CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-40
change here, please ↓
1. The two alternatives are: Direct materials 3.10
(1) to accept the special order Direct labor 2.25
(2) to reject the special order Variable overhead 1.15
Direct materials…………………………………………………………………………………………
Direct labor………………………………………………………………………………………
Variable overhead………………………………………………………………………………………
3. The statement that “existing sales will not be affected” indicates that there will
be no product-line cannibalization; in other words, there is sufficient excess
capacity such that the acceptance of the special sales will not decrease Smooth
Move’s regular sales. Another consideration, possibly due to the geographic
separation, is that existing customers are less likely to learn of the new price,
which was $5 (or 42%) lower.
E 8-41
change here, please ↓
In this case, it may be easier to deal with the total costs and revenues of the special Direct materials 3.30
order: ↓ links ↓ Direct labor 2.25
Revenue ($7.00 × 15,000)………………………………………………………………………………………………….…….…………..….
$105,000 7.00 × 15,000 = 105,000 Variable overhead 1.15
Less variable costs: Fixed overhead 1.8
Direct materials ($3.30 × 15,000).………………………………………………………………………………………………………..…
$49,500 3.30 × 15,000 = 49,500 Offer (units) 15,000
Direct labor ($2.25 × 15,000)………………………………………………………………………………………………………………..
Variable overhead ($1.15 × 15,000)………………………………………………………………………………………………………..
Less labeling machine…………………………………….……………………………………………………………………………………
CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-42
1.
change here, please
Sweaters Jackets Total Sweaters Jackets
Sales……………………….…………………………………………….…………………………………………….……………………
$210,000 $450,000 $660,000 Sales 210,000 450,000
Less variable expenses: Variable COGS 145,000 196,000
Variable cost of goods sold……………………….…………………………………………….…………………………………………….…………
145,000 196,000 341,000 Direct FOH 25,000 47,000
Variable selling expense……………………….…………………………………………….…………………………………………….………………
10,500 22,500 33,000 Commission 5% 5%
Direct fixed overhead……………………….…………………………………………….…………………………………………….…………………
Direct selling and administrative……………………….…………………………………………….…………………………………………….……
Segment margin……………………….…………………………………………….……………………
Less common fixed expenses:
Common fixed overhead……………………….…………………………………………….…………………………………………….……………
45,000
Common selling and administrative……………………….…………………………………………….…………………………………………….
15,000
Operating income……………………….…………………………………………….…………………………………………….……………………
$ 84,000
2. For the company as a whole, an increase of $10,000 in fixed expense will
result in a decrease in operating income to $74,000 ($84,000 – $10,000). If
the equipment is for the sweaters line, then that line’s segment margin will
E 8-43 Sales revenue 300,000
If Petoskey drops Conway, overall profit will decrease by $75,000 as a result of the ↓ links ↓ VC 225,000
lost contribution margin ($300,000 – $225,000). Note that the direct fixed expense for 300,000 – 225,000 = 75,000
depreciation is a sunk cost and not relevant to the decision (i.e., it will remain
CHAPTER 8 Tactical Decision Making and Relevant Analysis
CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-44
If Petoskey drops Conway, overall profit will increase by $5,000. Contribution margin will ↓ links ↓ 300,000 Sales revenue
decrease by $75,000 as a result of the lost contribution margin ($300,000 – $225,000). 300,000 – 225,000 = 75,000 225,000 VC
Note that the fixed expense for depreciation is a sunk cost and not relevant to the
80,000 – 75,000 = 5,000
E 8-45
If Petoskey drops Conway, profit will decrease by $28,000. There will be a decrease of ↓ links ↓ 300,000 Sales revenue
$75,000 as a result of the lost Conway contribution margin ($300,000 – $225,000). Note 300,000 – 225,000 = 75,000 225,000 VC
that the direct fixed expense for depreciation is a sunk cost and not relevant to the 80,000 Salary
decision (i.e., it will remain unchanged whether Conway is kept or dropped). However, Cont. margin(Alanson) 165,000
Petoskey will avoid the $80,000 supervisory salary cost for Conway if it drops Conway. % of customers 20%
Finally, if Petoskey drops Conway, 20% of Alanson’s contribution margin, or $33,000 20% × 165,000 = 33,000
(i.e., 0.20 × $165,000), will also be lost as Conway-loving customers shop elsewhere for
profits are higher with Conway than without Conway.
