Problem:13-12

1) Boyles Home Center has two departments, both bath and kitchen
!he most recent income statement "or the company "ollows:
#epartment
!otal Bath kitchen
$ales%%%%%%%%% &', '',''' 1', '',''' (', '','''
)ess *ariable e+penses 1,, '',''' 3, '',''' 1-, '','''
Contrib.tion mar/in 31, '',''' 0, '',''' 2(, '','''
)ess "i+ed e+penses 20, '',''' ,, '',''' 11, '','''
2et operatin/ income 3loss) (, '',''' 32, '',''') -, '','''
4 st.dy indicate that 30'''' o" the "i+ed e+penses bein/ char/ed to the
Bath department are s.nk costs or allocated costs that will contin.e e*en i"
the Bath department is dropped 5n addition, the elimination o" the bath
department wo.ld res.lt in a 1'6 decrease in the sales o" the kitchen
department 5" the Bath department is dropped, what will be the e""ect on
the net operatin/ income o" the company as a whole7
2) 8orrell Company prod.ces se*eral prod.ces "rom the processin/ o"
9rypton, a rare mineral 8aterial and processin/ costs total 3'''' per
ton, one third o" which is allocated to the prod.ct 8eri".lon !he
8eri".lon prod.ced "rom a ton o" 9rypton can either be sold at the split-
o"" point or processed ".rther at a cost o" 13''' and then sold "or
-''''the sales *al.e o" 8eri".lon at the split o"" point is (''''sho.ld
8eri".lon be processed ".rther or sold at the split-o"" point7
3) $helby Company prod.ces three prod.cts :,;,< #ata concernin/ the
three prod.cts "ollow3per .nit) :

Product
X Y Z
$ellin/ price%%%%%% 1' &- 0'
)ess *ariables e+penses:
#irect materials%%% 2( 1& ,
)abor and o*erhead%% 2( 20 ('
!otal *ariables e+penses%%%% (1 (2 (,
Contrib.tion mar/in%%%%%% 32 1( 21
Contrib.tion mar/in ratio%%% ('6 2&6 3'6
#emands "or the companys prod.cts are *ery stron/, with "ar more orders
each month than the company can prod.ce with the a*ailable raw
materials !he same material iss.ed in each prod.ct !he material costs3
po.nd, with a ma+im.m o" &''' po.nds a*ailable each month =hich
orders wo.ld yo. ad*ise the company to accept "irst, those "or :, ; and <7
=hich orders second7 !hird 7
() >or many years, #iehl company has prod.ces a small electrical part
that it .ses in the prod.ction o" its standard lines o" diesel tractors !he
companys .nit prod.ct cost, based on a prod.ction le*el o" -'''' parts
per year, is as "ollows:
Per part total
#irect materials%%%%%% (''
#irect labor%%%%%%%%% 20&
?ariables man."act.rin/ o*erhead%% '&'
>i+ed man."act.rin/ o*erhead traceable% 3' 1, 1','''
>i+ed man."act.rin/ o*erhead, common
34llocated on the basis o" labor ho.rs)%% 22& 1, 3&,'''
@nit prod.ct cost%%%%%%%%%%%%%% 12&'
4n o.tside s.pplier has o""ered to s.pply the electrical parts to the #iehl
Company "or only 1' per part Ane Bthird o" the traceable "i+ed
man."act.rin/ costs represent s.per*isory salaries and other costs that
can be eliminated i" the parts are p.rchased !he other two-thirds o" the
traceable "i+ed man."act.rin/ costs represent depreciation i" special
eC.ipments that has no rest *al.e Dconomic depreciation on this
eC.ipment is d.e to obsolescence rather than wear and tear !he
disc.ssion wo.ld ha*e no e""ect on the common "i+ed costs o" the
company, and the space bein/ .sed to prod.ces the parts wo.ld otherwise
be idle $how the dollar ad*anta/e o" acceptin/ the s.ppliers o""er
&) Elades Company prod.ces a sin/le prod.ct !he cost o" prod.cin/ and
sellin/ a sin/le .nit o" this prod.ct o" the companys c.rrent acti*ity le*el o"
