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. 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.
3. Past costs can be used to help predict future costs.
4. Depreciation is an allocation of a sunk cost. This cost is a past cost and will never differ across
alternatives.
5. 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.
6. Yes. Suppose, for example, that sufficient materials are on hand for producing a part for 2 years.
After 2 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.
7. If a firm is operating below capacity, then a price that is above variable costs will increase profits.
8. A segment is any subunit of sufficient importance to warrant production of performance reports.
9. Contribution margin is the amount available to cover fixed expenses and provide for profit.
Segment margin is the amount available to cover common fixed expenses and provide for
profit. Contribution margin is the difference between revenues and variable expenses.
Segment margin is contribution margin less direct fixed expenses.
10. 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.
11. No. Joint costs are irrelevant in a sell or process further decision. They occur regardless of
whether the product is sold at the split-off point or processed further.
12. Yes. The incremental revenue is $1,400, and the incremental cost is only $1,000, creating a
net benefit of $400.
13. 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.
8
DISCUSSION QUESTIONS
TACTICAL DECISION MAKING
AND RELEVANT ANALYSIS
8-1
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
8-1. e
8-2. b
8-3. e
8-4. c
8-5. b
8-6. e
8-7. e
8-8. c
8-9. b
8-10. d
8-11. c
8-12. c
8-13. c
8-14. a
8-15. d
MULTIPLE-CHOICE QUESTIONS
8-2
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-16
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). Relevant costs of
purchasing the ingredient externally include the purchase price.
3.
Make Buy
Direct materials…………………………… $25,000 — $ 25,000
Direct labor………………………………… 15,000 — 15,000
Variable manufacturing overhead……… 7,500 — 7,500
Variable marketing overhead…………… 10,000 — 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.
Make Buy
Direct materials…………………………… $25,000 — $ 25,000
Direct labor………………………………… 15,000 — 15,000
Variable manufacturing overhead……… 7,500 — 7,500
Variable marketing overhead…………… 10,000 — 10,000
Avoidable fixed plant overhead………… 6,000 — 6,000
Purchase cost……………………………… — $60,000 (60,000)
Total relevant cost………………………… $63,500 $60,000 $ 3,500
Now it is cheaper to purchase the ingredient. This alternative is cheaper by $3,500.
* $30,000 × 0.20 = $6,000
BRIEF EXERCISES: SET A
Cost to Make
Alternatives Differential
Cost to Make
Alternatives Differential
*
8-3
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-17
1. Relevant costs and benefits of accepting the special order include the sales price of
$5, 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:
Accept Reject
Price……………………………………… $ 5.00 — $ 5.00
Direct materials………………………… (1.75) — (1.75)
Direct labor……………………………… (2.50) — (2.50)
Variable overhead…………………… (1.50) — (1.50)
Decrease in operating income……… $(0.75) — $(0.75)
Operating income will decrease by $7,500 [($0.75) × 10,000 units] if the special order
is accepted; therefore, the special order should be rejected.
Differential
Benefit to
Accept
8-4
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-18
Poinsettias Fruit Trees Total
Sales……………………………………… $970,000 $3,100,000 $4,070,000
Less variable expenses:
Variable cost of goods sold……… 460,000 1,630,000 2,090,000
Variable selling expense…………… 38,800 124,000 162,800
Contribution margin…………………… $471,200 $1,346,000 $1,817,200
Less direct fixed expenses:
Direct fixed overhead……………… 160,000 200,000 360,000
Direct selling and administrative… 146,000 87,000 233,000
Segment margin………………………… $165,200 $1,059,000 $1,224,200
Less common fixed expenses:
Common fixed overhead………………………………………………… 800,000
Common selling and administrative…………………………………… 450,000
Operating income (loss)…………………………………………………… $ (25,800)
For the Coming Year
Gorman Nurseries Inc.
Segmented Income Statement
8-5
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-19
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 rent cost of $40,000*, and
supervision cost of $20,000.
None of the relevant benefits and costs of keeping the parquet flooring line would
occur under the drop alternative.
* The $40,000 of relevant machine rent cost is computed as 0.80 of the total $50,000 machine rent cost.
3.
Keep Drop
Sales…………………………………… $300,000 — $300,000
Less: Variable expenses…………… 250,000 — 250,000
Contribution margin………………… $ 50,000 — $ 50,000
Less: Machine rent*………………… (40,000) — (40,000)
Supervision…………………… (20,000) — (20,000)
Total relevant benefit (loss)………… $ (10,000) — $ (10,000)
The differential amount to keep the line is ($10,000), thus, in favor of dropping the
parquet flooring.
* $50,000 × 0.80 = $40,000
Differential
Amount to
Accept
8-6
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-20
1. Previous contribution margin of the strip line was $175,000. A 10% decrease in
sales implies a 10% percent decrease in total variable costs, so the contribution
margin decreases by 10%.
New Contribution Margin for Strip = $175,000 – 0.10($175,000) = $157,500.
The reasoning is the same for the plank line, but the decrease is 5%.
New Contribution Margin for Plank = $80,000 – 0.05($80,000) = $76,000.
Therefore, if the parquet floor product line were dropped, the resulting total
contribution margin for Hickory would equal $233,500 ($157,500 + $76,000).
2.
