Chapter 13 Relevant Costs For Decision Making: True/False Questions

Chapter 13 Relevant Costs for Decision Making
True/False Questions
1. Sunk costs are costs that have proven to be unproductive.
Ans: False AACSB: Reflective Thinking AICA BB: Critical Thinking
AICA F!: "ecision #aking$ Reporting %&: 1 %evel: #ediu'
(. All costs are avoidable in a decision e)cept sunk costs and future costs that do not
differ bet*een the alternatives at hand.
Ans: True AACSB: Reflective Thinking AICA BB: Critical Thinking
AICA F!: "ecision #aking$ Reporting %&: 1 %evel: +as,
-. Consistenc, de'ands that a cost that is relevant in one decision be regarded as
relevant in other decisions as *ell.
Ans: False AACSB: Anal,tic AICA BB: Critical Thinking
.. A cost 'a, be relevant for one decision 'aking situation but irrelevant for another
situation.
/. A future cost that does not var, a'ong alternatives under consideration is irrelevant.
0. &pportunit, costs represent econo'ic benefits that are forgone as a result of pursuing
so'e course of action.
1. An e)isting asset should not be replaced until its original cost has been full,
recovered.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-5
2. Fi)ed costs are irrelevant in decisions about *hether a product line should be dropped.
AICA F!: "ecision #aking$ Reporting %&: ( %evel: +as,
3. In a special order situation4 an, fi)ed cost associated *ith the order *ould be
irrelevant.
AICA F!: "ecision #aking$ Reporting %&: . %evel: #ediu'
15. 6hen a co'pan, has a production constraint4 total contribution 'argin *ill be
'a)i'i7ed b, e'phasi7ing the products *ith the highest contribution 'argin per unit
of the constrained resource.
AICA F!: "ecision #aking$ Reporting %&: / %evel: +as,
11. +li'inating nonproductive ti'e is particularl, i'portant in a bottleneck operation.
Ans: True AACSB: Anal,tic AICA BB: Critical Thinking
AICA F!: "ecision #aking$ Reporting %&: / %evel: #ediu'
1(. &ne *a, to increase the effective utili7ation of a bottleneck is to reduce the nu'ber of
defective units.
1-. As a general guide4 it is profitable to continue processing 8oint products after the split9
off point if their total revenues e)ceed the 8oint costs.
1.. :oint costs are irrelevant in the decision of *hether to sell a 8oint product at the split9
off point or process it further and then sell it.
13-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1/. A ke, advantage of using activit,9based costing is that an, cost that is assigned to a
product is also a relevant cost in an, decision involving that product.
Multiple Choice Questions
10. Costs *hich can be eli'inated in *hole or in part if a particular business seg'ent is
discontinued are called:
A; sunk costs.
B; opportunit, costs.
C; avoidable costs.
"; irrelevant costs.
Ans: C AACSB: Reflective Thinking AICA BB: Critical Thinking
11. Consider the follo*ing state'ents:
I. Asse'ble all costs associated *ith each alternative being considered.
II. +li'inate those costs that are sunk.
III. +li'inate those costs that differ bet*een alternatives.
6hich of the above state'ents does not represent a step in identif,ing the relevant
costs in a decision proble'<
A; &nl, I
B; &nl, II
C; &nl, III
"; &nl, I and III
Ans: C AACSB: Reflective Thinking AICA BB: Critical Thinking
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-
12. 6hich of the follo*ing cash flo*s is relevant in a decision about accepting Alternative
= or Alternative ><
A; a cash inflo* for Alternative = that is not a cash inflo* for Alternative >.
B; a cash inflo* that is lost if Alternative = is accepted and is not lost if Alternative
> is accepted.
C; a cash outflo* that is avoided if Alternative = is accepted and is not avoided if
Alternative > is accepted.
"; all of the above.
Ans: " AACSB: Reflective Thinking AICA BB: Critical Thinking
13. 6hich of the follo*ing best describes an opportunit, cost:
A; it is a relevant cost in decision 'aking4 but is not part of the traditional
accounting records.
B; it is not a relevant cost in decision 'aking4 but is part of the traditional
accounting records.
C; it is a relevant cost in decision 'aking4 and is part of the traditional accounting
records.
"; it is not a relevant cost in decision 'aking4 and is not part of the traditional
accounting records.
Ans: A AACSB: Reflective Thinking AICA BB: Critical Thinking
Source: CA4 adapted
(5. Consider the follo*ing state'ents:
I. A division?s net operating inco'e4 after deducting both traceable and allocated
co''on corporate costs4 is negative.
II. The division?s avoidable fi)ed costs e)ceed its contribution 'argin.
III. The division?s traceable fi)ed costs plus its allocated co''on corporate costs
e)ceed its contribution 'argin.
6hich of the above state'ents give an econo'ic reason for eli'inating the division<
A; &nl, I
B; &nl, II
C; &nl, III
"; &nl, I and II
Ans: B AACSB: Anal,tic AICA BB: Critical Thinking
13-! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(1. The :abba Co'pan, 'anufactures the @Snack BusterA *hich consists of a *ooden
snack chip bo*l *ith an attached porcelain dip bo*l. 6hich of the follo*ing *ould
be relevant in :abba?s decision to 'ake the dip bo*ls or bu, the' fro' an outside
supplier<
Fi)ed overhead cost The variable
that can be eli'inated if selling
the bo*ls are purchased cost of the
fro' the outside supplier Snack Buster
A; >es >es
B; >es !o
C; !o >es
"; !o !o
AICA F!: "ecision #aking$ Reporting %&: - %evel: #ediu'
((. The acceptance of a special order *ill i'prove overall net operating inco'e so long as
the revenue fro' the special order e)ceeds:
A; the contribution 'argin on the order.
B; the incre'ental costs associated *ith the order.
C; the variable costs associated *ith the order.
"; the sunk costs associated *ith the order.
(-. Binsi Corporation 'anufactures five different products. All five of these products
'ust pass through a sta'ping 'achine in its fabrication depart'ent. This 'achine is
Binsi?s constrained resource. Binsi *ould 'ake the 'ost profit if it produces the
product that:
A; uses the lo*est nu'ber of sta'ping 'achine hours.
B; generates the highest contribution 'argin per unit.
C; generates the highest contribution 'argin ratio.
"; generates the highest contribution 'argin per sta'ping 'achine hour.
Ans: " AACSB: Anal,tic AICA BB: Critical Thinking
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-"
(.. In a sell or process further decision4 consider the follo*ing costs:
I. A variable production cost incurred prior to split9off.
II. A variable production cost incurred after split9off.
III. An avoidable fi)ed production cost incurred after split9off.
6hich of the above costs is Care; not relevant in a decision regarding *hether the
product should be processed further<
A; &nl, I
B; &nl, III
C; &nl, I and II
"; &nl, I and III
Ans: A AACSB: Anal,tic AICA BB: Critical Thinking
(/. Dand, Co'pan, has /4555 obsolete desk la'ps that are carried in inventor, at a
'anufacturing cost of E/54555. If the la'ps are re*orked for E(545554 the, could be
sold for E-/4555. Alternativel,4 the la'ps could be sold for E24555 for scrap. In a
decision 'odel anal,7ing these alternatives4 the sunk cost *ould be:
A; E24555
B; E1/4555
C; E(54555
"; E/54555
Source: CA4 adapted
13-1# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(0. Fodge Inc. has so'e 'aterial that originall, cost E1.4055. The 'aterial has a scrap
value of E/14.55 as is4 but if re*orked at a cost of E14/554 it could be sold for
E/.4.55. 6hat *ould be the incre'ental effect on the co'pan,?s overall profit of
re*orking and selling the 'aterial rather than selling it as is as scrap<
A; 9E134155
B; 9E(14155
C; 9E.4/55
"; E/(4355
Ans: C AACSB: Anal,tic AICA BB: Critical Thinking
Source: CI#A4 adapted
Solution:
Incre'ental revenue fro' re*orking CE/.4.55 G E14/55;. E/(4355
%ess incre'ental revenue fro' selling as scrap................ /14.55
!et loss fro' re*orking.................................................... CE .4/55;
(1. #ilford Corporation has in stock 104155 kilogra's of 'aterial R that it bought five
,ears ago for E/.1/ per kilogra'. This ra* 'aterial *as purchased to use in a product
line that has been discontinued. #aterial R can be sold as is for scrap for E-.31 per
kilogra'. An alternative *ould be to use 'aterial R in one of the co'pan,?s current
products4 S22>4 *hich currentl, reHuires ( kilogra's of a ra* 'aterial that is
available for E1.05 per kilogra'. #aterial R can be 'odified at a cost of E5.11 per
kilogra' so that it can be used as a substitute for this 'aterial in the production of
product S22>. Fo*ever4 after 'odification4 . kilogra's of 'aterial R is reHuired for
ever, unit of product S22> that is produced. #ilford Corporation has no* received a
reHuest fro' a co'pan, that could use 'aterial R in its production process. Assu'ing
that #ilford Corporation could use all of its stock of 'aterial R to 'ake product S22>
or the co'pan, could sell all of its stock of the 'aterial at the current scrap price of
E-.31 per kilogra'4 *hat is the 'ini'u' acceptable selling price of 'aterial R to the
co'pan, that could use 'aterial R in its o*n production process<
A; E5.22
B; E-.5-
C; E../1
"; E-.31
AICA F!: "ecision #aking$ Reporting %&: 1 %evel: Fard
Solution:
roduct S22>:
Current cost C( kg I E1.05;: E1/.(5
If 'aterial R *ere used4 . kilogra's *ould be needed. It currentl, costs E1/.(5 for
roduct S22>$ to 'aintain this sa'e cost4 'aterial R *ould need to cost E-.5- per
kilogra' JCE1/.(5 K . kg; G E5.11L. The co'pan, should sell 'aterial R for E-.31 per
kilogra'.
(2. &tool Inc. is considering using stocks of an old ra* 'aterial in a special pro8ect. The
special pro8ect *ould reHuire all (.5 kilogra's of the ra* 'aterial that are in stock
and that originall, cost the co'pan, E(411( in total. If the co'pan, *ere to bu, ne*
supplies of this ra* 'aterial on the open 'arket4 it *ould cost E3.(/ per kilogra'.
Fo*ever4 the co'pan, has no other use for this ra* 'aterial and *ould sell it at the
discounted price of E2.-/ per kilogra' if it *ere not used in the special pro8ect. The
sale of the ra* 'aterial *ould involve deliver, to the purchaser at a total cost of
E11.55 for all (.5 kilogra's. 6hat is the relevant cost of the (.5 kilogra's of the ra*
'aterial *hen deciding *hether to proceed *ith the special pro8ect<
A; E143--
B; E(455.
C; E(4((5
"; E(411(
Solution:
&pportunit, cost of sales foregone if special pro8ect is
undertaken CE2.-/ M (.5;............................................... E(455.
%ess: deliver, cost.............................................................. 11
Relevant cost of (.5 kilogra's of ra* 'aterial................ E143--
13-1$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(3. Fa'b, Corporation is preparing a bid for a special order that *ould reHuire 125 liters
of 'aterial 6-.C. The co'pan, alread, has 0.5 liters of this ra* 'aterial in stock
that originall, cost E2.-5 per liter. #aterial 6-.C is used in the co'pan,?s 'ain
product and is replenished on a periodic basis. The resale value of the e)isting stock of
the 'aterial is E1.05 per liter. !e* stocks of the 'aterial can be readil, purchased for
E2.-/ per liter. 6hat is the relevant cost of the 125 liters of the ra* 'aterial *hen
deciding ho* 'uch to bid on the special order<
A; E04.21
B; E04-10
C; E04/1-
"; E/43(2
Solution:
Relevant cost N E2.-/ per liter M 125 liters N E04/1-
-5. Schickel Inc. regularl, uses 'aterial B-3O and currentl, has in stock .05 liters of the
'aterial for *hich it paid E-41(2 several *eeks ago. If this *ere to be sold as is on the
open 'arket as surplus 'aterial4 it *ould fetch E/.3/ per liter. !e* stocks of the
'aterial can be purchased on the open 'arket for E0../ per liter4 but it 'ust be
purchased in lots of 14555 liters. >ou have been asked to deter'ine the relevant cost of
105 liters of the 'aterial to be used in a 8ob for a custo'er. The relevant cost of the
105 liters of 'aterial B-3O is:
A; E.435(
B; E.401(
C; E.4/((
"; E04./5
Solution:
Relevant cost N E0../ per liter M 105 liters N E.435(
-1. #unafo Corporation is a specialt, co'ponent 'anufacturer *ith idle capacit,.
#anage'ent *ould like to use its e)tra capacit, to generate additional profits. A
potential custo'er has offered to bu, 04/55 units of co'ponent PDI. +ach unit of PDI
reHuires 1 unit of 'aterial I/1 and / units of 'aterial #31. "ata concerning these t*o
'aterials follo*:
#aterial
Onits in
Stock
&riginal
Cost er
Onit
Current
#arket
rice
er Onit
"isposal
Palue
er Onit
I/1........ (4.55 E3.15 E3..5 E2.3/
#31...... --4305 E..15 E..15 E-./5
#aterial I/1 is in use in 'an, of the co'pan,?s products and is routinel, replenished.
#aterial #31 is no longer used b, the co'pan, in an, of its nor'al products and
e)isting stocks *ould not be replenished once the, are used up.
6hat *ould be the relevant cost of the 'aterials4 in total4 for purposes of deter'ining
a 'ini'u' acceptable price for the order for product PDI<
A; E11.42/5
B; E(1-41-5
C; E(1-42/5
"; E11143(/
Solution:
#aterial
Q ReHuired
per unit
Relevant
price Total
I/1................ 1 M E3..5 N E 3..5
#31.............. / M E-./5 N 11./5
Total per unit relevant cost...................... E(0.35
#ini'u' acceptable price for 04/55 units of PDI N
E(0.35 per unit M 04/55 units N E11.42/5
13-1% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
-(. 6inder Corporation is a specialt, co'ponent 'anufacturer *ith idle capacit,.
#anage'ent *ould like to use its e)tra capacit, to generate additional profits. A
potential custo'er has offered to bu, -4555 units of co'ponent R+A. +ach unit of
R+A reHuires / units of 'aterial F2/ and / units of 'aterial +11. "ata concerning
these t*o 'aterials follo*:
#aterial
Onits in
Stock
&riginal
Cost er
Onit
Current
#arket rice
er Onit
"isposal
Palue er
Onit
F2/............. 1.5 E..35 E..1/ E..(5
+11............. 1-4025 E/.55 E..15 E-.05
#aterial F2/ is in use in 'an, of the co'pan,?s products and is routinel, replenished.
#aterial +11 is no longer used b, the co'pan, in an, of its nor'al products and
e)isting stocks *ould not be replenished once the, are used up.
6hat *ould be the relevant cost of the 'aterials4 in total4 for purposes of deter'ining
a 'ini'u' acceptable price for the order for product R+A<
A; E1(0415(
B; E1.141/5
C; E1(04(3/
"; E1./430/
Solution:
Total needed Inventor,
Q of units to
purchase on
'arket
Relevant
price Total cost
F2/.............
C-4555 M /; N
1/4555 1/4555 E..1/ E 114(/5
+11.............
C-4555 M /; N
1/4555
C1/4555 G
1-4025; N 14-(5 E..15 04(5.
1-4025 E-.05 .34(.2
#ini'u' acceptable price for -4555 units of R+A........... E1(0415(
--. Rice Corporation currentl, operates t*o divisions *hich had operating results last
,ear as follo*s:
6est Tro,
"ivision "ivision
Sales........................................................... E0554555 E-554555
Pariable costs............................................. -154555 (554555
Contribution 'argin................................... (354555 1554555
Traceable fi)ed costs.................................. 1154555 154555
Allocated co''on corporate costs............ 354555 ./4555
!et operating inco'e Closs;....................... E 354555 CE 1/4555;
Since the Tro, "ivision also sustained an operating loss in the prior ,ear4 Rice?s
president is considering the eli'ination of this division. Tro, "ivision?s traceable
fi)ed costs could be avoided if the division *ere eli'inated. The total co''on
corporate costs *ould be unaffected b, the decision. If the Tro, "ivision had been
eli'inated at the beginning of last ,ear4 Rice Corporation?s operating inco'e for last
,ear *ould have been:
A; E1/4555 higher
B; E-54555 lo*er
C; E./4555 lo*er
"; E054555 higher
AICA F!: "ecision #aking$ Reporting %&: ( %evel: #ediu'
Source: CA4 adapted
Solution:
Tro, "ivision:
Contribution 'argin........................................................... E1554555
%ess: traceable fi)ed costs................................................. 154555
Seg'ent 'argin of Tro, "ivision...................................... E -54555
Rice CorporationSs operating inco'e *ould have been E-54555 less *ithout the
seg'ent 'argin contributed b, the Tro, "ivision.
-.. Beaver Co'pan, Ca 'ulti9product fir'; produces /4555 units of roduct = each ,ear.
+ach unit of roduct = sells for E2 and has a contribution 'argin of E/. If roduct =
is discontinued4 E124555 of fi)ed overhead *ould be eli'inated. As a result of
discontinuing roduct =4 the co'pan,?s overall operating inco'e *ould:
A; decrease b, E(/4555
B; increase b, E.-4555
C; decrease b, E14555
"; increase b, E14555
Solution:
Fi)ed overhead savings if roduct = is eli'inated........... E124555
%ess: contribution 'argin lost if roduct = is
discontinued CE/ M /4555;............................................... (/4555
"ecrease in overall operating inco'e if roduct = is
eli'inated....................................................................... CE 14555;
-/. #illi Co'pan, plans to discontinue a division that generates a total contribution
'argin of E(54555 per ,ear. Fi)ed overhead associated *ith this division is E/545554
of *hich E/4555 cannot be eli'inated. The effect of this discontinuance on #illi?s
operating inco'e *ould be an increase of:
A; E/4555
B; E(54555
C; E(/4555
"; E-54555
Source: CA4 adapted
Solution:
Fi)ed overhead savings if division is discontinued........... E./4555
%ess: contribution 'argin lost if division is eli'inated..... (54555
Increase in operating inco'e if division is eli'inated...... E(/4555
-0. AB" Realt, 'anages five apart'ent co'ple)es in its region. Sho*n belo* are
su''ar, inco'e state'ents for each apart'ent co'ple):
O P 6 = >
Rental inco'e........... E14555 E14(15 E(4-.1 E14212 E1450/
+)penses................... 255 14-55 (4055 (4.55 14-55
&perating inco'e...... E (55 CE 35; CE (/-; CE /((; CE (-/;
Included in the e)penses is E14(55 of co''on corporate e)penses that have been
allocated to the apart'ent co'ple)es based on rental inco'e. These co''on
corporate e)penses *ould have to be incurred regardless of ho* 'an, apart'ent
co'ple)es AB" Realt, 'anages. The apart'ent co'ple)Ces; that AB" Realt, should
consider dropping is Care;:
A; P4 64 =4 >
B; 64 =4 >
C; =4 >
"; =
AICA F!: "ecision #aking$ Reporting %&: ( %evel: Fard
Source: C#A4 adapted
Solution:
Total rental inco'e N E14555 T E14(15 T E(4-.1 T E14212 T E1450/ N E14/55
O P 6 = >
Rental inco'e........... E14555 E14(15 E(4-.1 E14212 E1450/
%ess e)penses............ 255 14-55 (4055 (4.55 14-55
Add back proportional
share of co''on
e)penses JCRental
inco'e in each
colu'n K Total
rental inco'e of
E14/55; M E14(55LU 105 13. -10 -55 115
Apart'ent co'ple)
'argin E -05 E 15. E 1(- CE(((; CE 0/;
Ue)penses rounded to nearest *hole dollar
Since co'ple)es = and > have negative 'argins4 AB" Realt, should consider
dropping those t*o divisions.
13-1! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
-1. The follo*ing infor'ation relates to ne)t ,ear?s pro8ected operating results of the
Children?s "ivision of Drunge Clothing Corporation:
Contribution 'argin........... E(554555
Fi)ed e)penses................... /554555
!et operating loss.............. CE-554555;
If Children?s "ivision is dropped4 half of the fi)ed costs above can be eli'inated.
6hat *ill be the effect on Drunge?s profit ne)t ,ear if Children?s "ivision is dropped
instead of being kept<
A; E/54555 increase
B; E(/54555 increase
C; E(/54555 decrease
"; E//54555 increase
Solution:
Beep the
"ivision
"rop the
"ivision "ifference
Contribution 'argin....................... E(554555 E 5 CE(554555;
Fi)ed e)penses............................... /554555 (/54555 (/54555
!et operating inco'e Closs;........... CE-554555; CE(/54555; CE /54555;
!et operating inco'e *ould increase b, E/54555 if the ChildrenSs "ivision *ere
dropped. Therefore4 the division should be dropped.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1"
-2. The 'anage'ent of Furro* Corporation is considering dropping product %51+. "ata
fro' the co'pan,?s accounting s,ste' appear belo*:
Sales....................................................................... E2-54555
Pariable e)penses................................................... E-0/4555
Fi)ed 'anufacturing e)penses............................... E(314555
Fi)ed selling and ad'inistrative e)penses............. E1004555
In the co'pan,?s accounting s,ste' all fi)ed e)penses of the co'pan, are full,
allocated to products. Further investigation has revealed that E1204555 of the fi)ed
'anufacturing e)penses and E1504555 of the fi)ed selling and ad'inistrative e)penses
are avoidable if product %51+ is discontinued. 6hat *ould be the effect on the
co'pan,?s overall net operating inco'e if product %51+ *ere dropped<
A; &verall net operating inco'e *ould increase b, E24555.