E 8-46
1. Contribution Margin if HS Is Sold at Split-Off = $9 × 14,000 pounds 9 × 14,000 = 126,000 Units at split-off 14,000
= $126,000 Units of CS 4,000
2. Contribution margin if HS is processed into CS Price at split-off 9
← links to E 13-28
← links to E 13-29
CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-47
change here, please ↓
1. Reno Tahoe Reno cont. margin 120
Unit contribution margin………………………………………………………………………………………
$120 $75 Tahor cont. margin 75
÷ Painting department hours………………………………………………………………………………………
5 3 Hrs. reqd. for painting 5
Contribution margin per unit scarce resource………………………………………………………………………………………
$24 $25 Hrs. reqd. for painting 3
E 8-48
(links to E 13-32)
1. If 500 units of each product can be sold, then the company will first make and Reno cont. margin 120
sell 500 units of Tahoe (the product with the higher contribution margin per hour
↓ links ↓ Tahor cont. margin 75
of painting department time). This will take 1,500 hours (500 units × 3 hours) 500 × 3 = 1,500 Hrs. reqd. for painting 5
CHAPTER 8 Tactical Decision Making and Relevant Analysis
3. The financial manager might encounter one or more common challenges to using SP of National Parks Memory Game 20
cost-plus (or markup) pricing. One challenge might be identifying the most SP of Guess This Animal Track Game 40.0
appropriate percentage by which to mark up gift shop costs. For example, if the
percentage is too high (and 65% seems high), the manager risks setting prices Margin 65%
too high, thereby causing some customers to decide not to buy the gift shop’s
products. One factor working in the manager’s favor in this environment is that
businesses in remote locations, such as many national park gift shops, face
little or no competition. This can spur customers to spend more money than
they would when more competition exists. Alternatively, if the markup percentage
is too low, the manager risks setting prices too low. When prices are too low,
profits are less than they would be with higher prices. In extreme cases, profits
↓ change here, please
E 8-50 (profit margin) (target price)
1. Desired Profit = 0.20 × Target Price 20% × 60 = 12.00
= 0.20 × $60
= $12.00
CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-51
irrelevant because these are sunk costs.
2.
Restore
Cost Item Grand Am
↓ change here, please
Transmission………………………………………………………………………………………
$2,000 $ 0 2,000 Transmission overhaul
Water pump………………………………………………………………………………………
400 0400 Water pump
Master cylinder………………………………………………………………………………………
1,100 0 1,100 Master cylinder work
Sell Grand Am………………………………………………………………………………………
0 (6,400) 6,400 Sell Grand Am
Cost of new car………………………………………………………………………………………
0 9,400 9,400 Cost of new car
Total………………………………………………………………………………………
$3,500 $ 3,000
decreasing the Grand Am’s resale value?
E 8-52
change here, please ↓
1. If the analysis is done using total costs, each variable cost as well as the purchase Direct materials 6.00
price will be the unit cost multiplied by 35,000 units. The direct fixed overhead of Direct labor 2
$77,000 is avoidable if the part is purchased. Variable overhead 1.5
Make Buy Fixed overhead 3.5
Direct materialsa……………………………………………………………………………………
$210,000 $ 0 Annual prod. (units) 35,000
Direct laborb……………………………………………………………………………………
70,000 0 Avoidable fixed o/h 77,000
Variable overheadc……………………………………………………………………………………
52,500 0 SP offered 11
Fixed overhead……………………………………………………………………………………
Purchase costd……………………………………………………………………………………
Blasingham should purchase the part. ↓ links ↓
2. Maximum Price = $409,500/35,000 = $11.70 per unit 409,500 / 35,000 = 11.70
Alternatives
Buy Neon
CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-53
change here, please ↓
Make Buy ↓ links ↓ Direct materials 6.00
1.
Direct materialsa…………………………………………………………………………………
$210,000 $ 0 6.00 × 35,000 = 210,000 Direct labor 2
Direct laborb…………………………………………………………………………………
70,000 0 2.00 × 35,000 = 70,000 Variable overhead 1.5
Variable overheadc…………………………………………………………………………………
Purchase costd…………………………………………………………………………………
Blasingham should continue manufacturing the part.
2. Maximum Price = $332,500/35,000 = $9.50 per unit 332,500 / 35,000 = 9.50
CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-54
1. If the special order is accepted: ↓ links ↓
Revenues ($7 × 100,000)……………………………………….………………………………………….……………………………….…………………
$ 700,000 7 × 100,000 = 700,000
Direct materials ($2 × 100,000)………………………………….………………………………………….……………….……………………………….
