UNIT 7 - RELEVANT COSTING - Problem Solutions
Problem 7-2
Savings
Salary of gardeners
Plant materials
Fertilizer
Fuel
Sale of old equip
Total
Cost of Highline
Benefit of Outsourcing in yr 1
182000
75000
6000
7500
30000
300500
275000
25500
In Second year
Total Savings
Less Sale of old equip
Savings in 2nd yr
Higlline
Net Benefit in 2nd yr
300500
-30000
270500
275000
-4500
From second yr, there will be a loss of 4500, so outsourcing in this case is not profitable.
Problem 7-3
Savings
Payroll clerk
Software Updates
HR Manager
Seminar
Total Saving
Cost of ABC
Net Benefit
9000
1000
20000
1200
31200
18000
13200
The Company only saves money on outsourcing payroll. Also the computers can be used efficiently for othe
Problem 7-4
Don’t Buy
Materials
Labour to form ductwork
Labour to install ductwork
Misc Variable costs
Allocated fixed costs
Buy
35000
3000
9000
1500
3000
40000
0
9000
1500
3000
Difference
-5000
3000
0
0
0
Penalty for delay
Total
6000
57500
0
53500
6000
4000
Bradley should buy the pre-fabricated ductwork, since it gives a incremental revenue of 4000.
Problem 7-6
Cost Savings
Cost of purchasing containers
10% on Direct materials
20% on Direct Labor
15% on Variable Overhead
Supervisor Salary
Rent Savings
Total Savings
Net Benefit of purchasing
175000
65000
70000
15000
70000
15000
235000
Fixed Overhead is 200000, so for 1 packag
60000
Company should purchase containers since it yields a profit of 60000.
Problem 7-7
Revenue
Variable Cost incurred
Fixed Cost incurred
Recoloring cost
Total
Recolour and sell Sell
Difference
10000
7000
3000
5000
5000
0
3000
3000
0
2000
0
2000
0
-1000
1000
The company should repeat the coloring process—the net incremental benefit of this action is $1,000 comp
Problem 7-8
Zylex A
Costs
Selling Price
Material
Labor
Overhead
Total Costs
Contribution margin
Time to Produce
CM/min
9
2
2.5
2.25
6.75
2.25
25
0.09
Zylex B
Incremental Selling Price
Material
Labor
6
1.75
0.5
Overhead
Total Costs
Contribution margin
Incremental Time to Produce
CM/min
1.1
3.35
2.65
10
0.265
There is no question that ZylexA has to be produced, because the company
cannot make ZylexB without starting with ZylexA. The question is, “If you
have a unit of ZylexA, should you take up production time converting it into
ZylexB or should you just make more ZylexA?”
The analysis indicates that production of ZylexB actually yields profit at a
rate of $.265 per minute. Thus, ZylexB should be produced.
Problem 7-9
When you drop/stop a product you lose the CM.
Loss of CM
Savings on Direct Salaries
Net Effect
-310000
65000 Other fixed costs will remain the same only - Assumed
-245000
By dropping Accelerators the company will be worse off by 245000. So it is better to keep them, though the
Problem 7-10
Fescue
CM per sq. yard
1.45
Bermuda
1.7
15000
Planting bermuda in additional 60000 yards will yield an incremental profit of [(1.7-1.45)*60000], 15000. T
Problem 7-11
Cost Savings
Dropping Model 599
Lost revenue
Materials
Direct Labor
Direct Fixed Cost
Total Savings
Net Benefit
-6500000
3000000
2000000
500000
5500000
-1000000
Droppin Model 599 only worsens the profit by 1000000, so contuining with it is a rather good idea.
Problem 7-12
The Economy grade is dropped
Standard
Yards of Carpet
Deluxe
Total
45000
75000
120000
Sales
Variable Costs
Fixed Costs
Net Profit
675000
405000
303750
-33750
1500000
900000
506250
93750
2175000
1305000
810000
60000
Since Standard is generating a loss, that is also dropped
Deluxe
Yards of Carpet
Sales
Variable Costs
Fixed Costs
Net Profit
75000
1500000
900000
810000
-210000
In many if not most cases, common costs will not be reduced when aproduct or product line is dropped. Th
blem Solutions
profitable.
can be used efficiently for other useful purposes.
revenue of 4000.
head is 200000, so for 1 package it is 200000/100000 = 2, Total overhead is 3, 3-fixed = 3-2 = 1)
it of this action is $1,000 compared to selling the carpet to United Home Discount Store for $7 per square yard.
main the same only - Assumed
etter to keep them, though the profit from them is comparatively low.
f [(1.7-1.45)*60000], 15000. The opportunity cost of sticking to an equal mix is 15000.
t is a rather good idea.
or product line is dropped. The costs are simply “passed on” to theremaining products, which may in turn appear unprofitable!
turn appear unprofitable!