Relevant Cost

CHAPTER 13 SHORT-RUN DECISION MAKING: RELEVaNT COSTING 1 DISCUSSION QUESTIONS 1. Tactical decisions are short run in nature; they involve choosing among alternatives with an immediate or limited end in view. Strategic decisions involve selecting strategies that yield a long-term competitive advantage. 2. Depreciation is an allocation of a sunk cost. This cost is a past cost and will never differ across alternatives. 3. The salary of the supervisor of an assembly line with excess capacity is an example of an irrelevant future cost for an accept-or-reject decision. 4. Past costs can be used to help predict future costs. 5. Yes.

Suppose, for example, that sufficient materials are on hand for producing a part for two years. After two years, the part will be replaced by a newly engineered part. If there is no alternative use for the materials, then the cost of the materials is a sunk cost and not relevant in a make-or-buy decision. 6. A complementary effect is the loss of revenue on a secondary product when the primary product is dropped. Thus, complementary effects may make it more expensive to drop a product. 7. A manager can identify alternatives by using his or her own knowledge and experience and by obtaining input from others who are familiar with the problem. . No. Joint costs are irrelevant. They occur regardless of whether the product is sold at the split-off point or processed further. 9. Yes. The incremental revenue is $1,400, and the incremental cost is only $1,000, creating a net benefit of $400. 10. No. If a scarce resource is used in producing the two products, then the product providing the greatest contribution per unit of scarce resource should be selected. For more than one scarce resource, linear programming may be used to select the optimal mix. 11. If a firm is operating below capacity, then a price that is above variable costs will increase profits. MULTIPLE-CHOICE EXERCISES 13–1e 13–2d 13–3e 13–4c 13–5a 13–6c 13–7c 13–8c 13–9c 13–10c 13–11a 13–12d 3 CORNERSTONE EXERCISES Cornerstone Exercise 13–13 1. There are two alternatives: make the ingredient in-house or purchase it externally. 2. Relevant costs of making the ingredient in-house include direct materials, direct labor, and variable overhead (both manufacturing and marketing in nature). Relevant costs of purchasing the ingredient externally include the purchase price. 3. AlternativesDifferential MakeBuyCost to Make Direct materials$25,000—$25,000 Direct labor15,000—15,000

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Variable manufacturing overhead7,500—7,500 Variable marketing overhead10,000—10,000 Purchase cost—$60,000(60,000) Total relevant cost$57,500$60,000$(2,500) It is cheaper to make the ingredient in-house. This alternative is cheaper by $2,500. 4. AlternativesDifferential MakeBuyCost to Make Direct materials$25,000—$25,000 Direct labor15,000—15,000 Variable manufacturing overhead7,500—7,500 Variable marketing overhead10,000—10,000 Avoidable fixed plant overhead12,000a—12,000 Purchase cost—$60,000(60,000) Total relevant cost$69,500$60,000$9,500 Now it is cheaper to purchase the ingredient.

This alternative is cheaper by $9,500. a$12,000 = $30,000 ? 0. 40 Cornerstone Exercise 13–14 1. costs and benefits of accepting the special order include the sales price of $4, direct materials, direct labor, and variable overhead. No relevant costs or benefits are attached to rejecting the order. 2. If the problem is analyzed on a unit basis: Differential Benefit to AcceptRejectAccept Price$4. 00$—$4. 00 Direct materials(1. 50)—(1. 50) Direct labor(2. 00)—(2. 00) Variable overhead(1. 00)—(1. 00) Decrease in operating income$(0. 50)$0$(0. 50) Operating income will decrease by $5,000 [($0. 50) ? 0,000 units] if the special order is accepted; therefore, the special order should be rejected. Cornerstone Exercise 13–15 1. The two alternatives are to keep the parquet flooring line or to drop it. 2. The relevant benefits and costs of keeping the parquet flooring line include sales of $300,000, variable costs of $250,000, machine rental cost of $30,000, and supervision cost of $5,000. None of the relevant benefits and costs of keeping the parquet flooring line would occur under the drop alternative. 3. Differential KeepDropAmount to Keep Sales$300,000$—$300,000 Less: Variable expenses250,000—250,000

