Atkinson, Solutions Manual t/a Management Accounting, 6E
Chapter 3
Using Costs in
Decision Making
QUESTIONS
3-1
Cost information is used in pricing, product planning, budgeting, performance
evaluation, and contracting. Examples of specific uses of cost information
include deciding whether to introduce a new product or discontinue an existing
product (given the price structure), assessing the efficiency of a particular
operation, and assessing the cost of serving customer segments.
3-2
Variable costs are costs that increase proportionally with changes in the activity
level of some variable. Fixed costs are costs that in the short run do not vary
with a specified activity. Fixed costs depend on how much of the resource
(capacity) is acquired, rather than on how much is used.
3-3
Contribution margin per unit, which is the difference between revenue per unit
and variable cost per unit, is the contribution that each unit makes to covering
fixed costs and generating a profit. The contribution margin is therefore an
important component of the equation to determine the breakeven point and to
understand the effect on profit of proposed changes, such as changes in sales
volume in response to changes in advertising or sales prices.
3-4
Contribution margin per unit is the difference between revenue per unit and
variable cost per unit. The contribution margin per unit indicates how much the
total contribution margin will increase with an additional unit of sales. The
contribution margin ratio expresses similar ideas, but as a percentage of sales
dollars. Specifically, the contribution margin ratio is the total contribution
margin divided by total sales dollars (or contribution margin per unit divided
by sales price per unit), and indicates how much the total contribution margin
increases with an additional dollar of sales revenue.
3-5
In evaluating whether a business venture will be profitable, the breakeven point
is the volume at which the profit equals zero, that is, revenues equal total costs.
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Chapter 3: Using Costs in Decision Making
3-6
A mixed cost is a cost that has a fixed component and a variable component.
For example, utilities bills may include a fixed component per month plus a
variable component that depends on the amount of energy used. A step
variable cost increases in steps as quantity increases. For example, one
supervisor may be hired for every 20 factory workers. Mixed costs and step
variable costs both have elements of fixed and variable costs. However, mixed
costs have distinct fixed and variable components, with fixed costs that are
constant over a fairly wide range of activity (for a given time period) and
variable costs that vary in proportion to activity. Step variable costs are fixed
for a fairly narrow range of activity and increase only when the next step is
reached.
3-7
Step variable costs are fixed for a fairly narrow range of activity and increase
when the next step is reached. For example, one supervisor may be hired for
every 20 factory workers. Fixed costs are costs that in the short run do not vary
with a specified activity for a wide range of activity. For example, factory rent
per month would likely remain unchanged as production increased or
decreased, even if by large amounts.
3-8
Incremental cost is the cost of the next unit of production and is similar to the
economist’s notion of marginal cost. In a manufacturing setting, incremental
cost is often defined as a constant variable cost of a unit of production.
However, in some situations, the variable cost of a unit of production may be
more complicated. For example, the variable cost of labor per unit may
decrease over time if workers become more efficient (a learning effect.
Alternatively, the variable cost of labor per unit will change during overtime
hours if workers receive an overtime premium (commonly 50%). Finally, some
costs exhibit step-variable behavior, as when one supervisor can supervise a
quantity of employees but an additional supervisor is needed beyond a certain
number of employees.
3-9
In evaluating the different alternatives from which managers can choose, it is
better to focus only on the relevant costs that differ across different alternatives
because it does not divert the manager’s attention with irrelevant facts. If some
costs remain the same regardless of what alternative is chosen, then those costs
are not useful for the manager’s decisions, as they are not affected by the
decision. Therefore, it is better to omit them from the cost analysis used to
support the decision. Moreover, resources are not expended to find or prepare
irrelevant information.
3-10 Sunk costs are costs that are based on a previous commitment and cannot be
recovered. For example, depreciation on a building reflects the historical cost
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Atkinson, Solutions Manual t/a Management Accounting, 6E
of the building, which is a sunk cost. Therefore, they are not relevant costs for
the decision.
3-11 The general principal is that sunk costs are not relevant costs. But, some
managers may consider sunk costs to be relevant because they may be
concerned about how others will perceive their original decision to incur these
costs, and may want to cover up their initial poor judgment. Managers may also
feel that they do not want to waste the sunk costs by giving up on the
possibility of some benefit from the invested funds, or may continue to believe
in potential success despite overwhelming evidence to the contrary. Also,
managers may be embarrassed and unwilling to admit they made a mistake.
3-12 No, fixed cost are not always irrelevant. For example, in comparing the status
quo and a proposal to substantially increase the quantity of goods or services
provided, additional fixed costs (that is, costs not proportional to volume) may
be incurred to provide the increased quantity. Such costs might include a large
expenditure for more equipment or expanded factory facilities.
3-13 An opportunity cost is the maximum value forgone when a course of action is
chosen.
3-14 Yes, avoidable costs are relevant because they can be eliminated when, for
example, a part, product, product line, or business segment is discontinued.
3-15 In the context of a make or buy decision, fixed costs such as production
engineering staff salaries are relevant if these costs can be eliminated by assigning
the staff to other tasks, or by laying off the engineers not required when a part is
outsourced. If it is possible to find an alternative use for the facilities made
available because of the elimination of a product or a component, the associated
fixed costs also are relevant. Conversely, fixed costs that cannot be eliminated or
used for other productive purposes are not relevant for the decision. For example,
if factory facilities would remain idle if the company buys from outside, then the
associated costs are not relevant for the decision.
3-16 There are several qualitative considerations that must be evaluated in a makeor-buy decision. For example, one must question whether the outside supplier
has quoted a lower price to obtain the order, and plans to increase the price.
Also, the reliability of the supplier in meeting the required quality standards
and in making deliveries on time is important.
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Chapter 3: Using Costs in Decision Making
3-17 When a decision to outsource frees up space to produce an alternative product,
then the contribution margin on the alternative product is a relevant
opportunity cost for the “make” alternative in a make-or-buy decision.
3-18 A difficulty that arises with respect to revenue when analyzing whether to drop
a product or department is whether sales by one organizational unit can affect
sales in another organizational unit. A difficulty that arises with respect to cost
analysis is that many product costs, such as machine and factory depreciation,
are the result of sunk costs that often remain in whole or in part after the
product is discontinued. The analysis of what costs are avoided when a product
is dropped can be difficult due to the closing of plants, severance pay and
environmental cleanup costs.
3-19 The answer depends on the time frame and context considered. For example, a
one-time order that covers variable production (and selling costs) is
advantageous if capacity cannot be changed in the short run and excess
capacity exists. Also, for given capacity with one scare resource, maximizing
contribution margin per unit of scarce resource will maximize profit. In the
long run, prices must cover all their costs, both fixed and variable, in order for
the firm to survive.
3-20 No. Products should be ranked by the contribution margin per unit of the
constrained resource rather than by the contribution margin per unit of the product.
3-21 Yes. When capacity is fixed in the short run, the firm may need to sacrifice the
production of some profitable products to make capacity available for a new
order. The contribution margin on the production of profitable products
sacrificed for a new order is an opportunity cost that must be considered to
evaluate the profitability of the new order.
3-22 The three components of a linear program are the objective function, the
decision variables, and the constraints.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
EXERCISES
3-23 (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
3-24 (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Fixed
Variable
Variable
Fixed
Fixed
Variable
Variable
Fixed or variable (if number of production workers can vary in the short
run);
Fixed
Variable
Fixed
Variable
Variable
Fixed
Fixed or variable (if number of billing clerks can vary in the short run)
Fixed
Fixed
Variable
Fixed
Fixed (with respect to a unit of product, as stated in the problem.
However, gasoline costs will vary with miles driven.)
3-25
Burger ingredients
Variable
Cooks’ wages
Fixed
Server’s wages
Fixed
Janitor’s wages
Fixed
Depreciation on cooking equipment
Fixed
Paper supplies (wrapping, napkins, and supplies) Variable
Rent
Fixed
Advertisement in local newspaper
Fixed
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Chapter 3: Using Costs in Decision Making
3-26 (a)
Contribution margin per unit = $1,000 – $500 – $100 = $400
Contribution margin ratio = (Contribution margin)/Sales
= $400/$1,000 = 0.40
(b)
Let X = the number of units sold to break even
Sales revenue – Costs = Income
(Price × Quantity) – Variable costs – Fixed costs = Income
$1,000X – $600X – $3,500,000 = $0
$400X – $3,500,000 = 0
X = 8,750 units
(c)
Because the variable cost per unit will decrease, the contribution margin
per unit will increase. The breakeven point equals (fixed
costs)/(contribution margin), so the breakeven point will decrease.
Specifically, the new contribution margin per unit is $1,000 – $450 –
$100 = $450 and the new breakeven point is $3,500,000/$450 = 7,778
units (rounded).
3-27 (a)
Let P  charges per patient-day.