B; &verall net operating inco'e *ould decrease b, E11-4555.
C; &verall net operating inco'e *ould decrease b, E24555.
"; &verall net operating inco'e *ould increase b, E11-4555.
Solution:
Beep the
roduct
"rop the
roduct "ifference
Sales............................................... E2-54555 E 5 CE2-54555;
Pariable e)penses........................... -0/4555 5 -0/4555
Contribution 'argin....................... .0/4555 5 C.0/4555;
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses.... (314555 U15/4555 1204555
Fi)ed selling and ad'inistrative
e)penses.................................. 1004555 UU054555 1504555
Total fi)ed e)penses....................... ./14555 10/4555 (3(4555
!et operating inco'e Closs;........... E 24555 CE10/4555; CE11-4555;
!et operating inco'e *ould decline b, E11-4555 if product %51+ *ere dropped.
Therefore4 the product should not be dropped.
UE(314555 G E1204555 N E15/4555
UUE1004555 G E1504555 N E054555
13-$# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
-3. roduct O(-! has been considered a drag on profits at :inkerson Corporation for
so'e ti'e and 'anage'ent is considering discontinuing the product altogether. "ata
Sales....................................................................... E1-54555
Pariable e)penses................................................... E-/54555
Fi)ed 'anufacturing e)penses............................... E(-.4555
Fi)ed selling and ad'inistrative e)penses............. E1014555
In the co'pan,?s accounting s,ste' all fi)ed e)penses of the co'pan, are full,
allocated to products. Further investigation has revealed that E1..4555 of the fi)ed
'anufacturing e)penses and E3-4555 of the fi)ed selling and ad'inistrative e)penses
are avoidable if product O(-! is discontinued. 6hat *ould be the effect on the
co'pan,?s overall net operating inco'e if product O(-! *ere dropped<
A; &verall net operating inco'e *ould increase b, E1/4555.
B; &verall net operating inco'e *ould increase b, E1.-4555.
C; &verall net operating inco'e *ould decrease b, E1.-4555.
"; &verall net operating inco'e *ould decrease b, E1/4555.
Solution:
Beep the
roduct
"rop the
roduct "ifference
Sales............................................... E1-54555 E 5 CE1-54555;
Pariable e)penses........................... -/54555 5 -/54555
Contribution 'argin....................... -254555 5 C -254555;
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses.... (-.4555 U354555 1..4555
e)penses.................................. 1014555 UU024555 3-4555
Total fi)ed e)penses....................... -3/4555 1/24555 (-14555
!et operating inco'e Closs;........... CE 1/4555; CE 1/24555; CE1.-4555;
!et operating inco'e *ould decline b, E1.-4555 if product O(-! *ere dropped.
UE(-.4555 G E1..4555 N E354555
UUE1014555 G E3-4555 N E024555
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-$1
.5. Supler Co'pan, produces a part used in the 'anufacture of one of its products. The
unit product cost is E124 co'puted as follo*s:
"irect 'aterials.......................................... E 2
"irect labor................................................ .
Pariable 'anufacturing overhead.............. 1
Fi)ed 'anufacturing overhead.................. /
Onit product cost........................................ E12
An outside supplier has offered to provide the annual reHuire'ent of .4555 of the parts
for onl, E1. each. It is esti'ated that 05 percent of the fi)ed overhead cost above
could be eli'inated if the parts are purchased fro' the outside supplier. Based on
these data4 the per9unit dollar advantage or disadvantage of purchasing fro' the
outside supplier *ould be:
A; E1 disadvantage
B; E1 advantage
C; E( advantage
"; E. disadvantage
Solution:
Relevant cost per unit:
"irect 'aterials................................................ E 2
"irect labor...................................................... .
Pariable 'anufacturing overhead.................... 1
Fi)ed 'anufacturing overhead CE/ M 5.05;..... -
Relevant 'anufacturing cost........................... E10
!et advantage Cdisadvantage;:
Relevant 'anufacturing cost savings......... E10
%ess: cost fro' outside supplier................ 1.
!et advantage............................................. E (
13-$$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
.1. Sharp Co'pan, produces 24555 parts each ,ear4 *hich are used in the production of
one of its products. The unit product cost of a part is E-04 co'puted as follo*s:
Pariable production costs......... E10
Fi)ed production costs............. (5
Onit product cost...................... E-0
The parts can be purchased fro' an outside supplier for onl, E(2 each. The space in
*hich the parts are no* produced *ould be idle and fi)ed production costs *ould be
reduced b, one9fourth. If the parts are purchased fro' the outside supplier4 the annual
i'pact on the co'pan,?s operating inco'e *ill be:
A; E(.4555 increase
B; E(.4555 decrease
C; E/04555 increase
"; E/04555 decrease
Solution:
Pariable production costs................................. E10
Fi)ed 'anufacturing overhead CE(5 M 5.(/;. . . /
Relevant 'anufacturing cost........................... E(1
Relevant 'anufacturing cost savings CE(1 M 24555;............ E1024555
%ess: cost to purchase fro' outside supplier CE(2 M 24555;. ((.4555
!et disadvantage of purchasing fro' outside supplier......... CE /04555;
.(. #otor Co'pan, 'anufactures 154555 units of art #9l each ,ear for use in its
production. The follo*ing total costs *ere reported last ,ear:
"irect 'aterials.......................................... E (54555
"irect labor................................................ //4555
Pariable 'anufacturing overhead.............. ./4555
Fi)ed 'anufacturing overhead.................. 154555
Total 'anufacturing cost............................ E1354555
Palve Co'pan, has offered to sell #otor 154555 units of art #9l for E12 per unit. If
#otor accepts the offer4 so'e of the facilities presentl, used to 'anufacture art #9l
could be rented to a third part, at an annual rental of E1/4555. Additionall,4 E. per unit
of the fi)ed overhead applied to art #9l *ould be totall, eli'inated. Should #otor
Co'pan, accept Palve Co'pan,?s offer4 and *h,<
A; !o4 because it *ould be E/4555 cheaper to 'ake the part.
B; >es4 because it *ould be E154555 cheaper to bu, the part.
C; !o4 because it *ould be E1/4555 cheaper to 'ake the part.
"; >es4 because it *ould be E(/4555 cheaper to bu, the part.
AICA F!: "ecision #aking$ Reporting %&: - %evel: Fard
Source: CA4 adapted
Solution:
Relevant cost of 'anufacturing:
"irect 'aterials...................................................... E (54555
"irect labor............................................................ //4555
Pariable 'anufacturing overhead.......................... ./4555
Fi)ed 'anufacturing overhead CE. M 154555;....... .54555
Relevant 'anufacturing cost................................. E1054555
Relevant 'anufacturing cost savings............ E1054555
Annual rental of 'anufacturing facilities
given up if 'anufacture art #91............. 1/4555
Cost of purchasing the part CE12 M 154555;. . C 1254555;
!et disadvantage of purchasing part #91..... CE /4555;
13-$% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
.-. Bingston Co'pan, needs 154555 units of a certain part to be used in its production
c,cle. The follo*ing infor'ation is available concerning Bingston?s unit product cost:
"irect 'aterials.......................................... E 0
"irect labor................................................ (.
Pariable 'anufacturing overhead.............. 1(
Fi)ed 'anufacturing overhead.................. 1/
Onit product cost........................................ E/1
Otica Co'pan, has offered to suppl, Bingston?s entire annual reHuire'ents of the part
for E/- each. If Bingston bu,s the part fro' Otica instead of 'aking it4 Bingston
*ould have no other use for the facilities and 05 percent of the fi)ed 'anufacturing
overhead *ould continue. In deciding *hether to 'ake or bu, the part4 the total
relevant costs to 'ake the part internall, are:
A; E-.(4555
B; E.254555
C; E/-54555
"; E/154555
Source: CA4 adapted
Solution:
"irect 'aterials................................................ E 0
"irect labor...................................................... (.
Pariable 'anufacturing overhead.................... 1(
Fi)ed 'anufacturing overhead CE1/ M 5..5;.... 0
Relevant 'anufacturing cost............................ E.2
Total relevant costs to 'ake the part internall, CE.2 M 154555; N E.254555
... The follo*ing standard costs pertain to a co'ponent part 'anufactured b, Bor
Co'pan,:
"irect 'aterials........................ E .
"irect labor.............................. 15
#anufacturing overhead.......... .5
Standard cost per unit............... E/.
An outside supplier has offered to suppl, all of the parts needed b, Bor Co'pan, for
E/5 each. The 05V of the 'anufacturing overhead cost that is fi)ed *ould be
unaffected b, this decision. In the decision to @'ake or bu,4A *hat is the relevant unit
cost to 'ake the part internall,<
A; E/.
B; E-2
C; E-5
"; E/
Source: CA4 adapted
Solution:
"irect 'aterials.......................................... E .
"irect labor................................................ 15
#anufacturing overhead CE.5 M 5..5;....... 10
Relevant 'anufacturing cost...................... E-5
13-$6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
./. Dordon Co'pan, produces 14555 units of a part per ,ear *hich are used in the
asse'bl, of one of its products. The unit cost of producing these parts is:
Pariable 'anufacturing cost.......... E1/
Fi)ed 'anufacturing cost............... 1(
Total 'anufacturing cost................ E(1
The part can be purchased fro' an outside supplier at E(5 per unit. If the part is
purchased fro' the outside supplier4 t*o thirds of the total fi)ed costs incurred in
producing the part can be eli'inated. The annual increase or decrease on the
co'pan,?s operating inco'es as a result of bu,ing the part fro' the outside supplier
*ould be:
A; E-4555 increase
B; E14555 decrease
C; E14555 increase
"; E/4555 decrease
Solution:
Pariable production costs................................. E1/
Fi)ed 'anufacturing overhead CE1( M (W-;..... 2
Relevant 'anufacturing cost........................... E(-
!et advantage Cdisadvantage; per unit:
#anufacturing cost savings....................... E(-
Cost of purchasing the part........................ (5
!et advantage Cdisadvantage;.................... E -
Total N E- M 14555 units N E-555 increase
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-$
.0. Ruikcook #icro*ave Co'pan, currentl, 'anufactures the doors that it uses for its
'icro*ave ovens. The annual costs to 'anufacture the .54555 doors needed each ,ear
are as follo*s:
Total Cost
"irect 'aterial.................................. E(554555
"irect labor....................................... .54555
Pariable 'anufacturing overhead..... 254555
Fi)ed 'anufacturing overhead......... -(54555
Total.................................................. E0.54555
"elilah Dlass Corporation has offered to provide Ruikcook *ith all of its annual door
needs for E1. per door. If Ruikcook accepts this offer4 onl, .5V of the fi)ed overhead
above could be totall, eli'inated. Also4 Ruikcook has no alternative use for the idle
facilities if the decision *as 'ade to go *ith "elilah?s offer. Based on this
infor'ation4 *ould Ruikcook be better off to 'ake the doors or bu, the doors and b,
ho* 'uch<
A; E.24555 better to bu,
B; E.24555 better to 'ake
C; E11(4555 better to bu,
"; E11(4555 better to 'ake
Solution:
Relevant cost:
"irect 'aterials....................................................... E(554555
"irect labor.............................................................. .54555
Pariable 'anufacturing overhead............................ 254555
Fi)ed 'anufacturing overhead CE-(54555 M 5..5;. . 1(24555
Relevant 'anufacturing cost................................... E..24555
#anufacturing cost savings..................................... E..24555
Cost of purchasing the part CE1. M .54555;............. C /054555;
!et advantage Cdisadvantage; of bu,ing................. CE 11(4555;
13-$! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
.1. Sardi Inc. is considering *hether to continue to 'ake a co'ponent or to bu, it fro' an
outside supplier. The co'pan, uses 114555 of the co'ponents each ,ear. The unit
product cost of the co'ponent according to the co'pan,?s cost accounting s,ste' is
given as follo*s:
"irect 'aterials.......................................... E 2.(5
"irect labor................................................ 2.-5
Pariable 'anufacturing overhead.............. 1.(5
Fi)ed 'anufacturing overhead.................. ..-5
Onit product cost........................................ E((.55
Assu'e that direct labor is a variable cost. &f the fi)ed 'anufacturing overhead4 15V
is avoidable if the co'ponent *ere bought fro' the outside supplier. In addition4
'aking the co'ponent uses ( 'inutes on the 'achine that is the co'pan,?s current
constraint. If the co'ponent *ere bought4 this 'achine ti'e *ould be freed up for use
on another product that reHuires . 'inutes on the constraining 'achine and that has a
contribution 'argin of E1.55 per unit.
6hen deciding *hether to 'ake or bu, the co'ponent4 *hat cost of 'aking the
co'ponent should be co'pared to the price of bu,ing the co'ponent<
A; E(..(1
B; E(/./5
C; E(5.11
"; E((.55
Solution:
"irect 'aterials................................................... E 2.(5
"irect labor......................................................... 2.-5
Pariable 'anufacturing overhead....................... 1.(5
Fi)ed 'anufacturing overhead CE..-5 M 5.15;. . . -.51
Relevant 'anufacturing cost.............................. E(5.11
Add contribution 'argin lostU............................ -./5
E(..(1
UE1.55 K . 'inutes N E1.1/ per 'inute$ E1.1/ per 'inute M ( 'inutes N E-./5
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-$"
.2. art S/1 is used in one of Faberkorn Corporation?s products. The co'pan, 'akes
1(4555 units of this part each ,ear. The co'pan,?s Accounting "epart'ent reports the
follo*ing costs of producing the part at this level of activit,:
er Onit
"irect 'aterials.......................................... E0.-5
"irect labor................................................ E/.15
Pariable 'anufacturing overhead.............. E..25
SupervisorSs salar,..................................... E1.55
"epreciation of special eHuip'ent............. E2.05
Allocated general overhead........................ E1.(5
An outside supplier has offered to produce this part and sell it to the co'pan, for
E-1.15 each. If this offer is accepted4 the supervisor?s salar, and all of the variable
costs4 including direct labor4 can be avoided. The special eHuip'ent used to 'ake the
part *as purchased 'an, ,ears ago and has no salvage value or other use. The
allocated general overhead represents fi)ed costs of the entire co'pan,. If the outside
supplier?s offer *ere accepted4 onl, E114555 of these allocated general overhead costs
*ould be avoided.
If 'anage'ent decides to bu, part S/1 fro' the outside supplier rather than to
continue 'aking the part4 *hat *ould be the annual i'pact on the co'pan,?s overall
net operating inco'e<
A; !et operating inco'e *ould decline b, E/4255 per ,ear.
B; !et operating inco'e *ould decline b, E((4255 per ,ear.
C; !et operating inco'e *ould decline b, E1.34255 per ,ear.
"; !et operating inco'e *ould decline b, E-34255 per ,ear.
AICA F!: "ecision #aking$ Reporting %&: - %evel: +as,
Solution:
#ake Bu,
"irect 'aterials C1(4555 units I E0.-5 per unit;..... E 1/4055
"irect labor C1(4555 units I E/.15 per unit;............ 024.55
Pariable overhead C1(4555 units I E..25 per unit;. . /14055
SupervisorSs salar, C1(4555 units I E1.55 per unit; 2.4555
"epreciation of special eHuip'ent Cnot relevant;..... 5
Allocated general overhead Cavoidable onl,;........... 114555
&utside purchase price C1(4555 units I E-1.15 per
unit;....................................................................... E./(4.55
Total cost................................................................... E-5(4055 E./(4.55
The total cost of the 'ake alternative is lo*er b, E1.34255 CE-5(4055 G E./(4.55;.
Thus4 net operating inco'e *ould decline b, E1.34255 if the offer fro' the supplier
*ere accepted. Therefore4 the co'pan, should continue to 'ake the part itself.
.3. !orgaard Corporation 'akes 24555 units of part D(/ each ,ear. This part is used in
one of the co'pan,?s products. The co'pan,?s Accounting "epart'ent reports the
follo*ing costs of producing the part at this level of activit,:
er Onit
"irect 'aterials.......................................... E0.15
"irect labor................................................ E2.15
Pariable 'anufacturing overhead.............. E1.15
SupervisorSs salar,..................................... E(.55
"epreciation of special eHuip'ent............. E..(5
Allocated general overhead........................ E(.15
An outside supplier has offered to 'ake and sell the part to the co'pan, for E(1.(5
each. If this offer is accepted4 the supervisor?s salar, and all of the variable costs4
including direct labor4 can be avoided. The special eHuip'ent used to 'ake the part
*as purchased 'an, ,ears ago and has no salvage value or other use. The allocated
general overhead represents fi)ed costs of the entire co'pan,. If the outside supplier?s
offer *ere accepted4 onl, E(4555 of these allocated general overhead costs *ould be
avoided. In addition4 the space used to produce part D(/ *ould be used to 'ake 'ore
of one of the co'pan,?s other products4 generating an additional seg'ent 'argin of
E104555 per ,ear for that product.
6hat *ould be the i'pact on the co'pan,?s overall net operating inco'e of bu,ing
part D(/ fro' the outside supplier<
A; !et operating inco'e *ould decline b, E24.55 per ,ear.
B; !et operating inco'e *ould increase b, E104555 per ,ear.
C; !et operating inco'e *ould decline b, E24555 per ,ear.
"; !et operating inco'e *ould decline b, E.54555 per ,ear.
Solution:
#ake Bu,
"irect 'aterials C24555 units I E0.15 per unit;....... E /-4055
"irect labor C24555 units I E2.15 per unit;.............. 0.4255
Pariable overhead C24555 units I E1.15 per unit;.... 24255
SupervisorSs salar, C24555 units I E(.55 per unit;. . 104555
Allocated general overhead Cavoidable onl,;........... (4555
&utside purchase price C24555 units I E(1.(5 per
unit;....................................................................... E1034055
&pportunit, cost........................................................ C 104555;
Total cost................................................................... E1./4(55 E1/-4055
The total cost of the 'ake alternative is lo*er b, E24.55 CE1./4(55 G E1/-4055;. Thus4
net operating inco'e *ould decline b, E24.55 if the offer fro' the supplier *ere
accepted. Therefore4 the co'pan, should continue to 'ake the part itself.
/5. Rebelo Corporation is presentl, 'aking part +51 that is used in one of its products. A
total of 114555 units of this part are produced and used ever, ,ear. The co'pan,?s
Accounting "epart'ent reports the follo*ing costs of producing the part at this level
of activit,:
er Onit
"irect 'aterials.......................................... E-.25
"irect labor................................................ E-.25
SupervisorSs salar,..................................... E(./5
"epreciation of special eHuip'ent............. E1..5
Allocated general overhead........................ E2.05
An outside supplier has offered to 'ake and sell the part to the co'pan, for E(5.25
each. If this offer is accepted4 the supervisor?s salar, and all of the variable costs can
be avoided. The special eHuip'ent used to 'ake the part *as purchased 'an, ,ears
ago and has no salvage value or other use. The allocated general overhead represents
fi)ed costs of the entire co'pan,4 none of *hich *ould be avoided if the part *ere
purchased instead of produced internall,. If 'anage'ent decides to bu, part +51 fro'
the outside supplier rather than to continue 'aking the part4 *hat *ould be the annual
i'pact on the co'pan,?s overall net operating inco'e<
A; !et operating inco'e *ould decline b, E04255 per ,ear.
B; !et operating inco'e *ould decline b, E10-4(55 per ,ear.
C; !et operating inco'e *ould increase b, E10-4(55 per ,ear.
"; !et operating inco'e *ould increase b, E04255 per ,ear.
Solution:
#ake Bu,
"irect 'aterials C114555 units I E-.25 per unit;....... E 0.4055
"irect labor C114555 units I E-.25 per unit;............. 0.4055
Pariable overhead C114555 units I E1.15 per unit;.... 124155
SupervisorSs salar, C114555 units I E(./5 per unit;. . .(4/55
"epreciation of special eHuip'ent Cnot relevant;...... 5
Allocated general overhead Cnot relevant;................. 5
&utside purchase price C114555 units I E(5.25 per
unit;......................................................................... E-/-4055
Total cost.................................................................... E1354.55 E-/-4055
The total cost of the 'ake alternative is lo*er b, E10-4(55 CE-/-4055 G E1354.55;.
Thus4 net operating inco'e *ould decline b, E10-4(55 if the offer fro' the supplier
/1. art O10 is used b, #cvean Corporation to 'ake one of its products. A total of 1-4555
units of this part are produced and used ever, ,ear. The co'pan,?s Accounting
"epart'ent reports the follo*ing costs of producing the part at this level of activit,:
er Onit
"irect 'aterials.......................................... E(.35
"irect labor................................................ E1./5
SupervisorSs salar,..................................... E-..5
Allocated general overhead........................ E1.55
An outside supplier has offered to 'ake the part and sell it to the co'pan, for E(3.25
including the direct labor4 can be avoided. The special eHuip'ent used to 'ake the
part *as purchased 'an, ,ears ago and has no salvage value or other use. The
allocated general overhead represents fi)ed costs of the entire co'pan,4 none of *hich
*ould be avoided if the part *ere purchased instead of produced internall,. In
addition4 the space used to 'ake part O10 could be used to 'ake 'ore of one of the
co'pan,?s other products4 generating an additional seg'ent 'argin of E(/4555 per
,ear for that product. 6hat *ould be the i'pact on the co'pan,?s overall net
operating inco'e of bu,ing part O10 fro' the outside supplier<
A; !et operating inco'e *ould increase b, E(/4555 per ,ear.