1''' .nits per month as "ollows:
#irect materials%%%%%% 2&'
#irect labor%%%%%%%%% 3''
?ariables man."act.rin/ o*erhead%% '&'
>i+ed man."act.rin/ o*erhead% (2&
?ariables sellin/ and administrati*e e+penses% 1&'
>i+ed sellin/ and administrati*e e+pense% 2''
!he normal sellin/ price is 1& per .nit !he companys capacity is 1''''
.nits per months 4n order has been recei*ed "rom an o*erseas so.rce "or
2''' .nits at a price o" 12 per .nit !his order wo.ld not a""ect re/.lar
sales 5" the order is accepted, by how m.ch will monthly pro"its be
increased or decreased7 3!he order wo.ld not be chan/in/ the companys
total "i+ed costs)
-) Fe"er to the data in 3&) abo*e 4ss.me the company has &'' .nits o"
this prod.ct le"t o*er "rom last year that are in"erior to the c.rrent model
!he .nits m.st be sold thro./h re/.lar channels at red.ced prices =hat
.nit cost is rele*ant "or establishin/ a minim.m sellin/ price "or these .nits7
D+plain
Solution :13-12
1 Contrib.tion mar/in lost i" the Bath #epartment is dropped :
)ost "rom the Bath #epartment G 0'','''
)ost "rom the 9itchen #epartment 31',- + G 2,('',''') 2(','''
!otal lost contrib.tion mar/in ,(','''
)ess a*oidable "i+ed costs 3G ,'',''' B 30',''') &3','''
#ecrease in o*erall net operatin/ income G(1','''
2 8eri".lon sho.ld be processed ".rther:
$ales *al.e a"ter ".rther processin/ -','''
$ales *al.e at the split o" point (','''
5ncremental re*en.e "rom ".rther processin/ 2','''
Cost o" ".rther processin/ 13,'''
Pro"it "rom ".rther processin/ 0,'''
!he G1',''' in allocated common costs 31H3 + G3',''') will be the same
re/ardless o" which alternati*e is selected, and hence is not rele*ant to the
decision
3)!he company sho.ld accept orders "irst "or <, second "or :, and third
"or ;, the comp.tations are:
: ; <
3a) #irect materials reC.ired per .nit 2('' 1&'' ,''
3b) Cost per po.nd 3'' 3'' 3''
3c) Po.nds reC.ired per .nit 3a)3b) 1 &
3
3d) Contrib.tion mar/in per .nit 32 1( 21
Contrib.tion mar/in per po.nd o"
materials .sed 3d) 3c) ( 21' 0''
$ince < .ses the least amo.nt o" material per .nit o" the three prod.cts,
and since it is the most pro"itable o" the three in terms o" its .se o" this
constrained reso.rce, some st.dents will immediately ass.me that this is
an in"allible relationship !hat is, they will ass.me that the way to spot the
most pro"itable prod.ct is to "ind the one .sin/ the least amo.nt o" the
constrained reso.rce !he way to dispel this notion is to point o.t that
prod.ct : .s more material 3the constrained reso.rce) than does prod.ct ;
b.t yet it is pre"erred o*er prod.ct ? !he key "actor is not how m.ch o" a
constrain reso.rce a prod.ct .ses, b.t rather how m.ch contrib.tion
mar/in the prod.ct /enerates per .nit o" the constrained reso.rce
Fele*ant costs
5tem 8ake B.y
3 #irect materials 3-',''' I G('') G2(','''
#irect labor 3-',''' I G20&) 1-&,'''
?ariables man."act.rin/ o*erhead
3-'''' + '&') 3''''
>i+ed man."act.rin/ o*erhead, traceable
-''''+1' -'''''
!otal cost (,&''' -'''''
!he two-thirds o" the traceable "i+ed man."act.rin/ o*erhead costs that
cannot be eliminated, and all o" the common "i+ed man."act.rin/ A*erhead
costs, are irrele*ant
!he company wo.ld sa*e G1'&,''' per year by contin.in/ to make the
parts itsel"
&)8onthly pro"its wo.ld be increased by ,'''

!otal "or
Per @nit 2''' .nits
5ncremental re*en.e 12'' 2('''
5ncremental cost:
?ariable cost:
#irect materials 2&' &'''