Contribution margin$50,000$—$50,000 Less: Machine rent(30,000)—(30,000) Supervision(5,000)—(5,000) Total relevant benefit (loss)$15,000$0$15,000 The difference is $15,000 in favor of keeping the parquet flooring line. Cornerstone Exercise 13–16 1. Previous contribution margin of the strip line was $175,000. A 25 percent decrease in sales implies a 25 percent decrease in total variable costs, so the contribution margin decreases by 25 percent. New contribution margin for strip = $175,000 – 0. 25($175,000) = $131,250. The reasoning is the same for the plank line, but the decrease is 20 percent.

New contribution margin for plank = $80,000 – 0. 20($80,000) = $64,000. Therefore, if the parquet floor product line were dropped, the resulting total contribution margin for Hickory would equal $195,250 ($131,250 + $64,000). 2. Differential KeepDropAmount to Keep Contribution margin$305,000$195,250$109,750 Less: Machine rent(55,000)(25,000)(30,000) Supervision(30,000)(25,000)(5,000) Total$220,000$145,250$74,750 Notice that the contribution margin for the drop alternative equals the new contribution margins of the strip and plank lines ($131,250 + $64,000).

Also, machine rent and supervision remain relevant across these alternatives. Now the analysis even more heavily favors keeping the parquet line. In fact, company income will be $74,750 higher if all three flooring product lines are kept as opposed to dropping the parquet line. Cornerstone Exercise 13–17 1. Revenue from logs = ($500 ? 8,000) = $4,000,000. 2. Revenue from further processing = $0. 75 ? (8,000 ? 800) = $4,800,000. Further processing cost = $0. 05 ? (8,000 ? 800) = $320,000. Income from further processing = $4,800,000 – $320,000 = $4,480,000. 3.

Jack’s should process the logs into lumber because the company will make $4,480,000 versus the $4,000,000 it would make by selling the logs for use in cabins. Cornerstone Exercise 13–18 1. SwoopRufus Contribution margin per unit$5$15 Required machine time per unit? 0. 10a? 0. 50 Contribution margin per hour of machine time$50$30 a0. 10 = [pic]; 0. 50 = [pic] 2. Since the Swoop sweatshirt yields $50 of contribution margin per hour of machine time (which is higher than the $30 contribution margin per hour of machine time for Rufus), all machine time (i. e. , 7,000 hours) should be devoted to the production of Swoop sweatshirts.

Units of Swoop = [pic] = 70,000 units The optimal mix is Swoop—70,000 units and Rufus—0 units. 3. Total contribution margin of optimal mix= (70,000 units Swoop)$5 = $350,000 Note: Cornerstone Exercise 13–18 (as well as Cornerstone 13–6) clearly illustrates a fundamentally important point involving relevant decision making with a constrained resource. The point is that when making this relevant decision, one should choose the option with the highest contribution margin per unit of the constrained resource—even if that option does not have the highest contribution margin per unit.

For instance, in this exercise, Rufus’ contribution margin is three times greater than Swoop’s contribution margin ($15 > $5). However, because each Rufus sweatshirt requires more than three times as much machine time to produce than each Swoop sweatshirt (. 50 machine hour per Rufus sweatshirt > 0. 10 machine hour per Swoop sweatshirt), Swoop has a higher contribution margin per machine hour than does Rufus ($50 > $30). Cornerstone Exercise 13–19 1. SwoopRufus Contribution margin per unit$5$15 Required machine time per unit? 0. 10a? 0. 50 Contribution margin per hour of machine time$50$30 0. 10 = [pic]; 0. 50 = [pic] Cornerstone Exercise 13–19(Concluded) 2. Since Swoop yields $50 of contribution margin per hour of machine time, the first priority is to produce all of the Swoop sweatshirts that the market will take (i. e. , demands). Machine time required for maximum amount of Swoop = 50,000 maximum units ? 0. 10 hours of machine time required per Swoop sweatshirt = 5,000 hours needed to manufacture 50,000 Swoop sweatshirts. Remaining machine time for Rufus sweatshirts= 7,000 – 5,000 = 2,000 hours Units of Rufus to be produced in remaining 2,000 hours= [pic] = 4,000 units