(5,400  P)  (5,400  $500)  $2,000,000) = 0
5,400  (P  $500) = $2,000,000
P  $500 = $2,000,000/5,400 = $370.37
P = $870.37
(b)
Let X = the average number of patient days per month necessary to
generate a target profit of $45,000 per month
Revenue – Costs = Income
(Price × Quantity) – Variable costs – Fixed costs = Income
$2,000X – $500X – $2,000,000 = $45,000
$1,500X = $2,000,000 + $45,000 = $2,045,000
X = 1,363 patient days (rounded)
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-28 (a)
Contribution margin per unit = $30 – $19.50 = $10.50
Contribution margin ratio = (Contribution margin)/Sales
= $10.50/$30 = 0.35
(b)
Let X = the number of units sold to break even
Sales revenue – Costs = Income
(Price × Quantity) – Variable costs – Fixed costs = Income
$30X – $19.50X – $147,000 = $0
$10.50X – $147,000 = 0
X = 14,000 units
(c)
Let X = the number of units sold to generate revenue necessary to earn
pretax income of 20% of revenue
Sales revenue – Costs = Income
(Price × Quantity) – Variable costs – Fixed costs = Income
$30X – $19.50X – $147,000 = 0.2 × $30X
$10.50X – $147,000 = $6X
X = 32,667 units (rounded)
Desired revenue = $30X = $30 × 32,667 = $980,010
Alternatively, let R = sales revenue necessary to earn pretax income of
20% of revenue
Sales revenue – Variable costs – Fixed costs = Income
R – 0.65R – $147,000 = 0.2R
R = $147,000/0.15 = $980,000
(d)
Let X = the number of units sold to generate after-tax profit of $109,200
(Before-tax income)  (1 – 0.35) = $109,200
Before-tax income = $109,200/0.65 = $168,000
$30X – $19.50X – $147,000 = $168,000
$10.50X = $315,000
X = $315,000/$10.50 = 30,000 units
(e)
Let Y = necessary increase in sales units
Incremental sales revenue – Incremental variable costs – Incremental
fixed costs = $0
$30Y – $19.50Y – $38,500 = $0
Y = 3,667 units (rounded)
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Chapter 3: Using Costs in Decision Making
3-29 (a)
Let R = sales dollars necessary for a before-tax target profit of $250,000
The contribution margin ratio = ($1,260,000 – $570,000)/$1,260,000 =
0.547619 (rounded).
Sales revenue – Variable costs – Fixed costs = Income
Contribution margin – Fixed costs = Income
0.547619 R – $480,500 = $250,000
R = ($250,000 + $480,500)/0.547619
R = $1,333,956.60
(c) Let R = sales dollars necessary to break even
Contribution margin – Fixed costs = 0
0.547619 R – $480,500 = $0
R = $480,500/0.547619
R = $877,434.85
3-30 The sales mix in units is 3/5 Domestic and 2/5 International.
The Domestic CM = $50 – $30 = $20; the International CM = $40 – $16 = $24
Let X = total number of units that must be sold in the International market to
earn $200,000 before taxes, assuming the stated sales mix
Total CM – Fixed costs = $200,000
($20  1.5X) + $24X − $5,000,000 − $1,280,000= $200,000
$54X = $6,480,000
X = $6,480,000/$54 = 120,000 units in the International market
1.5 X = 180,000 units in the Domestic market
Equivalently, one can compute a weighted average unit CM: (3/5) × ($20) +
(2/5) × ($24) = $21.60
Let Y = total number of units that must be sold to earn $200,000 before taxes,
assuming the stated sales mix
Total CM – Fixed costs = $200,000
$21.60Y − $5,000,000 − $1,280,000= $200,000
$21.60Y = $6,480,000
Y = 300,000 units, which consists of 3/5 or 180,000 units in the Domestic
market and 2/5 or 120,000 units in the International market
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-31 (a)
Units sold
Sales mix
percentage*
Alligators
140,000
.7
Dolphins
60,000
Total
200,000
.3
Weighted
average**
Weighted
average**
Sum of
weighted
averages
Sales price
per unit
$20.00
$14.00
$25.00
$7.50
$21.50
Variable costs
per unit
$ 8.00
$ 5.60
$10.00
$3.00
$ 8.60
Unit CM
$12.00
$ 8.40
$15.00
$4.50
$12.90
* 140,000/(140,000 + 60,000) = .7; 60,000/(140,000 + 60,000) = .3
** $20 × .7 = $14; $8 × .7 = $5.60; $25 × .3 = $7.50; $10 × .3 = $3
Breakeven units = $1,290,000/$12.90 = 100,000 units. Of these, 100,000
× .7 = 70,000 will be alligators and 100,000 × .3 = 30,000 will be
dolphins.
(b)
Units sold
Sales mix
percentage*
Alligators
60,000
.3
Dolphins
140,000
Total
200,000
.7
Weighted
average**
Weighted
average**
Sum of
weighted
averages
Sales price
per unit
$20.00
$6.00
$25.00
$17.50
$23.50
Variable costs
per unit
$ 8.00
$2.40
$10.00
$ 7.00
$ 9.40
Unit CM
$12.00
$3.60
$15.00
$10.50
$14.10
* 60,000/(140,000 + 60,000) = .3; 140,000/(140,000 + 60,000) = .7
** $20 × .3 = $6; $8 × .3 = $2.40; $25 × .7 = $17.50; $10 × .7 = $7
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Chapter 3: Using Costs in Decision Making
Breakeven units = $1,290,000/$14.10 = 91,489.36, which we round up to
91,490 units. Of these, 91,490 × .3 = 27,447 will be alligators and 91,490
× .7 = 64,043 will be dolphins.
(c)
In part (b), the sales mix percentage for the higher-CM product
(dolphins) is greater than in part (a). Consequently, fewer total units are
required to break even (91,490 in part (b) versus 100,000 in part (a)).
3-32
Product
Hamburgers
Chicken
Sandwiches
French fries
Total Sales Without
Special Promotion
$1.09  20,000 
$21,800
—
Total Sales With
Special Promotion
$0.69  24,000 
$16,560
—
1.29  10,000 
$12,900
0.89  20,000 
$17,800
1.29  9,200  $11,868
0.89  22,400 
$19,936
Difference
($5,240)
—
(1,032)
2,136
($4,136)
Product
Hamburgers
Chicken
Variable Costs Without
Special Promotion
$0.51  20,000 
$10,200
—
Variable Costs With Difference
Special Promotion
$0.51  24,000 
($2,040)
$12,240
—
—
Sandwiches
0.63  10,000  $6,300 0.63  9,200  $5,796
504
French fries
0.37  20,000  $7,400 0.37  22,400  $8,288
(888)
($2,424)
Decrease in sales with special promotion
Increase in variable costs with special promotion
Decrease in contribution margin with special promotion
Incremental advertising expenses with special promotion
Decrease in profit with special promotion
$4,136
2,424
$6,560
4,500
($11,060)
Therefore, Andrea should not go ahead with this special promotion. A
countervailing argument is the creation of new customers who may stay with
the firm and generate additional contribution margin in the future.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-33 (a)
Healthy Hearth has sufficient excess capacity to handle the one-time
(short-run) order for 1,000 meals next month. Consequently, the analysis
focuses on incremental revenues and costs associated with the order:
Incremental revenue per meal
Incremental cost per meal
Incremental contribution margin per meal
Number of meals
Increase in contribution margin and operating income
$3.50
3.00
$0.50
× 1,000
$ 500
Healthy Hearth will be better off by $500 with this one-time order. Note
that total fixed costs remain unchanged, so it is sufficient to evaluate the
change in the contribution margin. If the order had been long-term,
Healthy Hearth would need to evaluate whether the price provides the
desired profitability considering the fixed costs and whether filling the
government order might require giving up higher-priced regular sales.
(b)
Healthy Hearth has insufficient excess capacity to handle the one-time
order for 1,000 meals next month, and must give up regular sales of 500
meals at $4.50 each, resulting in an opportunity cost.
Incremental contribution margin from one-time order
Incremental revenue per meal
Incremental cost per meal
Incremental contribution margin per meal
Number of meals
Increase in operating income from one-time order
$3.50
3.00
$0.50
1,000
$500
Opportunity cost
Lost contribution margin on regular sales: 500 × ($4.50 – $3.00) $(750)
Change in contribution margin and operating income
$(250)
Now, Healthy Hearth will be worse off by $250 with this one-time order.
Again, total fixed costs remain unchanged, so it is sufficient to evaluate
the change in the contribution margin.
3-34 (a)
Relevant costs:
•
Acquisition cost of Ford Escort
•
Repairs on the Impala
•
Annual operating costs on the Ford Escort
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Chapter 3: Using Costs in Decision Making
•
Annual operating costs on the Impala
Irrelevant costs:
•
(b)
Acquisition cost of Impala
Don will buy the Ford Escort if he bases the decision only on the
available cost information.
Year 1: (If Don buys the Ford Escort)
Cash savings:
Repairs on the Impala
Operating cost—Impala
$5,400
2,900
8,300
Cash expenditures:
Acquisition cost—Ford Escort
Operating cost—Ford Escort
First Year Savings
(c)
5,400
1,800
7,200
$1,100
Additional quantitative considerations:
1.
Number of years before car is replaced (decision horizon).
2.
Expected resale values of both cars when they will be replaced.
3.
Cost of capital (interest rate) to consider the time value of money.
(This topic is covered in other courses.)
Qualitative consideration:
1.
Subjective preference for driving an Impala rather than a Ford
Escort.
3-35 Per Unit
As Is
Rework
Sales price
$4
$10.00
Rework cost
—
$5.50*
Net after rework
$4
$4.50
*55,000 ÷ 10,000
Gilmark should rework the lamps.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-36 (a)
The original cost of $50,000 and accumulated depreciation of $40,000
are sunk, and therefore irrelevant, when the choice is between
overhauling the old machine and replacing it with a new machine. Note
that the annual operating costs (before overhaul) of $18,000 are not sunk
costs, yet they are irrelevant.
