Chapter 12 – Exercises
Exercise 3
a.
DINNER WARE COMPANY
Differential Product Analysis Report
Bowls
Plates
Cups
Differential revenue from monthly sales:
Revenue from sales ................................. $ 1,500,000 $ 2,350,000 $ 975,000
Differential costs of monthly sales:
Variable cost of goods sold .................... $ 540,0001 $ 840,0002 $ 468,0003
Variable selling and administrative
expenses ..............................................
221,4004
574,0005
246,0006
$ 761,400 $ 1,414,000 $ 714,000
Monthly differential income from sales ..... $ 738,600 $ 936,000
$ 261,000
Computations:
1$900,000 × (1.0 – 0.40) = $540,000
2$1,400,000 × (1.0 – 0.40) = $840,000
3$780,000 × (1.0 – 0.40) = $468,000
4$270,000 × (1.0 – 0.18) = $221,400
5$700,000 × (1.0 – 0.18) = $574,000
6$300,000 × (1.0 – 0.18) = $246,000
b. The Cups line should be retained. As indicated by the differential analysis in
part (a), the income would decrease by $261,000 (excess of differential
revenue over differential cost) if the Cups line is discontinued.
Exercise 6
a.
BALBOA TECHNOLOGIES COMPANY
Proposal to Manufacture Carrying Case
Purchase price of carrying case ..................................
Differential cost to manufacture carrying case:
Direct materials..........................................................
Direct labor.................................................................
Variable factory overhead (20% × $7.50) .................
Cost savings from manufacturing carrying case .......
$20.00
$9.00
7.50
1.50
18.00
$ 2.00
b. It would be advisable to manufacture the carrying cases because the cost
savings would be $2.00 per unit. Fixed factory overhead is irrelevant, since it
will continue whether the carrying cases are purchased or manufactured.
Exercise 11
a.
SPOKANE COFFEE COMPANY
Proposal to Process Columbian Coffee Further
Differential revenue from further processing per batch:
Revenue from sale of Decaf Columbian [(5,000
pounds – 400* pounds evaporation) × $12.50] ...............
Revenue from sale of Columbian coffee
(5,000 pounds × $9.00) .....................................................
Differential revenue ..................................................................
Differential cost per batch:
Additional cost of producing Decaf Columbian .................
Differential loss from further processing:
Decaf Columbian per batch .................................................
$ 57,500
45,000
$ 12,500
14,110
$ (1,610)
*8% × 5,000 pounds
b. The differential revenue from processing further to Decaf Columbian is less
than the differential cost of processing further. Thus, Spokane Coffee
Company should sell Columbian coffee and not process further to Decaf
Columbian.
c. The price of Decaf Columbian would need to increase to $12.85 per pound in
order for the differential analysis to yield neither an advantage nor a
disadvantage (indifference). This is determined as follows:
Net Disadvantage of Further Processing
$1,610
=
= $0.35 per lb.
4,600 lbs.
Volume of Decaf Columbian
The price of Decaf Columbian would need to be $0.35 higher, or $12.85, to
yield no net differential income or loss. This is verified by the following
differential analysis:
Differential revenue from further processing per batch:
Revenue from sale of Decaf Columbian [(5,000
pounds – 400 pounds evaporation) × $12.85] ................
$ 59,110
Revenue from sale of Columbian coffee
(5,000 pounds × $9.00) .....................................................
45,000
Differential revenue ..................................................................
$ 14,110
Differential cost per batch:
Additional cost of producing Decaf Columbian .................
14,110
Differential income from further processing:
Decaf Columbian per batch .................................................
$
0
Exercise 13
a.
Budgeted cost per battery for June = Total manufacturing costs ÷ Budgeted
production
Budgeted cost per battery for June = $1,434,000 ÷ 60,000 batteries = $23.90
per battery
b.
Total costs
Less fixed costs
Total variable costs
$1,434,000
288,000
$1,146,000
Variable cost per unit:
$1,146,000 ÷ 60,000 batteries = $19.10 per battery
The lowest bid should be sufficient to cover the variable cost of $19.10 per unit.
Exercise 21
a.
Large
Medium
Units produced........................
Revenues .................................
Less variable costs .................
Contribution margin ...............
Less fixed costs ......................
Income from operations .........