B; !et operating inco'e *ould decline b, E134555 per ,ear.
C; !et operating inco'e *ould decline b, E-/4.55 per ,ear.
"; !et operating inco'e *ould increase b, E1.4055 per ,ear.
Solution:
#ake Bu,
"irect 'aterials C1-4555 units I E(.35 per unit;..... E -14155
"irect labor C1-4555 units I E1./5 per unit;............ 314/55
Pariable overhead C1-4555 units I E2.55 per unit;. . 15.4555
SupervisorSs salar, C1-4555 units I E-..5 per unit; ..4(55
Allocated general overhead Cnot relevant;................ 5
&utside purchase price C1-4555 units I E(3.25 per
unit;....................................................................... E-214.55
&pportunit, cost Cseg'ent 'argin;.......................... C (/4555;
Total cost................................................................... E(2-4.55 E-0(4.55
The total cost of the 'ake alternative is lo*er b, E134555 CE(2-4.55 G E-0(4.55;.
Thus4 net operating inco'e *ould decline b, E134555 if the offer fro' the supplier
/(. %andor Appliance Co'pan, 'akes and sells electric fans. +ach fan regularl, sells for
E.(. The follo*ing cost data per fan is based on a full capacit, of 1/54555 fans
produced each period.
"irect 'aterials............................................................... E2
"irect labor..................................................................... E3
#anufacturing overhead
C15V variable and -5V unavoidable fi)ed;................ E15
A special order has been received b, %andor for a sale of (/4555 fans to an overseas
custo'er. The onl, selling costs that *ould be incurred on this order *ould be E. per
fan for shipping. %andor is no* selling 1(54555 fans through regular channels each
period. 6hat should %andor use as a 'ini'u' selling price per fan in negotiating a
price for this special order<
A; E(2
B; E(1
C; E-1
"; E(.
Solution:
"irect 'aterials................................................. E 2
"irect labor........................................................ 3
Pariable 'anufacturing overhead CE15 M 5.15;. 1
Pariable selling cost........................................... .
#ini'u' selling price...................................... E(2
/-. Ignace Ti'ekeepers4 Inc. 'anufactures and sells *rist *atches. Ignace has the
capacit, to 'anufacture and sell (54555 *atches each ,ear but is currentl, onl,
'anufacturing and selling 1/4555. The follo*ing costs relate to annual operations at
1/4555 *atches:
Total Cost
Pariable 'anufacturing cost...................... E1/54555
Fi)ed 'anufacturing cost........................... E1(54555
Pariable selling and ad'inistrative cost. . . . E354555
Fi)ed selling and ad'inistrative cost......... E1254555
Ignace nor'all, sells its *atches for E.( each. A discount chain is interesting in
purchasing Ignace?s e)cess capacit, of /4555 *atches. This special order *ould not
affect regular sales or the cost structure above. Ignace?s profits for the ,ear *ill
increase as long as the price on this special order e)ceeds:
A; E1(.55
B; E1-./5
C; E10.55
"; E-1.55
Solution:
Total relevant costs:
Pariable 'anufacturing cost............................... E1/54555
Pariable selling and ad'inistrative cost............. 354555
Total relevant costs................................................. E(.54555
"ivided b, 1/4555 *atches....................................
K
1/4555
#ini'u' selling price for special order................ E10
/.. Dallerani Corporation has received a reHuest for a special order of 04555 units of
product A35 for E(1.(5 each. roduct A35?s unit product cost is E10.(54 deter'ined as
follo*s:
"irect 'aterials.......................................... E 0.15
"irect labor................................................ ..(5
Pariable 'anufacturing overhead.............. (.-5
Fi)ed 'anufacturing overhead.................. -.05
Onit product cost........................................ E10.(5
"irect labor is a variable cost. The special order *ould have no effect on the
co'pan,?s total fi)ed 'anufacturing overhead costs. The custo'er *ould like
'odifications 'ade to product A35 that *ould increase the variable costs b, E..(5 per
unit and that *ould reHuire an invest'ent of E(14555 in special 'olds that *ould have
no salvage value.
This special order *ould have no effect on the co'pan,?s other sales. The co'pan,
has a'ple spare capacit, for producing the special order. If the special order is
accepted4 the co'pan,?s overall net operating inco'e *ould increase Cdecrease; b,:
A; CE124055;
B; CE104(55;
C; E-54555
"; E/4.55
Ans*er:
"
AICA F!: "ecision #aking$ Reporting %&: . %evel: +as,
Solution:
Incre'ental revenue C04555 units I E(1.(5 per unit;...................... E1(14(55
%ess incre'ental costs:
"irect 'aterials C04555 units I E0.15 per unit;............................ -04055
"irect labor C04555 units I E..(5 per unit;................................... (/4(55
Pariable 'anufacturing overhead C04555 units I E(.-5 per unit;. 1-4255
#odifications C04555 units I E..(5 per unit;................................ (/4(55
Special 'olds................................................................................. (14555
Total incre'ental cost....................................................................... 1(14255
Incre'ental net operating inco'e..................................................... E /4.55
//. A custo'er has reHuested that %e*elling Corporation fill a special order for 34555
units of product S.1 for E(5./5 a unit. 6hile the product *ould be 'odified slightl,
for the special order4 product S.1?s nor'al unit product cost is E1...5:
"irect 'aterials.......................................... E -.15
"irect labor................................................ 1./5
Pariable 'anufacturing overhead.............. 0..5
Fi)ed 'anufacturing overhead.................. -..5
Onit product cost........................................ E1...5
co'pan,?s total fi)ed 'anufacturing overhead costs. The custo'er *ould like
'odifications 'ade to product S.1 that *ould increase the variable costs b, E/.55 per
unit and that *ould reHuire an invest'ent of E-04555 in special 'olds that *ould have
no salvage value.
This special order *ould have no effect on the co'pan,?s other sales. The co'pan,
has a'ple spare capacit, for producing the special order. If the special order is
accepted4 the co'pan,?s overall net operating inco'e *ould increase Cdecrease; b,:
A; CE34355;
B; E.4/55
C; E/.4355
"; CE(04155;
Solution:
Incre'ental revenue C34555 units I E(5./5 per unit;...................... E12.4/55
"irect 'aterials C34555 units I E-.15 per unit;............................ (14355
"irect labor C34555 units I E1./5 per unit;................................... 1-4/55
Pariable 'anufacturing overhead C34555 units I E0..5 per unit;. /14055
#odifications C34555 units I E/.55 per unit;................................ ./4555
Special 'olds................................................................................. -04555
Total incre'ental cost....................................................................... 1254555
Incre'ental net operating inco'e..................................................... E .4/55
13-%# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
/0. Folden Co'pan, produces three products4 *ith costs and selling prices as follo*s:
roduct A roduct B roduct C
Selling price per unit................ E-5 155V E(5 155V E1/ 155V
Pariable costs per unit.............. 12 05V 1/ 1/V 0 .5V
Contribution 'argin per unit.... E1( .5V E / (/V E 3 05V
A particular 'achine is a bottleneck. &n that 'achine4 - 'achine hours are reHuired to
produce each unit of roduct A4 1 hour is reHuired to produce each unit of roduct B4
and ( hours are reHuired to produce each unit of roduct C. In *hich order should it
produce its products<
A; C4 A4 B
B; A4 C4 B
C; B4 C4 A
"; The order of production doesn?t 'atter.
Solution:
Contribution 'argin per unit................ E1( E/ E3
#achine9hours per unit........................ - 1 (
Contribution 'argin per hour.............. E..55 E/.55 E../5
Rank in ter's of profitabilit,............... - 1 (
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-%1
/1. 6ood Carving Corporation 'anufactures three products. Because of a recent lack of
skilled *ood carvers4 the corporation has had a shortage of available labor hours. The
follo*ing per unit data relates to the three products of the corporation:
%etter &peners +lvis Statues Candle Folders
Sales price.................... E-5 E25 E.(
Pariable costs............... E(5 E.5 E(5
%abor hours reHuired.... 1 0 (
Assu'e that 6ood Carving onl, has 14255 labor hours available ne)t 'onth. Also
assu'e that 6ood Carving can onl, sell 255 units of each product in a given 'onth.
6hat is the 'a)i'u' a'ount of contribution 'argin that 6ood Carving can generate
ne)t 'onth given this labor hour shortage<
A; E1(4555
B; E134555
C; E134055
"; E134255
AICA F!: "ecision #aking$ Reporting %&: / %evel: Fard
13-%$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Solution:
"e'and for *ood carvers:
%abor9hours per unit........... 1 0 (
#onthl, de'and in units. . . 255 255 255
Total hours reHuired........... 255 .4255 14055
Total ti'e reHuired for all products: 14(55
&pti'al production plan:
Selling price per unit............................ E-5.55 E25.55 E.(.55
Pariable cost per unit........................... E(5.55 E.5.55 E(5.55
Contribution 'argin per unit................ E15.55 E.5.55 E((.55
%abor9hours per unit............................. 1 0 (
Contribution 'argin per hour.............. E15.55 E0.01 E11.55
Rank in ter's of profitabilit,............... ( - 1
&pti'al production.............................. (55 5 255
Total hours available......................................................................... 14255
%ess: hours reHuired for 255 Candle Folders C255 M (;................... 14055
Fours re'aining................................................................................ (55
"ivided b, hours reHuired per %etter &pener................................... K 1
!u'ber of %etter &peners to produce.............................................. (55
#a)i'u' contribution 'argin:
Candle Folders C255 M E((;.......................................................... E114055
%etter &peners C(55 M E15;........................................................... (4555
#a)i'u' contribution 'argin......................................................... E134055
/2. Banfield Corporation 'akes three products that use co'pound 64 the current
constrained resource. "ata concerning those products appear belo*:
P >I 6=
Selling price per unit...................... E(.2.5. E(-5.00 E/5/...
Pariable cost per unit..................... E135.11 E11(.1. E-22.25
Centiliters of co'pound 6............ -.35 -.25 2.15
Rank the products in order of their current profitabilit, fro' 'ost profitable to least
profitable. In other *ords4 rank the products in the order in *hich the, should be
e'phasi7ed.
A; 6=4 P4 >I
B; >I4 P4 6=
C; 6=4 >I4 P
"; P4 6=4 >I
Solution:
P >I 6=
Selling price per unit............................ E(.2.5. E(-5.00 E/5/...
Pariable cost per unit........................... 135.11 11(.1. -22.25
Contribution 'argin per unit................ E/1.-- E/2./( E110.0.
Centiliters per unit................................ -.35 -.25 2.15
Contribution 'argin per centiliter........ E1..15 E1/..5 E1...5
Rank in ter's of profitabilit,............... ( 1 -
13-%% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
/3. An auto'ated turning 'achine is the current constraint at :ordison Corporation. Three
products use this constrained resource. "ata concerning those products appear belo*:
%! :R RR
Selling price per unit...................... E10/.22 E-1-.11 E.3../(
Pariable cost per unit..................... E112.-5 E(-3.01 E-21..(
#inutes on the constraint............... (.05 ..35 1.25
Rank the products in order of their current profitabilit, fro' 'ost profitable to least
e'phasi7ed.
A; %!4 :R4 RR
B; RR4 %!4 :R
C; RR4 :R4 %!
"; :R4 RR4 %!
Solution:
%! :R RR
Selling price per unit............................ E10/.22 E-1-.11 E.3../(
Pariable selling cost per unit................ 112.-5 (-3.01 -21..(
Contribution 'argin per unit................ E.1./2 E1-./5 E11-.15
#achine 'inutes per unit..................... (.05 ..35 1.25
Contribution 'argin per 'inute........... E12.-5 E1/.55 E1../5
Rank in ter's of profitabilit,............... 1 ( -
05. The constraint at Rauch*erger Corporation is ti'e on a particular 'achine. The
co'pan, 'akes three products that use this 'achine. "ata concerning those products
appear belo*:
6= B" FS
Selling price per unit...................... E13(.55 E/.(.00 E(((.2.
Pariable cost per unit..................... E1/2.1( E.(5./. E101.10
#inutes on the constraint............... -.(5 2.05 -.05
Assu'e that sufficient ti'e is available on the constrained 'achine to satisf, de'and
for all but the least profitable product. Op to ho* 'uch should the co'pan, be *illing
to pa, to acHuire 'ore of the constrained resource<
A; E--.(2 per unit
B; E15..5 per 'inute
C; E1((.1( per unit
"; E1/.-5 per 'inute
Solution:
6= B" FS
Selling price per unit............................ E13(.55 E/.(.00 E(((.2.
Pariable cost per unit........................... 1/2.1( .(5./. 101.10
Contribution 'argin per unit................ E--.(2 E1((.1( E//.52
#achine 'inutes per unit..................... -.(5 2.05 -.05
Contribution 'argin per 'inute........... E15..5 E1..(5 E1/.-5
Rank in ter's of profitabilit,............... - ( 1
The co'pan, should be *illing to pa, up to the contribution 'argin per 'inute for the
least profitable 8ob4 *hich is E15..5.
13-%6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
01. The Freed Co'pan, produces three products4 =4 >4 X4 fro' a single ra* 'aterial
input. roduct > can be sold at the splitoff point for total revenues of E/545554 or it can
be processed further at a total cost of E104555 and then sold for E024555. roduct >:
A; should be sold at the split9off point4 rather than processed further.
B; *ould increase the co'pan,?s overall net operating inco'e b, E124555 if
processed further and then sold.
C; *ould increase the co'pan,?s overall net operating inco'e b, E024555 if
"; *ould increase the co'pan,?s overall net operating inco'e b, E(4555 if
Solution:
roduct >
Sales value after further processing........... E024555
Costs of further processing........................ 104555
Benefit of further processing..................... /(4555
%ess: Sales value at split9off point............. /54555
!et advantage............................................. E (4555
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-%
0(. endall Co'pan, 'anufactures products "ee and +ff fro' a 8oint process. roduct
"ee has been allocated E(4/55 of the E(54555 in total 8oint costs associated *ith the
production of 14555 units each of "ee and +ff each ,ear. "ee can be sold at the split9
off point for E- per unit4 or it can be processed further *ith additional costs of E14555
and sold for E/ per unit. If "ee is processed further and sold4 the result *ould be:
A; A break9even situation.
B; An additional gain of E14555 fro' further processing.
C; A loss of E14555 fro' further processing.
"; An additional gain of E(4555 fro' further processing.
Source: CA4 adapted
Solution:
"ee
Sales value after further processing CE/ M 14555;.. E/4555
Costs of further processing.................................... 14555
Benefit of further processing................................. .4555
%ess: Sales value at split9off point CE- M 14555;.... -4555
!et advantage........................................................ E14555
13-%! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
0-. Faustina Che'ical Co'pan, 'anufactures three che'icals CT=1.4 !:-/4 and BS0-;
fro' a 8oint process. The three che'icals are in industrial grade for' at the split9off
point. The, can either be sold at that point or processed further into pre'iu' grade.
Costs related to each batch of this che'ical process is as follo*s:
T=1. !:-/ BS0-
Sales value at split9off point....................... E104555 E1(4555 E/4555
Allocated 8oint costs................................... E04555 E04555 E04555
Sales value after further processing........... E(54555 E124555 E34555
Cost of further processing.......................... E/4555 E-4555 E(4555
For *hich productCs; above *ould it be 'ore profitable for Faustina to sell at the split9
off point rather than process further<
A; T=1. onl,
B; BS0- onl,
C; T=1. and BS0- onl,
"; !:-/ and BS0- onl,
Solution:
T=1. !:-/ BS0-
Sales value after further processing..... E(54555 E124555 E34555
Sales value at split9off.......................... 104555 1(4555 /4555
Incre'ental revenue............................. .4555 04555 .4555
Further processing costs....................... /4555 -4555 (4555
Incre'ental inco'e Closs;.................... CE14555; E -4555 E(4555
roduct T=1. should be sold at the split9off point *ithout an, further processing.
roducts !:-/ and BS0- should be sold after further processing be,ond the split9off
point.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-%"
0.. Bhie'4 Inc. 'anufactures baseball gloves that nor'all, sell for E// each. Bhie'
currentl, has .55 defective gloves in inventor, that have E-/ of 'aterials4 labor4 and
overhead assigned to each glove. The defective gloves can either be co'pletel,
repaired at a cost of E(/ per glove or sold as is at a reduced price of E12 per glove.
Bhie' *ould be better off b,:
A; E(4555 to sell the gloves at the reduced price.
B; E(4255 to sell the gloves at the reduced price.
C; E.4255 to repair the gloves and sell the' at the nor'al price.
"; E/4(55 to sell the gloves at the reduced price.
Solution:
Sales value after repairing CE// M .55;.................. E((4555
Sales value at split9off CE12 M .55;........................ 14(55
Incre'ental revenue............................................... 1.4255
Repair costs CE(/ M .55;........................................ 154555
Incre'ental inco'e fro' further processing......... E .4255
0/. T*o products4 RI and PF4 e'erge fro' a 8oint process. roduct RI has been allocated
E34055 of the total 8oint costs of E1(4555. A total of 34555 units of product RI are
produced fro' the 8oint process. roduct RI can be sold at the split9off point for E1-
per unit4 or it can be processed further for an additional total cost of E/.4555 and then
sold for E12 per unit. If product RI is processed further and sold4 *hat *ould be the
effect on the overall profit of the co'pan, co'pared *ith sale in its unprocessed for'
directl, after the split9off point<
A; E124055 less profit
B; E1524555 'ore profit
C; E055 'ore profit
"; E34555 less profit
Solution:
roduct RI
Sales value after further processing CE12 M 34555;.... E10(4555
Costs of further processing........................................ /.4555
Benefit of further processing..................................... 1524555
%ess: Sales value at split9off point CE1- M 34555;...... 1114555
!et advantage Cdisadvantage;.................................... CE 34555;
00. T*o products4 OD and BC4 e'erge fro' a 8oint process. roduct OD has been
allocated E(34.55 of the total 8oint costs of E.(4555. A total of 34555 units of product
OD are produced fro' the 8oint process. roduct OD can be sold at the split9off point
for E1/ per unit4 or it can be processed further for an additional total cost of E0-4555
and then sold for E11 per unit. If product OD is processed further and sold4 *hat
*ould be the effect on the overall profit of the co'pan, co'pared *ith sale in its
unprocessed for' directl, after the split9off point<
A; E1.4.55 less profit
B; E1/4055 less profit
C; E./4555 less profit
"; E354555 'ore profit
Solution:
roduct FD
Sales value after further processing CE11 M 34555;... E1/-4555
Costs of further processing....................................... 0-4555
Benefit of further processing.................................... 354555
%ess: Sales value at split9off point CE1/ M 34555;..... 1-/4555
!et advantage Cdisadvantage;.................................. CE ./4555;
01. ridd, Corporation processes sugar cane in batches. The co'pan, purchases a batch
of sugar cane for E0( fro' far'ers and then crushes the cane in the co'pan,?s plant at
the cost of E12. T*o inter'ediate products4 cane fiber and cane 8uice4 e'erge fro' the
crushing process. The cane fiber can be sold as is for E(2 or processed further for E1-
to 'ake the end product industrial fiber that is sold for E-0. The cane 8uice can be sold
as is for E.- or processed further for E(- to 'ake the end product 'olasses that is sold
for E2/. 6hich of the inter'ediate products should be processed further<
A; Cane fiber should !&T be processed into industrial fiber$ Cane 8uice should be
processed into 'olasses
B; Cane fiber should be processed into industrial fiber$ Cane 8uice should !&T be
C; Cane fiber should be processed into industrial fiber$ Cane 8uice should be
"; Cane fiber should !&T be processed into industrial fiber$ Cane 8uice should
!&T be processed into 'olasses
Solution:
Cane Fiber Cane :uice
Sales value after further processing........... E-0 E2/
Costs of further processing........................ 1- (-
Benefit of further processing..................... (- 0(
%ess: Sales value at split9off point............. (2 .-
!et advantage Cdisadvantage;.................... CE /; E13
02. Pannor'an Corporation processes sugar beets in batches. A batch of sugar beets costs
E12 to bu, fro' far'ers and E12 to crush in the co'pan,?s plant. T*o inter'ediate
products4 beet fiber and beet 8uice4 e'erge fro' the crushing process. The beet fiber
can be sold as is for E(/ or processed further for E10 to 'ake the end product
industrial fiber that is sold for E/1. The beet 8uice can be sold as is for E-3 or
processed further for E(( to 'ake the end product refined sugar that is sold for E2..
Fo* 'uch profit Closs; does the co'pan, 'ake b, processing one batch of sugar
beets into the end products industrial fiber and refined sugar<
A; CE1-.;
B; CE-(;
C; E1
"; E-3
Solution:
Beet Fiber Beet :uice
Sales value after further processing........... E/1 E2.
Costs of further processing........................ 10 ((
Benefit of further processing..................... .1 0(
%ess: Sales value at split9off point............. (/ -3
!et advantage Cdisadvantage;.................... E10 E(-
Revenue:
Industrial fiber................................................. E/1
Refined sugar.................................................. 2.
Total revenue...................................................... E1.1
%ess e)penses:
urchase fro' far'ers.................................... 12
Crushing costs................................................. 12
rocessing fiber further................................... 10
rocessing 8uice further.................................. ((
Total e)penses.................................................... 1-.
!et profit fro' one batch................................... E 1
03. Stinehelfer Beet rocessors4 Inc.4 processes sugar beets in batches. A batch of sugar
beets costs E/0 to bu, fro' far'ers and E1- to crush in the co'pan,?s plant. T*o
inter'ediate products4 beet fiber and beet 8uice4 e'erge fro' the crushing process.
