Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
E25-15 Making product mix decisions
Learning Objective 3
2. CM per MHr, Regular $393
Tread Mile produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that
Tread Mile could use all its available machine hours to produce either model. The two models are
processed through the same production departments. Data for both models are as follows:
Requirements
1. What is the constraint?
2. Which model should Tread Mile produce? (Hint: Use the allocation of fixed manufacturing overhead
to determine the proportion of machine hours used by each product.)
3. If Tread Mile should produce both models, compute the mix that will maximize operating income.
SOLUTION
Requirement 1
Requirement 2
Contribution margin per treadmill:
Deluxe
Treadmill
Regular
Treadmill
Sales price per treadmill
$ 1,040
$ 570
Contribution margin per machine hour:
Deluxe
Treadmill
Regular
Treadmill
(1) Proportion of units produced per equivalent hour
1
3
Requirement 3
E25-16 Making sales mix decisions
Learning Objective 3
CM per sq. ft., Designer $4.40
Cole sells both designer and moderately priced fashion accessories. Top management is deciding which
product line to emphasize. Accountants have provided the following data:
The Cole store in Grand Junction, Colorado, has 13,000 square feet of floor space. If Cole emphasizes
moderately priced goods, it can display 780 items in the store. If Cole emphasizes designer wear, it can
display only 520 designer items. These numbers are also the average monthly sales in units.
Prepare an analysis to show which product the company should emphasize.
SOLUTION
Designer
Moderately
Priced
E25-17 Making sales mix decisions
Learning Objective 3
1. CM per linear ft., Licious-Ade
12-oz. can $5.10
Each morning, Joel Rowe stocks the drink case at Joel’s Beach Hut in Myrtle Beach, South Carolina.
The drink case has 100 linear feet of refrigerated drink space. Each linear foot can hold either six 12-
ounce cans or three 20-ounce bottles.
Joel’s Beach Hut sells three types of cold drinks:
1. Licious-Ade in 12-oz. cans for $1.30 per can
2. Licious-Ade in 20-oz. bottles for $1.70 per bottle
3. Pep-Cola in 20-oz. bottles for $2.30 per bottle
Joel’s Beach Hut pays its suppliers:
1. $0.45 per 12-oz. can of Licious-Ade
2. $0.60 per 20-oz. bottle of Licious-Ade
3. $0.90 per 20-oz. bottle of Pep-Cola
Joel’s Beach Hut’s monthly fixed costs include:
Joel’s Beach Hut can sell all the drinks stocked in the display case each morning.
Requirements
1. What is Joel’s Beach Hut’s constraining factor? What should Joel stock to maximize profits?
2. Suppose Joel’s Beach Hut refuses to devote more than 65 linear feet to any individual product.
Under this condition, how many linear feet of each drink should Joel’s stock? How many units of
each product will be available for sale each day?
SOLUTION
Requirement 1
Contribution Margin:
Licious-Ade
12-oz. Can
Licious-Ade
20-oz. Bottle
Pep-Cola
20-oz. Bottle
Sales Price
$ 1.30
$ 1.70
$ 2.30
Total Contribution Margin with Refrigerated Drink Space Constraint:
Licious-Ade
12-oz. Can
Licious-Ade
20-oz. Bottle
Pep-Cola
20-oz. Bottle
Contribution margin per drink
$ 0.85
$ 1.10
$ 1.40
Requirement 2
Under this condition Joel should stock 65 linear feet of Licious-Ade in 12-oz. cans because this drink
has the highest contribution margin per linear foot of refrigerated space. Joel should stock the remaining
35 linear feet with Pep-Cola in 20-oz. bottles because this drink has the second highest contribution
margin per linear foot of refrigerated space.
Licious-Ade
12-oz. Can
Licious-Ade
20-oz. Bottle
Pep-Cola
20-oz. Bottle
Linear ft. stocked
65
0
35
E25-18 Making outsourcing decisions
Learning Objective 4
Differential cost $1.50
Eclipse Systems manufactures an optical switch that it uses in its final product. The switch has the
following manufacturing costs per unit:
Another company has offered to sell Eclipse Systems the switch for $20.00 per unit. If Eclipse Systems
buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other
purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Eclipse Systems should make or buy the switch.
SOLUTION
Switch Cost
Make
Outsource
Difference
(Make – Outsource)
Variable costs:
Direct materials
$ 11.00
$ 11.00
Note: Exercise E25-18 must be completed before attempting Exercise E25-19.
