Chapter 8 Cost Concepts Relevant to Decision Making
Classifying Cost
8.1
• Storage and material handling costs for raw materials: product cost (indirect
costs)
• Gains or loss on disposal of factory equipment: period costs
• Lubricants for machinery and equipment used in production: product cost (mfg.
Overhead)
Cost behavior
8.2
• Wages paid to temporary workers: Variable cost
• Property taxes on factory building: Fixed cost
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8.3
(a)
(301) (300) 12,519.01 12,500C C− = −
$19.01=
8.4
Question Output level
1,000 units 2,000 Units
(a) Total manufacturing cost $98,000 $160,000
Cost–Volume–Profit Relationships
8.5
(a)
• RTJ Option:
• Wynlakes Option:
(b)
*
14,810 95 10,400 140
45 4,410
98
b
NN
N
N
+= +
=
=
8.6
(a) Break-even sales volume: $200,000
(b) Marginal contribution rate = 20%
(d) No change in MCR.
1.1 $44,000
$44,000 $220,000
0.2
FF
R
= =
= =
(e)
(f)
$40,000 $20,000 $100,000
0.2
−=
8.7
(a) Since belt A has maximum contribution margin, we choose to first pursue
belt A at its demand. And we choose to produce belt A at its maximum
demand.
Then the fixed cost remains
$255,000 $3(20,000) $195,000− =
and we
(c) Operating income =
$3(20,000) $2(80
,000) $1(100,000) $255,000 $65,000+ + − =
.
Once again, we choose to produce belt A at its maximum demand. Then
the new fixed cost is
$255,000 20,000($3) $195,000− =
. Then, we choose
belt B based on the contribution margin, the breakeven for belt B is
8.8
(a) Total fixed cost to be recovered
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8.9
(a)
No.
Description
No.
Description
1. Profit (Loss) 6. Break even
5. Fixed costs 10. Marginal contribution
(b)
Case
Unit
Sold
Sales
Variable
Expenses
Contribution
Margin per Unit
Fixed
Expenses
Net Income
(Loss)
A
9,000
$270,000
$162,000
$12
$90,000
$18,000
C
20,000
$280,000
$35,000
$14
Cost Concepts Relevant to Decision Making
8.10
Additional order units = 100
Labor cost = ($12)(5)(100) = $6,000
8.11
(a) Product mix that must satisfy: A:B = 4:3, or 4B = 3A
(b) 10A + 12A = 5A + 10A + 2,600; A = 371.43 units
(c) Compute the marginal contribution rate (MCR) for each product: Product A =
(d) Product A: MCR = $5 per unit; Production time = 0.5 hour per unit; profit per
Conclusion: Product A is more profitable, so it should be pushed first.
8.12
(a) Incremental cost
In-house Outsourcing
Option Option
Soldering operation 4.80$
Direct materials 7.50$ 6.00$
Description
The outsourcing option would cost $1.98 more for each unit.
(b) Break-even price = $4.80 – $1.98 = $2.82 per unit
8.13
Given, $60,000, 0.3
v
Fp
= =
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(a)
(b)
(c)
. 0.92 ($60,000) $60,000
Break-even sales = 0.92 10.92
pF p v
pv pv p
= =
−−
−
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Short Case Studies
ST 8.1
(a) Break-even volume:
• 6-day operation: capacity → 6,000 cwt/day, 6 days, p = $22.64 / cwt
• 7-day operation: capacity → 6,000 cwt/day, 7 days, p = $22.64 / cwt
(b)
• 6-day operation:
(c) 6-day operation
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(d) 7-day operation
• Net profit margin before taxes
• Total profit for each operation:
• 6days operation case
ST 8.2
(a)
11
:5 0
OP x
=
(b)
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(c)
5x= −30M−60x+100x
x=0.857M
ST 8.3
(a)
Make
Buy
Variable Costs
Direct materials
$40,000.00
Direct manufacturing labor
$20,000.00
$15,000.00
Inspection, setup, material handling
Cost to purchase chains
$82,000.00
Fixed Costs
Machine lease
insurance
$30,000.00
$30,000.00
$110,000.00
$112,000.00
Ace should not accept the offer since the unit cost is slightly more when ACE buy
chains.
(b)
Make
Buy
Variable Costs
Direct materials
$40,000.00
Direct manufacturing labor
$20,000.00
$15,000.00
handling
Cost to purchase chains
$82,000.00
Fixed Costs
Machine lease
taxes, & insurance
$30,000.00
$30,000.00
Fixed costs of upgrades
$16,000.00
Variable manufacturing
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(c)
Make
Buy
Variable Costs
Direct materials
$24,800.00
Direct manufacturing labor
$12,400.00
(power & utilities)
handling (8 batches)
units)
Fixed Costs
Machine lease
& insurance
$30,000.00
$81,100.00
Variable manufacturing overhead
Profit by upgrading the bike
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ST8.4
(a)
Volume
Make in-house Unit Cost 10,000
Direct materials 20.00$ 200,000.00$
Direct manufacturing labor 10.00$ 100,000.00$
Variable manufacturing overhead 6.00$ 60,000.00$
(b)
Opportunity cost of producing the engines in house:
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(c)
The outsourcing option is more economically attractive.
Make in-house Unit Cost 10,000 6,000
Direct materials 20.00$ 200,000.00$ 120,000.00$
Volume