Keep Drop
Contribution margin…………… $305,000 $233,500 $ 71,500
Less: Machine rent……………… (75,000) (35,000) (40,000)
Supervision……………… (45,000) (25,000) (20,000)
Total………………………………… $185,000 $173,500 $ 11,500
* $50,000 × 0.20 = $10,000; $10,000 (remaining parque) + $15,000 (strip) + $10,000 (plank) = $35,000
Notice that the contribution margin for the drop alternative equals the new
contribution margins of the strip and plank lines ($157,500 + $76,000). Also, machine
rent and supervision remain relevant across these alternatives.
As shown in BE 8-19, the decision to drop the parquet flooring line makes Hickory
better off by $10,000 (avoided relevant costs were greater than the lost contribution
margin) when only the parquet line is considered. However, as shown in this
exercise (BE 8-20), dropping parquet would have an $11,500 net detrimental effect
on the other two lines in that Hickory would lose contribution margin of $71,500
but only avoid relevant costs of $60,000. Therefore, Hickory is better off by
$11,500 if it KEEPS the parquet line.
BE 8-21
1. Revenue from Logs = (8,000 × $495) = $3,960,000
2. Revenue from Further Processing = $0.75 × (8,000 × 800) = $4,800,000
Further Processing Cost = $0.15 × (8,000 × 800) = $960,000
Income from Further Processing = $4,800,000 – $960,000 = $3,840,000
3. Jack’s should sell the logs without further processing because the company
will make $3,960,000 versus the $3,840,000 it would make by processing the
logs further for use in regular construction framing.
Differential
Amount to Keep
*
8-7
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-22
1. Swoop Rufus
Contribution margin per unit……………………………… $ 5.00 $15.00
÷ Required machine time per unit*……………………… 0.10 0.33
Contribution margin per hour of machine time………… $50.00 $45.00
2. Since the Swoop sweatshirt yields $50 of contribution margin per hour of machine
time (which is higher than the $45 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.
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: Brief Exercise 8-22 (as well as Example 8.7) 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’s 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 (0.33 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 > $45).
60 minutes *
Units of Swoop = = 70,000 units
0.10 = 0.33 =
0.10 hour per Swoop sweatshirt
7,000 total hours
6 minutes per Swoop unit
60 minutes
20 minutes per Rufus unit
8-8
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-23
1. Swoop Rufus
Contribution margin per unit………………………………… $ 5.00 $15.00
÷ Required machine time per unit*…………………………… 0.10 0.33
Contribution margin per hour of machine time…………… $50.00 $45.00
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 = 40,000 maximum units × 0.10 hour of machine time required per
Swoop sweatshirt = 4,000 hours needed to manufacture 40,000 Swoop
sweatshirts.
Remaining Machine Time
for Rufus Sweatshirts
= 3,000 hours
Units of Rufus to Be Produced
in Remaining 3,000 Hours
Now the optimal mix is 40,000 units of Swoop sweatshirts and 9,091 units of
Rufus sweatshirts. This mix will precisely exhaust the machine time available.
* Differences due to rounding.
3. Total Contribution Margin of Optimal Mix = (40,000 units Swoop × $5) +
(9,091 units Rufus × $15)
= $336,365
BE 8-24
Price = Cost + (Markup Percentage × Cost)
= $170,000 + 0.15($170,000)
= $170,000 + $25,500
=
BE 8-25
1. Desired Profit = 0.25 × Target Price
= 0.25 × $380
= $95
2. Target Cost = Target Price – Desired Profit
= $380 – $95
= $285
* 0.10 = 0.33
6 minutes per Swoop unit
60 minutes
20 minutes per Rufus unit
= 7,000 hours – 4,000 hours
$195,500
0.33 hours per unit
3,000 hours
=
60 minutes
= = 9,091 units*
8-9
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-26
1. There are two alternatives: make Two AM in-house or purchase it externally.
2. Relevant costs of making Two AM in-house include direct materials, direct labor, and
variable overhead (both manufacturing and marketing). Relevant costs of purchasing
Two AM externally include the purchase price.
3.
Make Buy
Direct materials……………………………… $2,000,000 — $ 2,000,000
Direct labor…………………………………… 350,000 — 350,000
Variable manufacturing overhead………… 150,000 — 150,000
Variable marketing overhead……………… 250,000 — 250,000
Purchase cost………………………………… — $2,500,000 (2,500,000)
Total relevant cost…………………………… $2,750,000 $2,500,000 $ 250,000
It is cheaper to buy Two AM in-house. This alternative is cheaper by $250,000.
4.
Make Buy
Direct materials……………………………… $2,000,000 — $ 2,000,000
Direct labor…………………………………… 350,000 — 350,000
Variable manufacturing overhead………… 150,000 — 150,000
Variable marketing overhead……………… 250,000 — 250,000
Intellectual property theft
management cost…………………………… — 350,000 (350,000)
Purchase cost………………………………… — $2,500,000 (2,500,000)
Total relevant cost…………………………… $2,750,000 $2,850,000 $ (100,000)
Now it is cheaper to make Two AM in-house. This alternative is cheaper by $100,000.
Cost to Make
BRIEF EXERCISES: SET B
Alternatives Differential
Cost to Make
Alternatives Differential
8-10
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-27
1. Relevant costs and benefits of accepting the special order include the sales price of
$18,000, 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:
Accept Reject
Price………………………………… $ 18,000.00 — $ 18,000.00
Direct materials…………………… (10,000.00) — (10,000.00)
Direct labor………………………… (2,000.00) — (2,000.00)
Variable overhead………………… (4,000.00) — (4,000.00)
Increase in operating income…… $ 2,000.00 — $ 2,000.00
Operating income will increase by $10,000,000 [($2,000) × 5,000 units], if the special
order is accepted; therefore, the special order should be accepted.