E25-19 Making outsourcing decisions
Learning Objective 4
1. Outsource and make new product $1,350,000
Refer to Exercise E25-18. Eclipse Systems needs 80,000 optical switches. By outsourcing them, Eclipse
Systems can use its idle facilities to manufacture another product that will contribute $250,000 to
operating income.
Requirements
1. Identify the expected net costs that Eclipse Systems will incur to acquire 80,000 switches under three
alternative plans.
2. Which plan makes the best use of Eclipse System’s facilities? Support your answer.
SOLUTION
Requirement 1
Outsource Switches
Switch Costs
Make
Facilities
Idle
Make New
Product
Variable costs:
Direct materials ($11.00 × 80,000)
$ 880,000
Direct labor ($4.50 × 80,000)
360,000
Requirement 2
In order to make the best use of its facilities, Eclipse Systems should outsource the switches and use the
freed manufacturing capacity to make the new product because this plan results in the lowest expected
E25-20 Making sell or process further decisions
Learning Objective 4
Total net rev. difference $4,104
Naturalplus processes organic milk into plain yogurt. Naturalplus sells plain yogurt to hospitals, nursing
homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of $820, yields
1,200 gallons of plain yogurt. Naturalplus sells the one-gallon tubs for $5 each and spends $0.10 for
each plastic tub. Naturalplus has recently begun to reconsider its strategy. Naturalplus wonders if it
would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores.
Naturalplus could further process each batch of plain yogurt into 25,600 individual portions (3/4 cup
each) of fruited yogurt. A recent market analysis indicates that demand for the product exists.
Naturalplus would sell each individual portion for $0.54. Packaging would cost $0.08 per portion, and
fruit would cost $0.07 per portion. Fixed costs would not change.
Should Naturalplus continue to sell only the gallon-size plain yogurt (sell as is) or convert the plain
yogurt into individual-size portions of fruited yogurt (process further)? Why?
SOLUTION
Revenues and Costs
Sell
Process
Further
Difference
Expected revenue from selling 1,200 gallons at $5 each
$ 6,000
Expected revenue from selling 25,600 portions at $0.54 each
$ 13,824
$ 7,824
Problems (Group A)
P25-21A Identifying relevant information and making pricing decisions
Learning Objectives 1, 2
2. $9,400
Deep Blue manufactures flotation vests in Charleston, South Carolina. Deep Blue’s contribution margin
income statement for the month ended December 31, 2016, contains the following data:
Suppose Overboard wishes to buy 4,700 vests from Deep Blue. Deep Blue will not incur any variable
selling and administrative expenses on the special order. The Deep Blue plant has enough unused
capacity to manufacture the additional vests. Overboard has offered $7 per vest, which is below the
normal sales price of $16.
Requirements
1. Identify each cost in the income statement as either relevant or irrelevant to Deep Blue’s decision.
2. Prepare a differential analysis to determine whether Deep Blue should accept this special sales order.
3. Identify long-term factors Deep Blue should consider in deciding whether to accept the special sales
order.
SOLUTION
Requirement 1
Variable Costs:
Manufacturing
150,000
Relevant
Requirement 2
Expected increase in revenue
(4,700 vests × $7 per vest)
$ 32,900
Requirement 3
In addition to considering this special order’s increase on profits, Deep Blue managers should consider
whether the special order could affect regular sales in the long run. Will regular customers find out about
P25-22A Making pricing decisions
Learning Objective 2
4. $4.39 per unit
Happy Gardener operates a commercial plant nursery where it propagates plants for garden centers
throughout the region. Happy Gardener has $4,800,000 in assets. Its yearly fixed costs are $650,000, and
the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total
$1.90. Happy Gardener’s volume is currently 480,000 units. Competitors offer the same plants, at the
same quality, to garden centers for $4.25 each. Garden centers then mark them up to sell to the public
for $9 to $12, depending on the type of plant.
Requirements
1. Happy Gardener’s owners want to earn a 11% return on investment on the company’s assets. What
is Happy Gardener’s target full product cost?
2. Given Happy Gardener’s current costs, will its owners be able to achieve their target profit?
3. Assume Happy Gardener has identified ways to cut its variable costs to $1.75 per unit. What is its
new target fixed cost? Will this decrease in variable costs allow the company to achieve its target
profit?
4. Happy Gardener started an aggressive advertising campaign strategy to differentiate its plants from
those grown by other nurseries. Happy Gardener does not expect volume to be affected, but it hopes
to gain more control over pricing. If Happy Gardener has to spend $90,000 this year to advertise and
its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Happy
Gardener will be able to sell its plants to garden centers at the cost-plus price? Why or why not?