Now the optimal mix is 50,000 units of Swoop sweatshirts and 4,000 units of Rufus sweatshirts. This mix will precisely exhaust the machine time available. 3. Total contribution margin of optimal mix= (50,000 units Swoop ? $5) + (4,000 units Rufus ? $15) = $310,000 Cornerstone Exercise 13–20 Price= Cost + Markup percentage ? Cost = $95,000 + 0. 15($95,000) = $95,000 + $14,250 = $109,250 Cornerstone Exercise 13–21 1. Desired profit= 0. 10 ? Target price = 0. 10 ? $350 = $35 2. Target cost= Target price – Desired profit = $350 – $35 = $315 4 EXERCISES Exercise 13–22

The correct order is 4, 5, 2, 6, 3, and 1. Exercise 13–23 Steps in Austin’s decision: Step 1:Define the problem. The problem is whether to continue studying at his present university or to study at a university with a nationally recognized engineering program. Step 2:Identify the alternatives. Events A and B. (Students may want to include event I—possible study for a graduate degree. However, future events indicate that Austin still defined his problem as in step 1 above. ) Step 3:Identify costs and benefits associated with each feasible alternative. Events C, E, F, and I. Students may also list E and F in step 5—they are included here because they may help Austin estimate future income benefits. ) Step 4:Total the relevant costs and benefits for each feasible alternative. No specific event is listed for this step, although we can assume that it was done, and that three schools were selected as feasible since event J mentions that two of three applications met with success. Step 5:Assess qualitative factors. Events D, E, F, G, and H. Step 6:Make the decision. Event J is certainly relevant to this. (What did Austin ultimately decide? He decided to stay at SMWU and finish his engineering degree.

He also applied for—and won—summer internships with large West coast companies in the aerospace industry. Currently, he’s applying for jobs and [Plan B] looking into graduate programs. ) Exercise 13–24 1. The two alternatives are to make the component in-house or to buy it from Bryce. 2. AlternativesDifferential MakeBuyCost to Make Direct materials$12. 00—$12. 00 Direct labor8. 25—8. 25 Variable overhead3. 50—3. 50 Purchase cost—$25. 00(25. 00) Total relevant cost$23. 75$25. 00$(1. 25) 3. Zion should make the component in-house because operating income will be $12,500 ($1. 25 ? 0,000) higher than if the part were purchased from Bryce. Exercise 13–25 AlternativesDifferential MakeBuyCost to Make Direct materials$12. 00—$12. 00 Direct labor8. 25—8. 25 Variable overhead3. 50—3. 50 Avoidable fixed overhead*1. 501. 50 Purchase cost—$25. 00(25. 00) Total relevant cost$25. 25$25. 00$0. 25 *Avoidable fixed overhead is the 75% of fixed overhead that would be eliminated if the component were no longer made in-house. Avoidable fixed overhead is relevant because if Zion makes the component, it will incur the cost, but if the component is purchased, that fixed overhead will not be incurred.