Differential
Benefit to
Accept
8-11
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-28
Bladers Ballers Total
Sales……………………………………… $80,000,000 $180,000,000 $260,000,000
Less variable expenses:
Variable cost of goods sold……… 10,000,000 30,000,000 40,000,000
Variable selling expense…………… 4,000,000 9,000,000 13,000,000
Contribution margin…………………… $66,000,000 $141,000,000 $207,000,000
Less direct fixed expenses:
Direct fixed overhead……………… 20,000,000 100,000,000 120,000,000
Direct selling and administrative… 4,000,000 10,000,000 14,000,000
Segment margin………………………… $42,000,000 $ 31,000,000 $ 73,000,000
Less common fixed expenses:
Common fixed overhead……………………………………………………… 18,000,000
Common selling and administrative………………………………………… 8,000,000
Operating income (loss)………………………………………………………… $ 47,000,000
Kraft Bowlen
Segmented Income Statement
For the Coming Year
8-12
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-29
1. The two alternatives are to keep the Boat Maintenance line or to drop it.
2. The relevant benefits and costs of keeping the Boat Maintenance line include sales
of $5,000,000, variable costs of $4,900,000, garage/warehouse cost of $210,000*, and
supervision cost of $75,000**.
None of the relevant benefits and costs of keeping the Boat Maintenance line would
occur under the drop alternative.
* The $210,000 of relevant garage/warehouse cost is computed as 0.60 of the total $350,000
garage/warehouse cost.
** The $75,000 of relevant supervision salaries is computed as 0.50 of the total $150,000 supervision
cost.
3.
Keep Drop
Sales…………………………………… $5,000,000 — $5,000,000
Less: Variable expenses…………… 4,900,000 — 4,900,000
Contribution margin………………… $ 100,000 — $ 100,000
Less: Garage/warehouse rent*…… (210,000) — (210,000)
Supervision**………………… (75,000) — (75,000)
Total relevant benefit (loss)………… $ (185,000) — $ (185,000)
The differential amount to keep the line is ($185,000), thus, in favor of dropping the
Boat Maintenance line.
* $350,000 × 0.60 = $210,000
** $150,000 × 0.50 = $75,000
Differential
Amount to
Accept
8-13
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-30
1. Previous contribution margin of the Winter Storage line was $2,000,000. A 20% decrease
in sales implies a 20% percent decrease in total variable costs, so the contribution
margin decreases by 20%.
New Contribution Margin for Winter Storage = $2,000,000 – 0.20($2,000,000) = $1,600,000.
The reasoning is the same for the Boat Fuel & Concessions line, but the decrease is
10%.
New Contribution Margin for Boat Fuel & Concessions =
$800,000 – 0.10($800,000) = $720,000.
Therefore, if the Boat Maintenance line were dropped, the resulting total
contribution margin for Mullett Marina would equal $2,320,000 ($1,600,000 + $720,000).
2.
Keep Drop
Contribution margin………………… $ 2,900,000 $2,320,000 $ 580,000
Less: Garage/warehouse rent……… (1,105,000) (895,000) (210,000)
Supervision…………………… (270,000) (195,000) (75,000)
Total relevant benefit (loss)………… $ 1,525,000 $1,230,000 $ 295,000
* $350,000 × 0.40 = $140,000 (remaining Boat Maintenance) + $700,000 (Winter Storage) +
$55,000 (Fuel & Con) = $895,000
** $150,000 × 0.50 = $75,000 (remaining Boat Maintenance + $50,000 (Winter Storage) +
$70,000 (Fuel & Con) = $195,000
Notice that the contribution margin for the drop alternative equals the new
contribution margins of the Winter Storage and Boat Fuel & Concessions lines
($1,600,000 + $720,000). Also, garage rent and supervision remain relevant across
these alternatives.
As shown in BE 8-29, the decision to drop the Boat Maintenance line makes Mullett
better off by $185,000 (avoided relevant costs were greater than the lost contribution
margin) when only the Boat Maintenance line is considered. However, as shown in this
exercise (BE 8-30), dropping Boat Maintenance would have a $295,000 net detrimental
effect on the other two lines in that Mullett would lose contribution margin of $580,000
but only avoid relevant costs of $285,000. Therefore, Mullett is better off by $295,000
if it KEEPS the Boat Maintenance line.
BE 8-31
1. Revenue (or contribution to income) from selling consumable milk =
(1,000,000 × $3) = $3,000,000
2. Revenue from Further Processing = $6.00 × (1,000,000 × 0.50) = $3,000,000
Further Processing Cost = $1.50 × (1,000,000 × 0.50) = $750,000
Income from Further Processing = $3,000,000 – $750,000 = $2,250,000
3. Bart’s should NOT further process the consumable milk into butter because the
company would make only $2,250,000 versus the $3,000,000 it would make by selling
the milk at the split-off point (i.e., not processing further).
Differential
Amount to Keep
*
**
8-14
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-32
1. Full Body
Contribution margin per unit……………………………… $198.00 $ 90.00
÷ Required masseuse time per massage*……………… 1.50 0.50
Contribution margin per hour of masseuse time……… $132.00 $180.00
2. Since the Trouble Spots massage yields $180 of contribution margin per
hour of masseuse time (which is higher than the $132 contribution margin
per hour of masseuse time for Full Body), all masseuse time (i.e., 6,000 hours)
should be devoted to the provision of Trouble Spots massages.
