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Chapter 12

Chapter 12.pdf

12 Pages
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Department
Accounting
Course Code
ACCTG322
Professor
Trish Stringer

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Chapter 12 – Solutions to Recommended Questions Exercise 12-11 The company should accept orders first for Beta, second forAlpha, and third for Omega. The computations are: Alpha Omega Beta (a) Direct ateriare quired per unit....................$48.00 $30.00 $18.00 (b) Cost per kilogram ......................................$6.00... $6.00 $6.00 (c) Kilograms required per unit (a) ÷ (b) ................ 8 5 3 (d) Contributionmarginpeuni.t.......................$64.00 $28.00 $42.00 Contributionrgin r kilogram of materi- als used (d) ÷ (c)...................................$8.00..... $5.60 $14.00 Since Beta uses the least amount of material per unit of the three products, and since it is the most profitable of the three in terms of its use of this constrained resource, some students will immediately assume that this is an infallible relationship. That is, they will assume that the way to spot the most profitable product is to find the one using the least amount of the constrained resource. The way to dispel this notion is to point out thatAlpha uses more material (the con- strained resource) than Omega, but yet it is more profitable per unit of the constrained resource. The key factor is not how much of a constrained resource a product uses, but rather how much contribution margin the product generates per unit of the constrained resource. Page 1 of 12 Chapter 12 – Solutions to Recommended Questions Problem 12-17 1. Contribution margin lost if the tour is discontinued.......................... $(1,960) Less tour costs that can be avoided if the tour is discontinued: prom...r...................................................$540............ Fee, tour guide...........................................................630.............. Fuel for bus..............................................................110................ Overnight parking fees, bus................................................50...... Room & meals, bus driver and tour guide.................................. 160 1,490 Net decrease in profits if the tour is discontinued............................. $ (470) The following costs are not relevant to the decision: Cost Reason Salary of bus driver The drivers are all on salary and there would be no change in the number of drivers on the payroll. Depreciation of bus Depreciation due to wear and tear is negligible and there would be no change in the number of buses in the fleet. Liability insurance, bus There would be no change in the number of buses in the fleet. Bus maintenance & preparation There would be no change in the size of the maintenance & preparation staff. Page 2 of 12 Chapter 12 – Solutions to Recommended Questions Problem 12-17(continued) AlternativeSolution: Difference: Operating In- come Keep the Drop Increase or Tour the Tour (Decrease) Ticket revenue .......................................$2,800......$. 0 $(2,800) Less variable expenses ..................................840... 0 840 Contributionarg.i.......................................... 1,960 0 (1,960) Less tour expenses: Topuromotio....................................540........ 0 540 Salary of bus driver...................................320.... 320 0 Fee, tour guide .......................................630....... 0 630 Fuel for bus...........................................110........ 0 110 Depreciation of bus....................................410... 410 0 Liabiliiysuranc.............................180... 180 0 Overnight parking fees, bus.............................50 0 50 Room & meals, bus driver and tour guide....... 160 0 160 Bus maintenance and preparation.................... 270 270 0 Total tour expenses....................................2,670..... 1,180 1,490 Operatinl....................................(710)............ $(1,180) $ (470) 2. The goal of increasing average seat occupancy could be accomplished by dropping tours like the Majestic Islands tour with lower-than-average seat occupancies (40%). This could reduce profits in at least two ways. First, the tours that are eliminated could have contribution mar- gins that exceed their avoidable costs (such as in the case of the “Majestic Islands” tour in part 1). If so, then eliminating these tours would reduce the company’s total contribution margin more than it would reduce total costs; therefore total profits would decline. Second, these tours might be drawing tourists to other, more profitable tours. So, eliminating tours with below average occupancy could result in lower occupancy on the more successful tours, further reducing total profits. Page 3 of 12 Chapter 12 – Solutions to Recommended Questions Problem 12-18 1. Per 480 gram T-Bone Revenue from further processing: Selling price of one filet mignon (.181 kg × $26.00 per kilogram).......................................................................................................... Selling price of one New York cut (.241 kg × $22.00 per kilogram).......................................................................................................... Total revenue from further processing....................................................................... Less revenue from one T-bone steak ($16.00 × .480 kg)........................................... Incremental revenue from further processing............................................................ Less cost of further processing ($1.40 × .480 kg)...................................................... Profit from further processing.................................................................................... 2. The t-bone steaks should be processed further into the filet mignon and the New York cut. This will yield $3.46 ($1.66/.480kg) per kilogram in added profit for the company. The $4.00 “profit” per kilogram for T-bone steak mentioned in the problem statement is not relevant to the decision, because it contains allocated joint costs. The company will incur the allocated joint costs regardless of whether the T-bone steaks are sold outright or processed further; thus, this cost should be ignored in the decision. Chapter 12 – Solutions to Recommended Questions Problem 12-20 1. The fixed overhead costs are common and will remain the same regardless of whether the cartridges are produced internally or purchased outside. Hence, they are not relevant. The variable manufacturing overhead cost per box of pens is $0.30, as shown below: Total manufacturing overhead cost per box of pens............................. $0.80 Less fixed manufacturing overhead ($50,000 ÷ 100,000 boxes) ......... 0.50 Variable manufacturing overhead cost per box.................................... $0.30 The total variable cost of producing one box of Zippo pens is: Direct materials .................................................................$1.50.............. Direct labour......................................................................1.00............... Variable manufacturing overhead....................................................0.30. Total variable cost per box ......................................................$2.80........ If the cartridges for the Zippo pens are purchased from the outside supplier, then the variable cost per box of Zippo pens would be: Direct materials ($1.50 × 80%)....................................................$1.20... Direct labour ($1.00 × 90%)........................................................0.90..... Variable manufacturing overhead ($0.30 × 90%) ................................ 0.27 Purchase of cartridges ............................................................0.48.......... Total variable cost per box ......................................................$2.85........ The company should reject the outside supplier’s offer. Producing the cartridges internally costs $0.05 less per box of pens than purchasing them from the supplier. Another approach to the solution is: Cost avoided by purchasing the cartridges: Direct materials ($1.50 × 20%).................................................$0.30... Direct labour ($1.00 × 10%).....................................................0.10.... Variable manufacturing overhead ($0.30 × 10%)............................. 0.03 Total costs avoided............................................................$0.43........... Cost of purchasing the cartridges.................................................$0.48... Cost savings per box by making cartridges internally ......................... $0.05 Page 5 of 12 Chapter 12 – Solutions to Recommended Questions Problem 12-20 (continued) Note that the avoidable cost of $0.43 above represents the cost of making one box of cartridges internally. 2. The company would not want to pay any more than $0.43 per box, since it can make the car- tridges for this amount internally. 3. The company has three alternatives for obtaining the necessary cartridges. It can: #1 Produce all cartridges internally. #2 Purchase all cartridges externally. #3 Produce the cartridges for 100,000 boxes internally and purchase the cartridges for 50,000 boxes externally. The costs under the three alternatives are: Alternative #1—Produce all cartridges internally: Variable costs (150,000 boxes × $0.43 per box)....................................$64,500 Fixed costs of adding capacity.....................................................30,000..... Total cost........................................................................$94,500.................. Alternative #2—Purchase all cartridges externally: Variable costs (150,000 boxes × $0.48 per box)......................................$72,000 Alternative #3—Produce 100,000 boxes internally, and purchase 50,000 boxes externally: Variable costs: 100,000 boxes × $0.43 per box..................................................$43,000.. 50,000 boxes ×
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