Zion should purchase the component from Bryce because it will save $2,500 ($0. 25 ? 10,000) over making it in-house. Exercise 13–26 1. The two alternatives are (1) to accept the special order or (2) to reject the special order. 2. Direct materials$3. 00 Direct labor2. 25 Variable overhead1. 15 Total$6. 40 Relevant manufacturing costs are $6. 40 per unit so the gross profit per unit from the special order is $0. 60 ($7. 00 – $6. 40). The increase in gross profit is $9,000 (15,000 ? $0. 60). Exercise 13–27 In this case, it may be easier to deal with the total costs and revenues of the special order: Revenue ($7. 00 ? 5,000)$105,000 Less variable costs: Direct materials ($3. 00 ? 15,000)$45,000 Direct labor ($2. 25 ? 15,000)33,750 Variable overhead ($1. 15 ? 15,000)17,25096,000 Less labeling machine14,000 Loss on special order$(5,000) Smooth Move should reject the special order because it will reduce income by $5,000. Exercise 13–28 If Petoskey drops Conway, overall profit will decrease by $75,000 as a result of the lost contribution margin ($300,000 – $225,000). Note that the direct fixed expense for depreciation is a sunk cost and not relevant to the decision (i. e. , it will remain unchanged whether Conway is kept or dropped).

Therefore, the overall impact of dropping Conway is that profit decreases by the 75,000 lost contribution margin. As a result, Petoskey should keep Conway because profits are higher with Conway than without Conway. Exercise 13–29 If Petoskey drops Conway, profit will decrease by $75,000 as a result of the lost contribution margin ($300,000 – $225,000). Note that the direct fixed expense for depreciation is a sunk cost and not relevant to the decision (i. e. , it will remain unchanged whether Conway is kept or dropped). In addition, Petoskey will avoid the $80,000 supervisory salary cost if it drops Conway.

Therefore, the overall impact of dropping Conway is that profit decreases by the 75,000 lost contribution margin but increases by the lost supervisory salary of $80,000, which is a net increase in profit of $5,000. Therefore, Petoskey should drop Conway because profits are higher without Conway than with Conway. Exercise 13–30 If Petoskey drops Conway, profit will decrease by $75,000 as a result of the lost contribution margin ($300,000 – $225,000). Note that the direct fixed expense for depreciation is a sunk cost and not relevant to the decision (i. e. , it will remain unchanged whether Conway is kept or dropped).

In addition, Petoskey will avoid the $80,000 supervisory salary cost if it drops Conway. Finally, if Petoskey drops Conway, 20% of Alanson’s contribution margin, or $33,000 (i. e. , . 20 ? $165,000), will also be lost as Conway customers shop elsewhere for Alanson. Therefore, the overall impact of dropping Conway is that profit decreases by the lost Conway contribution margin of $75,000, increases by the lost Conway supervisory salary of $80,000, and decreases by the lost Alanson contribution margin of $33,000, which is a net decrease in profit of $28,000.

Therefore, Petoskey should keep Conway because profits are higher with Conway than without Conway. Exercise 13–31 1. Contribution margin if HS is sold at split-off= $8 ? 20,000 = $160,000 2. Contribution margin if HS is processed into CS: Revenue ($45 ? 4,000)$180,000 Less further processing cost34,000 Contribution margin$146,000 Bozo should sell HS at split-off; profit from selling at split-off will be $14,000 higher ($160,000 – $146,000) than if it were processed into CS. Exercise 13–32 1. RenoTahoe Unit contribution margin$120$75 Painting department hours? 5? 3 Contribution margin per unit scarce resource$24$25 . Assuming no other constraints, the optimal mix is zero units of Reno and 820 units of Tahoe. Total painting department time is 2,460 hours per year; if all of them are devoted to Tahoe production, then 820 ([pic]) units of Tahoe can be produced. 3. Contribution margin = ($120 ? 0) + ($75 ? 820) = $61,500 Exercise 13–33 1. If 500 units of each product can be sold, then the company will first make and sell 500 units of Tahoe (the product with the higher contribution margin per hour of painting department time). This will take 1,500 (500 units ? 3 hours) hours of painting department time, leaving 960 (2,460 – 1,500) hours for Reno production.