(b)
Relevant costs include the acquisition cost of the new machine, the cost
of overhauling the old machine, current salvage of $4,000 for the old
machine (all of which are up-front costs), salvage value at the end of five
years for the new and overhauled machines, and the annual operating
costs for both the new machine and the overhauled old machine.
Net acquisition cost
Replacement
$66,000a
Salvage value at the
end of 5 years
(500)
(200)
(300)
Operating costs for
5 years
Total relevant costs
65,000b
$130,500
70,000c
$94,800
(5,000)
$35,700
(c)
a
b
c
Overhauling
$25,000
Difference
$41,000
$70,000 – $4,000 = $66,000
$13,000  5 = $65,000
$14,000  5 = $70,000
It costs McKinnon Company $35,700 more with the new grinding
machine than overhauling the old one. Therefore, the plant manager
should overhaul the old grinding machine. However, this analysis is
incomplete as it ignores the time value of money, considered in net
present value analysis, which is covered in other courses.
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Chapter 3: Using Costs in Decision Making
3-37
Year 1
Year 2
Year 3
Year 4
Year 5
Cash inflow:
Sale of old machine
Saving because old
machine not repaired
$40,000
(5,000)
20,000
Salvage value of
new machine
Decrease in annual
operating costs
$10,000
20,000
$20,000
$20,000
$20,000 $20,000
(120,000)
0
0
Net cash inflow
(outflow)
($40,000)
$20,000
$20,000
$20,000 $25,000
Cumulative cash
inflow (outflow)
($40,000) ($20,000)
$0
$20,000 $45,000
Cash outflow:
Purchase of new machines
0
0
Joyce Printers should replace the machines if they expect to use the new
machines for more than three years. (A more complete evaluation would use
net present value analysis, which is covered in other courses.)
3-38
(a)
Insource (Make)
Smart phones:
$140  50,000
Component:
$35.00  50,000
$34.00  50,000
Relevant costs
(b)
Smart phones:
$140  50,000
Component:
$30.00  50,000
$34.00  50,000
Relevant costs
$7,000,000
Outsource (Buy)
$7,000,000
1,750,000
1,700,000
$8,750,000
$8,700,000
Insource (Make)
Outsource (Buy)
$7,000,000
$7,000,000
1,500,000
1,700,000
$8,500,000
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$8,700,000
Atkinson, Solutions Manual t/a Management Accounting, 6E
3-39 (a)
Assumptions need to be made about the avoidability of the fixed
overhead costs if Kane outsources the component.
(b)
If the variable costs (direct materials, direct labor, and variable overhead)
are all avoidable, then Kane will certainly reduce costs by outsourcing
the component. Fixed overhead costs may be unavoidable if the facility
cannot be converted to alternative uses when the component is
outsourced. However, even if the fixed overhead costs are unavoidable,
Kane would reduce costs by outsourcing. In this case, the cost savings
per unit if the component is outsourced would be:
Purchase price
(c)
3-40
$64.50
Avoidable costs ($73.10 – $6.90)
66.20
Savings per unit
$1.70
Other factors relevant to the decision are the supplier’s ability to live up
to expected quality and delivery standards, and the likelihood of
suppliers increasing prices of components in the near future.
Premier should make the gear model G37 because it costs $87,000 less to
make than to buy. (Fixed overhead is irrelevant and may be dropped from
the analysis.)
Make
Cost of purchase: $120  20,000 =
Direct material cost: $55  20,000 =
Buy
$2,400,000
$1,100,000
Direct labor cost: $30  20,000 =
600,000
—
Variable overhead: $25  20,000 =
500,000
—
Fixed overhead $15  20,000 =
300,000
300,000
—
(113,000)
$2,500,000
$2,587,000
Savings in facility-sustaining costs
Relevant costs
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Chapter 3: Using Costs in Decision Making
3-41 (a) The offer by Superior Compressor should not be accepted if fixed
overhead costs are unavoidable.
Cost per unit
Cost of purchase
Make
Variable cost:
Direct material
Direct labor
Variable overhead
$ 80
60
56
Relevant cost per unit
$196
Buy
$200
$200
(b)
The maximum acceptable purchase price is $213 per unit if the plant
facilities are fully utilized at present and the incremental cost of adding
more capacity is approximated well by the $17 per unit fixed overhead
cost.
3-42 (a)
The billiards segment currently produces a segment margin of $40,000 −
$25,000 = $15,000, so the bar’s segment margin would have to increase
by at least that amount in order for the grill’s income to be at least as
high as it is now.
George should consider the effect on the other two segments’ revenues if
he drops the billiards segment. It may be that the availability of billiards
attracts customers to the bar and restaurant segments. Traditional
segment margin analysis as in part (a) does not capture such interactive
effects.
3-43 In order to accept the new order for 1,500 modules next week, McGee must
give up regular sales of 500 modules per week.
(b)
Variable costs are $800 per module ($2,400,000/3,000 modules). The
contribution margin per unit on regular sales is $900 – $800 = $100 per
module. Therefore, the opportunity cost (lost CM) of accepting the new order is
500($100) = $50,000, and McGee will be indifferent between filling the special
order and not filling the special order when the contribution margins of the two
alternatives are equal (fixed costs will remain unchanged). That is, McGee will
be indifferent at a price P where 1,500(P – $800) = $50,000, or P = $833.33.
This is the floor price that McGee should charge for the new order.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-44 This order will require 500 = 5 × (10,000 ÷ 100) machine hours. Since there is
excess capacity of 800 = 4,000 × (100% − 80%) machine hours per month,
Shorewood Shoes Company can accept this order without expanding its
capacity. Therefore, Shorewood should charge at least as much as the
incremental variable costs for this order.
Direct material
Direct labor
Variable manufacturing overhead
Additional cost of embossing the private label
Minimum price to be charged for this order
$6.00
4.00
2.00
0.50
$12.50
Shorewood’s costs stated in the problem are average costs per pair of shoes.
Shorewood should determine whether the costs are reasonably accurate for the
discount store’s order. Shorewood should also consider how its regular customers
might react to the lower price offered to the discount store.
3-45 Incremental variable costs = ($16 + $5 + $3) × 10,000
= $24 × 10,000
= $240,000.
Incremental revenue = $40 × 10,000 = $400,000.
Berry’s operating income will increase by $160,000 if it accepts this offer.
3-46 (a)
Variable cost per unit = $198,000 ÷ 36,000 = $5.50.
Sales (30,000 units × $10 and 30,000 units × $9)
$570,000
Variable manufacturing and selling costs
(60,000 units × $5.50)
(330,000)
Contribution margin
$240,000
Fixed costs
(99,000)
Operating income
$141,000
If Ritter accepts the export order, its operating income will increase by
$78,000 = $141,000 − $63,000. Although Ritter’s operating income will
increase with the special order, Ritter must consider the long-run effect
of displeasing its regular domestic customers by not fulfilling their
demand.
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Chapter 3: Using Costs in Decision Making
(b)
Sales (36,000 units × $10 and 30,000 units × $9)
Variable manufacturing and selling costs
(66,000 units × $5.50)
Contribution margin
Fixed costs: $99,000  $25,000
Operating income
$630,000
(363,000)
$267,000
124,000
$143,000
If Ritter operates the extra shift and accepts the export order, operating
income will increase by $80,000. Ritter should consider whether the
same quality will be achieved with new operators or existing operators
working overtime (with possible fatigue). In addition, Ritter should
understand whether the additional fixed costs will be incurred on a
continuing basis or are avoidable when production drops back to its
previous level. Finally, Ritter should also consider the effect of this price
reduction on regular customers.
3-47 (a)
Superstore faces a problem of maximizing contribution margin per unit
of scarce resource. Here, the scarce resource is shelf space. Superstore
requires at least 24 square feet for each category. The store manager
should assign additional available space to the category with the highest
contribution margin per square foot, i.e., ice cream. After assigning a
total of 100 square feet to ice cream, there is sufficient available shelf
space to assign a total of 100 square feet to frozen dinners and 26 square
feet to juices. The frozen vegetable receives the minimum required
assignment of 24 square feet.
Ice Cream Juices
Frozen
Dinners
Frozen
Vegetables
Selling price per unit
(square-foot package)
$12.00
$13.00
$24.00
$9.00
Variable costs per unit
(square-foot package)
$8.00
$10.00
$20.50
$7.00
Unit CM
(square-foot package)
$4.00
$3.00
$3.50
$2.00
Minimum required
24
24
24
24
Maximum allowed
100
100
100
100
Allocation to maximize
total CM
100
26
100
24
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Atkinson, Solutions Manual t/a Management Accounting, 6E
(b)
In setting the minimum required and maximum allowed square footage
per category, the manager might consider seasonality (for example,
permitting more ice cream space during the summer or more frozen
vegetable space during the winter) and the effect on contribution margins
of variability in costs and prices. The analysis does not take into account
the rate at which products are sold within each category. The analysis
should also consider the effect of the mix on other product sales. If the
store offers only a limited selection of frozen vegetables, for example,
shoppers may switch to another store for their regular grocery shopping.
Regular
3-48
Sale price per sq. yard
Deluxe
$16
$25
Variable costs per sq. yard
10
15
Contribution margin per sq. yard
$6
$10
0.15
0.20
DLH required per sq. yard
$40a
Contribution margin per DLH
a
b
$50b
$6 ÷ 0.15 = $40
$10 ÷ 0.20 = $50
Because deluxe grade has a higher contribution margin per unit of scarce resource
(DLH) than regular grade, and no more than 8,000 square yards of deluxe grade
can be produced, Boyd Wood Company should produce the maximum of 8,000
square yards of deluxe grade first and then use the remaining available capacity of
3,000 DLH (= 4,600 − [8,000 × 0.20]) to produce regular grade. Therefore, the
optimal production level for each product is:
Deluxe: 8,000 sq. yards
Regular: 20,000 sq. yards (= 3,000 ÷ 0.15).