= 12,000 units
The optimal mix is Trouble Spots = 12,000 massages and Full Body =
0 massages
3. Total Contribution Margin
of Optimal Mix
= $2,376,000
= 12,000 units Trouble Spots × $198
6,000 total masseuse hours
0.50 hour per Trouble Spots massage
Trouble Spots
30 minutes per Trouble Spots unit
60 minutes
* 0.50 =
Units of Trouble Spots
60 minutes
1.50 =
90 minutes per Full Body unit
=
8-15
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
BE 8-33
1. Full Body
Contribution margin per massage $198.00 $ 90.00
÷ Required masseuse time per massage*……………………… 1.50 0.50
Contribution margin per hour of masseuse time…………… $132.00 $180.00
2. Since Trouble Spots yields $180 of contribution margin per hour of masseuse time,
the first priority is to offer all of the Trouble Spots massages that the market will
take (i.e., demands). Masseuse time required for maximum amount of Trouble Spots =
8,000 maximum units × 0.50 hours of masseuse time required per Trouble Spots =
4,000 hours needed to provide 8,000 Trouble Spots massages.
Remaining Masseuse Time
for Full Body Massages
= 2,000 hours
Now the optimal mix is 8,000 units of Trouble Spots massages and 1,333 units of
Full Body massages. This mix will precisely exhaust the masseuse time available.
* Differences due to rounding.
3. Total Contribution Margin of Optimal Mix = 8,000 units Trouble Spots × $90) +
(1,333 units* Full Body × $198)
= $983,934
BE 8-34
Price = Cost + (Markup Percentage × Cost)
= $750,000 + 0.10($750,000)
= $750,000 + $75,000
=
BE 8-35
1. Desired Profit = 0.20 × Target Price
= 0.20 × $600
= $120
2. Target Cost = Target Price – Desired Profit
= $600 – $120
= $480
Trouble Spots
30 minutes per Trouble Spots massage
60 minutes
= 6,000 hours – 4,000 hours
* 1.50 =
90 minutes per Full Body massage
0.50
$825,000
60 minutes
=
2,000 hours =
= 1.50 hours per unit Units of Full Body Massages to Be Offered
in Remaining 2,000 Hours 1,333 units*
8-16
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-36
The correct order is 4, 5, 2, 6, 3, and 1.
E 8-37
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 the costs and benefits associated with each feasible alternative.
Events c, e, f, and i. (Students may also list Events 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 and Event k is the
actual decision. [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.]
EXERCISES
8-17
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-38
1. The two alternatives are to make the component in-house or to buy it from Bryce.
2.
Make Buy
Direct materials………………………… $12.00 — $ 12.00
Direct labor……………………………… 8.25 — 8.25
Variable overhead……………………… 4.50 — 4.50
Purchase cost………………………… — $25.00 (25.00)
Total relevant cost………………… $24.75 $25.00 $ (0.25)
3. Zion should make the component in-house because operating income will be
$2,500 ($0.25 × 10,000) higher than if the part were purchased from Bryce.
E 8-39
1.
Make Buy
Direct materials………………………… $12.00 — $ 12.00
Direct labor……………………………… 8.25 — 8.25
Variable overhead……………………… 4.50 — 4.50
Avoidable fixed overhead*…………… 1.50 1.50
Purchase cost………………………… — $25.00 (25.00)
Total relevant cost………………… $26.25 $25.00 $ 1.25
* 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 ($2.00 × 0.75 = $1.50).
Zion should purchase the component from Bryce because it will save $12,500
($1.25 × 10,000) over making it in-house.
Alternatives Differential
Alternatives Differential
Cost to Make
Cost to Make
8-18
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-39 (Concluded)
2. As the percentage of avoidable fixed cost increases (above 75%), total relevant
costs of making the component increase, causing the “purchase” decision to
be more financially appealing (compared to the “make” option) than it was when
the percentage was 75%. In other words, as the percentage increases, the $12,500
difference between the “purchase” and “make” options increases resulting in the
“purchase” decision being even more attractive. Alternatively, as the percentage
of avoidable fixed costs decreases, the “make” option eventually is equally costly
(a difference of zero) and as equally appealing financially as the “purchase” option.
Finally, as the percentage of avoidable fixed cost decreases low enough and the
total relevant costs of making the component decrease, the “make” option
becomes the more financially appealing option (i.e., when the relevant fixed costs
per unit become sufficiently small—which is explored in Requirement 3).
3. Total relevant avoidable fixed cost would need to decrease by $12,500. Total
relevant make costs of $262,500 need to decrease to $250,000 to equal the total
relevant buy costs. Holding all other relevant make costs constant, this decrease
of $12,500 ($262,500 – $250,000) in fixed cost would reduce the total relevant
avoidable fixed overhead from $15,000 (0.75 × $2 per unit × 10,000 units) or $1.50
per unit ($15,000/10,000 units) to $2,500 ($15,000 – $12,500) or $0.25 per unit
($2,500/10,000 units). Therefore, for Zion to be indifferent between “making”
versus “buying” the component (i.e., incur the same cost), the avoidable fixed
overhead cost would need to be $0.25 per unit ($2,500/10,000 units), which is 12.5%
($0.25/$2.00). In other words, the $1.50 per unit fixed cost (75% figure) would need
to decrease to $0.25 per unit (12.5%) before Zion is indifferent between “making”
versus “buying” the component.