Small
5,000
$ 900,0001
720,0004
$ 180,000
Total
5,000
$750,0002
650,0005
$ 100,000
5,000
$675,0003
550,0006
$ 125,000
$ 2,325,000
1,920,000
$ 405,000
125,000
$ 280,000
Computations:
× 5,000 units = $900,000
2$150 × 5,000 units = $750,000
3$135 × 5,000 units = $675,000
4$144 × 5,000 units = $720,000
5$130 × 5,000 units = $650,000
6$110 × 5,000 units = $550,000
1$180
b. The Small glass product is the most profitable in a bottleneck operation,
demonstrated as follows:
Large
Medium
Small
Unit contribution margin ..........
$36
$
Autoclave hours per unit ..........
÷10
÷
Unit contribution margin per production
bottleneck hour .....................
$3.60 $
20 $
8÷
2.50
25
4
$6.25
Chapter 12 – Problems
Problem 2
1.
CATALINA TOOLING COMPANY
Proposal to Replace Machine
Annual manufacturing costs associated with present machine .......
Annual manufacturing costs associated with proposed
new machine.....................................................................................
Annual reduction in manufacturing costs ...........................................
Number of years applicable ..................................................................
Cost reduction attributable to difference in manufacturing costs ...
Proceeds from sale of present machine ..............................................
Cost of new machine .............................................................................
Differential income anticipated from replacement, eight-year total ......
2.
$ 33,150
18,200
$ 14,950
×
8
$119,600
24,000
$143,600
90,000
$ 53,600
Other factors to be considered include the following:
a. Are there any improvements in the quality of work turned out by the new
machine?
b. What effect does the federal income tax have on the decision?
c. What opportunities are available for the use of the $66,000 of funds
($90,000 less $24,000 sales price of old machine) that are required to
purchase the new machine?
After considering such factors as those listed above, the net cost reduction
anticipated over the eight-year period may not be sufficient to justify the
replacement. For example, if there is an opportunity to invest the $66,000
($90,000 – $24,000) of additional funds required for the replacement in a project
that earns a return of 12%, the amount of the return over the eight-year period
would be $63,360 ($66,000 × 12% × 8). This is more than the differential income
determined in part (1), suggesting the proposal to replace should not be
accepted.
Problem 5
1. $240,000 ($1,200,000 × 20%)
2.
a. Total costs:
Variable ($50.00 × 20,000 units) ....................................................
Fixed ($340,000 + $160,000) ..........................................................
Total costs .................................................................................
$1,000,000
500,000
$1,500,000
Cost amount per unit: $1,500,000 ÷ 20,000 units .........................
$75.00
b. Markup Percentage =
=
Desired Profit
Total Costs
$240,000
$1,500,000
= 16%
3.
c. Cost amount per unit .....................................................................
Markup ($75.00 × 16%) ...................................................................
Selling price ....................................................................................
$75.00
12.00
$87.00
a. Total manufacturing costs:
Variable manufacturing costs ($46 × 20,000 units) .....................
Fixed factory overhead ..................................................................
Total manufacturing costs ........................................................
Cost amount per unit: $1,260,000 ÷ 20,000 units .........................
$ 920,000
340,000
$1,260,000
$63.00
b. Markup Percentage =
Desired Profit + Total Selling and Administr ative Expenses
Total Manufacturing Costs
=
$240,000 + $160,000 + ($4 × 20,000)
$1,260,000
=
$240,000 + $160,000 + $80,000
$1,260,000
=
$480,000
$1,260,000
= 38.10% (rounded)
c. Cost amount per unit ..........................................................
$63.00
Problem 5, Concluded
Markup ($63.00 × 38.10%) ...................................................
(rounded)
Selling price ........................................................................
4.
24.00
$87.00
a. Variable cost amount per unit: $50.00
Total variable costs: $50 × 20,000 units = $1,000,000
b. Markup Percentage =
Desired Profit + Total Fixed Costs
Total Variable Costs
=
$240,000 + $340,000 + $160,000
$1,000,000
=
$740,000
$1,000,000
= 74%
c. Cost amount per unit .....................................................................
Markup ($50.00 × 74%) ...................................................................
Selling price ....................................................................................
$50.00
37.00
$87.00
5. The cost-plus approach price of $87 should be viewed as a general guideline
for establishing long-run normal prices. Other considerations, such as the
price of competing products and general economic conditions of the
marketplace, could lead management to establish a short-run price more or
less than $87.
6.
a.
TWILIGHT LUMINA COMPANY
Proposal to Sell to Contech Inc.
Differential revenue from accepting offer:
Revenue from sale of 3,000 additional units at $52.00 ...........
Differential cost of accepting offer:
Variable costs of 3,000 additional units at $46* .......................
Differential income from accepting offer .....................................
*$50 – $4 (Excluding variable selling and administrative expenses)
b. The proposal should be accepted.
$156,000
138,000
$ 18,000