The beet fiber can be sold as is for E(. or processed further for E1( to 'ake the end
product industrial fiber that is sold for E-1. The beet 8uice can be sold as is for E.- or
processed further for E(3 to 'ake the end product refined sugar that is sold for E31.
Fo* 'uch profit Closs; does the co'pan, 'ake b, processing the inter'ediate
product beet 8uice into refined sugar rather than selling it as is<
A; E13
B; E0
C; CE/5;
"; CE10;
Solution:
Beet :uice
Costs of further processing........................ (3
Benefit of further processing..................... 0(
%ess: Sales value at split9off point............. .-
!et advantage Cdisadvantage;.................... E13
15. aine Corporation processes sugar beets in batches that it purchases fro' far'ers for
E1( a batch. A batch of sugar beets costs E11 to crush in the co'pan,?s plant. T*o
inter'ediate products4 beet fiber and beet 8uice4 e'erge fro' the crushing process.
The beet fiber can be sold as is for E(1 or processed further for E10 to 'ake the end
product industrial fiber that is sold for E.5. The beet 8uice can be sold as is for E.- or
6hich of the inter'ediate products should be processed further<
A; beet fiber should !&T be processed into industrial fiber$ beet 8uice should be
processed into refined sugar
B; beet fiber should !&T be processed into industrial fiber$ beet 8uice should !&T
be processed into refined sugar
C; beet fiber should be processed into industrial fiber$ beet 8uice should !&T be
"; beet fiber should be processed into industrial fiber$ beet 8uice should be
Solution:
Sales value after further processing........... E.5 E155
Costs of further processing........................ 10 (2
Benefit of further processing..................... (. 1(
%ess: Sales value at split9off point............. (1 .-
!et advantage Cdisadvantage;.................... CE -; E (3
Ose the follo*ing to ans*er Huestions 1191(:
&u7ts Corporation is considering t*o alternatives: A and B. Costs associated *ith the
alternatives are listed belo*:
Alternative A Alternative B
#aterials costs................... E.54555 E/04555
rocessing costs................. E-14555 E-14555
+Huip'ent rental................ E1-4555 E1-4555
&ccupanc, costs................. E1/4555 E((4555
11. Are the 'aterials costs and processing costs relevant in the choice bet*een
alternatives A and B< CIgnore the eHuip'ent rental and occupanc, costs in this
Huestion.;
A; Both 'aterials costs and processing costs are relevant
B; !either 'aterials costs nor processing costs are relevant
C; &nl, processing costs are relevant
"; &nl, 'aterials costs are relevant
1(. 6hat is the differential cost of Alternative B over Alternative A4 including all of the
relevant costs<
A; E15/4555
B; E(-4555
C; E1(24555
"; E1104/55
Solution:
Alternative A Alternative B
"ifferential
Costs
#aterials costs................... E.54555 E/04555 E104555
&ccupanc, costs................. E1/4555 E((4555 14555
"ifferential cost.............. E(-4555
Ose the follo*ing to ans*er Huestions 1-91.:
T*o alternatives4 code9na'ed = and >4 are under consideration at Du,er Corporation. Costs
associated *ith the alternatives are listed belo*.
Alternative = Alternative >
#aterials costs................... E.14555 E/34555
rocessing costs................. E./4555 E./4555
+Huip'ent rental................ E114555 E114555
&ccupanc, costs................. E104555 E(.4555
1-. Are the 'aterials costs and processing costs relevant in the choice bet*een
alternatives = and >< CIgnore the eHuip'ent rental and occupanc, costs in this
Huestion.;
A; !either 'aterials costs nor processing costs are relevant
B; &nl, processing costs are relevant
C; &nl, 'aterials costs are relevant
"; Both 'aterials costs and processing costs are relevant
1.. 6hat is the differential cost of Alternative > over Alternative =4 including all of the
relevant costs<
A; E1-(4555
B; E1134555
C; E1./4555
"; E(04555
Solution:
Alternative = Alternative >
"ifferential
Costs
#aterials costs................... E.14555 E/34555 E124555
&ccupanc, costs................. E104555 E(.4555 24555
"ifferential cost.............. E(04555
Ose the follo*ing to ans*er Huestions 1/912:
The "raper Co'pan, is considering dropping its "oo'bug to, due to continuing losses.
Revenue and cost data on the to, for the past ,ear follo*:
Sales of 1/4555 units.......... E1/54555
Pariable e)penses............... 1(54555
Contribution 'argin........... -54555
Fi)ed e)penses................... .54555
!et operating loss.............. CE 154555;
If the to, *ere discontinued4 then "raper could avoid E24555 per ,ear in fi)ed costs.
1/. Onder the given conditions4 the change in annual operating inco'e fro' discontinuing
the production and sale of "oo'bugs *ould be:
A; E-54555 decrease
B; E154555 increase
C; E((4555 decrease
"; E124555 increase
Solution:
Beep "oo'bugs "rop "oo'bugs "ifference
Sales............................................... E1/54555 E 5 CE1/54555;
Pariable e)penses........................... 1(54555 5 1(54555
Avoidable fi)ed e)penses............... .54555 -(4555 24555
roduct 'argin............................... CE 154555; CE-(4555; CE ((4555;
!et operating inco'e *ould decline b, E((4555 if "oo'bugs *ere dropped.
Therefore4 "oo'bugs should not be dropped.
10. Assu'ing all other conditions sta, the sa'e4 at *hat level of annual sales of
"oo'bugs Cin units; should "raper be indifferent to discontinuing "oo'bugs or
continuing the production and sale of "oo'bugs<
A; (54555 units
B; 124555 units
C; 04555 units
"; .4555 units
Solution:
Total contribution 'argin............. E-54555
"ivided b, 1/4555 units............... K1/4555
Contribution 'argin per unit........ E(
Breakeven point in units N Avoidable fi)ed e)penses K Onit contribution 'argin
N E24555 K E( N .4555 units
11. Suppose that if the "oo'bug to, is dropped4 the production and sale of other "raper
to,s *ould increase so as to generate a E104555 increase in the contribution 'argin
received fro' these other to,s. If all other conditions are the sa'e4 the change in
annual operating inco'e fro' discontinuing the production and sale of "oo'bugs
*ould be:
A; E04555 decrease
B; E1.4555 increase
C; E(4555 decrease
"; E(24555 increase
Solution:
Sales................................... E1/54555
Pariable e)penses............... 1(54555
Contribution 'argin........... -54555
Avoidable fi)ed e)penses... 24555
"oo'bug product 'argin. . CE ((4555;
Additional contribution 'argin....... E104555
%ess "oo'bug product 'argin....... C ((4555;
"ecrease in net operating inco'e.... CE 04555;
12. Suppose again that if the "oo'bug to, is dropped4 the production and sale of other
"raper to,s *ould increase so as to generate a E104555 increase in the contribution
'argin received fro' these other to,s. At *hat selling price per "oo'bug should
"raper be indifferent Con econo'ic grounds; bet*een dropping the "oo'bug or
continuing its production and sale< CAll other conditions re'ain the sa'e4 including
annual sales of 1/4555 units of the "oo'bug to,.;
A; E2.--
B; E3.(/
C; E3.05
"; E15.15
AICA F!: "ecision #aking$ Reporting %&: ( %evel: Fard
Solution:
Total variable e)penses................. E1(54555
"ivided b, 1/4555 units............... K 1/4555
Pariable e)pense per unit.............. E2
Total contribution 'argin N Fi)ed e)penses plus increase in contribution 'argin fro'
other to,s
Total contribution 'argin N 1/4555 M CSelling price G Pariable e)pense per unit;
1/4555 M CSelling price G E2; N E24555 T E104555
1/4555 M Selling price G E1(54555 N E(.4555
1/4555 M Selling price N E1..4555
Selling price N E3.05
Ose the follo*ing to ans*er Huestions 13925:
The 'anage'ent of Bonga Corporation is considering dropping product "1.F. "ata fro' the
co'pan,?s accounting s,ste' appear belo*:
Sales....................................................................... E2-54555
Pariable e)penses................................................... E-354555
Fi)ed 'anufacturing e)penses............................... E(004555
Fi)ed selling and ad'inistrative e)penses............. E(-(4555
All fi)ed e)penses of the co'pan, are full, allocated to products in the co'pan,?s accounting
s,ste'. Further investigation has revealed that E1114555 of the fi)ed 'anufacturing e)penses
and E15-4555 of the fi)ed selling and ad'inistrative e)penses are avoidable if product "1.F
is discontinued.
13. According to the co'pan,?s accounting s,ste'4 *hat is the net operating inco'e
earned b, product "1.F<
A; CE/24555;
B; CE..54555;
C; E/24555
"; E..54555
AICA F!: Reporting %&: ( %evel: +as,
Solution:
Sales................................................................... E2-54555
Pariable e)penses.............................................. -354555
Contribution 'argin.......................................... ..54555
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses....................... (004555
Fi)ed selling and ad'inistrative e)penses..... (-(4555
Total fi)ed e)penses.......................................... .324555
!et operating inco'e Closs;............................... CE /24555;
25. 6hat *ould be the effect on the co'pan,?s overall net operating inco'e if product
"1.F *ere dropped<
A; &verall net operating inco'e *ould increase b, E((04555.
B; &verall net operating inco'e *ould increase b, E/24555.
C; &verall net operating inco'e *ould decrease b, E((04555.
"; &verall net operating inco'e *ould decrease b, E/24555.
Solution:
Beep the
roduct
"rop the
roduct "ifference
Sales..................................................... E2-54555 E 5 CE2-54555;
Pariable e)penses................................. -354555 5 -354555
Contribution 'argin............................. ..54555 5 C ..54555;
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses.......... (004555 1//4555 1114555
e)penses........................................ (-(4555 1(34555 15-4555
Total fi)ed e)penses............................. .324555 (2.4555 (1.4555
!et operating inco'e Closs;................. CE /24555; CE(2.4555; CE((04555;
!et operating inco'e *ould decline b, E((04555 if product "1.F *ere dropped.
The 'anage'ent of 6o7nick Corporation has been concerned for so'e ti'e *ith the
financial perfor'ance of its product P20& and has considered discontinuing it on several
occasions. "ata fro' the co'pan,?s accounting s,ste' appear belo*:
Sales................................................................. E1/54555
Pariable e)penses............................................. E1(4555
Fi)ed 'anufacturing e)penses......................... E/54555
Fi)ed selling and ad'inistrative e)penses....... E--4555
In the co'pan,?s accounting s,ste' all fi)ed e)penses of the co'pan, are full, allocated to
products. Further investigation has revealed that E-54555 of the fi)ed 'anufacturing e)penses
and E1-4555 of the fi)ed selling and ad'inistrative e)penses are avoidable if product P20& is
discontinued.
21. According to the co'pan,?s accounting s,ste'4 *hat is the net operating inco'e
earned b, product P20&<
A; E124555
B; CE/4555;
C; CE124555;
"; E/4555
AICA F!: Reporting %&: ( %evel: +as,
Solution:
Sales................................................................. E1/54555
Pariable e)penses............................................. 1(4555
Contribution 'argin......................................... 124555
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses...................... /54555
Fi)ed selling and ad'inistrative e)penses.... --4555
Total fi)ed e)penses......................................... 2-4555
!et operating inco'e Closs;.............................
CE
/4555;
2(. 6hat *ould be the effect on the co'pan,?s overall net operating inco'e if product
P20& *ere dropped<
A; &verall net operating inco'e *ould decrease b, E-/4555.
B; &verall net operating inco'e *ould decrease b, E/4555.
C; &verall net operating inco'e *ould increase b, E-/4555.
"; &verall net operating inco'e *ould increase b, E/4555.
Solution:
Beep the
roduct
"rop the
roduct "ifference
Sales............................................... E1/54555 E 5 CE1/54555;
Pariable e)penses........................... 1(4555 5 1(4555
Contribution 'argin....................... 124555 5 C 124555;
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses.... /54555 (54555 -54555
e)penses.................................. --4555 (54555 1-4555
Total fi)ed e)penses....................... 2-4555 .54555 .-4555
!et operating inco'e Closs;........... CE /4555; CE .54555; CE -/4555;
!et operating inco'e *ould decline b, E-/4555 if product P20& *ere dropped.
Ose the follo*ing to ans*er Huestions 2-92/:
S'ithtone Co'pan, uses 24555 units of a certain part in production each ,ear. resentl,4 this
part is purchased fro' an outside supplier at E1( per unit. For so'e ti'e no* there has been
idle capacit, in the factor, that could be utili7ed to 'ake this part. The follo*ing infor'ation
has been asse'bled on the unit costs of 'aking this part internall,:
"irect 'aterials.......................................... E-.(/
"irect labor................................................ E(.1/
Pariable 'anufacturing overhead.............. E(.55
Fi)ed 'anufacturing overhead.................. E/.55
The fi)ed 'anufacturing overhead listed above represents an allocation of e)isting costs to
this part. Fo*ever4 there *ould be an increase of E1(4555 in fi)ed 'anufacturing overhead
costs for the salar, of a ne* supervisor.
2-. If S'ithtone chooses to 'ake the part instead of bu,ing it outside4 the change in the
co'pan,?s operating inco'e per ,ear *ould be:
A; E(54555 decrease.
B; E(54555 increase.
C; E24555 decrease.
"; E24555 increase.
Solution:
"irect 'aterials CE-.(/ M 24555;............................... E(04555
"irect labor CE(.1/ M 24555;..................................... ((4555
Pariable 'anufacturing overhead CE(.55 M 24555;. . . 104555
Fi)ed 'anufacturing overhead................................. 1(4555
Total cost to 'ake..................................................... E104555
Cost of purchasing part CE1( M 24555;....... E304555
Total cost to 'ake...................................... 104555
!et savings fro' 'aking part ................... E(54555
2.. Assu'ing other things sta, the sa'e4 at *hat price per unit fro' the outside supplier
should S'ithtone be indifferent Con econo'ic grounds; to bu,ing or 'aking the part<
A; E2.55
B; E2./5
C; E3.55
"; E3./5
Solution:
"irect 'aterials CE-.(/ M 24555;................................ E(04555
"irect labor CE(.1/ M 24555;....................................... ((4555
Pariable 'anufacturing overhead CE(.55 M 24555;..... 104555
Fi)ed 'anufacturing overhead................................... 1(4555
Total cost to 'ake....................................................... E104555
Total cost to 'ake............................... E104555
"ivided b, 24555 units....................... K 24555
rice per unit fro' outside supplier. . . E3./5
2/. Suppose that the idle capacit, Cfloor space and 'achiner,; is presentl, being rented to
another co'pan, for E-(4555 per ,ear. All the other conditions are still the sa'e. If
S'ithtone chooses to 'ake the part instead of bu,ing it outside4 the net advantage or
disadvantage Cper ,ear; *ould be:
A; E1/4555 disadvantage.
B; E.4555 advantage.
C; E1(4555 disadvantage.
"; E154555 advantage.
Solution:
"irect 'aterials CE-.(/ M 24555;............................. E(04555
"irect labor CE(.1/ M 24555;.................................... ((4555
Pariable 'anufacturing overhead CE(.55 M 24555;.. 104555
Fi)ed 'anufacturing overhead................................ 1(4555
Total cost to 'ake................................................... E104555
Cost of purchasing part CE1( M 24555;....... E304555
Total cost to 'ake...................................... C 104555;
&pportunit, cost of rental inco'e............. C -(4555;
!et disadvantage of 'aking part............... E1(4555
+ll, Industries is a 'ulti9product co'pan, that currentl, 'anufactures -54555 units of art
#R(. each 'onth for use in production. The facilities no* being used to produce art #R(.
have a fi)ed 'onthl, cost of E1/54555 and a capacit, to produce -/4555 units per 'onth. If
+ll, *ere to bu, part #R(. fro' an outside supplier4 the facilities *ould be idle4 but its fi)ed
costs *ould continue at .5V of their present a'ount. The variable production costs of art
#R(. are E11 per unit.
20. If +ll, Industries continues to use -54555 units of art #R(. each 'onth4 it *ould
reali7e a net benefit b, purchasing art #R(. fro' an outside supplier onl, if the
supplier?s unit price is less than:
A; E1..55
B; E11.55
C; E10.55
"; E1-.55
Solution:
Avoidable fi)ed costs CE1/54555 M 5.05;... E354555
"ivided b, -54555 units............................. K-54555
Relevant fi)ed cost per unit....................... E -
Add variable production costs per unit...... 11
&utside supplier price................................ E1.
21. If +ll, industries is able to obtain art #R(. fro' an outside supplier at a unit
purchase price of E1/4 the 'onthl, usage at *hich it *ill be indifferent bet*een
purchasing and 'aking art #R(. is:
A; -54555 units
B; -(4555 units
C; -/4555 units
"; ((4/55 units
Solution:
A co'pan, *ill be indifferent bet*een purchasing and 'aking a part *hen the outside
purchase price is eHual to the total relevant cost per unit of 'aking the part. The total
relevant cost per unit of 'aking the part is co'posed of the variable production cost
per unit CE11; plus the fi)ed cost per unit. Since the total cost 'ust be eHual to E1/4
then the fi)ed cost per unit 'ust be E. CE1/ G E11;.
The fi)ed cost per unit is calculated as:
Fi)ed cost per unit N Total relevant fi)ed costs K Onits to be produced
Substituting:
E. N E354555 K Onits to be produced
Onits to be produced N ((4/55
Ahron Co'pan, 'akes 254555 units per ,ear of a part it uses in the products it 'anufactures.
The unit product cost of this part is co'puted as follo*s:
"irect 'aterials.......................................... E1..35
"irect labor................................................ 11./5
Pariable 'anufacturing overhead.............. 1.35
Fi)ed 'anufacturing overhead.................. (1.15
Onit product cost........................................ E//..5
An outside supplier has offered to sell the co'pan, all of these parts it needs for E.0.05 a
unit. If the co'pan, accepts this offer4 the facilities no* being used to 'ake the part could be
used to 'ake 'ore units of a product that is in high de'and. The additional contribution
'argin on this other product *ould be E/054555 per ,ear.
If the part *ere purchased fro' the outside supplier4 all of the direct labor cost of the part
*ould be avoided. Fo*ever4 E1-.05 of the fi)ed 'anufacturing overhead cost being applied
to the part *ould continue even if the part *ere purchased fro' the outside supplier. This
fi)ed 'anufacturing overhead cost *ould be applied to the co'pan,?s re'aining products.
22. Fo* 'uch of the unit product cost of E//..5 is relevant in the decision of *hether to
'ake or bu, the part<
A; E-..-5
B; E11./5
C; E//..5
"; E.1.25
Solution:
"irect 'aterials......................................................... E1..35
"irect labor............................................................... 11./5
Pariable 'anufacturing overhead............................. 1.35
Fi)ed 'anufacturing overhead CE(1.15 G E1-.05;. . . 1./5
Relevant 'anufacturing cost.................................... E.1.25
23. 6hat is the net total dollar advantage Cdisadvantage; of purchasing the part rather than
'aking it<
A; E/054555
B; E15.4555
C; E1104555
"; CE-2.4555;
Solution:
"irect 'aterials...................................................... E1..35
"irect labor............................................................ 11./5
Pariable 'anufacturing overhead.......................... 1.35
Fi)ed 'anufacturing overhead CE(1.15 G E1-.05; 1./5
Relevant 'anufacturing cost................................. E.1.25
#anufacturing cost savings CE.1.25 M 254555;........ E-4-..4555
Additional contribution 'argin................................ /054555
Cost of purchasing the part CE.0.05 M 254555;......... C -41(24555;
!et advantage Cdisadvantage;................................... E 1104555
35. 6hat is the 'a)i'u' a'ount the co'pan, should be *illing to pa, an outside
supplier per unit for the part if the supplier co''its to suppl,ing all 254555 units
reHuired each ,ear<
A; E1.55
B; E0(..5
C; E.2.25
"; E//..5
Solution:
"irect 'aterials...................................................... E1..35
"irect labor............................................................ 11./5
Fi)ed 'anufacturing overhead CE(1.15 G E1-.05; 1./5
Relevant 'anufacturing cost................................. E.1.25
#a)i'u' acceptable purchase price:
#anufacturing cost savings CE.1.25 M 254555;..... E-4-..4555
Additional contribution 'argin............................. /054555
Total benefit........................................................... E-435.4555
!u'ber of units..................................................... 254555
Benefit per unit...................................................... E.2.25
13-# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
enagos Corporation is presentl, 'aking part X.- that is used in one of its products. A total
of /4555 units of this part are produced and used ever, ,ear. The co'pan,?s Accounting
er Onit
"irect 'aterials.......................................... E1.15
"irect labor................................................ E-.15
Pariable overhead....................................... E0.35
SupervisorSs salar,..................................... E/.25
"epreciation of special eHuip'ent............. E/.(5
Allocated general overhead........................ E/.05
An outside supplier has offered to produce and sell the part to the co'pan, for E(5.25 each. If
this offer is accepted4 the supervisor?s salar, and all of the variable costs4 including direct
labor4 can be avoided. The special eHuip'ent used to 'ake the part *as purchased 'an, ,ears
ago and has no salvage value or other use. The allocated general overhead represents fi)ed
costs of the entire co'pan,. If the outside supplier?s offer *ere accepted4 onl, E.4555 of these
allocated general overhead costs *ould be avoided.
31. If 'anage'ent decides to bu, part X.- fro' the outside supplier rather than to
A; !et operating inco'e *ould decline b, E-.4/55 per ,ear.