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Chapter 3: Using Costs in Decision Making
PROBLEMS
3-49 The following items are variable costs:
Carpenter labor to make shelves
Wood to make the shelves
Sales commissions based on number of units sold
Miscellaneous variable manufacturing overhead
Total variable costs
$600,000
450,000
180,000
350,000
$1,580,000
The variable costs per unit are $1,580,000/50,000 = $31.60. The following
items are fixed costs:
Sales staff salaries
Office and showroom rental expenses
Depreciation on carpentry equipment
Advertising
Miscellaneous fixed manufacturing overhead
Rent for the building where the shelves are made
Depreciation for office equipment
Total fixed costs
$80,000
150,000
50,000
200,000
150,000
300,000
10,000
$940,000
Let X = the number of units sold to earn a pre-tax profit of $500,000
Revenue – Costs = Income
(Price × Quantity) – Variable costs – Fixed costs = Income
$70X – $31.60X – $940,000 = $500,000
X = 37,500 units
3-50
(a)
Selling price per unit:
$105.00
Variable cost per unit:
Direct material
Direct labor
Variable overhead
Commission
$30.00
20.00
10.00
10.50
Contribution margin
per unit:
70.50
$34.50
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Atkinson, Solutions Manual t/a Management Accounting, 6E
Incremental profit:
Increase in contribution
margin from new sales
Decrease in contribution
margin from
cannibalization
Increase in fixed costs
Increase in profits if the
new model is introduced
(b)
$34.50  120,000
$4,140,000
$20  (300,000 – 240,000)
(1,200,000)
(2,000,000)
$940,000
Yes. Introducing the new product will increase profits by $940,000.
3-51 (a)
The number of miles driven is an important activity measure in
estimating the cost of driving. In comparing the cost of driving to work
or taking public transportation, Shannon may also want to consider the
cost of parking at work. The cost of parking may vary with the number
of days at work or may be a flat rate per month.
(b)
Incremental costs of driving include gas, oil, maintenance, and tire
expenditures. Costs associated with driving also include toll costs and
parking fees.
(c)
Fixed costs include taxes, depreciation of the vehicle, car registration,
license fees, and insurance.
(d)
For a two-week vacation by car, two likely activity measures are number
of miles driven and number of days (for lodging and meals).
3-52 (a)
Costs that vary with number of passengers:
Meals and refreshments = $5
Let X  number of passengers needed to break even each week
Total revenue per week – costs per passenger per week – costs per flight
per week – fixed costs per week = profit per week
($200  X  70) – ($5  X  70) – ($5,000  70) – $400,000 = $0
$13,650X = $750,000
X  $750,000 ÷ $13,650 = 54.95 (i.e., 55 passengers per flight)
– 72 –
Chapter 3: Using Costs in Decision Making
(b)
Let N  number of flights to earn a profit of $500,000 per week
Number of passengers per flight = 60%  150 = 90
($200  90  N) – ($5  90  N) – ($5,000  N) – $400,000 = $500,000
N  71.71 (i.e., 72 flights)
(c)
Fuel costs are fixed once the flights are scheduled, but these costs vary
with the number of flights.
(d)
In this case, there is no opportunity cost to the airline because the seat
would otherwise go empty. The variable cost for the additional passenger
is $5 for the meals and refreshments and perhaps a small amount of
additional fuel cost.
3-53 (a)
Johnson Co. breakeven point in number of rides =
(Fixed costs)/(Unit contribution margin) = $300,000/$6 = 50,000 rides
Smith Co. breakeven point in number of rides =
(Fixed costs)/(Unit contribution margin) =
$1,500,000/$15 = 100,000 rides
(b)
Let x be the number of rides.
Johnson Co.’s profit function is:
$30x – $24x – $300,000 = $6x – $300,000
Smith Co.’s profit function is:
$30x – $15x – $1,500,000 = $15x – $1,500,000
Profit-Volume Chart
Profit
S
J
$0
($300,000)
Loss
($1,500,000)
(c)
50,000
100,000 133,333
Number of rides
We cannot say which firm’s cost structure is more profitable as profits
depend on sales volume. If sales drop to below 133,333 rides, Johnson
Company’s cost structure leads to more profits. However, if sales remain
– 73 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
above 133,334 rides, then Smith Company’s cost structure leads to more
profits.
(d)
3-54 (a)
The contribution margin generated must first cover the fixed costs and
then the balance remaining after the fixed costs are fully covered goes
toward profits. If the contribution margin is not sufficient to cover the
fixed costs, then a loss occurs for the period. Once the breakeven point
has been reached, profit will increase by the unit contribution margin for
each additional unit sold. Here, Smith Company is more risky because it
has higher fixed costs to cover and a higher unit contribution margin,
which makes its profits more sensitive to decreases in the sales activity
level.
Contribution margin per unit:
Selling price
$250
Less variable costs:
Variable production costs
$100
Variable selling and distribution costs
20
Contribution margin per unit
(b)
$130
Let X  the sales volume at which the profit on sales is 10%
Profit = 250X  120 X  200,000  62,500
 01
.  250 X 
130 X  262,500  25 X
105 X  262,500
X  2,500 units.
(c)
(1)
Single-shift operations 0  X  4,400 :
Selling price
Variable costs
Contribution margin per unit
$200
120
$80
Fixed costs =
$200,000 + $62,500 + $17,500 = $280,000
Breakeven point = $280,000 ÷ $80 = 3,500 units
note: 0  3,500  4,400
– 74 –
120
Chapter 3: Using Costs in Decision Making
Two-shift operations 4,400  X  8,800 :
(2)
Selling price
Variable costs
Contribution margin per unit
$200
120
$80
Fixed costs =
$310,000 + $62,500 + $17,500 = $390,000
Breakeven point = $390,000 ÷ $80 = 4,875 units
note : 4,400  4,875  8,800
(d)
Profit to sales ratio in September:
130  3, 000  262 , 500
250  3, 000
390, 000  262 , 500

750, 000
 0.17

(1)
Single-shift operations 0  X  4,400
200 X  120 X  280,000  017
.  200 X
80 X  280,000  34 X
46 X  280,000
X  6,087 units
(Not acceptable because X cannot be more than 4,400 units with
single-shift operations)
(2)
Two-shift operations 4,400  X  8,800
200 X  120 X  390,000  017
.  200 X
80 X  390,000  34 X
46 X  390,000
X  8,478 units
note : 4,400  8,478  8,800
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-55 Total labor cost
Total materials cost
Total variable manufacturing overhead
cost
Total lease payments
Total SG&A expenses
Total costs
$114,800 *
153,600 **
41,280 ***
36,000
20,000
$365,680
* Labor cost
Total labor hours required:
60 × 800 × 0.05
60  4
30  1, 600  0.05
30  4
2,400
240
2,400
120
5,160
Labor hours available
Overtime hours required
Regular wages (= $20  4,000)
Overtime wages (= $30  1,160)
Total labor cost
4,000
1,160
$ 80,000
34,800
$114,800
** Materials cost
$1.60  60  800 = $76,800
$1.60  30  1,600 = 76,800
$153,600
*** Variable manufacturing overhead cost
$8  5,160 labor hours
3-56 (a)
$41,280
This is a special order where the company has sufficient excess capacity
to fill the order.
Incremental revenue 8,000  $22
Incremental VC
8,000  ($5 + 4+1)
Incremental CM
8,000  ($22  10)
$176,000
80,000
$96,000
Because fixed costs are unchanged, the $96,000 incremental CM is the
increase in income if the company accepts the special order.
– 76 –
Chapter 3: Using Costs in Decision Making
(b)
This is a special order where the company has insufficient excess
capacity to fill the order, and therefore faces an opportunity cost if it fills
the order.
Incremental CM from (a)
Opportunity cost from lost sales*
Net increase in CM
8,000  ($22  10)
5,000  ($25  (5 + 4))
$96,000
80,000
$16,000
*The opportunity cost is the net benefit from the foregone CM on 5,000
boxes of regular sales.
Because fixed costs are unchanged, the $16,000 net increase in CM is
the increase in income if the company accepts the special order.
3-57 (a)
(b)
Variable costs per chip = $720,000/1,600 = $450 per chip
Profit = ($500 − $450) × 2,000 − $75,000 = $25,000
Fixed costs per chip = $75,000/2,000 = $37.50 per chip
Variable cost per chip
Fixed cost per chip
Reported cost per unit
$450.00
37.50
$487.50
There is currently enough surplus capacity to produce the 200 units per
week for the new order. The estimated increase in the company’s profit if
it accepts the order is ($480 − $450) × 200 = $6,000 per week.
(c)
Because there is not enough surplus capacity to produce the 600 units
per week for the new order, the company faces an opportunity cost if it
accepts the order. The company has surplus capacity of 2,000 – 1600 =
400 chips per week. If the company accepts the order, it will have to give
up 200 chips per week of regular sales, at $500 revenue per chip. The
company will gain ($480 – $450)  600 = $18,000 per week from the
special order, but that gain will be offset by lost contribution margin
from regular sales, ($500 – $450)  200 = $10,000, for a net gain of
$8,000 per week.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-58 (a)
(b)
Acquisition cost and depreciation expense for the existing elevator
system are irrelevant.