(200,000) 2 × 100,000 = 200,000
Direct labor ($1 × 100,000)……………………………………….………………………………………….………………….……………………………
(100,000) 1 × 100,000 = 100,000
Variable overhead ($3 × 100,000)……………………………….………………………………………….…………………………………………..…..
(300,000) 3 × 100,000 = 300,000
↓ change here, please
Total net benefit…………………………………………………………………………………………………..
$ 100,000 Direct materials 2
2. The qualitative factors are those that cannot be easily quantified. The company is Price offer per fixture 7
faced with a problem of idle capacity. Accepting the special order would bring Order received (units ) 100,000
production up to near capacity and allow the company to avoid laying off
employees. This would also enhance the company’s community image.
PROBLEMS
CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-55
1. make changes here, please
Coffee Coffee
Blenders Makers Total Blenders Makers
Sales………………………………………………………………………...…………………………………………………………
$1,560,000 $2,175,000 $3,735,000 V. exp. per appliance 18 27
Less: Variable cost of goods sold…………………...……………………………………………………………………………...……
1,170,000 2,025,000 3,195,000 SP per appliance 24 29
Contribution margin………………………………………………………………………...…………………………………………………………
$ 390,000 $ 150,000 $ 540,000 Units produced 65,000 75,000
Less: Direct fixed expenses…………………………………………………………………………………………………………………………………
184,000 142,500 326,500 FC (avoided) 184,000 142,500 326,500
Less: Common fixed expenses*…………………………………………………………………………………………………...……………………….
2. If the coffee maker line is dropped, profits will decrease by $7,500, the segment
margin. If the blender line is dropped, profits will decrease by $206,000.
3. Coffee
Blenders Makers Total
Sales………………………………………………………………………...………………………………
$1,775,000 $2,175,000 $3,950,000
Less: Variable cost of goods sold…………………...……………………………………………………………………………...……
1,350,000 2,025,000 3,375,000
Contribution margin………………………………………………………………………...………………………………
$ 425,000 $ 150,000 $ 575,000
Less: Direct fixed expenses…………………………………………………………………………………………………………
184,000 142,500 326,500
Less: Common fixed expenses*…………………………………………………………………………………………………...………………………………
Alard Company
Segmented Income Statement
CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-56 make changes here, please
Scented Musical Regular Total Scented Musical Regular Total
1.
Sales………………………………………………………………………………………………………………
$13,000 $19,500 $25,000 $57,500 Sales 10,000 15,000 25,000 50,000
Less: Variable expenses………………………………………………………………………………………………………………
9,100 15,600 12,500 37,200 Variable exp. 7,000 12,000 12,500 31,500
Contribution margin………………………………………………………………………………………………………………
$ 3,900 $ 3,900 $12,500 $20,300 Direct fixed exp. 4,000 5,000 3,000 12,000
Less: Direct fixed expenses………………………………………………………………………………………………………………
4,250 5,750 3,000 13,000 Segment margin (1,000) (2,000) 9,500 6,500
Product margin………………………………………………………………………………………………………………………………………………………
$ (350) $ (1,850) $ 9,500 $ 7,300 Common fixed exp. 7,500
Less: Common fixed expenses………………………………………………………………………………………………………………
7,500 Operating loss (1,000)
Operating income (loss)……………………………………………………………………………………………………...………
$ (200) Advertising 250 750
2. Regular:
Sales…………………………………………………………………………………………………….
$20,000 25,000 × 80% = 20,000
Less: Variable expenses………………………………………………………………………………………………………………………………….
10,000 12,500 × 80% = 10,000
Contribution margin………………………………………………………………………………………………………………………………………….
$10,000
Less: Fixed expenses*………………………………………………………………………………………………………………………………………..
10,500 3,000 + 7,500 = 10,500
Operating income (loss)……………………………………………………………………………………………………………………...……………..
$ (500)
3. Combinations would be beneficial. Dropping the musical line (which
shows the greatest segment loss) and keeping the scented line while
increasing advertising yields a profit (the optimal combination).
Scented Regular Total
Sales………………………………………………………………………………………………………………
$13,000 $22,500 $35,500
Less: Variable expenses………………………………………………………………………………………………………………
9,100 11,250 20,350
Contribution margin………………………………………………………………………………………………………………
Less: Direct fixed expenses………………………………………………………………………………………………………………
Product margin………………………………………………………………………………………………………………
$ (350) $ 8,250 $ 7,900
Less: Common fixed expenses………………………………………………………………………………………………………………
result.
(links)