#irect )abor 3''
-'''
?ariable man."act.rin/ o*erhead '&' 1'''
?ariable sellin/ and administrati*e 1&' 3'''
!otal *ariable cost 0&' 1&'''
>i+ed cost:
2one a""ected by the special order '
!otal incremental cost
1&'''
5ncremental net operatin/ income ,'''
( !he rele*ant cost is G 1 &' 3the *ariable settin/ and administrati*e
cash) 4ll other *ariable cost are s.nk, ii1ce the .nits ha*e already
been prod.ced !he "i+ed costs wo.ld not be rele*ant, since they
wo.ld not be a""ected by the sa"e o" le"to*er .nits
Problem 13-1&
Bronson Company man."act.res a *ariety o" ballpoint pens !he
company has J.st recei*ed an o""er "rom an o.tside s.pplier to pro*ide
the ink cartrid/e "or the companys <ippo pen line, at a price o" '(1 per
doKen cartrid/es !he company is interested in this o""er $ince its own
prod.ction o" cartrid/es is at capacity
Bronson Company estimates that i" the s.ppliers o""er were accepted,
the direct labor and *ariable o*erhead costs o" the <ippo pen line
wo.ld be red.ced by 1'6 and the direct materials cost wo.ld be
red.ced by 2'6
@nder present operations, Bronson Company man."act.res all o" its
own pens "rom start to "inish !he <ippo pens are sold thro./h
wholesalers at( per bo+ Dach bo+ contains one doKen pens >i+ed
o*erhead costs char/ed to the <ippo pen line total &'''' each year
3!he same eC.ipment and "acilities are .sed to prod.ce se*eral pen
lines) !he present cost o" prod.cin/ one doKen <ippo pens 3one bo+) is
/i*en below:
#irect materials%%%%%%%%%%%%%1&'
#irect labor%%%%%%%%%%%%%%%1''
8an."act.rin/ o*erhead%%%%%%%%'1'L
!otal cost%%%%%%%%%%%%%%% 33'
Lincl.des both *ariable and "i+ed man."act.rin/ o*erhead, based on
prod.ction o" 1, '',''' bo+es o" pens each year

FeC.ired:
1) $ho.ld Bronson Company accept the o.tside s.ppliers o""er7 $how
comp.tations
2) =hat is the ma+im.m price that Bronson Company sho.ld be willin/
to pay o.tside s.pplier per doKen cartrid/es7
3) #.e to the bankr.ptcy o" a competitor, Bronson Company e+pects to
sell 1&'''' bo+es o" <ippo pens ann.ally By inc.rrin/ 3'''' in
added "i+ed cost each year, the company co.ld e+pand its prod.ction
o" cartrid/es to satis"y the anticipated demand "or <ippo pens !he
*ariable cost per .nit to prod.ce the additional cartrid/es wo.ld be
the same as at present @nder these circ.mstances, sho.ld all
1&'''' bo+es be p.rchased "rom the o.tside s.pplier, or sho.ld
some o" the 1&'''' bo+es be made by Bronson7 $how comp.tations
to s.pport yo.r answer
() =hat C.alitati*e "actors sho.ld Bronson Company consider in
determinin/ whether it sho.ld make or b.y the ink cartrid/es7
Solution 13-15
1 !he "i+ed o*erhead costs are common and will remain the same
re/ardless o" whether the cartrid/es are prod.ced internally or p.rchased
o.tside Hence, they are not rele*ant !he *ariable man."act.rin/
o*erhead cost per bo+ o" pens is G'3', as shown below:
!otal man."act.rin/ o*erhead cost per bo+ o" pens G'1'
)ess "i+ed man."act.rin/ o*erhead
3G&','''M1'',''' bo+es) '&'
?ariable man."act.rin/ o*erhead cost per bo+ G'3'
!he total *ariable cost o" prod.cin/ one bo+ o" <ippo pens is:
#irect materials G 1&'
#irect labor 1''
?ariable man."act.rin/ o*erhead '3'
!otal *ariable cost per bo+ G21'
5" the cartrid/es "or the <ippo pens are p.rchased "rom the o.tside s.pplier,
then the *ariable cost per bo+ o" <ippo pens wo.ld be:
#irect materials 3G1&' + 1'6) G12'
#irect labor 3G1'' + ,'6) ','
?ariable man."act.rin/ o*erhead 3G '3' + ,'6) '20