B; !et operating inco'e *ould decline b, E-54/55 per ,ear.
C; !et operating inco'e *ould decline b, E1/4/55 per ,ear.
"; !et operating inco'e *ould decline b, E-24/55 per ,ear.
Solution:
#ake Bu,
"irect 'aterials C/4555 units I E1.15 per unit;.......... E /4/55
"irect labor C/4555 units I E-.15 per unit;................. 1/4/55
Pariable overhead C/4555 units I E0.35 per unit;....... -.4/55
SupervisorSs salar, C/4555 units I E/.25 per unit;..... (34555
"epreciation of special eHuip'ent Cnot relevant;........ 5
Allocated general overhead Cavoidable onl,;.............. .4555
&utside purchase price C/4555 units I E(5.25 per
unit;.......................................................................... E15.4555
Total cost...................................................................... E224/55 E15.4555
The total cost of the 'ake alternative is lo*er b, E1/4/55. Thus4 net operating inco'e
*ould decline b, E1/4/55 if the offer fro' the supplier *ere accepted.
13-$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
3(. In addition to the facts given above4 assu'e that the space used to produce part X.-
could be used to 'ake 'ore of one of the co'pan,?s other products4 generating an
additional seg'ent 'argin of E(.4555 per ,ear for that product. 6hat *ould be the
i'pact on the co'pan,?s overall net operating inco'e of bu,ing part X.- fro' the
outside supplier and using the freed space to 'ake 'ore of the other product<
A; !et operating inco'e *ould decline b, E154/55 per ,ear.
B; !et operating inco'e *ould decline b, E/24/55 per ,ear.
C; !et operating inco'e *ould increase b, E(.4555 per ,ear.
"; !et operating inco'e *ould increase b, E24/55 per ,ear.
Solution:
#ake Bu,
"irect 'aterials C/4555 units I E1.15 per unit;.. . . E /4/55
"irect labor C/4555 units I E-.15 per unit;........... 1/4/55
Pariable overhead C/4555 units I E0.35 per unit;. -.4/55
SupervisorSs salar, C/4555 units I E/.25 per unit; (34555
"epreciation of special eHuip'ent Cnot relevant;. . 5
Allocated general overhead Cavoidable onl,;........ .4555
&utside purchase price C/4555 units I E(5.25 per
unit;.................................................................... E15.4555
&pportunit, cost..................................................... C (.4555;
Total cost................................................................ E224/55 E 254555
The total cost of the 'ake alternative is higher b, E24/55. Thus4 net operating inco'e
*ould increase b, E24/55 if the offer fro' the supplier *ere accepted.
#cfarlain Corporation is presentl, 'aking part O32 that is used in one of its products. A total
of 14555 units of this part are produced and used ever, ,ear. The co'pan,?s Accounting
er Onit
"irect 'aterials.......................................... E-.15
"irect labor................................................ E-.05
Pariable overhead....................................... E1..5
SupervisorSs salar,..................................... E..55
"epreciation of special eHuip'ent............. E-.35
Allocated general overhead........................ E..15
An outside supplier has offered to produce and sell the part to the co'pan, for E11.15 each. If
this offer is accepted4 the supervisor?s salar, and all of the variable costs4 including direct
labor4 can be avoided. The special eHuip'ent used to 'ake the part *as purchased 'an, ,ears
ago and has no salvage value or other use. The allocated general overhead represents fi)ed
costs of the entire co'pan,4 none of *hich *ould be avoided if the part *ere purchased
instead of produced internall,.
13-% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
3-. If 'anage'ent decides to bu, part O32 fro' the outside supplier rather than to
A; !et operating inco'e *ould decline b, E-54255 per ,ear.
B; !et operating inco'e *ould increase b, E(/4(55 per ,ear.
C; !et operating inco'e *ould increase b, E-54255 per ,ear.
"; !et operating inco'e *ould decline b, E(/4(55 per ,ear.
Solution:
#ake Bu,
"irect 'aterials C14555 units I E-.15 per unit;.. . . E (/4355
"irect labor C14555 units I E-.05 per unit;........... (/4(55
Pariable overhead C14555 units I E1..5 per unit;. 34255
SupervisorSs salar, C14555 units I E..55 per unit; (24555
Allocated general overhead Cnot relevant;............. 5
&utside purchase price C14555 units I E11.15 per
unit;.................................................................... E1134155
Total cost................................................................ E224355 E1134155
The total cost of the 'ake alternative is lo*er b, E-54255. Thus4 net operating inco'e
*ould decline b, E-54255 if the offer fro' the supplier *ere accepted.
3.. In addition to the facts given above4 assu'e that the space used to produce part O32
could be used to 'ake 'ore of one of the co'pan,?s other products4 generating an
additional seg'ent 'argin of E(.4555 per ,ear for that product. 6hat *ould be the
i'pact on the co'pan,?s overall net operating inco'e of bu,ing part O32 fro' the
outside supplier and using the freed space to 'ake 'ore of the other product<
A; !et operating inco'e *ould decline b, E04255 per ,ear.
B; !et operating inco'e *ould decline b, E14(55 per ,ear.
C; !et operating inco'e *ould increase b, E(.4555 per ,ear.
"; !et operating inco'e *ould decline b, E.34(55 per ,ear.
Solution:
#ake Bu,
"irect 'aterials C14555 units I E-.15 per unit;.. . . E (/4355
"irect labor C14555 units I E-.05 per unit;........... (/4(55
Pariable overhead C14555 units I E1..5 per unit;. 34255
SupervisorSs salar, C14555 units I E..55 per unit; (24555
Allocated general overhead Cnot relevant;............. 5
&utside purchase price C14555 units I E11.15 per
unit;.................................................................... E1134155
&pportunit, cost..................................................... C (.4555;
Total cost................................................................ E224355 E3/4155
The total cost of the 'ake alternative is less b, E04255. Thus4 net operating inco'e
*ould decline b, E04255 if the offer fro' the supplier *ere accepted.
>ounes Inc. 'anufactures industrial co'ponents. &ne of its products4 *hich is used in the
construction of industrial air conditioners4 is kno*n as 50. "ata concerning this product are
given belo*:
er Onit
Selling price..................................................... E((5
"irect 'aterials................................................ E-2
"irect labor...................................................... E1
Pariable 'anufacturing overhead.................... E2
Fi)ed 'anufacturing overhead........................ E10
Pariable selling e)pense................................... E.
Fi)ed selling and ad'inistrative e)pense........ E10
The above per unit data are based on annual production of .4555 units of the co'ponent.
"irect labor can be considered to be a variable cost.
3/. The co'pan, has received a special4 one9ti'e9onl, order for .55 units of co'ponent
50. There *ould be no variable selling e)pense on this special order and the total
fi)ed 'anufacturing overhead and fi)ed selling and ad'inistrative e)penses of the
co'pan, *ould not be affected b, the order. Assu'ing that >ounes has e)cess
capacit, and can fill the order *ithout cutting back on the production of an, product4
*hat is the 'ini'u' price per unit on the special order belo* *hich the co'pan,
should not go<
A; E.1
B; E2-
C; E0-
"; E((5
Solution:
Pariable cost per unit on nor'al sales:
"irect 'aterials...................................................... E-2
"irect labor............................................................ 1
Pariable 'anufacturing overhead.......................... 2
Pariable selling e)pense......................................... .
Pariable cost per unit on nor'al sales................... E/1
Pariable cost per unit on special order:
!or'al variable cost per unit................................. E/1
Reduction in variable selling e)pense.................... C .;
Pariable cost per unit on special order................... E.1
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-
30. The co'pan, has received a special4 one9ti'e9onl, order for /55 units of co'ponent
50. There *ould be no variable selling e)pense on this special order and the total
fi)ed 'anufacturing overhead and fi)ed selling and ad'inistrative e)penses of the
co'pan, *ould not be affected b, the order. Fo*ever4 assu'e that >ounes has no
e)cess capacit, and this special order *ould reHuire -5 'inutes of the constraining
resource4 *hich could be used instead to produce products *ith a total contribution
'argin of E154555. 6hat is the 'ini'u' price per unit on the special order belo*
*hich the co'pan, should not go<
A; E01
B; E15-
C; E(5
"; E2-
AICA F!: "ecision #aking$ Reporting %&: .4/ %evel: Fard
Solution:
"irect 'aterials............................................................. E-2
"irect labor.................................................................... 1
Pariable 'anufacturing overhead.................................. 2
Pariable selling e)pense................................................ .
Pariable cost per unit on nor'al sales........................... E/1
!or'al variable cost per unit........................................ E/1
Reduction in variable selling e)pense........................... C .;
&pportunit, cost of sales given up E154555 K /55;....... (5
Pariable cost per unit on special order.......................... E01
13-! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
31. Refer to the original data in the proble'. 6hat is the current contribution 'argin per
unit for co'ponent 50 based on its selling price of E((5 and its annual production of
.4555 units<
A; E/1
B; E1-1
C; E103
"; E11-
AICA F!: Reporting %&: . %evel: +as, Source: C#A4 adapted
Solution:
Pariable cost per unit:
"irect 'aterials...................................................... E-2
"irect labor............................................................ 1
Pariable 'anufacturing overhead.......................... 2
Pariable selling e)pense......................................... .
Pariable cost per unit............................................. E/1
Contribution 'argin per unit:
Selling price........................................................... E((5
Pariable cost per unit............................................. /1
Contribution 'argin............................................... E103
The follo*ing are Silver Co'pan,?s unit costs of 'aking and selling an ite' at a volu'e of
24555 units per 'onth C*hich represents the co'pan,?s capacit,;:
#anufacturing:
"irect 'aterials........................... E.
"irect labor................................. E/
Pariable overhead....................... E(
Fi)ed overhead............................ E2
Selling and ad'inistrative:
Pariable....................................... E1
Fi)ed........................................... E0
resent sales a'ount to 14555 units per 'onth. An order has been received fro' a custo'er in
a foreign 'arket for 14555 units at a price of E(5 per unit. The order *ould not affect regular
sales. Fi)ed costs4 both 'anufacturing and selling and ad'inistrative4 are constant *ithin the
relevant range bet*een 04555 and 24555 units per 'onth. The variable selling and
ad'inistrative costs *ould have to be incurred for this special order as *ell as all other sales.
32. If the co'pan, accepts the special order4 the effect on total operating inco'e *ill be a:
A; E14555 increase
B; E34555 increase
C; E04555 decrease
"; E24555 increase
13-!# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Solution:
"irect 'aterials...................................................... E .
"irect labor............................................................ /
Pariable 'anufacturing overhead.......................... (
Pariable selling Y ad'inistrative e)pense............. 1
Pariable cost per unit on nor'al sales................... E1(
Selling price for special order................................ E(5
Pariable cost per unit on special order................... 1(
Onit contribution 'argin on special order............. E 2
!u'ber of units in special order............................ 14555
Increase Cdecrease; in net operating inco'e.......... E24555
33. The co'pan, has 155 defective units of roduct = left over fro' last ,ear *hich *ill
have to be sold as scrap at reduced prices. The sale of these units *ould have no effect
on the co'pan,?s other sales. The cost figure that is relevant as a guide for setting a
'ini'u' price on these units is:
A; E1
B; E1
C; E13
"; E1(
AICA F!: "ecision #aking$ Reporting %&: . %evel: Fard
Solution:
+)cept for variable selling and ad'inistrative e)penses CE1;4 all other e)penses
associated *ith theses 155 defective units are sunk Calread, incurred; and therefore
irrelevant.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-!1
+lfving Co'pan, produces a single product. The cost of producing and selling a single unit of
this product at the co'pan,?s nor'al activit, level of 254555 units per 'onth is as follo*s:
"irect 'aterials...................................................... E-1./5
"irect labor............................................................ E0.55
Pariable 'anufacturing overhead.......................... E1.55
Fi)ed 'anufacturing overhead.............................. E11./5
Pariable selling Y ad'inistrative e)pense............. E1.25
Fi)ed selling Y ad'inistrative e)pense................. E2.55
The nor'al selling price of the product is E11.15 per unit.
An order has been received fro' an overseas custo'er for 14555 units to be delivered this
'onth at a special discounted price. This order *ould have no effect on the co'pan,?s nor'al
sales and *ould not change the total a'ount of the co'pan,?s fi)ed costs. The variable selling
and ad'inistrative e)pense *ould be E1./5 less per unit on this order than on nor'al sales.
"irect labor is a variable cost in this co'pan,.
13-!$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
155. Suppose there is a'ple idle capacit, to produce the units reHuired b, the overseas
custo'er and the special discounted price on the special order is E0-.15 per unit. B,
ho* 'uch *ould this special order increase Cdecrease; the co'pan,?s net operating
inco'e for the 'onth<
A; E14.55
B; CE/4355;
C; E124355
"; CE(4155;
Solution:
"irect 'aterials...................................................... E-1./5
"irect labor............................................................ 0.55
Pariable selling Y ad'inistrative e)pense............. 1.25
Pariable cost per unit on nor'al sales................... E.0.-5
!or'al variable cost per unit................................. E.0.-5
Reduction in variable selling and ad'inistrative
e)pense............................................................... C 1./5;
Pariable cost per unit on special order................... E...25
Selling price for special order................................ E0-.15
Pariable cost per unit on special order................... ...25
Onit contribution 'argin on special order............. E12.35
!u'ber of units in special order............................ 14555
Increase Cdecrease; in net operating inco'e.......... E124355
151. Suppose the co'pan, is alread, operating at capacit, *hen the special order is
received fro' the overseas custo'er. 6hat *ould be the opportunit, cost of each unit
delivered to the overseas custo'er<
A; E(..25
B; E0.25
C; E1..5
"; E/.-5
Solution:
"irect 'aterials...................................................... E-1./5
"irect labor............................................................ 0.55
Selling price for nor'al sales................................ E11.15
Pariable cost per unit............................................. .0.-5
Onit contribution 'argin........................................ E(..25
15(. Suppose there is not enough idle capacit, to produce all of the units for the overseas
custo'er and accepting the special order *ould reHuire cutting back on production of
.55 units for regular custo'ers. The 'ini'u' acceptable price per unit for the special
order is closest to:
A; E/0.55
B; E0/.25
C; E11.15
"; E/..1(
13-!% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Solution:
"irect 'aterials...................................................... E-1./5
"irect labor............................................................ 0.55
%ost contribution 'argin:
Selling price for nor'al sales............................. E11.15
Pariable cost per unit on nor'al sales................ .0.-5
Contribution 'argin per unit.............................. E(..25
!u'ber of units cut back in production............. .55
Total lost contribution 'argin............................ E343(5
!u'ber of units in special order........................ 14555
%ost contribution 'argin per unit.......................... E3.3(
!or'al variable cost per unit................................................ E.0.-5
Add opportunit, cost for lost contribution 'argin............... 3.3(
Reduction in variable selling and ad'inistrative e)pense.... C1./5;
Pariable cost per unit on special order.................................. E/..1(
The Bharu Piolin Co'pan, has the capacit, to 'anufacture and sell /4555 violins each ,ear
but is currentl, onl, 'anufacturing and selling .4255. The follo*ing per unit nu'bers relate
to annual operations at .4255 units:
er Piolin
Selling price............................................... E055
#anufacturing costs:
Pariable................................................... E1-5
Fi)ed....................................................... E(15
Selling and ad'inistrative costs:
Pariable................................................... E(5
Fi)ed....................................................... E.5
6oolgar S,'phon, &rchestra is interested in purchasing Bharu?s e)cess capacit, of (55 units
but onl, if the, can get the violins for E-/5 each. This special order *ould not affect regular
sales or the cost structure above.
15-. If the special order fro' 6oolgar S,'phon, &rchestra is accepted4 Bharu?s profits for
the ,ear *ill:
A; increase b, E.54555
B; decrease b, E154555
C; decrease b, E((4555
"; decrease b, E(24555
Solution:
Incre'ental revenues C(55 units I E-/5;............. E154555
Pariable 'anufacturing C(55 units I E1-5;....... C (04555;
Pariable selling C(55 units I E(5;..................... C .4555;
!et advantage of accepting the order..................... E .54555
13-!6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
15.. Assu'e that Bharu is 'anufacturing and selling at capacit, C/4555 units;. An, special
order *ill 'ean a loss of regular sales. Onder these conditions if the special order
fro' 6oolgar S,'phon, &rchestra is accepted4 Bharu?s profits for the ,ear *ill
decrease b,:
A; E(54555
B; E((4555
C; E(24555
"; E/54555
Solution:
Contribution 'argin per unit of regular sales:
Selling price........................................................ E055
Pariable 'anufacturing costs............................. 1-5
Pariable selling costs.......................................... (5
Contribution 'argin per unit.............................. E./5
!u'ber of units of lost sales.............................. (55
Total lost contribution 'argin................................ E354555
Incre'ental revenues C(55 units I E-/5;............. E154555
Pariable 'anufacturing C(55 units I E1-5;....... C (04555;
Pariable selling C(55 units I E(5;..................... C .4555;
%ess lost contribution 'argin................................. C 354555;
!et disadvantage of accepting special order.......... CE/54555;
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-!
Bro*ning Co'pan, 'akes four products in a single facilit,. These products have the
follo*ing unit product costs:
roduct
A
roduct
B
roduct
C
roduct
"
"irect 'aterials................................. E15.05 E1.35 E0.15 E-.25
"irect labor....................................... 11..5 10.25 2.15 11..5
Pariable 'anufacturing overhead..... -.15 ..15 /..5 0.15
Fi)ed 'anufacturing overhead......... (..05 -...5 (1./5 13.-5
Onit product cost............................... E/5.-5 E0-.(5 E.1.15 E.5.05
Additional data concerning these products are listed belo*.
roduct
A
roduct
B
roduct
C
roduct
"
Drinding 'inutes per unit................. (.05 1.25 (./5 1..5
Selling price per unit......................... E03./5 E1..25 E/3./5 E/3.05
Pariable selling cost per unit............. E1.05 E1./5 E(.05 E-..5
#onthl, de'and in units.................. .4555 (4555 -4555 .4555
The grinding 'achines are potentiall, the constraint in the production facilit,. A total of
(.4/55 'inutes are available per 'onth on these 'achines.
15/. Fo* 'an, 'inutes of grinding 'achine ti'e *ould be reHuired to satisf, de'and for
all four products<
A; (14/55
B; (14155
C; 1-4555
"; (.4/55
13-!! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Solution:
"e'and on the grinding 'achine:
roduct
A
roduct
B
roduct
C
roduct
"
Drinding 'inutes per unit................. (.05 1.25 (./5 1..5
#onthl, de'and in units.................. .4555 (4555 -4555 .4555
Total 'inutes reHuired...................... 154.55 -4055 14/55 /4055
Total ti'e reHuired for all products N 154.55 T -4055 T 14/55 T /4055 N (14155
150. 6hich product 'akes the %+AST profitable use of the grinding 'achines<
A; roduct A
B; roduct B
C; roduct C
"; roduct "
Solution:
roduct
A
roduct
B
roduct
C
roduct
"
Selling price per unit............................ E03./5 E1..25 E/3./5 E/3.05
"irect 'aterials per unit....................... 15.05 1.35 0.15 -.25
"irect labor per unit............................. 11..5 10.25 2.15 11..5
Pariable 'anufacturing overhead per unit -.15 ..15 /..5 0.15
Pariable selling cost per unit................ 1.05 1./5 (.05 -..5
Contribution 'argin per unit................ E.(.(5 E.../5 E-0.15 E-..35
Drinding 'inutes per unit.................... (.05 1.25 (./5 1..5
Contribution 'argin per 'inute........... E10.(- E(..1( E1..02 E(..3-
Rank in ter's of profitabilit,............... - ( . 1
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-!"
151. 6hich product 'akes the #&ST profitable use of the grinding 'achines<
A; roduct A
B; roduct B
C; roduct C
"; roduct "
Solution:
roduct
A
roduct
B
roduct
C
roduct
"
Selling price per unit.................... E03./5 E1..25 E/3./5 E/3.05
"irect 'aterials per unit............... 15.05 1.35 0.15 -.25
"irect labor per unit...................... 11..5 10.25 2.15 11..5
Pariable selling cost per unit........ 1.05 1./5 (.05 -..5
Contribution 'argin per unit........ E.(.(5 E.../5 E-0.15 E-..35
Drinding 'inutes per unit............. (.05 1.25 (./5 1..5
Contribution 'argin per 'inute.. . E10.(- E(..1( E1..02 E(..3-
Rank in ter's of profitabilit,....... - ( . 1
13-"# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
152. Op to ho* 'uch should the co'pan, be *illing to pa, for one additional 'inute of
grinding 'achine ti'e if the co'pan, has 'ade the best use of the e)isting grinding
'achine capacit,< CRound off to the nearest *hole cent.;
A; E5.55
B; E1..02
C; E-..35
"; E11.05
Solution:
roduct
A
roduct
B
roduct
C
roduct
"
Selling price per unit............................ E03./5 E1..25 E/3./5 E/3.05
"irect 'aterials per unit....................... 15.05 1.35 0.15 -.25
"irect labor per unit............................. 11..5 10.25 2.15 11..5
Pariable selling cost per unit................ 1.05 1./5 (.05 -..5
Contribution 'argin per unit................ E.(.(5 E.../5 E-0.15 E-..35
Drinding 'inutes per unit.................... (.05 1.25 (./5 1..5
Contribution 'argin per 'inute........... E10.(- E(..1( E1..02 E(..3-
Rank in ter's of profitabilit,............... - ( . 1
'arginal 8ob4 *hich is E1..02.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-"1
Cra*shan Co'pan, 'akes four products in a single facilit,. "ata concerning these products
appear belo*:
roduct
A
roduct
B
roduct
C
roduct
"
Selling price per unit............................ E-2./5 E--.25 E-1.15 E-2.05
Pariable 'anufacturing cost per unit.. . E((.15 E13./5 E(-.(5 E(/.15
Pariable selling cost per unit................ E-.55 E(.35 E-./5 E1.15
#illing 'achine 'inutes per unit........ -.(5 -.55 (./5 -.55
#onthl, de'and in units..................... (4555 14555 -4555 14555
The 'illing 'achines are potentiall, the constraint in the production facilit,. A total of 114555
'inutes are available per 'onth on these 'achines.