This time will yield 192 ([pic]) units of Reno. Optimal mix: 192 units Reno, 500 units Tahoe 2. Total contribution margin = ($120 ? 192) + ($75 ? 500) = $60,540 Exercise 13–34 1. Price of carved bear candle = $12. 00 + (0. 8 ? $12) = $21. 60 2. Price of scented votive candle = $1. 10 + (0. 8 ? $1. 10) = $1. 98 Exercise 13–35 1. Desired profit= 0. 25 ? Target price = 0. 25 ? $75 = $18. 75 2. Target cost= Target price – Desired profit = $75 – $18. 75 = $56. 25 Exercise 13–36 1. The amounts Heather has spent on purchasing and improving the Grand Am are irrelevant because these are sunk costs. . Alternatives Cost ItemRestore Grand AmBuy Neon Transmission$2,000 Water pump400 Master cylinder1,100 Sell Grand Am0$(6,400) Cost of new car09,400 Total$3,500$3,000 Heather should sell the Grand Am and buy the Neon because it provides a net savings of $500. Note: Heather should consider the qualitative factors. If she restores the Grand Am, how much longer will it last? What about increased license fees and insurance on the newer car? Could she remove the stereo and put it in the Neon without greatly decreasing the Grand Am’s resale value? Exercise 13–37 1.

If the analysis is done using total costs, each variable cost as well as the purchase price will be the unit cost multiplied by 35,000 units. The direct fixed overhead of $77,000 is avoidable if the part is purchased. MakeBuy Direct materials$210,000$0 Direct labor70,0000 Variable overhead52,5000 Fixed overhead77,0000 Purchase cost0385,000 Total relevant costs$409,500$385,000 Blasingham should purchase the part. 2. Maximum price = [pic] = $11. 70 per unit 3. Income would increase by $24,500 ($409,500 – $385,000). Exercise 13–38 1. MakeBuy Direct materials$210,000$0 Direct labor70,0000 Variable overhead52,5000 Purchase cost0385,000($11 ? 5,000) Total relevant costs$332,500$385,000 Blasingham should continue manufacturing the part. 2. Maximum price = [pic] = $9. 50 per unit 3. Income would decrease by $52,500 ($385,000 – $332,500). 5 PROBLEMS Problem 13–39 1.

If the special order is accepted: Revenues ($7 ? 100,000)$700,000 Direct materials ($2 ? 100,000)(200,000) Direct labor ($1 ? 100,000)(100,000) Variable overhead ($3 ? 100,000)(300,000) Total net benefit$100,000 Fixed overhead and selling costs are irrelevant. If the special order is rejected, there will be no impact on income. Therefore, the quantitative analysis is $100,000 in favor of accepting the special order. . The qualitative factors are those that cannot be easily quantified. The company is faced with a problem of idle capacity. Accepting the special order would bring production up to near capacity and allow the company to avoid laying off employees. This would also enhance the company’s community image. The special-order price is well below the company’s normal price. Will this have a potential impact on regular customers? Considering the fact that the customer is located in a region not usually served by the company, the likelihood of an adverse impact on regular business is not high. Problem 13–40 1. Cost ItemMakeBuy