P.rchase o" cartrid/es '(1
!otal *ariable cost per bo+ G 21&
!he company sho.ld reJect the o.tside s.ppliers o""er Prod.cin/ the
cartrid/es internally costs G ''& less per bo+ o" pens than p.rchasin/
them "rom the s.pplier
2 !he company wo.ld not want to pay any more than G '(3 per bo+, since
it can make the cartrid/es "or this amo.nt internally
3 !he company has been alternati*es "or obtainin/ the necessary
cartrid/es 5t can:
N 1 Prod.ce all cartrid/es internally
N 2 P.rchase all cartrid/es e+ternally
N 3 Prod.ce 1'',''' bo+es internally and p.rchases &',''' bo+es
e+ternally
!he costs .nder the three alternati*es are:
4lternati*e N 1 B Prod.ce all cartrid/es internally
?ariable costs 3 1&', ''' bo+es + G '(3 per bo+) G-(,&''
>i+ed costs o" addin/ capacity G3','''
!otal cost G,(,&''
4lternati*e N 2 B Prod.ce all cartrid/es e+ternally
?ariable costs 31&', ''' bo+es + G '(1 per bo+) G02,'''
4lternati*e N 3 B Prod.ce 1'',''' bo+es internally, and p.rchase &','''
bo+es e+ternally
?ariable costs :
1'', ''' bo+es + G '(3 per bo+) G(3,'''
&',''' bo+es + G'(1 per bo+ 2(,'''
!otal cost G-0,'''
!h.s the company sho.ld accept the o.tside s.ppliers o""er, b.t only
"or &',''' bo+es o" cartrid/es
( 5n addition to cost considerations, Bronson sho.ld take into acco.nt the
"ollowin/ "actors:
a) !he ability o" the s.pplier to meet reC.ired deli*ery sched.les
b) !he C.ality o" the cartrid/es p.rchased "rom the s.pplier
c) 4lternati*es .ses o" the capacity that s .sed to make the
cartrid/es
d) !he ability o" the s.pplier to s.pply cartrid/es i" *ol.me increases
in ".t.re years
e) !he problem o" alternati*e so.rces o" s.pply i" the s.pplier pro*es
@ndependable
Problem:13-11
O!hat old eC.ipment "or prod.cin/ s.bassemblies is worn o.t,P said Pa.l
!aylor, president o" !imkin Company !he company is tryin/ to decide
whether it sho.ld rent new eC.ipment and contin.e to make its
s.bassemblies internally or whether it sho.ld discontin.e prod.ction o" its
s.bassemblies and p.rchase them "rom an o.tside s.pplier !he
alternati*es "ollow:
4lternati*es 1:2ew eC.ipment "or prod.cin/ the s.bassemblies can be
rented "or -''''per year
4lternati*es 2: !he s.bassemblies can be p.rchased "rom an o.tsider
s.pplier who has o""ered to pro*ide them "or 1 each
!imkin Companys presents costs per .nit o" prod.cin/ the s.bassemblies
internally 3with the old eC.ipment) are /i*en below !hese costs are based
on a c.rrent acti*ity le*el o" ('''' s.bassemblies per year:
#irect materials%%%%%%%%%%%%% 20&
#irect labor%%%%%%%%%%%%%%% (''
?ariable o*erhead%%%%%%%%%%%%% '-'
>i+ed o*erhead3'0&s.per*ision,','
#epreciationQ2/eneral company o*erhead)% 3-&
!otal cost per .nit%%%%%%%%%%%%%% 11''

!he new eC.ipment wo.ld be more e""icient and, accordin/ to the
man."act.rer, wo.ld red.ce direct labor costs and *ariable costs
by2&6 $.per*ision costs 33'''' per year) and direct materials cost per
.nit wo.ld not be a""ected by new eC.ipment !he new eC.ipments
capacity wo.ld be s.bassemblies per year !he total /eneral company
o*erhead wo.ld be .na""ected by this decision
FeC.ired:
1) !he president is .ns.re what the company sho.ld do and wo.ld like
an analysis showin/ what .nit costs and what total costs wo.ld be
.nder each o" the two alternati*es /i*en abo*e 4ss.me that (''''
s.bassemblies are needed each year =hich co.rse o" action wo.ld
yo. recommend to the president7