153. Fo* 'an, 'inutes of 'illing 'achine ti'e *ould be reHuired to satisf, de'and for
all four products<
A; 134355
B; 114555
C; 1.4055
"; 14555
Solution:
"e'and on the 'illing 'achine:
roduct
A
roduct
B
roduct
C
roduct
"
#onthl, de'and in units..................... (4555 14555 -4555 14555
Total 'inutes reHuired 04.55 -4555 14/55 -4555
Total ti'e reHuired for all products N 04.55 T -4555 T 14/55 T -4555 N 134355
13-"$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
115. 6hich product 'akes the %+AST profitable use of the 'illing 'achines<
A; roduct A
B; roduct B
C; roduct C
"; roduct "
Solution:
roduct
A
roduct
B
roduct
C
roduct
"
Pariable 'anufacturing cost per unit.. . ((.15 13./5 (-.(5 (/.15
Pariable selling cost per unit................ -.55 (.35 -./5 1.15
Contribution 'argin per unit................ E1-..5 E11..5 E11.55 E11.25
Contribution 'argin per 'inute........... E..13 E-.25 E...5 E-.3-
Rank in ter's of profitabilit,............... ( . 1 -
111. 6hich product 'akes the #&ST profitable use of the 'illing 'achines<
A; roduct A
B; roduct B
C; roduct C
"; roduct "
Solution:
roduct
A
roduct
B
roduct
C
roduct
"
11(. Op to ho* 'uch should the co'pan, be *illing to pa, for one additional 'inute of
'illing 'achine ti'e if the co'pan, has 'ade the best use of the e)isting 'illing
A; E11.55
B; E5.55
C; E-.25
"; E1-..5
13-"% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Solution:
roduct
A
roduct
B
roduct
C
roduct
"
least profitable 8ob4 *hich is E-.25.
Bertucci Corporation 'akes three products that use the current constraint9a particular t,pe of
'achine. "ata concerning those products appear belo*:
TC D% !D
Selling price per unit............. E.3...5 E..3..- E.03.02
Pariable cost per unit............ E-3/.(5 E-(5.(1 E-1-.3(
#inutes on the constraint...... 2.55 1.15 1.05
11-. Rank the products in order of their current profitabilit, fro' 'ost profitable to least
e'phasi7ed.
A; TC4 !D4 D%
B; D%4 !D4 TC
C; D%4 TC4 !D
"; TC4 D%4 !D
Solution:
TC D% !D
Selling price per unit.................................. E.3...5 E..3..- E.03.02
Pariable cost per unit................................. -3/.(5 -(5.(1 -1-.3(
Contribution 'argin per unit...................... E 33.(5 E1(3.(( E 3/.10
#inutes on the constraint........................... 2.55 1.15 1.05
Contribution 'argin per unit of the
constrained resource............................... E1(..5 E12.(5 E1(.05
Ranking...................................................... - 1 (
Resulting ranking of products: D%4 !D4 TC
11.. Assu'e that sufficient constraint ti'e is available to satisf, de'and for all but the
least profitable product. Op to ho* 'uch should the co'pan, be *illing to pa, to
acHuire 'ore of the constrained resource<
A; E1(..5 per 'inute
B; E12.(5 per 'inute
C; E1(3.(( per unit
"; E3/.10 per unit
13-"6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Solution:
TC D% !D
Selling price per unit............. E.3...5 E..3..- E.03.02
Pariable cost per unit............ -3/.(5 -(5.(1 -1-.3(
Contribution 'argin per unit. E 33.(5 E1(3.(( E 3/.10
#inutes on the constraint...... 2.55 1.15 1.05
Contribution 'argin per unit
of the constrained resource E1(..5 E12.(5 E1(.05
Ranking................................. - 1 (
The co'pan, should be *illing to pa, up to E1(..5 per 'inute to obtain 'ore of the
constrained resource because this is the value to the co'pan, of using this constrained
resource to 'ake 'ore of product TC. B, assu'ption4 the other products *ill alread,
have been produced up to de'and.
The constraint at ickrel Corporation is ti'e on a particular 'achine. The co'pan, 'akes
three products that use this 'achine. "ata concerning those products appear belo*:
P" :T S#
Selling price per unit............. E-...2/ E.1/..5 E113.-(
Pariable cost per unit............ E(15.12 E-15.22 E31.30
#inutes on the constraint...... /.15 0.15 1.35
11/. Rank the products in order of their current profitabilit, fro' 'ost profitable to least
e'phasi7ed.
A; :T4 S#4 P"
B; :T4 P"4 S#
C; P"4 S#4 :T
"; S#4 P"4 :T
Solution:
P" :T S#
Selling price per unit......................... E-...2/ E.1/..5 E113.-(
Pariable cost per unit......................... (15.12 -15.22 31.30
Contribution 'argin per unit............. E 1..01 E15../( E (1.-0
Ti'e on the constraint C'inutes;....... /.15 0.15 1.35
constrained resource....................... E1-.15 E1/.05 E1...5
Ranking.............................................. - 1 (
13-"! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
110. Assu'e that sufficient ti'e is available on the constrained 'achine to satisf, de'and
for all but the least profitable product. Op to ho* 'uch should the co'pan, be *illing
to pa, to acHuire 'ore of this constrained resource<
A; E1/.05 per 'inute
B; E1-.15 per 'inute
C; E15../( per unit
"; E(1.-0 per unit
Solution:
P" :T S#
Selling price per unit......................... E-...2/ E.1/..5 E113.-(
Pariable cost per unit......................... (15.12 -15.22 31.30
Contribution 'argin per unit............. E 1..01 E15../( E (1.-0
Ti'e on the constraint C'inutes;....... /.15 0.15 1.35
constrained resource....................... E1-.15 E1/.05 E1...5
Ranking.............................................. - 1 (
Resulting ranking of products: :T4 S#4 P"
The co'pan, should be *illing to pa, up to E1-.15 per 'inute to obtain 'ore of the
constrained resource because this is the value to the co'pan, of using this constrained
resource to 'ake 'ore of product P". B, assu'ption4 the other products *ill alread,
have been produced up to de'and.
The Anthon, Co'pan, 'akes t*o products4 = and >4 in a 8oint process. At the split9off point4
054555 units of product = and 154555 units of product > are available each 'onth. #onthl,
8oint production costs total E(554555. roduct = can be sold at the split9off point for E-.(5 per
unit. roduct > can be either sold at the split9off point for E(.05 per unit or it can be processed
further and sold for E/.25 per unit. If product > is processed further4 additional processing
costs of E(.-5 per unit *ill be incurred.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-""
111. If product > is processed further4 rather than being sold at the split9off point4 the
i'pact on 'onthl, operating inco'e should be:
A; E1-14555 decrease
B; E(./4555 increase
C; E0-4555 increase
"; E(..4555 increase
Solution:
Anal,sis of sell or process further:
roduct >
Final sales value after further processing............ E/.25
%ess sales value at split9off point........................ (.05
Incre'ental revenue fro' further processing..... -.(5
%ess cost of further processing........................... (.-5
rofit Closs; fro' further processing................... E 5.35
Total increase in 'onthl, operating inco'e: 154555 units M E5.35 N E0-4555
112. 6hat *ould the unit selling price of product > need to be at the split9off point in order
for Anthon, to be econo'icall, indifferent bet*een selling > at split9off or processing
> further before sale<
A; E-.25
B; E-./5
C; E-.(5
"; E(.35
Solution:
For Anthon, to be econo'icall, indifferent bet*een selling > at the split9off or
processing > further4 the incre'ental revenue fro' further processing *ould need to
be eHual to the cost of further processing4 or:
E/.25 G Sales value at split9off point N E(.-5
Sales value at split9off point N E-./5
13-1## Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Ose the follo*ing to ans*er Huestions 11391(1:
"odd Co'pan, 'akes t*o products fro' a co''on input. :oint processing costs up to the
split9off point total E-/4555 a ,ear. The co'pan, allocates these costs to the 8oint products on
the basis of their total sales values at the split9off point. +ach product 'a, be sold at the split9
off point or processed further. "ata concerning these products appear belo*:
roduct = roduct > Total
Allocated 8oint processing costs................. E1.4555 E(14555 E-/4555
Sales value at split9off point....................... E(54555 E-54555 E/54555
Costs of further processing........................ E(-4/55 E104355 E.54.55
Sales value after further processing........... E./4/55 E.14/55 E3-4555
113. 6hat is the net 'onetar, advantage Cdisadvantage; of processing roduct = be,ond
the split9off point<
A; E((4555
B; E24555
C; E(24555
"; E(4555
Solution:
roduct =
Sales value after further processing........... E./4/55
Costs of further processing........................ (-4/55
Benefit of further processing..................... ((4555
%ess: Sales value at split9off point............. (54555
!et advantage Cdisadvantage;.................... E (4555
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1#1
1(5. 6hat is the net 'onetar, advantage Cdisadvantage; of processing roduct > be,ond
the split9off point<
A; E-54055
B; E34055
C; E-34055
"; E055
Solution:
roduct >
Sales value after further processing........... E.14/55
Costs of further processing........................ 104355
Benefit of further processing..................... -54055
%ess: Sales value at split9off point............. -54555
!et advantage Cdisadvantage;.................... E 055
1(1. 6hat is the 'ini'u' a'ount the co'pan, should accept for roduct = if it is to be
sold at the split9off point<
A; E./4/55
B; E1.4555
C; E((4555
"; E-14/55
Solution:
roduct =
Sales value after further processing........... E./4/55
Costs of further processing........................ (-4/55
Benefit of processing roduct = further.... E((4555
Since the co'pan, could earn E((4555 in incre'ental benefits fro' processing
roduct = further4 the E((4555 represents the 'ini'u' that the co'pan, should
accept for roduct = if it is sold at the split9off point.
13-1#$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Ose the follo*ing to ans*er Huestions 1((91(.:
#ae Refiners4 Inc.4 processes sugar cane that it purchases fro' far'ers. Sugar cane is
processed in batches. A batch of sugar cane costs E05 to bu, fro' far'ers and E1- to crush in
the co'pan,?s plant. T*o inter'ediate products4 cane fiber and cane 8uice4 e'erge fro' the
crushing process. The cane fiber can be sold as is for E(3 or processed further for E1- to 'ake
the end product industrial fiber that is sold for E01. The cane 8uice can be sold as is for E.5 or
processed further for E(2 to 'ake the end product 'olasses that is sold for E01.
1((. Fo* 'uch profit Closs; does the co'pan, 'ake b, processing one batch of sugar cane
into the end products industrial fiber and 'olasses<
A; CE.;
B; CE11.;
C; E12
"; E1.
Solution:
Sales value after further processing........... E01 E01
Costs of further processing........................ 1- (2
Benefit of further processing..................... .2 -3
%ess: Sales value at split9off point............. (3 .5
!et advantage Cdisadvantage;.................... E13 CE1;
Revenue:
Industrial fiber.................... E01
Refined sugar...................... 01
Total revenue.......................... E1(2
%ess e)penses:
urchase fro' far'ers....... 05
Crushing costs.................... 1-
rocessing fiber further...... 1-
rocessing 8uice further...... (2
Total e)penses........................ 11.
!et profit fro' one batch....... E 1.
1(-. Fo* 'uch profit Closs; does the co'pan, 'ake b, processing the inter'ediate
product cane 8uice into 'olasses rather than selling it as is<
A; CE1.;
B; CE1.;
C; CE1;
"; CE-2;
Solution:
Cane :uice
Benefit of further processing..................... -3
%ess: Sales value at split9off point............. .5
!et advantage Cdisadvantage;.................... CE1;
1(.. 6hich of the inter'ediate products should be processed further<
A; Cane fiber should be processed into industrial fiber$ Cane 8uice should be
B; Cane fiber should be processed into industrial fiber$ Cane 8uice should !&T be
C; Cane fiber should !&T be processed into industrial fiber$ Cane 8uice should
!&T be processed into 'olasses
"; Cane fiber should !&T be processed into industrial fiber$ Cane 8uice should be
Solution:
Sales value after further processing........... E01 E01
Costs of further processing........................ 1- (2
Benefit of further processing..................... .2 -3
%ess: Sales value at split9off point............. (3 .5
!et advantage Cdisadvantage;.................... E13 CE1;
13-1#% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Ose the follo*ing to ans*er Huestions 1(/91(1:
Bone, Corporation processes sugar beets that it purchases fro' far'ers. Sugar beets are
processed in batches. A batch of sugar beets costs E/- to bu, fro' far'ers and E12 to crush in
the co'pan,?s plant. T*o inter'ediate products4 beet fiber and beet 8uice4 e'erge fro' the
crushing process. The beet fiber can be sold as is for E(/ or processed further for E12 to 'ake
the end product industrial fiber that is sold for E-3. The beet 8uice can be sold as is for E-( or
1(/. Fo* 'uch profit Closs; does the co'pan, 'ake b, processing one batch of sugar
beets into the end products industrial fiber and refined sugar<
A; E1/
B; CE1.;
C; CE111;
"; E1
Solution:
Sales value after further processing........... E-3 E13
Benefit of further processing..................... (1 /1
%ess: Sales value at split9off point............. (/ -(
!et advantage Cdisadvantage;.................... CE.; E13
Revenue:
Industrial fiber................................ E-3
Refined sugar.................................. 13
Total revenue...................................... E112
%ess e)penses:
urchase fro' far'ers................... /-
Crushing costs................................ 12
rocessing fiber further.................. 12
rocessing 8uice further.................. (2
Total e)penses.................................... 111
!et profit fro' one batch................... E 1
1(0. Fo* 'uch profit Closs; does the co'pan, 'ake b, processing the inter'ediate
product beet 8uice into refined sugar rather than selling it as is<
A; E1
B; CE11;
C; E13
"; CE/(;
Solution:
Beet :uice
Benefit of further processing..................... /1
%ess: Sales value at split9off point............. -(
!et advantage Cdisadvantage;.................... E13
1(1. 6hich of the inter'ediate products should be processed further<
A; beet fiber should be processed into industrial fiber$ beet 8uice should be
B; beet fiber should !&T be processed into industrial fiber$ beet 8uice should !&T
be processed into refined sugar
C; beet fiber should !&T be processed into industrial fiber$ beet 8uice should be
"; beet fiber should be processed into industrial fiber$ beet 8uice should !&T be
Solution:
Sales value after further processing........... E-3 E13
Benefit of further processing..................... (1 /1
%ess: Sales value at split9off point............. (/ -(
!et advantage Cdisadvantage;.................... CE.; E13
13-1#6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Essay Questions
1(2. Saalfrank Corporation is considering t*o alternatives that are code9na'ed # and !.
Costs associated *ith the alternatives are listed belo*:
Alternative # Alternative !
Supplies costs......... E.-4555 E/-4555
Asse'bl, costs....... E.-4555 E/04555
o*er costs............ E(04555 E(04555
Inspection costs...... E134555 E(04555
ReHuired:
a. 6hich costs are relevant and *hich are not relevant in the choice bet*een these
t*o alternatives<
b. 6hat is the differential cost bet*een the t*o alternatives<
Ans:
a.
Supplies costs Relevant4 since costs differ bet*een alternatives
Asse'bl, costs Relevant4 since costs differ bet*een alternatives
o*er costs !ot relevant since the costs do not differ bet*een alternatives
Inspection costs Relevant4 since costs differ bet*een alternatives
b.
Alternative # Alternative ! "ifferential
Supplies costs......... E .-4555 E /-4555 E154555
Asse'bl, costs....... .-4555 /04555 1-4555
o*er costs............ (04555 (04555 5
Inspection costs...... 134555 (04555 14555
Total....................... E1-14555 E1014555 E-54555
AACSB: Anal,tic AICA BB: Critical Thinking
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1#
1(3. Costs associated *ith t*o alternatives4 code9na'ed R and R4 being considered b,
Albiston Corporation are listed belo*:
Alternative R Alternative R
Supplies costs......... E0/4555 E0/4555
o*er costs............ E-54555 E(34555
Inspection costs...... E124555 E(34555
Asse'bl, costs....... E--4555 E--4555
ReHuired:
a. 6hich costs are relevant and *hich are not relevant in the choice bet*een these
t*o alternatives<
b. 6hat is the differential cost bet*een the t*o alternatives<
Ans:
a.
Supplies costs !ot relevant since the costs do not differ bet*een alternatives
o*er costs Relevant4 since costs differ bet*een alternatives
Inspection costs Relevant4 since costs differ bet*een alternatives
Asse'bl, costs !ot relevant since the costs do not differ bet*een alternatives
b.
Alternative R Alternative R "ifferential
Supplies costs......... E 0/4555 E 0/4555 E 5
o*er costs............ -54555 (34555 C14555;
Inspection costs...... 124555 (34555 114555
Asse'bl, costs....... --4555 --4555 5
Total....................... E1.04555 E1/04555 E154555
13-1#! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1-5. The 'ost recent 'onthl, inco'e state'ent for Benner Stores is given belo*:
Total Store A Store B
Sales................................... E145554555 E.554555 E0554555
Pariable e)penses............... /254555 1054555 .(54555
Contribution 'argin........... .(54555 (.54555 1254555
Traceable fi)ed e)penses. . . -554555 1554555 (554555
Store seg'ent 'argin......... 1(54555 1.54555 C(54555;
Co''on fi)ed e)penses.... /54555 (54555 -54555
!et operating inco'e......... E 154555 E1(54555 CE /54555;
"ue to its poor sho*ing4 consideration is being given to closing Store B. Studies sho*
that if Store B is closed4 one9fourth of its traceable fi)ed e)penses *ill continue
unchanged. The studies also sho* that closing Store B *ould result in a 15 percent
decrease in sales in Store A. The co'pan, allocates co''on fi)ed e)penses to the
stores on the basis of sales dollars.
ReHuired:
Co'pute the overall increase or decrease in the co'pan,?s operating inco'e if Store
B is closed.
Ans:
%oss in contribution 'argin if Store B is closed:
Store B loss........................................................................... CE1254555;
Store A loss C15V M E(.54555;............................................. C (.4555;
Total lost contribution 'argin............................................... C (5.4555;
Fi)ed costs avoided if Store B is closed C1/V M E(554555;. 1/54555
!et disadvantage of closing Store B..................................... CE /.4555;
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1#"
1-1. Co'panies often allocate co''on fi)ed costs a'ong seg'ents. For e)a'ple4
co''on fi)ed corporate costs are often allocated to divisions and appear as part of the
divisional perfor'ance reports.
ReHuired:
6hat dangers are there in allocating co''on fi)ed costs to seg'ents *hen involved
in a decision to possibl, drop a seg'ent such as a product or a division<
Ans:
A seg'ent such as a product or a division 'a, sho* a net loss onl, because of the
allocated co''on fi)ed cost. Fo*ever4 if the seg'ent is dropped4 the co''on fi)ed
e)pense *ill continue. A seg'ent should be dropped onl, if its contribution 'argin
does not cover its o*n avoidable fi)ed costs. And even in cases *here a seg'ent does
not cover its o*n costs4 it 'a, be beneficial to retain the seg'ent if it has positive
effects on other seg'ents. For e)a'ple4 a @losingA product 'a, be i'portant in luring
custo'ers into a store *here the, *ill bu, other products.
1-(. The 'anage'ent of Sch'ader Corporation is considering dropping product #1(C.
"ata fro' the co'pan,?s accounting s,ste' appear belo*:
Sales................................................................. E//54555
Pariable e)penses............................................. E(.(4555
Fi)ed 'anufacturing e)penses......................... E(1/4555
Fi)ed selling and ad'inistrative e)penses....... E1-(4555
All fi)ed e)penses of the co'pan, are full, allocated to products in the co'pan,?s
accounting s,ste'. Further investigation has revealed that E1-14555 of the fi)ed
'anufacturing e)penses and E134555 of the fi)ed selling and ad'inistrative e)penses
are avoidable if product #1(C is discontinued.
ReHuired:
a. 6hat is the net operating inco'e earned b, product #1(C according to the
co'pan,?s accounting s,ste'< Sho* ,our *orkZ
b. 6hat *ould be the effect on the co'pan,?s overall net operating inco'e of
dropping product #1(C< Should the product be dropped< Sho* ,our *orkZ
Ans:
Beep the
roduct
"rop the
roduct "ifference
Sales............................................... E//54555 E 5 CE//54555;
Pariable e)penses........................... (.(4555 5 (.(4555
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses.... (1/4555 124555 1-14555
e)penses.................................. 1-(4555 /-4555 134555
Total fi)ed e)penses....................... -.14555 1-14555 (104555
!et operating inco'e Closs;........... CE -34555; CE1-14555; CE3(4555;
a. According to the co'pan,Ss accounting s,ste'4 the productSs net operating loss is
E-34555.
b. !et operating inco'e *ould decline b, E3(4555 if product #1(C *ere dropped.