8-19
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-40
1. The two alternatives are:
(1) to accept the special order
(2) to reject the special order
2. Direct materials…………………… $3.10
Direct labor………………………… 2.25
Variable overhead………………… 1.15
Total…………………………… $6.50
Relevant manufacturing costs are $6.50 per unit so the contribution margin
per unit from the special order is $0.50 ($7.00 – $6.50). The increase in total
contribution margin is $7,500 (15,000 × $0.50). Therefore, the special order
should be accepted.
3. The statement that “existing sales will not be affected” indicates that there will
be no product-line cannibalization; in other words, there is sufficient excess
capacity such that the acceptance of the special sales will not decrease Smooth
Move’s regular sales. Another consideration, possibly due to the geographic
separation, is that existing customers are less likely to learn of the new price,
which was $5 (or 42%) lower.
E 8-41
In this case, it may be easier to deal with the total costs and revenues of the special
order:
Revenue ($7.00 × 15,000)…………………………………………… $105,000
Less variable costs:
Direct materials ($3.30 × 15,000).……………………………… $49,500
Direct labor ($2.25 × 15,000)…………………………………… 33,750
Variable overhead ($1.15 × 15,000)…………………………… 17,250 100,500
Less labeling machine…………………………………….………… 12,000
Loss on special order………………………………….………… $ (7,500)
Smooth Move should reject the special order because it will reduce income by $7,500.
8-20
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-42
1.
Sweaters Jackets Total
Sales……………………….………………… $210,000 $450,000 $660,000
Less variable expenses:
Variable cost of goods sold…………… 145,000 196,000 341,000
Variable selling expense……………… 10,500 22,500 33,000
Contribution margin………………………. $ 54,500 $231,500 $286,000
Less direct fixed expenses:
Direct fixed overhead…………………… 25,000 47,000 72,000
Direct selling and administrative……… 20,000 50,000 70,000
Segment margin……………………….…… $ 9,500 $134,500 $144,000
Less common fixed expenses:
Common fixed overhead……………………….………………………… 45,000
Common selling and administrative……………………….…………… 15,000
Operating income……………………….……………………………………… $ 84,000
2. For the company as a whole, an increase of $10,000 in fixed expense will
result in a decrease in operating income to $74,000 ($84,000 – $10,000). If
the equipment is for the sweaters line, then that line’s segment margin will
be $(500), and management will need to consider whether the line should
be dropped. If profitability is not expected to improve (either by increasing
price or decreasing other costs), then the sweaters line should be dropped.
If the equipment is for the jackets line, while segment margin will decrease
to $124,500 ($134,500 – $10,000), it remains profitable and there will be no
need to drop it.
E 8-43
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.
Knitline Inc.
Segmented Income Statement
For the Coming Year
8-21
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-44
If Petoskey drops Conway, overall profit will increase by $5,000. Contribution margin will
decrease by $75,000 as a result of the lost contribution margin ($300,000 – $225,000).
Note that the 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). However,
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.
E 8-45
If Petoskey drops Conway, profit will decrease by $28,000. There will be a decrease of
$75,000 as a result of the lost Conway 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). However,
Petoskey will avoid the $80,000 supervisory salary cost for Conway if it drops Conway.
Finally, if Petoskey drops Conway, 20% of Alanson’s contribution margin, or $33,000
(i.e., 0.20 × $165,000), will also be lost as Conway-loving customers shop elsewhere for
Alanson.
Therefore, the overall impact of dropping Conway is that profit decreases by the $75,000
lost Conway contribution margin, 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.
E 8-46
1. Contribution Margin if HS Is Sold at Split-Off = $9 × 14,000 pounds
= $126,000
2. Contribution margin if HS is processed into CS
Revenue ($45 × 4,000)……………………………… $180,000
Less further processing cost……………………… 34,000
Contribution margin………………………………… $146,000
Bozo should further process HS; profit from processing further will be $20,000 higher
($146,000 – $126,000) than if it were sold at split-off.
8-22
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-47
1. Reno Tahoe
Unit contribution margin………………………………………… $120 $75
÷ Painting department hours…………………………………… 5 3
Contribution margin per unit scarce resource…………… $ 24 $25
2. 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 units (2,460/3) of Tahoe can
be produced.
3. Contribution Margin = ($120 × 0) + ($75 × 820) = $61,500
E 8-48
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 hours (500 units × 3 hours)
of painting department time, leaving 960 hours (2,460 hours – 1,500 hours)
for Reno production. This time will yield 192 units (960 hours/5 hours per unit)
of Reno.
Optimal mix: 192 units Reno, 500 units Tahoe
2. Total Contribution Margin = ($120 × 192) + ($75 × 500) = $60,540
8-23
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-49
1. Price of National Parks Memory Card Game = $20.00 + (0.65 × $20) = $33.00
2. Price of Guess This Animal Track Game = $40.00 + (0.65 × $40) = $66.00
3. The financial manager might encounter one or more common challenges to using
cost-plus (or markup) pricing. One challenge might be identifying the most
appropriate percentage by which to mark up gift shop costs. For example, if the
percentage is too high (and 65% seems high), the manager risks setting prices
too high, thereby causing some customers to decide not to buy the gift shop’s
products. One factor working in the manager’s favor in this environment is that
businesses in remote locations, such as many national park gift shops, face
little or no competition. This can spur customers to spend more money than
they would when more competition exists. Alternatively, if the markup percentage
is too low, the manager risks setting prices too low. When prices are too low,
profits are less than they would be with higher prices. In extreme cases, profits
can be negative if total revenues are less than total costs.