Relevant cost
Existing System New System
Acquisition cost
—
$875,000
Salvage value of existing system at present
—
(100,000)
Operating costs for 6 years
$900,000
Salvage value after 6 years
(25,000)
48,000
(100,000)
$875,000
$723,000
The decision to replace the existing elevator system with the new one will
require net present value analysis that considers the time value of money.
Without considering the time value of money, the new system is less costly.
3-59
(a) Selling price per unit
$4.00
Variable cost per unit
3.30
Contribution margin per unit
Number of units
$0.70
50,000
Increase in operating income
$35,000
Genis Battery Company should accept the special order because it is
operating under capacity and this order can generate $35,000 in
additional operating income.
(b)
Average unit costs can be misleading. Fixed costs are not relevant to this
decision—the decision should be based on incremental costs.
(c)
Other customers may also demand a reduced price. Therefore, their
reaction to the reduced price for the special order must also be taken into
account.
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Chapter 3: Using Costs in Decision Making
3-60 (a)
Net cost saving over 4 years with new machine
Cash inflow:
Salvage value difference
Decrease in annual operating costs (4 years  $60,000)
Reduction in rework cost
$ 2,000
240,000
10,000a
Cash outflow:
Acquisition of new machine ($360,000 – $100,000)
(260,000)
Net cash inflow (outflow):
($ 8,000)
a
0.05 (100,000  4)  $1
=
– 0.025 (100,000  4)  $1 =
Reduction in rework
$20,000
–$10,000
$10,000
Syd Young should not replace the old machine due to net cash outflow
of ($8,000).
(b)
The acquisition cost of the old machine is a sunk cost.
(c)
Other considerations:
1.
Will sales increase because of lower defects with the new machine
2.
What is the cost of capital used to discount future cash flows? In this
case, discounting will only make the new machine appear worse. (This topic
is covered in other courses.)
3-61 (a)
Because the distinctive desserts are a source of competitive advantage,
Beau should carefully consider the quality, freshness, and distinctiveness
of the desserts from the outside providers, as well as the providers’
reliability in delivering the desserts. Beau will want to consider the
possibility of price increases from an outside bakery. For the in-house
option, Beau may have concerns about his ability to hire a suitable
replacement pastry chef. If Beau hires a new pastry chef, the chef may be
more responsive than the outside bakers to Beau’s customers’ tastes.
Also, there would be no concern about delivery to Beau’s Bistro.
(b)
This question is designed to generate discussion about the trade-offs
among the options. Although the second bid is lower-cost than the first,
the first bid promises continual developments of gourmet desserts; the
second bid promises only traditional desserts. In-house pastry production
is the highest-cost option. The ultimate decision should take into account
not only the costs of the different options, but also the issues in part (a)
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Atkinson, Solutions Manual t/a Management Accounting, 6E
and the anticipated effect on demand and revenue (for pastry and for
Beau’s Bistro) under each option.
3-62 (a)
The costs and benefit shown below are relevant for the outsourcing
decision. All but the –$20,000 sale of office equipment are annual costs.
Costs
Labor
Rent
Phone
Other overhead
Office equipment
Outside call center
In-house
Outside
Call Center Call Center
$650,000
60,000
35,000
42,000
($20,000)
700,000
$787,000
$680,000
(b)
Hollenberry must consider the outside call center’s reliability and quality of
service in responding to Hollenberry’s customers. Given Hollenberry’s
worldwide operations, the greater number of multilingual operators
available at the outside call center could be an important feature. Finally,
Hollenberry must factor in the prospect of laying off employees, many of
whom have worked at Hollenberry for over 20 years.
(c)
If the outside call center can meet Hollenberry’s expectations for reliability
and quality, including better service for international customers, financial
considerations point toward Hollenberry outsourcing the call center
function. However, although the outsourcing decision seems financially
sound, there is great potential for decreasing the remaining employees’
morale because of the layoffs. This question is designed to generate
discussion about trade-offs among the company’s stakeholders, including
employees. One alternative to firing Hollenberry’s call center employees is
reassigning the employees to other jobs and relying on attrition to eventually
reduce employee costs to Hollenberry’s desired level. However, this would
increase the cost of the outsourcing option and reduce its financial
benefits.
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Chapter 3: Using Costs in Decision Making
3-63 (a)
Impact of dropping JT484 on operating income:
Reduction in contribution margin
$100,000
Cost savings:
Utilities
Supervision
Maintenance
Administrative
(9,000)
(30,000)
(7,000)
(30,000)
Decrease in operating income
$24,000
Therefore, JT484 should not be eliminated.
(b)
No, the decision to retain JT484 will only be reinforced by the sales
manager’s comments.
3-64 Some examples of articles that describe dropping unprofitable products appear
below. The article by Hymowitz provides interesting background for the article
in The Economist on Sony’s unprofitable products. These articles describe the
need for a turnaround at Sony. The article in The Economist states, “Almost
every product line is unprofitable.” Important issues include strong
competition, “vanity projects that lacked a market,” and cost cutting through
layoffs and factory closings. The article by Ball lays a foundation for activitybased costing through its discussion of high costs and unprofitable products
due in part to excessive proliferation of variations of products.
Hymowitz, C. “More American Chiefs Are Taking Top Posts At Overseas
Concerns.” The Wall Street Journal, October 17, 2005, page B1.
“Game on: Sir Howard Stringer believes he is finally in a position to fix Sony.”
The Economist, March 5, 2009. http://www.economist.com/node/13234173,
accessed December 12, 2010.
Ball, D. “Crunch Time: After Buying Binge, Nestlé Goes on a Diet; Departing
CEO Slashes Slow Sellers, Brands; ‘No’ to Low-Carb Rolo.” The Wall Street
Journal, July 23, 2007, page A1.
Wingfield, N. “Amazon to Cut Product Offerings, Plans to Drop Unprofitable
Items.” The Wall Street Journal, February 2, 2001, page B6.
Kardos, D. and M. Andrejczak. “Earnings Digest -- Food: Heinz Net Rises as
Sales Offset Costs.” The Wall Street Journal, November 30, 2007, page C11.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-65 (a)
XLl
$10.00
XL2
$14.00
XL3
$12.00
Direct materials
(4.00)
(4.50)
(5.00)
Direct labor
(2.00)
(3.00)
(2.50)
Variable overhead
(2.00)
(3.00)
(2.50)
Unit contribution margin
$2.00
$3.50
$2.00
0.20
0.35
0.25
$10.00
$10.00
$8.00
Sales price
Machine hours per unit
Contribution margin per machine hour
Products XLl and XL2 should be produced first because they have a
higher contribution margin per machine hour. Maximum production of
these two products requires 110,000 machine hours:
XL1: 200,000 units  0.20 machine hours  40,000 machine hours
XL2: 200,000 units  0.35 machine hours  70,000 machine hours
110,000 machine hours
Therefore, a balance of 10,000  120,000 – 110,000 machine hours are
available for XL3 production, which is sufficient for 40,000 units of XL3
(10,000 machine hours ÷ 0.25 machine hours).
Optimal Production Levels:
XL1: 200,000 units; XL2: 200,000 units, XL3: 40,000 units
(b)
Under the current capacity constraint, Excel Corporation cannot meet all
of XL3’s demand. If additional capacity becomes available, it can
produce more units of XL3. To determine whether it is worthwhile
operating overtime, Excel needs to analyze the contribution margin of
XL3 when operating overtime.
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Chapter 3: Using Costs in Decision Making
XL3
$12.00
Sales price
Direct materials
$5.00
Direct labor
3.75*
Variable overhead
2.50
11.25
Unit contribution margin
$0.75
* 3.75  2.50  150%
Because the unit contribution margin of XL3 using overtime is positive,
it is worthwhile operating overtime.
3-66 (a)
HCD2 requires $100 ÷ $20 = 5 direct labor hours per unit. The new order
requires 1,000 = 200 × 5 direct labor hours, so the existing capacity is adequate.
The contribution margin per unit of HCD2 for the new order = $400 − (75 +
100 + 125) = $100. The increase in profit is $20,000 = 200 units × $100
contribution margin.
(b)
HCD1
$400
Sales price
HCD2
$500
Variable cost:
Direct material
Direct labor
Variable overhead
Contribution margin per unit
DLH per unit
Contribution margin per DLH
$60
$75
80
100
100
240 125
300
$160
$200
4
5
$40 per DLH $40 per DLH
The new order requires a total of 1,500  5  300 DLH, but only
1,000  15,000 – 14,000 DLH are available. This will leave a capacity
shortage of 500  1,500 – 1,000 DLH. The contribution margin per DLH
is $40 for each product, so the company can forego sales of either
product with the same effect. Therefore, the change in profit is
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Atkinson, Solutions Manual t/a Management Accounting, 6E
Total contribution margin – opportunity cost
= (300 units  $100 contribution margin per unit) – (500 DLH  $40
contribution margin per DLH)
= $30,000 – $20,000
= $10,000 increase.