1--. Suire Corporation is considering dropping product "1.+. "ata fro' the co'pan,?s
accounting s,ste' appear belo*:
Sales................................................................. E-.54555
Pariable e)penses............................................. E1/04555
Fi)ed 'anufacturing e)penses......................... E1104555
Fi)ed selling and ad'inistrative e)penses....... E1/4555
accounting s,ste'. Further investigation has revealed that E1(4555 of the fi)ed
'anufacturing e)penses and E.24555 of the fi)ed selling and ad'inistrative e)penses
are avoidable if product "1.+ is discontinued.
ReHuired:
a. According to the co'pan,?s accounting s,ste'4 *hat is the net operating inco'e
earned b, product "1.+< Sho* ,our *orkZ
b. 6hat *ould be the effect on the co'pan,?s overall net operating inco'e of
dropping product "1.+< Should the product be dropped< Sho* ,our *orkZ
Ans:
Beep the
roduct
"rop the
roduct "ifference
Sales................................................ E-.54555 E 5 CE-.54555;
Pariable e)penses............................ 1/04555 5 1/04555
Contribution 'argin........................ 12.4555 5 C 12.4555;
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses........ 1104555 ..4555 1(4555
e)penses...................................... 1/4555 (14555 .24555
Total fi)ed e)penses........................ 1314555 114555 1(54555
!et operating inco'e Closs;............ CE 14555; CE114555; CE 0.4555;
a. According to the co'pan,Ss accounting s,ste'4 the productSs net operating loss is
E14555.
b. !et operating inco'e *ould decline b, E0.4555 if product "1.+ *ere dropped.
1-.. The 'anage'ent of 6engel Corporation is considering dropping product B35". "ata
Sales................................................................. E1(54555
Pariable e)penses............................................. E-1.4555
Fi)ed 'anufacturing e)penses......................... E(./4555
Fi)ed selling and ad'inistrative e)penses....... E(534555
accounting s,ste'. Further investigation has revealed that E11-4555 of the fi)ed
'anufacturing e)penses and E1/54555 of the fi)ed selling and ad'inistrative e)penses
are avoidable if product B35" is discontinued.
ReHuired:
6hat *ould be the effect on the co'pan,?s overall net operating inco'e if product
B35" *ere dropped< Should the product be dropped< Sho* ,our *orkZ
Ans:
Beep the
roduct
"rop the
roduct "ifference
Sales................................................ E1(54555 E 5 CE1(54555;
Pariable e)penses............................ -1.4555 5 -1.4555
Contribution 'argin........................ -.04555 5 C -.04555;
Fi)ed e)penses:
Fi)ed 'anufacturing e)penses........ (./4555 1(4555 11-4555
e)penses...................................... (534555 /34555 1/54555
Total fi)ed e)penses........................ ./.4555 1-14555 -(-4555
!et operating inco'e Closs;............ CE1524555; CE1-14555; CE (-4555;
!et operating inco'e *ould decline b, E(-4555 if product B35" *ere dropped.
1-/. Foubert Co'pan, 'akes .54555 units per ,ear of a part it uses in the products it
'anufactures. The unit product cost of this part is co'puted as follo*s:
"irect 'aterials.................................... E1-.25
"irect labor.......................................... 12.15
Pariable 'anufacturing overhead........ ..-5
Fi)ed 'anufacturing overhead............ (..05
Onit product cost.................................. E05.25
An outside supplier has offered to sell the co'pan, all of these parts it needs for
E/1.25 a unit. If the co'pan, accepts this offer4 the facilities no* being used to 'ake
the part could be used to 'ake 'ore units of a product that is in high de'and. The
additional contribution 'argin on this other product *ould be E(024555 per ,ear.
If the part *ere purchased fro' the outside supplier4 all of the direct labor cost of the
part *ould be avoided. Fo*ever4 E11.55 of the fi)ed 'anufacturing overhead cost
being applied to the part *ould continue even if the part *ere purchased fro' the
outside supplier. This fi)ed 'anufacturing overhead cost *ould be applied to the
co'pan,?s re'aining products.
ReHuired:
a. Fo* 'uch of the unit product cost of E05.25 is relevant in the decision of *hether
to 'ake or bu, the part<
b. 6hat is the net total dollar advantage Cdisadvantage; of purchasing the part rather
than 'aking it<
c. 6hat is the 'a)i'u' a'ount the co'pan, should be *illing to pa, an outside
supplier per unit for the part if the supplier co''its to suppl,ing all .54555 units
reHuired each ,ear<
Ans:
a. Relevant cost per unit:
"irect 'aterials.......................................... E1-.25
"irect labor................................................ 12.15
Pariable 'anufacturing overhead.............. ..-5
Fi)ed 'anufacturing overhead.................. 1.05
Relevant 'anufacturing cost...................... E.-.25
b. !et advantage Cdisadvantage;:
#anufacturing cost savings....................... E141/(4555
Additional contribution 'argin.................. (024555
Cost of purchasing the part........................ C (451(4555;
!et advantage Cdisadvantage;.................... CE /(4555;
c. #a)i'u' acceptable purchase price:
#anufacturing cost savings....................... E141/(4555
Additional contribution 'argin.................. (024555
Total benefit............................................... E(45(54555
!u'ber of units......................................... .54555
Benefit per unit.......................................... E/5./5
1-0. Birsten Corporation 'akes 1554555 units per ,ear of a part called a B-./ gasket for
use in one of its products. "ata concerning the unit production costs of the B-./
gasket follo*:
"irect 'aterials.................................... E5.1/
"irect labor.......................................... 5.15
Pariable 'anufacturing overhead........ 5.1-
Fi)ed 'anufacturing overhead............ 5.(.
Total 'anufacturing cost per unit........ E5.0(
An outside supplier has offered to sell Birsten Corporation all of the B-./ gaskets it
reHuires. If Birsten Corporation decided to discontinue 'aking the B-./ gaskets4 (/V
of the above fi)ed 'anufacturing overhead costs could be avoided.
ReHuired:
a. Assu'e Birsten Corporation has no alternative use for the facilities presentl,
devoted to production of the B-./ gaskets. If the outside supplier offers to sell the
gaskets for E5..0 each4 should Birsten Corporation accept the offer< Full, support
,our ans*er *ith appropriate calculations.
b. Assu'e that Birsten Corporation could use the facilities presentl, devoted to
production of the B-./ gaskets to e)pand production of another product that
*ould ,ield an additional contribution 'argin of E154555 annuall,. 6hat is the
'a)i'u' price Birsten Corporation should be *illing to pa, the outside supplier
for B-./ gaskets<
Ans:
a. The anal,sis of the alternatives follo*s belo*:
#ake Bu,
urchase cost..................................... E5..0
"irect 'aterials................................. E5.1/
"irect labor....................................... 5.15
Pariable 'anufacturing overhead..... 5.1-
Fi)ed 'anufacturing overheadU....... 5.50
Total cost........................................... E5... E5..0
U(/V M E5.(.
The co'pan, should 'ake the part rather than bu, it fro' the outside supplier
since it costs E5.5( less under that alternative.
b. The 'a)i'u' acceptable price is E5./. since that is the cost to the co'pan, of
'aking the part itself *hen the opportunit, cost is included:
Total cost of 'aking the part internall,................. E5...
&pportunit, cost per unit CE154555 K 1554555;..... 5.15
Total....................................................................... E5./.
1-1. #cDra* Co'pan, uses /4555 units of art = each ,ear as a co'ponent in the
asse'bl, of one of its products. The co'pan, is presentl, producing art = internall,
at a total cost of E15545554 co'puted as follo*s:
"irect 'aterials.................................... E 1/4555
"irect labor.......................................... -54555
Pariable 'anufacturing overhead........ 154555
Fi)ed 'anufacturing overhead............ ./4555
Total costs............................................ E1554555
An outside supplier has offered to provide art = at a price of E12 per unit. If #cDra*
Co'pan, stops producing the part internall,4 one9third of the fi)ed 'anufacturing
overhead *ould be eli'inated.
ReHuired:
repare an anal,sis sho*ing the annual dollar advantage or disadvantage of accepting
the outside supplier?s offer.
Ans:
Cost of Cost of
#aking Bu,ing
&utside purchase.................................. E354555
"irect 'aterials.................................... E1/4555
"irect labor.......................................... -54555
Pariable 'anufacturing overhead........ 154555
Fi)ed 'anufacturing overheadU.......... 1/4555
Total cost.............................................. E154555 E354555
U1W- M E./4555 N E1/4555
Therefore4 the annual advantage to 'ake the parts is E(54555.
1-2. Dottshall Inc. 'akes a range of products. The co'pan,?s predeter'ined overhead rate
is E13 per direct labor9hour4 *hich *as calculated using the follo*ing budgeted data:
Pariable 'anufacturing overhead........ E((/4555
Fi)ed 'anufacturing overhead............ E0-54555
"irect labor9hours................................ ./4555
Co'ponent 5 is used in one of the co'pan,Ss products. The unit cost of the
co'ponent according to the co'pan,Ss cost accounting s,ste' is deter'ined as
follo*s:
"irect 'aterials.......................................... E(1.55
"irect labor................................................ .5.25
#anufacturing overhead applied............... -(.-5
Onit product cost........................................ E3..15
An outside supplier has offered to suppl, co'ponent 5 for E12 each. The outside
supplier is kno*n for Hualit, and reliabilit,. Assu'e that direct labor is a variable cost4
variable 'anufacturing overhead is reall, driven b, direct labor9hours4 and total fi)ed
'anufacturing overhead *ould not be affected b, this decision. Dottshall chronicall,
has idle capacit,.
ReHuired:
Is the offer fro' the outside supplier financiall, attractive< 6h,<
Ans:
"irect 'aterials4 direct labor4 and variable 'anufacturing overhead are relevant in this
decision. Fi)ed 'anufacturing overhead is not relevant since it *ould not be affected
b, the decision. The variable portion of the 'anufacturing overhead rate is co'puted
as follo*s:
Pariable portion of the predeter'ined overhead rate N Pariable 'anufacturing
overhead K "irect labor9hours N E((/4555 K ./4555 "%Fs N E/.55 per "%F
The direct9labor hours per unit for the special order can be deter'ined as follo*s:
"irect labor9hours N #anufacturing overhead applied K redeter'ined overhead rate
N E-(.-5 K E13.55 per "%F N 1.15 "%Fs
ConseHuentl,4 the variable 'anufacturing overhead for the special order *ould be:
Pariable 'anufacturing overhead N Pariable portion of the predeter'ined overhead
rate M "irect labor9hours N E/.55 per "%F M 1.15 "%Fs N E2./5
utting this all together:
"irect 'aterials.......................................... E(1.55
"irect labor................................................ .5.25
Pariable 'anufacturing overhead.............. 2./5
Total variable cost...................................... E15.-5
Since the outside supplier has offered to sell the co'ponent for E12.55 each4 but it
onl, costs the co'pan, E15.-5 to 'ake the co'ponent internall,4 this is not a
financiall, attractive offer.
13-1$# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1-3. Recher Corporation uses part R23 in one of its products. The co'pan,?s Accounting
"epart'ent reports the follo*ing costs of producing the 24555 units of the part that are
needed ever, ,ear.
er Onit
"irect 'aterials.......................................... E2.15
"irect labor................................................ E...5
Pariable overhead....................................... E2.05
SupervisorSs salar,..................................... E-.(5
"epreciation of special eHuip'ent............. E(.05
Allocated general overhead........................ E1.-5
An outside supplier has offered to 'ake the part and sell it to the co'pan, for E(1.05
offer *ere accepted4 onl, E-4555 of these allocated general overhead costs *ould be
avoided. In addition4 the space used to produce part R23 could be used to 'ake 'ore
of one of the co'pan,?s other products4 generating an additional seg'ent 'argin of
E104555 per ,ear for that product.
ReHuired:
a. repare a report that sho*s the effect on the co'pan,?s total net operating inco'e
of bu,ing part R23 fro' the supplier rather than continuing to 'ake it inside the
co'pan,.
b. 6hich alternative should the co'pan, choose<
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1$1
Ans:
a.
#ake Bu,
"irect 'aterials C24555 units I E2.15 per unit;.. . . E 0.4255
"irect labor C24555 units I E...5 per unit;........... -/4(55
Pariable overhead C24555 units I E2.05 per unit;. 024255
SupervisorSs salar, C24555 units I E-.(5 per unit; (/4055
Allocated general overhead Cavoidable onl,;........ -4555
&utside purchase price C24555 units I E(1.05 per
unit;.................................................................... E((54255
&pportunit, cost..................................................... C 104555;
Total cost................................................................ E1314.55 E(5.4255
b. The total cost of the 'ake alternative is lo*er b, E14.55. Thus4 net operating
inco'e *ould decline b, E14.55 if the offer fro' the supplier *ere accepted.
Therefore4 the co'pan, should continue to 'ake the part itself.
13-1$$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1.5. art O01 is used in one of Broce Corporation?s products. The co'pan,?s Accounting
"epart'ent reports the follo*ing costs of producing the 14555 units of the part that are
needed ever, ,ear.
er Onit
"irect 'aterials.......................................... E2.15
"irect labor................................................ E(.15
Pariable overhead....................................... E-.-5
SupervisorSs salar,..................................... E1.35
Allocated general overhead........................ E/./5
An outside supplier has offered to 'ake the part and sell it to the co'pan, for E(1..5
offer *ere accepted4 onl, E04555 of these allocated general overhead costs *ould be
avoided.
ReHuired:
a. repare a report that sho*s the effect on the co'pan,?s total net operating inco'e
of bu,ing part O01 fro' the supplier rather than continuing to 'ake it inside the
co'pan,.
b. 6hich alternative should the co'pan, choose<
Ans:
a.
#ake Bu,
"irect 'aterials C14555 units I E2.15 per unit;............. E 054355
"irect labor C14555 units I E(.15 per unit;.................... 124355
Pariable overhead C14555 units I E-.-5 per unit;.......... (-4155
SupervisorSs salar, C14555 units I E1.35 per unit;........ 1-4-55
"epreciation of special eHuip'ent Cnot relevant;........... 5
Allocated general overhead Cavoidable onl,;................. 04555
&utside purchase price C14555 units I E(1..5 per unit; E1.34255
Total cost......................................................................... E1((4(55 E1.34255
b. The total cost of the 'ake alternative is lo*er b, E(14055. Thus4 net operating
inco'e *ould decline b, E(14055 if the offer fro' the supplier *ere accepted.
Therefore4 the co'pan, should continue to 'ake the part itself.
1.1. :uline Co'pan, produces a single product. The cost of producing and selling a single
unit of this product at the co'pan,?s nor'al activit, level of .54555 units per 'onth is
as follo*s:
"irect 'aterials...................................................... E/-.05
"irect labor............................................................ E/.-5
Pariable 'anufacturing overhead.......................... E1..5
Fi)ed 'anufacturing overhead.............................. E1-.(5
Pariable selling and ad'inistrative e)pense.......... E1.05
Fi)ed selling and ad'inistrative e)pense.............. E3.15
The nor'al selling price of the product is E31.05 per unit.
An order has been received fro' an overseas custo'er for -4555 units to be delivered
this 'onth at a special discounted price. This order *ould have no effect on the
co'pan,?s nor'al sales and *ould not change the total a'ount of the co'pan,?s fi)ed
costs. The variable selling and ad'inistrative e)pense *ould be E1.55 less per unit on
this order than on nor'al sales.
ReHuired:
a. Suppose there is a'ple idle capacit, to produce the units reHuired b, the overseas
custo'er and the special discounted price on the special order is E21.35 per unit.
B, ho* 'uch *ould this special order increase Cdecrease; the co'pan,?s net
operating inco'e for the 'onth<
b. Suppose the co'pan, is alread, operating at capacit, *hen the special order is
received fro' the overseas custo'er. 6hat *ould be the opportunit, cost of each
unit delivered to the overseas custo'er<
c. Suppose there is not enough idle capacit, to produce all of the units for the
overseas custo'er and accepting the special order *ould reHuire cutting back on
production of (4155 units for regular custo'ers. 6hat *ould be the 'ini'u'
acceptable price per unit for the special order<
13-1$% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Ans:
b. Pariable cost per unit on nor'al sales:
"irect 'aterials...................................................... E/-.05
"irect labor............................................................ /.-5
Pariable 'anufacturing overhead.......................... 1..5
Pariable cost per unit on nor'al sales................... E01.35
!or'al variable cost per unit................................. E01.35
Reduction in variable selling and ad'inistrative
e)pense............................................................... 1.55
Pariable cost per unit on special order................... E05.35
Selling price for special order................................ E21.35
Pariable cost per unit on special order................... 05.35
Onit contribution 'argin on special order............. (1.55
!u'ber of units in special order............................ -4555
Increase Cdecrease; in net operating inco'e.......... E0-4555
b. The opportunit, cost is 8ust the contribution 'argin on nor'al sales:
!or'al selling price per unit................................. E31.05
Pariable cost per unit on nor'al sales................... 01.35
Onit contribution 'argin on nor'al sales.............. E(3.15
c. #ini'u' acceptable price:
Onit contribution 'argin on nor'al sales.............. E(3.15
"isplaced nor'al sales.......................................... (4155
%ost contribution 'argin displaced sales............... E 0(4-15
Total variable cost on special order........................ 12(4155
E(./4515
!u'ber of units in special order............................ -4555
#ini'u' acceptable price on special order.......... E21.03
1.(. #arsdon Co'pan, has an annual production capacit, of 1/4555 units. The costs
associated *ith production and sale of the co'pan,?s product are given belo*:
#anufacturing costs:
Pariable................................................... E1( per unit
Fi)ed Cannual cost;.................................. E354555
Selling and ad'inistrative costs:
Pariable Csales co''issions;.................. E- per unit
Fi)ed Cannual cost;.................................. E054555
The co'pan, presentl, is selling 1(4555 units annuall, at a selling price of E(2 each.
A special order has been received fro' a distributor *ho *ants to purchase -4555 units
at a special price of E(5 each. Regular sales *ould not be affected b, this order and
the order could be filled *ithout an, i'pact on total fi)ed costs. Sales co''issions on
the special order *ould be reduced b, one9third.
ReHuired:
"eter'ine *hether the co'pan, should accept the special order.
Ans:
Incre'ental revenues C-4555 units I E(5;............ E054555
Pariable 'anufacturing C-4555 units I E1(;...... C -04555;
Pariable selling C-4555 units I E(;.................... C 04555;
!et advantage of accepting the order..................... E 124555
>es4 the order should be accepted.
13-1$6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1.-. #cniff Corporation 'akes a range of products. The co'pan,?s predeter'ined
overhead rate is E(2 per direct labor9hour4 *hich *as calculated using the follo*ing
budgeted data:
Pariable 'anufacturing overhead.............. E1254555
Fi)ed 'anufacturing overhead.................. E-254555
"irect labor9hours...................................... (54555
#anage'ent is considering a special order for (55 units of product &30S at E1((
each. The nor'al selling price of product &30S is E1.3 and the unit product cost is
deter'ined as follo*s:
"irect 'aterials.......................................... E 01.55
"irect labor................................................ -(.55
#anufacturing overhead applied............... ...25
Onit product cost........................................ E1.-.25
If the special order *ere accepted4 nor'al sales of this and other products *ould not
be affected. The co'pan, has a'ple e)cess capacit, to produce the additional units.
Assu'e that direct labor is a variable cost4 variable 'anufacturing overhead is reall,
driven b, direct labor9hours4 and total fi)ed 'anufacturing overhead *ould not be
affected b, the special order.
ReHuired:
If the special order *ere accepted4 *hat *ould be the i'pact on the co'pan,?s overall
profit<
Ans:
"irect 'aterials4 direct labor4 and variable 'anufacturing overhead are relevant in this
decision. Fi)ed 'anufacturing overhead is not relevant since it *ould not be affected
b, the decision. The variable portion of the 'anufacturing overhead rate is co'puted
as follo*s:
Pariable portion of the predeter'ined overhead rate N Pariable 'anufacturing
overhead K "irect labor9hours N E1254555 K (54555 direct labor9hours N E3.55 per
direct labor9hour
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1$
The direct9labor hours per unit for the special order can be deter'ined as follo*s:
"irect labor9hours N #anufacturing overhead applied K redeter'ined overhead rate
N E...25 K E(2.55 per direct labor9hour N 1.05 direct labor9hours
ConseHuentl,4 the variable 'anufacturing overhead for the special order *ould be:
Pariable 'anufacturing overhead N Pariable portion of the predeter'ined overhead
rate M "irect labor9hours N E3.55 per direct labor9hour M 1.05 direct labor9hours N
E1...5
utting this all together:
Special order price.......................................................... E1((.55
Pariable costs:
"irect 'aterials............................................................ 01.55
"irect labor.................................................................. -(.55
Pariable 'anufacturing overhead................................ 1...5
Total variable cost........................................................... 11-..5
Contribution 'argin........................................................ E 2.05
M Onits ordered............................................................... (55
N Total increase in profit fro' the special order............. E141(5
13-1$! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1... Bneller Co. 'anufactures and sells 'edals for *inners of athletic and other events. Its
'anufacturing plant has the capacit, to produce 1(4555 'edals each 'onth$ current
'onthl, production is 34055 'edals. The co'pan, nor'all, charges E33 per 'edal.
Cost data for the current level of production are sho*n belo*:
Pariable costs:
"irect 'aterials........................... E.254555
"irect labor................................. E1/-4055
Selling and ad'inistrative.......... E(.4305
Fi)ed costs:
#anufacturing............................. E1..4555
Selling and ad'inistrative.......... E1241(5
The co'pan, has 8ust received a special one9ti'e order for /55 'edals at E23 each.