2) =o.ld yo.r recommendation in 1) abo*e be the same i" the
companys needs were 3a) &'''' s.bassemblies per year, or 3b)
-'''' s.bassemblies per year7 $how comp.tation in a /ood "orm
3) =hat other "actors wo.ld yo. recommend what the company
consider be"ore makin/ a decision7
Solution : 13-18
1 !he G2'' per .nit /eneral o*erhead cost is not rele*ant to the decision,
since the total /eneral company o*erhead cost will be the same re/ardless
o" whether the company decides to make or b.y the - s.bassemblies 4lso,
the depreciation on the old eC.ipment is not a rele*ant cost since it
represents a s.nk cost and the old eC.ipment is - worn o.t and m.st be
replaced !i cost o" s.per*ision is rele*ant since this cost can be-a*oided
by -b.yin/ the s.bassemblies

!otal #i""erential
#i""erential Costs "or
Cost per .nit ('''' .nits
8ake B.y 8ake B.y
A.tside s.ppliers price G1'' G32','''
#irect materials G20& G11','''
#irect labor 3G('' + '0&) 3'' 12','''
?ariable o*erhead
3'-' + '0&) '(& 11,'''
$.per*ision '0& 3','''
DC.ipment rental L 1&' -','''
!otal 1(& 1'' 331,'''
32','''
#i""erence in "a*or o" b.yin/ '(& 11,'''
L -',''' per year M (',''' .nits per year R 1&' per .nit
2 a 2otice that .nit costs "or both s.per*ision and eC.ipment rental will
chan/e i" the company needs &',''' s.bassemblies each year !hese
"i+ed costs will be spread o*er a lar/er n.mber o" .nits, thereby -
decreasin/ the cost per .nit
#i""erential !otal #i""erential
Cost per @nit Costs B &',''' .nits
8ake B.y 8ake
B.y
A.tside s.ppliers price G1''
G('','''
#irect materials G20& G130,&''
#irect labor 3'' 1&','''
?ariable o*erhead '(& 22,&''
$.per*ision
3G 3','''M&',''' .nits) '-' 3','''
DC.ipment rental
3G -','''M&',''' .nits) 12' -','''
!otal 1'' 1'' ('',''' ('','''
#i""erence ' '
!he company wo.ld be indi""erent between the two alternati*es i" &','''
s.bassemblies were needed each year
b 4/ain, notice that the .nit costs to both s.per*ision and eC.ipment rental
decrease with the /reater *ol.me o" .nits:
#i""erential !otal #i""erential
Cost per @nit Costs B -',''' .nits
8ake B.y 8ake
B.y
A.tside s.ppliers price G1''
G(1','''
#irect materials G20& G1-&,'''
#irect labor 3'' 11','''
?ariable o*erhead '(& 20,'''
$.per*ision
3G 3','''M-',''' .nits) '&' 3','''
DC.ipment rental
3G -','''M-',''' .nits) 1'' -','''
!otal 00' 1'' (-2,''' (1','''
#i""erence in "a*or o" makin/ '3' 11,'''
!he company sho.ld p.rchase the new eC.ipment and make the
s.bassemblies i" -',''' .nits per year are needed
3 Ather "actors that the company sho.ld consider incl.de:
a) =ill *ol.me in ".t.re years be increasin/, or will it remain constant at
(',''' .nits per year7 35" *ol.me increases, then b.yin/ the new
DC.ipment becomes more desirable, as shown in the comp.tations abo*e)
b) Can C.ality control be maintained i" the s.bassemblies are p.rchased
"rom the o.tside s.ppler7
c) #oes the company ha*e some other pro"itable .se "or the space now
bein/ .sed to prod.ce the s.bassemblies7 #oes prod.ction o" the
s.bassemblies reC.ire .se o" a constrained reso.rce7
d) =ill the o.tside s.pplier be dependable in meetin/ shippin/ sched.les7
e Can the company be/in makin/ the s.bassemblies a/ain i" the s.pplier
pro*es to be .ndependable, or are there alternati*e s.ppliers7
") 5" the o.tside s.ppliers o""er is accepted and the need "or s.bassemblies
increases in ".t.re years, will the s.pplier ha*e the capacity to pro*ide
more than (',''' s.bassemblies per year7