SOLUTION
Requirement 1
Revenue at market price
(480,000 units × $4.25 per unit)
$ 2,040,000
Requirement 2
Current variable costs
($1.90 per unit × 480,000 units)
$ 912,000
Requirement 3
Target full product cost
(calculated in Req. 1)
$ 1,512,000
Requirement 4
Current variable costs per unit
($1.75 per unit × 480,000 units)
$ 840,000
Plus: Fixed costs
($650,000 + $90,000 advertising)
740,000
P25-23A Making dropping a product decisions
Learning Objective 3
2b. $(31,000)
Members of the board of directors of Safety Step have received the following operating income data for
the year ended May 31, 2016:
Members of the board are surprised that the industrial systems product line is not profitable. They
commission a study to determine whether the company should drop the line. Company accountants
estimate that dropping industrial systems will decrease fixed cost of goods sold by $84,000 and decrease
fixed selling and administrative expenses by $11,000.
Requirements
1. Prepare a differential analysis to show whether Safety Step should drop the industrial systems
product line.
2. Prepare contribution margin income statements to show Safety Step’s total operating income under
the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the
difference between the two alternatives’ income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?
SOLUTION
Requirement 1
Expected decrease in revenue
$ (340,000)
Expected decrease in total variable costs ($35,000 + $63,000)
$ 98,000
Requirement 2
(a) with the Industrial Systems product line:
SAFETY STEP
Contribution Margin Income Statement
For the Year Ended May 31, 2016
Product Line
Total
Industrial
Systems
Household
Systems
Sales Revenue
$ 710,000
$ 340,000
$ 370,000
Variable Costs:
Manufacturing
81,000
35,000
46,000
P25-23A, cont.
Requirement 2, cont.
(b) without the Industrial Systems product line:
SAFETY STEP
Contribution Margin Income Statement
For the Year Ended May 31, 2016
Household
Systems
Sales Revenue
$ 370,000
Variable Costs:
Manufacturing
46,000
Requirement 3
This demonstrates that the differential analysis approach in Requirement 1 yields the same result as the
P25-24A Making product mix decisions
Learning Objective 3
2. CM, Deluxe $1,680
Brill, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard.
Because Brill can sell all the toothbrushes it can produce, the owners are expanding the plant. They are
deciding which product line to emphasize. To make this decision, they assemble the following data:
After expansion, the factory will have a production capacity of 5,000 machine hours per month. The
plant can manufacture either 58 standard electric toothbrushes or 28 deluxe electric toothbrushes per
machine hour.
Requirements
1. Identify the constraining factor for Brill.
2. Prepare an analysis to show which product line to emphasize.
SOLUTION
Requirement 1
Requirement 2
Deluxe
Toothbrush
Standard
Toothbrush
(1) Toothbrushes produced per hour
28
58
P25-25A Making outsourcing decisions
Learning Objective 4
1. $(9,600)
Wild Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:
Suppose Lancaster will sell bindings to Wild Ride for $16 each. Wild Ride would pay $2 per unit to
transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.50 per
binding.
Requirements
1. Wild Ride’s accountants predict that purchasing the bindings from Lancaster will enable the
company to avoid $2,400 of fixed overhead. Prepare an analysis to show whether Wild Ride should
make or buy the bindings.
2. The facilities freed by purchasing bindings from Lancaster can be used to manufacture another
product that will contribute $3,200 to profit. Total fixed costs will be the same as if Wild Ride had
produced the bindings. Show which alternative makes the best use of Wild Ride’s facilities: (a) make
bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.
SOLUTION
Requirement 1
Binding Costs
Make
Outsource
Difference
(Make – Outsource)
Variable costs:
Direct materials
$ 17,600
$ 17,600
Direct labor
3,500
3,500
Requirement 2
Outsource Bindings
Binding Costs
Make
Facilities
Idle
Make New
Product
Variable costs:
Direct materials
$ 17,600
Direct labor
3,500
P25-26A Making sell or process further decisions
Learning Objective 4
3. $(12,200)
Rouse Petroleum has spent $205,000 to refine 62,000 gallons of petroleum distillate, which can be sold
for $6.30 per gallon. Alternatively, Rouse can process the distillate further and produce 56,000 gallons
of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can
be sold for $9.00 per gallon. To sell the cleaner fluid, Rouse must pay a sales commission of $0.10 per
gallon and a transportation charge of $0.15 per gallon.
Requirements
1. Diagram Rouse’s decision alternatives, using Exhibit 25-18 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Rouse’s decision?
3. Should Rouse sell the petroleum distillate or process it into cleaner fluid? Show the expected net
revenue difference between the two alternatives.