(c)
If the plant is worked overtime to manufacture HCD2 for the new order,
the contribution margin is negative $12.50 as shown below:
Unit Variable Cost for Overtime
1  75 
$75.00
Material
Labora
1.5  100 
150.00
Variable overhead
1.5  125 
187.50
Total variable cost
$412.50
Sales price
400.00
Contribution margin
a
$(12.50)
or 5 hours  $30 per hour
Change in Profit
200  100 
100  (12.50) 
Increase
3-67 (a)
During
$20,000
Regular hours
(1,250)
Overtime hours
$18,750
In order to produce 13,000 standard doors and 5,000 deluxe doors, the
following number of direct labor hours and machine hours are required:
Cutting:
Direct labor hours: 0.5  13,000  1  5,000  11,500 > 8,000 capacity
Machine hours: 2  13,000  3  5,000  41,000 > 40,000 capacity
Assembly:
Direct labor hours: 1  13,000  1.5  5,000  20,500 > 17,500 capacity
Machine hours: 2  13,000  3  5,000  41,000 > 40,000 capacity
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Chapter 3: Using Costs in Decision Making
Finishing:
Direct labor hours: 0.5  13,000  0.5  5,000  9,000 > 8,000 capacity
Machine hours: 1  13,000  1.5  5,000  20,500 > 15,000 capacity
The direct labor hour capacity in each department and the machine hour
capacity in each department are not adequate to meet the next month’s
demand.
(b)
Linear programming can be used to solve this problem. The product
contribution margins needed for the objective function are:
Standard
$150
Deluxe
$200
Variable cost per unit
110
155
Contribution margin per unit
$40
$45
Sales price per unit
Let S denote the number of standard doors to produce and D denote the
number of deluxe doors to produce. The linear programming problem is:
Maximize $40S + $45D
Subject to the following constraints:
Cutting:
Direct labor hours: 0.5S  D ≤ 8,000
Machine hours: 2S  3D ≤ 40,000
Assembly:
Direct labor hours: S  1.5D ≤ 17,500
Machine hours: 2S  3D ≤ 40,000
Finishing:
Direct labor hours: 0.5S  0.5D ≤ 8,000
Machine hours: S  1.5D ≤ 15,000
Maximum demand:
S ≤ 13,000
D ≤ 5,000
Nonnegativity:
S > 0, D > 0
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Atkinson, Solutions Manual t/a Management Accounting, 6E
Using the “Solver” function in Excel to solve the linear programming
problem, the optimal solution is to produce 13,000 standard doors and
1,333 (rounded down) deluxe doors. Though not required, the
contribution margin with this solution is $579,985.
(c)
The contribution margin for standard doors remains the same, but the
contribution margin for deluxe doors is now $50:
Deluxe
Sales price per unit
$200
Variable cost per unit ($80 + $56 + $14)
150
Contribution margin per unit
$50
The linear programming problem is now:
Maximize $40S + $50D
Subject to the following constraints:
Cutting:
Direct labor hours: 0.5S  0.8D ≤ 8,000
Machine hours: 2S  3D ≤ 40,000
Assembly:
Direct labor hours: S  1.5D ≤ 17,500
Machine hours: 2S  3D ≤ 40,000
Finishing:
Direct labor hours: 0.5S  0.5D ≤ 8,000
Machine hours: S  1.2D ≤ 15,000
Maximum demand:
S ≤ 13,000
D ≤ 5,000
Nonnegativity:
S > 0, D > 0
Using the “Solver” function in Excel to solve the linear programming
problem, the optimal solution is to produce 12,000 standard doors and
2,500 deluxe doors. Though not required, the contribution margin with
this solution is $605,000, as compared to $579,985 in part (b). The slight
increase in efficiency with respect to deluxe door production has
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Chapter 3: Using Costs in Decision Making
increased the number of deluxe doors in the optimal product mix and
increased the total contribution margin.
(d)
3-68 (a)
The following alternatives may be considered:
1.
Add more machines in the finishing department.
2.
Use overtime or add a second shift in the cutting department.
To maximize monthly commissions while working 160 hours per month,
Spencer should devote the maximum allowable time (90 hours) to
customer group B because that group provides the largest average
commission per hour of Spencer’s time. Spencer should next allocate the
maximum of 60 hours to customer group A because that group provides
the next largest average commission per hour. Finally, Spencer should
devote the remaining 10 hours of his 160 hours to group C.
Customer Group
A
B
C
Average monthly sales
per customer
Commission
6%
5%
4%
$54
$30
$8
3
1.5
0.5
$18
$20
$16
Current hours
60
90
60
Hours per month
60
90
10 Total: 160 hours
(40 hours per week)
Average commission
Hours per customer per
monthly visit
Average commission
per hour
(b)
$900 $600 $200
Spencer should also consider the probable future increased profitability
from customers in group C, as well as likely future profitability of
customers in the other groups.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
CASES
3-69 Wage rate = $3,600 ÷ 150 hours = $24/hour.
Neighboring laboratory charges $80 ÷ 2 hours = $40/hour, which also equals
$100 ÷ 2.5 and $160 ÷ 4.
(a)
Month
June
July
August
Simple
Routine
800
600
750
Simple
Nonroutine Complex
250
450
200
400
225
450
Total
Hours
4,025.0
3,300.0
3,862.5
Equivalent
Workers
26.83
22.00
25.75
Workers In-house
Hours Short
Outside Outside
Total
Hired Wages* June July August Hours Charges
Cost
20 $216,000 1,025 300 862.5 2,187.5 $87,500 $303,500
21
226,800
875 150 712.5 1,737.5
69,500 296,300
22
237,600
725
0 562.5 1,287.5
51,500 289,100
23
248,400
575
0 412.5
987.5
39,500 287,900
24
259,200
425
0 262.5
687.5
27,500 286,700
25
270,000
275
0 112.5
387.5
15,500 285,500
26
280,800
125
0
0.0
125.0
5,000 285,800
27
291,600
0
0
0.0
0.0
0 291,600
*$3,600 per month × 3 months = $10,800 for one worker for a quarter.
In-house wages equal $10,800 times the number of workers hired.
Dr. Barker should employ 25 workers at a total cost of $285,500.
(b)
Outside charges will exceed the monthly wages of an additional worker hired
by Barrington if the number of outside hours exceeds $3,600 ÷ $40 = 90.
Therefore, Barrington should hire an additional employee when the
outside services are expected to exceed 90 hours in any month, which
corresponds to 90 ÷ 150 = 0.6 equivalent workers.
Month
June
July
August
Simple
Simple
Routine Nonroutine Complex
800
250
450
600
200
400
750
225
450
Total
Hours
4,025.0
3,300.0
3,862.5
Equivalent
Workers
26.83
22.00
25.75
Therefore, Barrington should hire 27 workers in June, 22 in July, and 26
in August.
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Chapter 3: Using Costs in Decision Making
Month
June
July
August
Total cost
Workers
Hired
27
22
26
Fixed
Outside
Cost
Hours
$97,200
0
79,200
0
93,600
0
Outside
Charges
0
0
0
Total
Cost
$97,200
79,200
93,600
$270,000
3-70 (Numbers in square brackets below refer to reference numbers that appear at
the end of the solution for this case.)
(a)
An organization’s value proposition defines what the organization tries
to deliver to its customers. As described in Chapter 2, the value
proposition is the unique mix of product performance, price, quality,
availability, ease of purchase, service, relationship, and image that a
company offers its targeted group of customers. The value proposition
represents the “advantage” of a company’s strategy; it should
communicate what it intends to deliver to its customers better or
differently from competitors.
Nordstrom is an upscale retailer, often included among lists of luxury
retailers. Nordstrom’s value proposition can be described as “quality,
value, selection, and service”
(http://about.nordstrom.com/aboutus/?origin=hp=leftnav,
December 3, 2002) or “superior service and high quality, distinctive
merchandise”
(http://about.nordstrom.com/aboutus/investor.asp?origin=footer,
April 7, 2003). Nordstrom’s sales force is legendary for its customer
service. As mentioned below in part (c), sales staff kept handwritten
notes about customers’ sizes and designer preferences, as well as special
occasions, in loose-leaf binders [2]. Sales staff would then match the
information with new merchandise arrivals and store promotions.
Saks Fifth Avenue is a luxury retailer that can be described much like
Neiman-Marcus is described in Chapter 2. Both stores target fashionconscious customers with high disposable incomes who are willing to
pay more for high-end merchandise. Fred Wilson, former Saks Fifth
Avenue divisional CEO, viewed Neiman Marcus as Saks’ closest
competitor [4]. Saks Fifth Avenue offers a wide assortment of distinctive
luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts
(10-K Report, Saks Fifth Avenue, Fiscal year ending February 3, 2000).
Saks Fifth Avenue’s web site states: “Saks Fifth Avenue today is
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Atkinson, Solutions Manual t/a Management Accounting, 6E
renowned for its superlative selling services and merchandise offerings.
The best of European and American designers for men and women are
sold throughout its 47 stores servicing customers in 23 states.”
(http://www.saksfifthavenue.com/html/aboutus/saks_history.jsp?bmUID
=iSXpdBi).
(b)
Nordstrom centralized purchasing in an attempt to leverage its buying
power. Previously, Nordstrom’s buying transpired through more than 12
offices [6]. Nordstrom negotiated with suppliers to reduce markups on
merchandise [7]. These measures should reduce Nordstrom’s costs
without adversely affecting the company’s ability to fulfill its value
proposition.
Nordstrom also laid off 2,500 employees between September 1 and
October 19, 2001. Mindful of the importance of its sales staff,
Nordstrom’s layoffs focused on “back-office employees” [7]. Retaining
most of the sales staff would help Nordstrom continue to fulfill its value
proposition. Nevertheless, a retail analyst noted that Nordstrom needed
to dramatically cut costs, pointing out that Nordstrom’s annual selling,
general, and administrative expenses of approximately $100 per square
foot overshadowed the $60 industry average [2].