Another challenge might be accurately estimating the costs on which the markup
percentage is applied. Even if the markup percentage is appropriate, marking up a
grossly inaccurate estimate of costs can result in consequences similar to those
described in the previous paragraph. For example, if reported costs are far too low,
the price and total revenues that result will be lower than they could be (or need to
be) to be profitable. If reported costs are far too high, the price will be too high,
and total revenues will be lower than if a more appropriate price, that customers
are willing to pay, is set.
E 8-50
1. Desired Profit = 0.20 × Target Price
= 0.20 × $60
= $12.00
2. Target Cost = Target Price – Desired Profit
= $60.00 – $12.00
= $48.00
8-24
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-51
1. The amounts Heather has spent on purchasing and improving the Grand Am a
irrelevant because these are sunk costs.
2.
Restore
Cost Item Grand Am
Transmission…………………………………… $2,000 $ 0
Water pump…………………………………… 400 0
Master cylinder………………………………… 1,100 0
Sell Grand Am………………………………… 0 (6,400)
Cost of new car………………………………… 0 9,400
Total………………………………………… $3,500 $ 3,000
Heather should sell the Grand Am and buy the Neon because it provides a net
savings of $3,500 – $3,000.
Note: Heather should consider the qualitative factors. If she restores the Gran
how much longer will it last? What about increased license fees and insurance
the newer car? Could she remove the stereo and put it in the Neon without gre
decreasing the Grand Am’s resale value?
E 8-52
1. If the analysis is done using total costs, each variable cost as well as the purc
price will be the unit cost multiplied by 35,000 units. The direct fixed overhead
$77,000 is avoidable if the part is purchased.
Make Buy
Direct materialsa……………………………… $210,000 $ 0
Direct laborb…………………………………… 70,000 0
Variable overheadc…………………………… 52,500 0
Fixed overhead………………………………… 77,000 0
Purchase costd………………………………… 0 385,000
Total relevant costs……………………… $409,500 $385,000
Blasingham should purchase the part.
2. Maximum Price = $409,500/35,000 = $11.70 per unit
3. Income would increase by $24,500 ($409,500 – $385,000).
a $6.00 × 35,000 = $210,000
b $2.00 × 35,000 = $70,000
c $1.50 × 35,000 = $52,500
d $11.00 × 35,000 = $385,000
Alternatives
Buy Neon
8-25
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
E 8-53
Make Buy
1. Direct materialsa…………………………… $210,000 $ 0
Direct laborb………………………………… 70,000 0
Variable overheadc………………………… 52,500 0
Purchase costd……………………………… 0 385,000
Total relevant costs…………………… $332,500 $385,000
Blasingham should continue manufacturing the part.
2. Maximum Price = $332,500/35,000 = $9.50 per unit
3. Income would decrease by $52,500 ($332,500 – $385,000).
a $6.00 × 35,000 = $210,000
b $2.00 × 35,000 = $70,000
c $1.50 × 35,000 = $52,500
d $11.00 × 35,000 = $385,000
8-26
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-54
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.
2. 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. However, if it were likely and the amount
could be quantified, then it would represent a relevant item for consideration in the
analysis.
PROBLEMS
8-27
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-55
1.
Coffee
Blenders Makers Total
Sales……………………………………………… $1,560,000 $2,175,000 $3,735,000
Less: Variable cost of goods sold…………… 1,170,000 2,025,000 3,195,000
Contribution margin…………………………… $ 390,000 $ 150,000 $ 540,000
Less: Direct fixed expenses………………… 184,000 142,500 326,500
Segment margin………………………………… $ 206,000 $ 7,500 $ 213,500
Less: Common fixed expenses*…………………………………………………… 13,500
Operating income……………………………………………………………………… $ 200,000
* $340,000 – $184,000 – $142,500
2. If the coffee maker line is dropped, profits will decrease by $7,500, the segment
margin. If the blender line is dropped, profits will decrease by $206,000.
3. Coffee
Blenders Makers Total
Sales……………………………………………… $1,775,000 $2,175,000 $3,950,000
Less: Variable cost of goods sold…………… 1,350,000 2,025,000 3,375,000
Contribution margin…………………………… $ 425,000 $ 150,000 $ 575,000
Less: Direct fixed expenses………………… 184,000 142,500 326,500
Segment margin………………………………… $ 241,000 $ 7,500 $ 248,500
Less: Common fixed expenses*…………………………………………………… 13,500
Operating income……………………………………………………………………… $ 235,000
Profits increase by $35,000.
* $340,000 – $184,000 – $142,500
Alard Company
Segmented Income Statement
8-28
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-56
Scented Musical Regular Total
1. Sales…………………………………… $13,000 $19,500 $25,000 $57,500
Less: Variable expenses…………… 9,100 15,600 12,500 37,200
Contribution margin………………… $ 3,900 $ 3,900 $12,500 $20,300
Less: Direct fixed expenses……… 4,250 5,750 3,000 13,000
Product margin……………………… $ (350) $ (1,850) $ 9,500 $ 7,300
Less: Common fixed expenses………………………………………………… 7,500
Operating income (loss)………………………………………………………… $ (200)
Kathy should accept this proposal. The 30% sales increase, coupled with the
increased advertising, reduces the loss from $1,000 to $200. Both scented and
musical product-line profits increase. However, more must be done. If the
scented and musical product margins remain negative, the two products
may need to be dropped.
