
(Decrease)
Sales ………………………………………
$980,000
$ 0
Variable costs…………………………
700,000
0
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Exercise 23-9 (15 minutes)
Instructor: Total unavoidable expenses of $107,800 do not changes because they cannot be
avoided by eliminating departments.
b. IF DEPARTMENTS WITH SALES LESS THAN AVOIDABLE EXPENSES ARE ELIMINATED
N
T
Total
Sales……………………………………….
$35,000
$28,000
$ 63,000
Exercise 23-10 (25 minutes)
a.
Machine A:
Keep or Replace Analysis
Keep
Replace
Income Increase
(Decrease)
Revenues
Sale of existing machine ………..
$ 52,000
Costs
Purchase of new machine ………
(115,000)
Income (loss) …………………………..
b.
Machine B:
Keep or Replace Analysis
Keep
Replace
Income Increase
(Decrease)
Revenues
Sale of existing machine ………..
$ 52,000
Costs
Purchase of new machine ………
(125,000)
c. Replace Machine. The company should replace the old machine because
income is higher with either new machine.
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Exercise 23-11 (25 minutes)
❶ Determine total cost per unit
Product costs
Direct materials ($100 x 10,000) …………………..
$1,000,000
Direct labor ($25 x 10,000) …………………………..
Variable overhead ($20 x 10,000) …………………
250,000
200,000
❷ Determine dollar markup per unit
Total cost per unit ……………………………………….
$ 240
Markup percentage ……………………………………..
❸ Determine selling price per unit
Total cost per unit ……………………………………….
$ 240
Exercise 23-12 (25 minutes)
① Determine markup percentage
Target profit ………………………………………………………..
$ 300,000
Fixed costs
Overhead …………………………………………………………..
670,000
Selling, general and administrative……………………….
Variable cost per unit ($70 + $40 + $25 + $15)
$ 150
② Determine dollar markup per unit
Variable cost per unit ($70 + $40 + $25 + $15) ………..
$ 150
Markup percentage ………………………………………………
③ Determine selling price per unit
Variable cost per unit …………………………………………..
$ 150
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 23
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Exercise 23-13 (20 minutes)
a.
SPECIAL OFFER ANALYSIS
PER UNIT
TOTAL
Sales (15,000 units) ………………………………………….
$12.00
$180,000
Variable costs ………………………………………………….
Fixed costs
b. Reject Special Offer. The company should not accept the special offer
because it would decrease income by $12,000.
Exercise 23-14 (20 minutes)
a.
SPECIAL OFFER ANALYSIS
PER UNIT
TOTAL
Sales (20,000 units) ………………………………………..
$75.00
$1,500,000
Variable costs ………………………………………………..
Fixed costs
b. Accept Special Offer. The company should accept the special offer
because its income would increase by $470,000.