(c)
Nordstrom invested in computerized inventory-tracking systems [5, 6].
The previous system relied partly on sales staff’s handwritten notes in
loose-leaf binders [2]. In addition to inventory management, new
technology was introduced to improve customer service:
Nordstrom’s salespeople are getting ready to throw out their
little black books. Instead of filling pages with handscrawled
notes about customers’ sizes and designer preferences, 20,000
sales clerks at the Seattle chain’s 137 stores soon will be using
new software and mobile devices to track their customers’
tastes and match them to new merchandise arrivals and store
promotions.
For Nordstrom, what makes sense is getting customer
information to retail sales personnel in real time, whether those
customers are conducting business on the Web, in the store or
over the telephone [3].
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Chapter 3: Using Costs in Decision Making
Sales staff could also contact customers as soon as a desired item arrived
in the store and better serve repeat customers with readily available
information on sizes and preferences [3].
Nordstrom’s 2001 Annual Report (p. 4) reports that implementation of
the perpetual inventory system is “going very well,” with the expectation
that the system will help buyers improve decision-making, manage
inventory, and respond quickly to trends. The 2001 Annual Report
covers the fiscal year from February 2001 to January 2002.
(d)
Nordstrom’s efforts affected the classic cost-volume-profit elements of
sales prices, product costs, product mix, and selling, general, and
administrative expenses. The objective was to increase net income. In an
effort to move excess inventory, Nordstrom ran a clearance sale, unusual
for the company [7]. Nordstrom also altered its product mix by
expanding its offerings of lower-priced merchandise. Nordstrom’s efforts
to decrease selling, general, and administrative expenses are described in
part (b). Net sales increased about 7% in 2000 (comparing fiscal years
ending January 2000 and January 2001) due to new store openings;
comparable store sales were flat (Nordstrom 2001 Annual Report, p. 9).
Operating income decreased 50% and gross profit as a percent of sales
decreased.
In 2001 (comparing fiscal years ending January 2001 and January 2002),
net sales increased about 2% due to new store openings; comparable
store sales decreased during the year. Operating income increased 10%
after declining 50% the year before. The following year, net sales
increased 6% and operating income increased 30%. Gross profit as a
percent of sales decreased in 2001 and increased in 2002
(http://about.nordstrom.com/aboutus/investor/10yr_stats_printable.asp,
April 7, 2003).
(e)
“Reinvent Yourself” was an advertising campaign that began in February
2000 (see [5] for details). The advertising campaign was Nordstrom’s
first national television advertising campaign and targeted younger
shoppers than its traditional clientele, concurrent with Nordstrom’s push
to appeal to a younger clientele with “flashing lights and funky clothes”
[1] and store columns painted orange for a more youthful look [7]. The
ads did not emphasize Nordstrom’s customer service. Instead, Nordstrom
planned to impress customers with its service once they had ventured
into the store [5].
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Atkinson, Solutions Manual t/a Management Accounting, 6E
The campaign was less than successful; the company announced that it
had “overreached.” Nordstrom had “alienated its faithful clientele” [7] by
trying to appeal to younger shoppers. That is, there was an opportunity
cost to targeting younger shoppers. Some financial results appear in part
(d).
Nordstrom may need to reconsider its value proposition. Reference [2]
comments:
..the retail world has changed since Nordstrom’s heyday. With
the rise of such speciality retailers as Talbots, The Limited,
and Ann Taylor, competition is ferocious. And its old winning
formula—great customer service—isn’t the easy advantage it
once was. Neiman Marcus Group Inc is now No. 1 in service
among department-store chains. It generates annual sales of
$490 per square foot, handily eclipsing second-place
Nordstrom at $342. And Talbots Inc also took a page from
Nordstrom’s playbook. The Hingham (Mass.) chain improved
its service and stuck to classic merchandise. The result: It
ended last year as one of the best-performing retailers in the
nation, with same-store sales jumping 17%.
The same article points out that in response to growing customer
focus on value, Nordstrom needs excellence in inventory
management and control of expenses in addition to its recognized
excellence in the “art” of retailing.
Saks Fifth Avenue’s “Wild About Cashmere” campaign offered a
wide range of products in cashmere and was designed to appeal to
young, fashion-hungry customers. The campaign not only
alienated loyal 45-54 year-old customers with “edgy, midriffbaring fashion,” but also confused customers who did realize the
connection between cashmere and the goat mannekins in the store,
or why there were audios of goats bleating [4]. Like Nordstrom,
Saks appears to have suffered some opportunity cost from this
effort to expand its customer base.
References
[1]
Anonymous. 2001. Nordstrom Inc. To Be As Much as 50% Below
Expectations. The Wall Street Journal (January 8), B8.
– 92 –
Chapter 3: Using Costs in Decision Making
[2]
Anonymous. 2001. Can Nordstroms Find The Right Style? Business Week (July
30), 59–62.
[3]
Bednarz, A. 2002. The Customer Is King. Network World (December 2), 65–
66.
Byron, E. 2006. Struggling Saks Tries Alternations In Management. Wall
Street Journal (January 10), B1.
[4]
[5]
Cuneo, A. Z. 2000. Nordstrom Breaks with Traditional Media Plan. Advertising
Age (February 14), 4, 71.
[6]
Lee, L. 2000. Nordstrom Cleans Out Its Closets. Business Week (May 22), 105.
[7]
Merrick, A. 2001. Nordstrom Accelerates Plans to Straighten Out Business:
Upscale Retailer Offers Lower-priced Goods, Lays Off Staff and Holds
Clearance Sale. Wall Street Journal (October 19), B4.
Nordstrom previously provided the following list of references at its web site
http://about.nordstrom.com/aboutus/faq/faq.asp#12:
"With a New location in Dadeland Mall, Nordstrom Seeks to Become a Florida
Institution," The Miami Herald, November 12, 2004
"Author of Books on Nordstrom Culture to Address Virginia Trade Show,"
Richmond Times-Dispatch, September 23, 2004
"Nordstrom Regains Its Luster - Challenge Awaits as Rivals Encroach on Image of
Affordable Luxury," The Wall Street Journal, August 19, 2004
"Shoppers put Heart, Soles Into Yearly Nordstrom Sale," The Seattle Times, July 17,
2004
"Q&A with Blake Nordstrom - 4th Generation Leads Growth of Nordstrom," The
Charlotte Observer, March 12, 2004
"Nordstrom 'Cachet' Hits Wellington Friday," Palm Beach Post, November 10, 2003
"Back in the Family; Fourth Generation Takes Control After a Brief Change in
Company Leadership," Seattle Post-Intelligencer, June 27, 2001
"A Time of Change; Company Makes Huge Leaps with Expansion, Public Stock
Offering," Seattle Post-Intelligencer, June 26, 2001
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Atkinson, Solutions Manual t/a Management Accounting, 6E
"Still in Style; From Small Shoe Store, to Upscale Retailer, Company has Kept
Founder's Values," Seattle Post-Intelligencer, June 25, 2001
"Success Came a Step at a Time; Company Rose From Small Seattle Shoe Store to
Retail Giant with National Appeal," Seattle Times, May 29, 2001
Books:
The Nordstrom Way by Robert Spector and Patrick D. McCarthy
Fabled Service: Ordinary Acts, Extraordinary Outcomes by Bonnie Jameson and
Betsy Sanders
3-71 (a)
Unit cost
AA100
AA101
AA102
$560
$400
$470
Direct materials: AA 100
—
680
680
Direct labor
60
30
60
Variable mfg. overhead
60
30
60
Total variable mfg. cost
$680
$1,140
$1,270
20
30
30
$700
$1,170
$1,300
940
1,500
1,700
Contribution margin per ton
$240
$330
$400
Hours per ton
4 hrs
6 hrs
8 hrs
$60
$55
$50
Direct materials: Chem. &
frag.
Variable selling cost
Total variable cost
Sales price
Contribution margin per hour
(b)
AA100 has a higher contribution margin per hour than AA101 and
A102. Aramis should produce AA100 up to 600 tons. Since the
production of 600 tons of AA100 requires 2,400 = 600 × 4 hours, which
equals available capacity, no other products will be manufactured.
Therefore, the optimal production levels are: AA100: 600 tons; AA101:
0 tons; and AA102: 0 tons.
(c)
Opportunity cost is $60 per hour (the contribution margin per hour for
AA100 production that must be sacrificed) and each ton of AA101
requires 6 hours.
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Chapter 3: Using Costs in Decision Making
Required contribution margin per ton (= $60 × 6)
Variable cost per ton
Required minimum sales price per ton
(d)
$360
1,170
$1,530
It is worthwhile operating the plant overtime. The optimal production
level is AA100: 600 tons; AA101: 100 tons; and AA102: 0 tons.
Explanation: The regular capacity of 2,400 hours (before operating the
plant overtime) is used to produce 600 tons of AA100. How should 600
hours of overtime be used? We know that the demand for AA100 has
been filled fully. Therefore, we consider AA101 and AA102. AA101 has
a higher contribution margin per hour than A102. With 600 hours of
overtime, the company can produce 100 tons of A101 (600 hours  6
hours per ton), which is less than the maximum demand. This leaves no
hours for A102.