2. Regular:
Sales………………………………………………… $20,000
Less: Variable expenses………………………… 10,000
Contribution margin……………………………… $10,000
Less: Fixed expenses*…………………………… 10,500
Operating income (loss)…………………………… $ (500)
*$3,000 direct + $7,500 common
While dropping the two lines results in a $500 loss versus the original
$1,000 loss, it is worse than the alternative offered in Requirement 1.
Other options need to be developed.
3. Combinations would be beneficial. Dropping the musical line (which
shows the greatest segment loss) and keeping the scented line while
increasing advertising yields a profit (the optimal combination).
Scented Regular Total
Sales…………………………………………………… $13,000 $22,500 $35,500
Less: Variable expenses…………………………… 9,100 11,250 20,350
Contribution margin………………………………… $ 3,900 $11,250 $15,150
Less: Direct fixed expenses……………………… 4,250 3,000 7,250
Product margin……………………………………… $ (350) $ 8,250 $ 7,900
Less: Common fixed expenses………………………………………………… 7,500
Operating income………………………………………………………………… $ 400
8-29
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-57
1. Cost Item Make Buy
Raw materialsa………………………………………………… $218,000 $ 0
Direct laborb…………………………………………………… 70,200 0
Variable overheadc…………………………………………… 20,800 0
Fixed overheadd……………………………………………… 58,000 0
Purchase coste……………………………………………… 0 340,000
$367,000 $340,000
Net savings by purchasing: $367,000 – $340,000 = $27,000.
Hetrick should purchase the crowns rather than make them.
Depreciation of $5,000 is irrelevant (and therefore excluded from the analysis
here) because it will NOT change regardless of whether Hetrick makes or
buys the crowns.
a ($70 × 2,000 Porcelain) + ($130 × 600 Gold) = $218,000
b $27 × (2,000 + 600) = $70,200
c $8 × (2,000 + 600) = $20,800
d $26,000 + $32,000 = $58,000
e ($125 × 2,000) + ($150 × 600) = $340,000
8-30
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-57 (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 ($367,000 – $32,000), which
is less than the cost of buying because fixed overhead decreases to $26,000 for
a total relevant make cost of $5,000 less than the buy cost. Therefore, Hetrick
should make the crowns.
4. Cost Item Make Buy
Raw materialsa………………………………………………… $372,000 $ 0
Direct laborb…………………………………………………… 129,600 0
Variable overheadc…………………………………………… 38,400 0
Fixed overhead………………………………………………… 58,000 0
Purchase costd………………………………………………… 0 615,000
$598,000 $615,000
Hetrick should produce its own crowns if demand increases to this level because
the fixed overhead is spread over more units.
a ($70 × 4,200 Porcelain) + ($130 × 600 Gold) = $372,000
b $27 × (4,200 + 600) = $129,600
c $8 × (4,200 + 600) = $38,400
d ($125 × 4,200) + ($150 × 600) = $615,000
P 8-58
Process
Per 600 lbs. Further Sell Difference
Revenuesa…………………………………… $24,000 $7,200 $16,800
Bagsb…………………………………………… 0 (39) 39
Shippingc……………………………………… (384) (60) (324)
Grindingd……………………………………… (1,500) 0 (1,500)
Bottlese………………………………………… (2,400) 0 (2,400)
$19,716 $7,101 $12,615
a 600 × 10 × $4 = $24,000;
$12 × 600 = $7,200
b $1.30 × (600/20)
c [(10 × 600)/25] × $1.60 = $384;
$0.10 × 600 = $60
d $2.50 × 600 = $1,500
e 10 × 600 × $0.40 = $2,400
Zanda should process depryl further.
2. $12,615/600 = $21.025 additional income per pound
$21.025 × 265,000 = $5,571,625
8-31
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-59
1. System A System B Headset Total
Sales……………………………………… $45,000 $32,500 $8,000 $85,500
Variable expenses……………………… 20,000 25,500 3,200 48,700
Contribution margin…………………… $25,000 $ 7,000 $4,800 $36,800
Direct fixed cost……………………… 526 11,158 1,016 12,700
Segment margin…………………… $24,474 $ (4,158) $3,784 $24,100
Common fixed cost…………………… 18,000
Operating income………………… $ 6,100
* $45,000/$85,500 × $18,000 = $9,474;
$10,000 – $9,474 = $526
** $32,500/$85,500 × $18,000 = $6,842;
$18,000 – $6,842 = $11,158
*** $8,000/$85,500 × $18,000 = $1,684;
$2,700 – $1,684 = $1,016
2. System A Headset Total
Sales……………………………………… $58,500 $6,000 $64,500
Variable expenses……………………… 26,000 2,400 28,400
Contribution margin…………………… $32,500 $3,600 $36,100
Direct fixed cost……………………… 526 1,016 1,542
Segment margin…………………… $31,974 $2,584 $34,558
Common fixed cost…………………… 18,000
Operating income………………… $16,558
System B should be dropped.