Raw materialsa$218,000$0 Direct laborb70,2000 Variable overheadc20,8000 Fixed overheadd58,0000 Purchase coste0340,000 $367,000$340,000 a($70 ? 2,000) + ($130 ? 600). b$27 ? 2,600. c$8 ? 2,600. d$26,000 + $32,000. e($125 ? 2,000) + ($150 ? 600). Net savings by purchasing: $27,000. Hetrick should purchase the crowns rather than make them. Problem 13–40(Concluded) 2. Qualitative factors that Hetrick should consider include quality of crowns, reliability and promptness of producer, and reduction of workforce. 3. It reduces the cost of making the crowns to $335,000, which is less than the cost of buying. . Cost ItemMakeBuy Raw materials$316,000$0 Direct labor108,0000 Variable overhead32,0000 Fixed overhead58,0000 Purchase cost515,000 $514,000$515,000 Hetrick should produce its own crowns if demand increases to this level because the fixed overhead is spread over more units. Problem 13–41 1. @ 600 lbs. Process FurtherSellDifference Revenuesa$24,000$7,200$16,800 Bagsb0(39)39 Shippingc(384)(60)(324) Grindingd(1,500)0(1,500) Bottlese(2,400)0(2,400) $19,716$7,101$12,615 a600 ? 10 ? $4 = $24,000; $12 ? 600. b$1. 30 ? [pic]. c[pic] ? $1. 60 = $384; $0. 10 ? 600 = $60. d$2. 50 ? 600. 10 ? 600 ? $0. 40. Zanda should process depryl further. 2. [pic] = $21. 025 additional income per pound $21. 025 ? 265,000 = $5,571,625 Problem 13–42 1. System ASystem BHeadsetTotal Sales$45,000$32,500$8,000$85,500 Variable expenses20,00025,5003,20048,700 Contribution margin$25,000$7,000$4,800$36,800 Direct fixed cost526a11,158b1,016c12,700 Segment margin$24,474$(4,158)$3,784$24,100 Common fixed cost18,000 Operating income$6,100 a$45,000/$85,500 ? $18,000 = $9,474; $10,000 – $9,474 = $526. b$32,500/$85,500 ? $18,000 = $6,842; $18,000 – $6,842 = $11,158. c$8,000/$85,500 ? 18,000 = $1,684; $2,700 – $1,684 = $1,016. 2. System AHeadsetTotal Sales$58,500$6,000$64,500 Variable expenses26,0002,40028,400 Contribution margin$32,500$3,600$36,100 Direct fixed costs5261,0161,542 Segment margin$31,974$2,584$34,558 Common fixed costs18,000 Operating income$16,558 System B should be dropped. 3. System ASystem CHeadsetTotal Sales$45,000$26,000$7,200$78,200 Variable expenses20,00013,0002,88035,880 Contribution margin$25,000$13,000$4,320$42,320 Direct fixed costs52611,1581,01612,700 Segment margin$24,474$1,842$3,304$29,620 Common fixed costs18,000 Operating income$11,620

Replacing B with C is better than keeping B, but not as good as dropping B without replacement with C. Problem 13–43 1. Steve should consider selling the part for $1. 85 because his division’s profits would increase $12,800: AcceptReject Revenues (2 ? $1. 85 ? 8,000)$29,600$0 Variable expenses16,8000 Total$12,800$0 Pat’s divisional profits would increase by $18,400: AcceptReject Revenues ($32 ? 8,000)$256,000$0 Variable expenses: Direct materials ($17 ? 8,000)(136,000)0 Direct labor ($7 ? 8,000)(56,000)0 Overhead ($2 ? 8,000)(16,000)0 Component (2 ? $1. 85 ? 8,000)(29,600) 0 Total relevant benefits$18,400$0 2.