Under overtime:
AA100
$560
AA101
$400
AA102
$470
Direct materials: AAA100
—
740
740
Direct labor
90
45
90
Variable mfg. overhead
90
45
90
Total variable mfg. cost
$740
$1,230
$1,390
20
30
30
$760
$1,260
$1,420
940
1,500
1,700
$180
$240
$280
4
6
8
$45
$40
$35
Direct materials: Chem. & frag.
Variable selling cost
Total variable cost
Sales price
Contribution margin per ton
Hours per ton
Contribution margin per hour
Since contribution margins per hour for AA101 and AA102 are positive,
it is worthwhile operating the plant overtime.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-72 TEACHING NOTE: A VOTRE SANTÉ 1
The A Votre Santé (AVS) case is multi-faceted in that it requires students to
incorporate operational measures into product costing results, and also to
understand cost accounting from a variety of perspectives, such as:
 Product versus period costs
 Variable versus fixed costs
 Activity based costing
 Relevant costs and opportunity costs
Additionally, the case questions require both quantitative and qualitative
analyses of the business issues faced by AVS. AVS has been used in a
graduate-level managerial accounting class for MBAs, and would be most
appropriate for an advanced undergraduate or a graduate-level accounting or
MBA course.
The detail in the case is rich enough to support a variety of analyses.
Alternative uses could be to have the student construct a cost of goods
manufactured statement or a traditional financial statement, both of which
reinforce the differences between product and period costs. Additionally,
alternative decision analysis questions could be developed using the variable
and fixed cost structures described in the case. Case question number two is
only one example of a potential decision analysis question.
(a) Contribution Margin Income Statement
To develop the contribution margin income statement, you first have to
calculate the number of bottles of wine produced by AVS. This number is
dependent upon the yield from the grapes. The relevant calculations are as
follows:
Yield:
Pounds harvested
Loss in processing
Yield:
1
Chardonnay
Grapes
100,000
10,000 10%
90,000
Generic
Grapes
60,000
3,000 5%
57,000
© 2010 Priscilla S. Wisner. Adapted and used by permission of Priscilla S. Wisner.
– 96 –
Chapter 3: Using Costs in Decision Making
Bottles of wine produced:
Chardonnay
Estate
Regular
Blanc de
Blanc Total
Pounds of grapes:
Chardonnay grapes
Generic grapes
Total pounds of grapes
72,000
0
72,000
18,000
9,000
27,000
0
48,000
48,000
90,000
57,000
147,000
Bottles (3 lb./bottle)
24,000
9,000
16,000
49,000
The contribution margin income statement (Teaching Note Exhibit 1) is fairly
straightforward, with the following concepts or calculations causing the most
difficulty:
 The inclusion of liquor taxes and sales commissions in variable costs:
These are both period expenses, but are clearly based upon the number
of bottles sold, and therefore are included in the variable costs.
 Where to include the wine master expense: Since the wine master is paid
according to number of blends, not number of bottles, this expense is
listed as a fixed cost. Arguably, it could be listed as a variable cost, given
that the cost will be based on the number of wines produced. As part of
the discussion we will examine the rationale behind listing wine master
as a fixed or a variable expense.
 Barrel expense: The case states that the barrels produce the equivalent of
40 cases of wine. A case of wine is post-fermentation/bottling and
therefore after the 10% loss has occurred. The barrels contain the wine at
the start of the process. Therefore, there have to be enough barrels to
hold all the wine at the beginning of the process, not at the end. This
factor results in 63 (62.5) barrels being required for the harvest 2.
2
Each case of wine requires 36 pounds of grapes (post-fermenting). A barrel holds the
equivalent of 40 cases of wine (post-fermenting), or 1,440 pounds of grapes (40 × 36). To
convert the post-fermenting grapes to pre-fermenting grapes, they must be divided by 0.9, or
1,440/0.9 equals 1,600 pounds of grapes. The harvest of 100,000 pounds of grapes therefore
requires 62.5 barrels for storage (100,000/1,600).
– 97 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
Teaching Note Exhibit 1: Contribution Margin Income Statement
Number
Sales
Price of Bottles
Chardonnay - Estate
$ 22
24,000 $528,000
Chardonnay (non-Estate)
$ 16
9,000 $144,000
Blanc de Blanc
$ 11
16,000 $176,000
Total Revenues
49,000 $848,000
Variable Costs
Grapes
$124,000
Bottle, labels, corks
122,500
Harvest labor
14,500
Crush labor
2,400
Indirect materials
6,329
Liquor taxes
147,000
Sales distribution
98,000
Barrels
4,725
Total Variable Costs
$519,454 61.3%
Contribution Margin
$328,546 38.7%
Fixed Costs
Admin. rent and office
$ 20,000
Depreciation
8,100
Lab expenses
8,000
Production office
12,000
Sales
30,000
Supervisor
55,000
Utilities
5,500
Waste treatment
2,000
Wine master
15,000
Administrative salary
75,000
Total Fixed Costs
$230,600
Operating Margin
$ 97,946 11.6%
Average revenue
per bottle
$ 17.31
of sales
of sales
of sales
$ 2.00
per bottle
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Chapter 3: Using Costs in Decision Making
(b) Additional Purchase Opportunity, Quantitative Analysis
Part b asks, “What is the maximum amount that AVS would pay to buy
an additional pound of Chardonnay grapes?” There are three parts to
calculating this answer: the benefit from the additional Chardonnay wine
to be sold, the relevant costs related to producing this wine and the
opportunity cost of not producing as much Blanc de Blanc wine.
Teaching Note: Exhibit 2 displays the calculations relevant to this
decision. Chardonnay regular wine requires a 2 to 1 mixture of
Chardonnay and generic white grapes. Therefore, the 18,000 pounds of
Chardonnay grapes will be combined with 9,000 pounds of generic white
grapes. The 27,000 pounds of grapes will result in an additional 9,000
bottles of new Chardonnay regular wine being produced. However, it
will also result in a 3,000-bottle decrease in the amount of Blanc de
Blanc wine produced, since some generic grapes will now be used for
the Chardonnay-regular wine. Recall that only Chardonnay wine is
processed in barrels.
Teaching Note Exhibit 2: Decision Analysis, Additional Grape Purchase
Yield:
Pounds
Loss in processing
Yield:
Bottles of wine:
Chardonnay
Grapes
20,000
2,000
18,000
9,000
Additional Chardonnay Product Line
Sales Revenue
$ 126,000
Costs
Generic grapes
$
6,079
Bottle, labels, corks
22,500
Indirect materials
1,163
Liquor taxes
27,000
Sales distribution
18,000
Barrels
975
– 99 –
10%
2 lbs. of Chardonnay grapes per bottle
(along with 1 lb. of generic grapes)
9,000 bottles × $14/bottle
9,000 pounds × $0.6754/pound
# bottles × $2.50
# bottles × $1.55/12
$3/bottle
$2/bottle
13 barrels × $300/4 years
Atkinson, Solutions Manual t/a Management Accounting, 6E
Wine master
5,000
Total costs
$
80,717
Gain from new Chardonnay
$
45,283
Lost Sales of Blanc de Blanc Wine
Sales Revenue
Costs
Generic grapes
Bottle, labels, corks
Indirect materials
Liquor taxes
Sales distribution
Total costs
$ 33,000
3,000 bottles × $11/bottle
$ 6,079
7,500
388
9,000
6,000
9,000 pounds × $0.6754/pound
# bottles × $2.50
# bottles × $1.55/12
$3/bottle
$2/bottle
$ 28,967
Lost Contribution Margin
$ 4,033
Net Impact
$ 41,250
Required 15% Return on Sales
$ 18,900
Total Net Benefit
$ 22,350
Pounds of Grapes
20,000
Maximum Price per Pound
15%
$ 1.1175
(c) Additional Purchase Opportunity, Qualitative Analysis
The following factors would support AVS’s decision to purchase the
additional grapes:
 Potential increase in market share
 Diversification of suppliers
 Ability to leverage fixed costs over more production
 If quality of purchased grapes is perceived to be better
 To block a competitor from buying the grapes
 Ability to focus time and effort on wine making (rather than
harvesting and crushing)
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Chapter 3: Using Costs in Decision Making
 Creates an incentive for the current grower to control costs
The following factors would support AVS’s decision to reject the grape
purchase:
 Poor quality of the grapes
 An additional AVS Chardonnay wine creates confusion in the
marketplace
 Lack of control over the harvest and crush process
 Lack of confidence in the additional sales forecast
 Inability of the current capacity (e.g. bottling line, space) to support
additional production
 Inability to use the additional barrels purchased in future years
 Cannibalization of the current Chardonnay, Chardonnay-Estate or
Blanc de Blanc sales
 Reliability concerns with the new supplier
 Other hidden costs
Summary
The AVS case is based upon actual wine industry data, although the data has
been simplified to reinforce the teaching points and concepts. It is also true to
the wine making process, with the exception of AVS’s process of making the
Chardonnay regular wine from the fermented Chardonnay and Blanc de Blanc
wines. This can be done, but most commonly the juice from the wine grapes is
combined at the start of the fermenting process, so that they can ferment
together. Because of the different yield rates in the fermenting process, the case
had the wines ferment separately and blend at the end.
Note: The full case, which includes activity-based cost analysis, can be taught
in a 75-minute class, or by omitting the decision analysis question 50 minutes
would be sufficient. The case author has also used it to teach the differences
between the financial income statement reporting (product and period costs)
and the contribution margin income statement reporting (variable and fixed
costs), and then assigned decision analysis and/or the ABC costing as an
additional assignment.
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