3. System A System C Headset Total
Sales……………………………………… $45,000 $26,000 $7,200 $78,200
Variable expenses……………………… 20,000 13,000 2,880 35,880
Contribution margin…………………… $25,000 $13,000 $4,320 $42,320
Direct fixed cost*……………………… 526 11,158 1,016 12,700
Segment margin…………………… $24,474 $ 1,842 $3,304 $29,620
Common fixed cost…………………… 18,000
Operating income………………… $11,620
Replacing B with C is better than keeping B, but not as good as dropping B
without replacement with C.
* ** ***
8-32
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-60
1. Steve should consider selling the part for $1.85 because his division’s profits would
increase $12,800:
Accept Reject
Revenues (2 × $1.85 × 8,000)………………………………… $29,600 $0
Variable expenses (2 × $1.05 × 8,000)……………………… 16,800 0
Total…………………………………………………………… $12,800 $0
Pat’s divisional profits would increase by $18,400:
Accept Reject
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.)
P 8-61
1. Markup based on cost of goods sold:
Cost of Goods Sold + (Cost of Goods Sold × Markup) = Sell Price
$48,100 + ($48,100 × Markup) = $130,000
Markup = ($130,000 – $48,100)/$48,100
= 1.703, or 170.3%
2. Direct materials……………………………… $ 1,800
Direct labor…………………………………… 1,600
Overhead……………………………………… 800
Total cost…………………………………… $ 4,200
Add: Markup ($4,200 × 1.703)……………… 7,153
Initial bid…………………………………… $11,353
8-33
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-62
Basic Standard Deluxe
1. Price……………………………………………… $ 9.00 $30.00 $35.00
Variable cost……………………………………… 6.00 20.00 10.00
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 (15,000/0.75) 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.
2. First, produce and sell 12,000 deluxe units, which would use 9,000 machine
hours (12,000 × 0.75). Then, produce and sell 50,000 basic units, which would
use 5,000 machine hours (50,000 × 0.10). Finally, with the remaining 1,000
machine hours, produce 2,000 standard units.
Total Contribution Margin = ($25 × 12,000) + ($3 × 50,000) + ($10 × 2,000)
= $470,000
* Rounded
P 8-63
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 box…………………………………………………… 4.25
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.
*
8-34
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-64
1. Sales………………………………………………………………………………… $263,000
Costs………………………………………………………………………………… 223,000
Operating profit……………………………………………………………… $ 40,000
Process
2. Sell Further Difference
Revenues………………………………… $40,000 $75,000 $35,000
Further processing cost………………… 0 23,900 23,900
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.)
P 8-65
1. ($30 × 2,000) + ($60 × 4,000) = $300,000
2. Juno Hera
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 lbs. per unit = 4,000 pounds
16,000 pounds – 4,000 pounds = 12,000 pounds for Hera
Hera Production = 12,000 lbs. per unit/5 lbs. per unit = 2,400 units
Product mix is 2,000 Juno and 2,400 Hera.
Total Contribution Margin = ($30 × 2,000) + ($60 × 2,400)
= $204,000
8-35
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-66
1. Process
Sell Further
Revenues……………………… $24,000 $33,000 $ 9,000
Processing cost……………… — (4,100) (4,100)
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. Process
Sell 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.
P 8-67
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 (0.06/12 × $100,000)………………… 500
Internet banking charges………………………………….…… 20
Total monthly charges…………………………………….… $6,095
One-time Internet setup fees ($15 × 6 accounts)………… $ 90
Differential Amount
to Process Further
Differential Amount
to Process Further
8-36
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Tactical Decision Making and Relevant Analysis
P 8-67 (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)……………………………………… 140 2,140
Wire transfers ($30 × 100)…….……………………………………. 3,000
Line of credit charges (0.07/12)($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 (0.065/12)($100,000)……………………… 542
Internet banking charges………………………………….………… 20
Total monthly charges………………………………….………… $6,307
* Answers rounded to the nearest dollar.
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.
*
*
8-37
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CHAPTER 8 Tactical Decision Making and Relevant Analysis
Case 8-68
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. 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 any concerns about the qualitative
factors. She should also project what the costs of operating internally would be for
the next 5 years and compare that with the estimates of the costs of external
acquisition. Pamela also might consider the potential cost of laying off workers,
such as unemployment insurance costs, severance pay, etc. Later, if business
improves, Pamela would then have to incur costs for training any new employees
or formerly laid off employees that are hired back.
CASES
8-38
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Tactical Decision Making and Relevant Analysis
Case 8-69
1. Salesa…………………………………………………… $3,751,500
Less: Variable expensesb…………………………… 2,004,900
Contribution margin…………………………………… $1,746,600
Less: Direct fixed expensesc………………………… 1,518,250
Divisional margin……………………………………… $ 228,350
Less: Common fixed expensesc…………………… 299,250
Operating (loss)……………………………………… $ (70,900)
a Based on sales of 41,000 units
Let X = Units sold
$83X/2 + $100X/2 = $3,751,500
$183X = $7,503,000
X = 41,000 units
b $83X/125.0% $66.40 Manufacturing cost
– 20.00 Fixed overhead
$46.40 Per internal unit variable cost
+ 5.00 Selling expenses
$51.40 Per external unit variable cost
Variable Costs = ($46.40 × 20,500) + ($51.40 × 20,500)
= $2,004,900
c Fixed selling and admin.: $1,100,000 – $5(20,500) = $997,500
Direct fixed selling and admin.: 0.70 × $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 = 0.30 × $997,500 = $299,250
2. Keep Drop
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 8-70
Answers will vary.
*
8-39
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