Pat should accept the $2 price. This price will increase the cost of the component from $29,600 to $32,000 (2 ? $2 ? 8,000) and yield an incremental benefit of $16,000 ($18,400 – $2,400). Steve’s division will see an increase in profit of $15,200 (8,000 units ? 2 components per unit ? $0. 95 contribution margin per component). 3. Yes. At full price, the total cost of the component is $36,800 (2 ? $2. 30 ? 8,000), an increase of $7,200 over the original offer. This still leaves an increase in profits of $11,200 ($18,400 – $7,200). (See the answer to Requirement 1. ) Problem 13–44 1. Markup = [pic] = 0. 63, or 63% . Direct materials$1,800 Direct labor1,600 Overhead800 Total cost$4,200 Add: Markup2,646 Initial bid$6,846 Problem 13–45 1. BasicStandardDeluxe Price$9. 00$30. 00$35. 00 Variable cost6. 0020. 0010. 00 Contribution margin$3. 00$10. 00$25. 00 ? Machine hours? 0. 10? 0. 50? 0. 75 Contribution margin per machine hour$30. 00$20. 00$33. 33 The company should sell only the deluxe unit with contribution margin per machine hour of $33. 33. Sealing can produce 20,000 ([pic]) deluxe units per year. These 20,000 units, multiplied by the $25 contribution margin per unit, would yield a total contribution margin of $500,000. . First, produce and sell 12,000 deluxe units, which would use 9,000 machine hours. Then, produce and sell 50,000 basic units, which would use 5,000 machine hours. Finally, with the remaining 1,000 machine hours, produce 2,000 standard units. Total contribution margin= ($3 ? 50,000) + ($25 ? 12,000) + ($10 ? 2,000) = $470,000 Problem 13–46 1. The company should not accept the offer because the additional revenue is less than the additional costs (assuming fixed overhead is allocated and will not increase with the special order): Incremental revenue per box$4. 20

Incremental cost per box4. 25 Loss per box$(0. 05) Total loss: $0. 05 ? 5,000 = $250 2. Costs associated with the layoff: Increase state UI premiums (0. 01 ? $1,460,000)$14,600 Notification costs ($25 ? 20)500 Rehiring and retraining costs ($150 ? 20)3,000 Total$18,100 The order should be accepted. The loss of $250 on the order is more than offset by the $18,100 savings by not laying off employees. Problem 13–47 1. Sales$263,000 Costs223,000 Operating profit$40,000 2. SellProcess FurtherDifference Revenues$40,000$75,000$35,000 Further processing cost023,90023,900 Operating income (loss)$40,000$51,100$11,100

The company should process Delta further because gross profit would increase by $11,100 if it were processed further. (Note: Joint costs are irrelevant to this decision because the company will incur them whether or not Delta is processed further. ) Problem 13–48 1. ($30 ? 2,000) + ($60 ? 4,000) = $300,000 2. JunoHera Contribution margin$30$60 ? Pounds of material? 2? 5 Contribution margin/pound$15$12 Norton should make as much of Juno as can be sold and then make Hera. 2,000 units of Juno ? 2 = 4,000 pounds 16,000 pounds – 4,000 pounds = 12,000 pounds for Hera Hera production = [pic] = 2,400 units

Product mix is 2,000 Juno and 2,400 Hera. Total contribution margin= (2,000 ? $30) + (2,400 ? $60) = $204,000 Problem 13–49 1. ProcessDifferential Amount SellFurtherto Process Further Revenues$24,000$33,000$9,000 Processing cost—4,1004,100 Total$24,000$28,900$4,900 Germain should be processed further as it will increase profit by $4,900 for every 1,000 liters. 2. ProcessDifferential Amount SellFurtherto Process Further Revenues$24,000$33,000$9,000 Processing cost—(4,100)(4,100) Distribution cost—(800)(800) Commissions—(3,300)(3,300) Total$24,000$24,800$800

Germain should be processed further as it will increase profit by $800 for every 1,000 liters. Note that the liability issue was not quantified so it would need to be considered as a qualitative factor, further reducing the attractiveness of making geraiten. Problem 13–50 1. Monthly cost for FirstBank: Checking accounts: Maintenance fees ($5 ? 6)$30 Foreign DR/CR ($0. 10 ? 200)20 Returned checks ($3 ? 25)75 Earnings on deposits ($0. 50 ? 300)(150)$(25) Credit card fees ($0. 50 ? 4,000)2,000 Wire transfers [($15 ? 40) + ($50 ? 60)]3,600 Line of credit charges [pic]($100,000)500 Internet banking charges20