For this particular order4 no variable selling and ad'inistrative costs *ould be
incurred. This order *ould also have no effect on fi)ed costs.
ReHuired:
Should the co'pan, accept this special order< 6h,<
Ans:
&nl, the direct 'aterials and direct labor costs are relevant in this decision. To 'ake
the decision4 *e 'ust co'pute the average direct 'aterials and direct labor cost per
unit.
"irect 'aterials............................................................... E.254555
"irect labor..................................................................... 1/-4055
Total................................................................................ E0--4055
Current 'onthl, production............................................ 34055
Average direct 'aterials and direct labor cost per unit... E00
Since price on the special order is E23 per 'edal and the relevant cost is onl, E004 the
co'pan, *ould earn a profit of E(- per 'edal. Therefore4 the special order should be
accepted.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1$"
1./. Anglen Co. 'anufactures and sells trophies for *inners of athletic and other events.
Its 'anufacturing plant has the capacit, to produce 124555 trophies each 'onth$
current 'onthl, production is 1.4.55 trophies. The co'pan, nor'all, charges E15-
per troph,. Cost data for the current level of production are sho*n belo*:
Pariable costs:
"irect 'aterials........................... E.054255
"irect labor................................. E-104255
Selling and ad'inistrative.......... E1/42.5
Fi)ed costs:
#anufacturing............................. E.5.40.5
Selling and ad'inistrative.......... E1.4225
The co'pan, has 8ust received a special one9ti'e order for 355 trophies at E.2 each.
For this particular order4 no variable selling and ad'inistrative costs *ould be
incurred. This order *ould also have no effect on fi)ed costs.
ReHuired:
Should the co'pan, accept this special order< 6h,<
Ans:
&nl, the direct 'aterials and direct labor costs are relevant in this decision. To 'ake
the decision4 *e 'ust co'pute the average direct 'aterials and direct labor cost per
unit.
"irect 'aterials............................................................... E.054255
"irect labor..................................................................... -104255
Total................................................................................ E1114055
Current 'onthl, production............................................ 1.4.55
Average direct 'aterials and direct labor cost per unit... E/.
Because price on the special order is E.2 per troph, and the relevant cost is E/.4 the
co'pan, *ould suffer a loss of E0 per troph,. Therefore4 the special order should not
be accepted.
1.0. 6ehrs Corporation has received a reHuest for a special order of 04555 units of product
B13 for E-(.-5 each. The nor'al selling price of this product is E--../ each4 but the
units *ould need to be 'odified slightl, for the custo'er. The nor'al unit product
cost of product B13 is co'puted as follo*s:
"irect 'aterials.......................................... E1/.55
"irect labor................................................ -.25
Pariable 'anufacturing overhead.............. 1..5
Fi)ed 'anufacturing overhead.................. (.15
Onit product cost........................................ E((.-5
co'pan,?s total fi)ed 'anufacturing overhead costs. The custo'er *ould like so'e
'odifications 'ade to product B13 that *ould increase the variable costs b, E..35 per
unit and that *ould reHuire a one9ti'e invest'ent of E(-4555 in special 'olds that
*ould have no salvage value. This special order *ould have no effect on the
co'pan,?s other sales. The co'pan, has a'ple spare capacit, for producing the
special order.
ReHuired:
"eter'ine the effect on the co'pan,?s total net operating inco'e of accepting the
special order. Sho* ,our *orkZ
Ans:
Incre'ental revenue C04555 units I E-(.-5 per unit;...................... E13-4255
"irect 'aterials C04555 units I E1/.55 per unit;.......................... 354555
"irect labor C04555 units I E-.25 per unit;................................... ((4255
Pariable 'anufacturing overhead C04555 units I E1..5 per unit;. 24.55
#odifications C04555 units I E..35 per unit;................................ (34.55
Special 'olds................................................................................. (-4555
Total incre'ental cost....................................................................... 11-4055
Incre'ental net operating inco'e..................................................... E (54(55
1.1. A custo'er has asked %alka Corporation to suppl, -4555 units of product F054 *ith
so'e 'odifications4 for E-..15 each. The nor'al selling price of this product is
E.0.-/ each. The nor'al unit product cost of product F05 is co'puted as follo*s:
"irect 'aterials.......................................... E1..15
"irect labor................................................ 1.-5
Pariable 'anufacturing overhead.............. 1.55
Fi)ed 'anufacturing overhead.................. 1.35
Onit product cost........................................ E-5.35
co'pan,?s total fi)ed 'anufacturing overhead costs. The custo'er *ould like so'e
'odifications 'ade to product F05 that *ould increase the variable costs b, E-.25 per
unit and that *ould reHuire a one9ti'e invest'ent of E(.4555 in special 'olds that
*ould have no salvage value. This special order *ould have no effect on the
co'pan,?s other sales. The co'pan, has a'ple spare capacit, for producing the
special order.
ReHuired:
"eter'ine the effect on the co'pan,?s total net operating inco'e of accepting the
special order. Sho* ,our *orkZ
Ans:
Incre'ental revenue C-4555 units I E-..15 per unit;....... E15.4155
"irect 'aterials C-4555 units I E1..15 per unit;........... ..4155
"irect labor C-4555 units I E1.-5 per unit;.................... -4355
Pariable 'anufacturing overhead C-4555 units I E1.55
per unit;....................................................................... (14555
#odifications C-4555 units I E-.25 per unit;................. 114.55
Special 'olds.................................................................. (.4555
Total incre'ental cost........................................................ 15.4.55
Incre'ental net operating inco'e...................................... CE -55;
1.2. Dlodd, Co'pan, 'akes three products in a single facilit,. These products have the
follo*ing unit product costs:
"irect 'aterials................................. E(..35 E(/.15 E(0.05
"irect labor....................................... 1-.-5 11.15 1/.15
Pariable 'anufacturing overhead..... (./5 (.25 -.15
Fi)ed 'anufacturing overhead......... 13.25 (1.15 (1.55
Onit product cost............................... E05./5 E1-.-5 E00..5
Additional data concerning these products are listed belo*.
#i)ing 'inutes per unit.................... (./5 1.15 1.05
Selling price per unit......................... E11./5 E21.35 E2-.55
Pariable selling cost per unit............. E(.-5 E1.35 E-.25
#onthl, de'and in units.................. 14555 -4555 -4555
The 'i)ing 'achines are potentiall, the constraint in the production facilit,. A total of
154255 'inutes are available per 'onth on these 'achines.
ReHuired:
a. Fo* 'an, 'inutes of 'i)ing 'achine ti'e *ould be reHuired to satisf, de'and
for all four products<
b. Fo* 'uch of each product should be produced to 'a)i'i7e net operating
inco'e< CRound off to the nearest *hole unit.;
c. Op to ho* 'uch should the co'pan, be *illing to pa, for one additional hour of
'i)ing 'achine ti'e if the co'pan, has 'ade the best use of the e)isting 'i)ing
Ans:
a. "e'and on the 'i)ing 'achine:
#i)ing 'inutes per unit..... (./5 1.15 1.05
#onthl, de'and in units. . . 14555 -4555 -4555
Total 'inutes reHuired....... (4/55 /4155 .4255
Total ti'e reHuired for all products: 1(4.55
b. &pti'al production plan:
Selling price per unit............................ E11./5 E21.35 E2-.55
"irect 'aterials.................................... E(..35 E(/.15 E(0.05
"irect labor.......................................... 1-.-5 11.15 1/.15
Pariable 'anufacturing overhead........ (./5 (.25 -.15
Pariable selling cost per unit................ (.-5 1.35 -.25
Total variable cost per unit................... E.-.55 E.1./5 E.3.(5
Contribution 'argin per unit................ E(2./5 E.5..5 E--.25
#i)ing 'inutes per unit....................... (./5 1.15 1.05
Contribution 'argin per 'inute........... E11..5 E(-.10 E(1.1-
Rank in ter's of profitabilit,............... - 1 (
&pti'al production.............................. -05 -4555 -4555
c. The co'pan, should be *illing to pa, up to the contribution 'argin per 'inute
for the 'arginal 8ob4 *hich is E11..5.
1.3. Fol7'e,er Co'pan, 'akes three products in a single facilit,. "ata concerning these
products follo*:
Selling price per unit......................... E0../5 E0..25 E0-.-5
"irect 'aterials................................. E(5.35 E1../5 E12.-5
"irect labor....................................... E-5.25 E--..5 E(0.55
Pariable 'anufacturing overhead..... E1.05 E1.35 E(.15
Pariable selling cost per unit............. E1.55 E-..5 E1./5
#i)ing 'inutes per unit.................... -./5 -.15 -./5
#onthl, de'and in units.................. .4555 (4555 .4555
The 'i)ing 'achines are potentiall, the constraint in the production facilit,. A total of
-(4.55 'inutes are available per 'onth on these 'achines.
ReHuired:
a. Fo* 'an, 'inutes of 'i)ing 'achine ti'e *ould be reHuired to satisf, de'and
for all four products<
b. Fo* 'uch of each product should be produced to 'a)i'i7e net operating
inco'e< CRound off to the nearest *hole unit.;
c. Op to ho* 'uch should the co'pan, be *illing to pa, for one additional hour of
'i)ing 'achine ti'e if the co'pan, has 'ade the best use of the e)isting 'i)ing
Ans:
a. "e'and on the 'i)ing 'achine:
roduct A roduct B roduct C Total
#i)ing 'inutes per unit..... -./5 -.15 -./5
#onthl, de'and in units. . . .4555 (4555 .4555
Total 'inutes reHuired....... 1.4555 04(55 1.4555 -.4(55
b. &pti'al production plan:
Selling price per unit......................... E 0../5 E 0..25 E 0-.-5
"irect 'aterials................................. E(5.35 E1../5 E12.-5
"irect labor....................................... -5.25 --..5 (0.55
Pariable 'anufacturing overhead..... 1.05 1.35 (.15
Pariable selling cost per unit............. 1.55 -..5 1./5
Total variable cost per unit................ E/..-5 E/-.(5 E.1.35
Contribution 'argin per unit............. E15.(5 E11.05 E1/..5
#i)ing 'inutes per unit.................... -./5 -.15 -./5
Contribution 'argin per 'inute........ E(.31 E-.1. E...5
Rank in ter's of profitabilit,............ - ( 1
&pti'al production........................... -4.20 (4555 .4555
c. The co'pan, should be *illing to pa, up to the contribution 'argin per 'inute
for the 'arginal 8ob4 *hich is E(.31.
1/5. Darson4 Inc. produces three products. "ata concerning the selling prices and unit costs
of the three products appear belo*:
roduct F roduct D roduct F
Selling price................................... E/5 E25 E15
Pariable costs................................. E.5 E/5 E//
Fi)ed costs..................................... E1/ E(5 E1(
#illing 'achine ti'e C'inutes;..... . ( /
Fi)ed costs are applied to the products on the basis of direct labor hours.
"e'and for the three products e)ceeds the co'pan,?s productive capacit,. The
'illing 'achine is the constraint4 *ith onl, (4.55 'inutes of 'illing 'achine ti'e
available this *eek.
ReHuired:
a. Diven the 'illing 'achine constraint4 *hich product should be e'phasi7ed<
Support ,our ans*er *ith appropriate calculations.
b. Assu'ing that there is still unfilled de'and for the product that the co'pan,
should e'phasi7e in part Ca; above4 up to ho* 'uch should the co'pan, be
*illing to pa, for an additional hour of 'illing 'achine ti'e<
Ans:
a. The product to e'phasi7e can be deter'ined b, co'puting the contribution
'argin per unit of the scarce resource4 *hich in this case is 'illing 'achine ti'e.
roduct F roduct D roduct F
Selling price................................... E/5 E25 E15
Pariable costs................................. .5 /5 //
Contribution 'argin....................... E15 E-5 E1/
#illing 'achine ti'e C'inutes;..... . ( /
Contribution 'argin per 'inute..... E(./5 E1/.55 E-.55
roduct D should be e'phasi7ed because it has the greatest contribution 'argin
per unit of the scarce resource.
b. If additional 'illing 'achine ti'e *ould be used to produce 'ore of roduct D4
the ti'e *ould be *orth 05 'inutes per hour M E1/ per 'inute N E355 per hour.
1/1. Brissett Corporation 'akes three products that use the current constraint4 *hich is a
particular t,pe of 'achine. "ata concerning those products appear belo*:
DB %R =B
Selling price per unit...................... E113./1 E((0.51 E((2.30
Pariable cost per unit..................... E23.21 E110.20 E112.3(
Ti'e on the constraint C'inutes;. . . 1.35 -.15 -.05
ReHuired:
a. Rank the products in order of their current profitabilit, fro' the 'ost profitable to
the least profitable. In other *ords4 rank the products in the order in *hich the,
should be e'phasi7ed. Sho* ,our *orkZ
b. Assu'e that sufficient constraint ti'e is available to satisf, de'and for all but the
Ans:
a. DB %R =B
Selling price per unit......................... E113./1 E((0.51 E((2.30
Pariable cost per unit......................... 23.21 110.20 112.3(
Contribution 'argin per unit............. E (3.0. E .3.(1 E /5.5.
Ti'e on the constraint C'inutes;....... 1.35 -.15 -.05
constrained resource....................... E1/.05 E1-.-5 E1-.35
Ranking.............................................. 1 - (
Resulting ranking of products: DB4 =B4 %R
b. The co'pan, should be *illing to pa, up to E1-.-5 per 'inute to obtain 'ore of
the constrained resource because this is the value to the co'pan, of using this
constrained resource to 'ake 'ore of product %R. B, assu'ption4 the other
products *ill alread, have been produced up to de'and.
1/(. The constraint at "re,fus Inc. is an e)pensive 'illing 'achine. The three products
listed belo* use this constrained resource.
P> R= A#
Selling price per unit......................... E12.0/ E.(1./3 E1./.3(
Pariable cost per unit........................ E0(..5 E--1.(5 E11-.(2
Ti'e on the constraint C'inutes;...... 1.-5 0.35 (..5
ReHuired:
a. Rank the products in order of their current profitabilit, fro' the 'ost profitable to
the least profitable. In other *ords4 rank the products in the order in *hich the,
should be e'phasi7ed. Sho* ,our *orkZ
b. Assu'e that sufficient constraint ti'e is available to satisf, de'and for all but the
Ans:
a. P> R= A#
Selling price per unit............................... E12.0/ E.(1./3 E1./.3(
Pariable cost per unit............................... 0(..5 --1.(5 11-.(2
Contribution 'argin per unit................... E10.(/ E 35.-3 E -(.0.
Ti'e on the constraint C'inutes;............. 1.-5 0.35 (..5
constrained resource............................. E1(./5 E1-.15 E1-.05
Ranking.................................................... - ( 1
Resulting ranking of products: A#4 R=4 P>
b. The co'pan, should be *illing to pa, up to E1(./5 per 'inute to obtain 'ore of
the constrained resource because this is the value to the co'pan, of using this
constrained resource to 'ake 'ore of product P>. B, assu'ption4 enough of the
other t*o products *ill alread, have been produced to full, satisf, de'and.
1/-. Iaria Corporation 'akes t*o products fro' a co''on input. :oint processing costs up
to the split9off point total E--4055 a ,ear. The co'pan, allocates these costs to the
8oint products on the basis of their total sales values at the split9off point. +ach product
'a, be sold at the split9off point or processed further. "ata concerning these products
appear belo*:
roduct = roduct >
Allocated 8oint processing costs........... E134055 E1.4555
Sales value at split9off point................. E(24555 E(54555
Costs of further processing.................. E((4.55 E1/4155
Sales value after further processing..... E/-4/55 E--4/55
ReHuired:
a. 6hat is the net 'onetar, advantage Cdisadvantage; of processing roduct =
be,ond the split9off point<
b. 6hat is the net 'onetar, advantage Cdisadvantage; of processing roduct >
be,ond the split9off point<
c. 6hat is the 'ini'u' a'ount the co'pan, should accept for roduct = if it is to
be sold at the split9off point<
d. 6hat is the 'ini'u' a'ount the co'pan, should accept for roduct > if it is to
be sold at the split9off point<
Ans:
a. Y b.
roduct = roduct >
Sales value after further processing........... E/-4/55 E--4/55
Costs of further processing........................ ((4.55 1/4155
Benefit of further processing..................... -14155 114255
%ess: Sales value at split9off point............. (24555 (54555
!et advantage Cdisadvantage;.................... E -4155 CE (4(55;
c. Y d.
roduct = roduct >
#ini'u' selling price at split9off............. E-14155 E114255
13-1%# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1/.. rosner Corp. 'anufactures three products fro' a co''on input in a 8oint processing
operation. :oint processing costs up to the split9off point total E/554555 per ,ear. The
co'pan, allocates these costs to the 8oint products on the basis of their total sales
value at the split9off point.
+ach product 'a, be sold at the split9off point or processed further. The additional
processing costs and sales value after further processing for each product Con an
annual basis; are:
Sales Palue
at Split9&ff
Further
rocessing
Costs
Sales Palue
After Further
rocessing
roduct "...... E-554555 E1(/4555 E/-.4555
roduct F....... E(1/4555 E(154555 E./54555
roduct D...... E13/4555 E1-/4555 E-054555
The @Further rocessing CostsA consist of variable and avoidable fi)ed costs.
ReHuired:
6hich product or products should be sold at the split9off point4 and *hich product or
products should be processed further< Sho* co'putations.
Ans:
roduct " roduct F roduct D
Sales value after further processing..... E/-.4555 E./54555 E-054555
Sales value at split9off.......................... -554555 (1/4555 13/4555
Incre'ental revenue............................. (-.4555 11/4555 10/4555
Further processing costs....................... 1(/4555 (154555 1-/4555
Incre'ental inco'e Closs;.................... E1534555 CE -/4555; E -54555
roducts " and D should be sold after further processing be,ond the split9off point.
roduct F should be sold at the split9off point *ithout an, further processing.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1%1
1//. S*agger Corporation purchases potatoes fro' far'ers. The potatoes are then peeled4
producing t*o inter'ediate products9peels and depeeled spuds. The peels can then be
processed further to 'ake a cocktail of organic nutrients. And the depeeled spuds can
be processed further to 'ake fro7en french fries. A batch of potatoes costs E0- to bu,
fro' far'ers and E1( to peel in the co'pan,?s plant. The peels produced fro' a batch
can be sold as is for ani'al feed for E(3 or processed further for E1/ to 'ake the
cocktail of nutrients that are sold for E.1. The depeeled spuds can be sold as is for E.5
or processed further for E(( to 'ake fro7en french fries that are sold for E11.
ReHuired:
a. Assu'ing that no other costs are involved in processing potatoes or in selling
products4 ho* 'uch 'one, does the co'pan, 'ake fro' processing one batch of
potatoes into the cocktail of organic nutrients and fro7en french fries< Sho* ,our
*orkZ
b. Should each of the inter'ediate products4 peels and depeeled spuds4 be sold as is
or processed further into an end product< +)plain.
Ans:
a. Anal,sis of the profitabilit, of the overall operation:
Co'bined final sales value CE.1 T E11;.......... E112
%ess costs of producing the end products:
Cost of potatoes............................................ E0-
Cost of peeling.............................................. 1(
Cost of further processing peels.................... 1/
Cost of further processing depeeled spuds. . . (( 11(
rofit Closs;....................................................... E 0
b. Anal,sis of sell or process further:
Cocktail of
&rganic
!utrients
Fro7en
French
Fries
Final sales value after further processing......... E.1 E11
%ess sales value at split9off point..................... (3 .5
Incre'ental revenue fro' further processing. . 1( -1
%ess cost of further processing........................ 1/ ((
rofit Closs; fro' further processing................ CE -; E1/
"onSt
process
further
rocess
further
13-1%$ Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1/0. Farrugia Corporation produces t*o inter'ediate products4 A and B4 fro' a co''on
input. Inter'ediate product A can be further processed into end product =.
Inter'ediate product B can be further processed into end product >. The co''on
input is purchased in batches that cost E-0 each and the cost of processing a batch to
produce inter'ediate products A and B is E1/. Inter'ediate product A can be sold as is
for E(1 or processed further for E1. to 'ake end product = that is sold for E-(.
Inter'ediate product B can be sold as is for E.. or processed further for E(2 to 'ake
end product > that is sold for E0..
ReHuired:
a. Assu'ing that no other costs are involved in processing potatoes or in selling
products4 ho* 'uch 'one, does the co'pan, 'ake fro' processing one batch of
the co''on input into the end products = and >< Sho* ,our *orkZ
b. Should each of the inter'ediate products4 A and B4 be sold as is or processed
further into an end product< +)plain.
Ans:
a. Anal,sis of the profitabilit, of the overall operation:
Co'bined final sales value CE-( T E0.;.......... E30
%ess costs of producing the end products:
Cost of co''on input................................... E-0
Cost of processing co''on input................ 1/
Cost of further processing product A............ 1.
Cost of further processing product B............ (2 3-
rofit Closs;....................................................... E -
b. Anal,sis of sell or process further:
roduct = roduct >
Final sales value after further processing............ E-( E0.
%ess sales value at split9off point........................ (1 ..
Incre'ental revenue fro' further processing..... 11 (5
%ess cost of further processing........................... 1. (2
rofit Closs; fro' further processing................... CE -; CE 2;
"onSt
process
further
"onSt
process
further
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-1%3
13-1%% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs For Decision Making: True/False Questions

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