Total monthly charges$6,095 One-time Internet setup fees ($15 ? 6 accounts)$90 Problem 13–50(Concluded) Monthly cost for Community Bank: Checking accounts: Returned checks ($2 ? 25)$50 Credit card fees Per item ($0. 50 ? 4,000)$2,000 Batch processing ($7 ? 20)1402,140 Wire transfers ($30 ? 100)3,000 Line of credit charges [pic] ($100,000)583 Total monthly charges$5,773 Monthly cost for RegionalOne Bank: Checking accounts: Foreign DR/CR ($0. 20 ? 200)$40 Returned checks ($3. 80 ? 25)95 Earnings on deposits ($0. 30 ? 300)(90)$45 Credit card fees ($0. 50 ? 4,000)2,000 Wire transfers [($10 ? 40) + ($55 ? 60)]3,700

Line of credit charges [pic] ($100,000)542 Internet banking charges20 Total monthly charges$6,307 Community Bank has the lowest overall monthly fees. On quantitative factors alone, it would be chosen. 2. If the full online banking access were crucial, Community Bank would be eliminated immediately. This leaves FirstBank and RegionalOne Bank. The two sets of monthly costs are similar, $6,095 for FirstBank versus $6,307 for RegionalOne. Now, the banking relationship, comfort level of Kicker with the loan officer, and confidence in the bank’s ability to respond quickly and appropriately to Kicker’s needs will be the deciding factors.

Additionally, some further negotiation would probably be done—for example, on the interest rate on the line of credit. 6 CASES Case 13–51 1. Pamela should not have told Roger about the deliberations concerning the power department because this is confidential information. She had been explicitly told to keep the details quiet but deliberately informed the head of the unit affected by the potential decision. (Standard II: 1) Her revelation may be interpreted as actively or passively subverting the attainment of the organization’s legitimate and ethical objectives. 2.

The romantic relationship between Pamela and Roger sets up a conflict of interest for this particular decision, and Pamela should have withdrawn from any active role in it. (Standard III: 1) However, she should definitely provide the information she currently has about the cost of eliminating the power department. To not do so would be active subversion of the organization’s legitimate and ethical objectives. Moreover, she has the obligation to communicate information fairly and to disclose all relevant information that could reasonably be expected to influence an intended user’s understanding.

In addition, however, Pamela should discuss the qualitative effects of eliminating the power department. The effects on workers, community relations, reliability of external service, and any ethical commitments the company may have to its workers should all enter into the decision. Pamela should communicate the short-term quantitative effects and express her concerns about the qualitative factors. She should also project what the costs of operating internally would be for the next five years and compare that with estimates of the costs of external acquisition.

Case 13–52 1. Salesa$3,751,500 Less: Variable expensesb2,004,900 Contribution margin$1,746,600 Less: Direct fixed expensesc1,518,250 Divisional margin$228,350 Less: Common fixed expensesc299,250 Operating (loss)$(70,900) aBased on sales of 41,000 units Let X = Units sold [pic]+ [pic]= $3,751,500 $183X= $7,503,000 X= 41,000 units b[pic] =$66. 40Manufacturing cost 20. 00Fixed overhead $46. 40Per internal unit variable cost 5. 00Selling $51. 40Per external unit variable cost Variable costs= ($46. 40 ? 20,500) + ($51. 40 ? 20,500) = $2,004,900 Fixed selling and admin: $1,100,000 – $5(20,500) = $997,500 Direct fixed selling and admin: 0. 7 ? $997,500 = $698,250 Direct fixed overhead: $20 ? 41,000 = $820,000 Total direct fixed expenses = $698,250 + $820,000 = $1,518,250 Common fixed expenses = 0. 3 ? $997,500 = $299,250 2. KeepDrop Sales$3,751,500$— Variable costs(2,004,900)(2,050,000)* Direct fixed expenses(1,518,250)— Annuity—100,000 Total$228,350$(1,950,000) *$100 ? 20,500 (The units transferred internally must be purchased externally. ) The company should keep the division. Case 13–53 Answers will vary.

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