You are on page 1of 7

14-62

Purchased
Tackle
Boxes

Manufactured
Tackle
Boxes

Skateboards

$86.00

$45.00

Material .............................................................................
(68.00)

(17.00)

(12.50)

Direct labor .......................................................................

(18.75)

(7.50)

Manufacturing overhead* ..............................................

(6.25)

(2.50)

Selling and administrative cost .....................................


(4.00)

(11.00)

(3.00)

Contribution margin ............................................................


$14.00

$33.00

$19.50

Direct-labor hours per unit ..................................................

Contribution per hour ..........................................................

1.25
$26.40

.5
$39.00

Selling price .........................................................................


$86.00
Less:

*Calculation of variable overhead per unit:


Tackle boxes:
Direct-labor hours ........................................
$18.75 $15.00 = 1.25 hours
Overhead per direct-labor hour ..................
$12.50 1.25 = $10.00
Capacity ........................................................
8,000 boxes 1.25 = 10,000 hours
Total overhead ..............................................
10,000 hours $10 per hour = $100,000
Total variable overhead ...............................
$100,000 $50,000 = $50,000
Variable overhead per hour .........................
$50,000 10,000 = $5.00
Variable overhead per box ..........................
$5.00 1.25 = $6.25
Skateboards:
Direct-labor hours ........................................
$7.50 $15.00 = .5 hours
Variable overhead ........................................
$5.00 .5 = $2.50

In calculating the contribution margin, $6.00 of fixed overhead cost per unit for
distribution must be deducted from the selling and administrative cost.
CASE 14-62 (CONTINUED)
The optimal use of Sportways scarce resource (direct labor) is to manufacture
skateboards, up to the number of skateboards that the company can sell (17,500).
With its remaining labor time, Sportway can produce 1,000 tackle boxes.

The following table shows the improvement in the companys total contribution margin if it
manufactures 17,500 skateboards and 1,000 tackle boxes, rather than manufacturing
8,000 tackle boxes.
The optimal use of Sportways available direct-labor hours (DLH):

Item

Quantity

DLH
per
Unit

Total
DLH

Total hours ...............

Balance
of
DLH

Unit
Contribution

Total
Contribution

10,000

Skateboards .............

17,500

.50

8,750

1,250

$19.50

$341,250

Make boxes ..............

1,000

1.25

1,250

33.00

33,000

Buy boxes .................

9,000

14.00

126,000

Total contribution .....

$500,250

Less:
Contribution from manufacturing 8,000 boxes
(8,000 $33.00) ...............................................................................................264,000
Improvement in contribution margin ..................................................................$236,250

14- The relevant cost of the theolite to be used in producing the special order is the
36 14,500p sales value that the company will forgo if it uses the chemical. This is an
example of an opportunity cost.
p denotes Argentinas peso.
(a) 14,500p sales value: Discussed in requirement (1).
(b) 16,000p book value (8,000 kilograms 2p per kilogram): Irrelevant, since the
book value is a sunk cost.
(c) 19,200p current purchase cost (8,000 kilograms 2.40p per kilogram): Irrelevant,
since the company will not be buying any theolite.

14- (a) $9,100 allocation of rent on factory building: Irrelevant, since Fusion Metals
38
Company will rent the entire factory building regardless of whether it continues
to operate the Packaging Department. If the department is eliminated, the space
will be converted to storage space.
(b) $11,000 rental of storage space in warehouse: Relevant, since this cost will be
incurred only if the Packaging Department is kept in operation. If the department
is eliminated, this $11,000 rental cost will be avoided.
The $11,000 warehouse rental cost is the opportunity cost associated with using
space in Fusion Metals Companys factory building for the Packaging Department.
PROBLEM 14-45
1.

Yes, the order should be accepted because it generates a profit of $34,050 for the firm. Note: The
fixed administrative cost is irrelevant to the decision, because this cost will be incurred regardless
of whether Jupiter accepts or rejects the order.
Selling price
Less: Direct material ($8.20 - $2.10).
Direct labor..
Variable manufacturing overhead
(.5 hours x $7.50*)..
Unit contribution margin.
Total contribution margin (11,000 units x $3.65)..
Less: Additional setup costs
Special device.
Net contribution to profit.

$15.75
$6.10
2.25
3.75

$40,150
$3,700
2,400

* Fixed manufacturing overhead: $750,000 60,000


machine hours = $12.50 per hour
Variable manufacturing overhead: $20.00 - $12.50 = $7.50
PROBLEM 14-45 (CONTINUED)
2.

No, Jupiter lacks adequate machine capacity to manufacture the entire order.
Planned machine hours (5,000 hours x 3 months)
Current usage (15,000 hours x 70%)..
Available hours
Required machine hours (11,000 units x .5 hours)

12.10
$ 3.65

15,000
10,500
4,500
5,500

6,100
$34,050

Prob 5-56
1.

a.

WGCC's predetermined overhead rate, using direct-labor cost as the single cost
driver, is $5 per direct labor dollar, calculated as follows:
Overhead rate

total manufacturing-overhead cost


budgeted direct-labor cost

= $3,000,000/$600,000
= $5 per direct-labor dollar
b.

The full product costs and selling prices of one pound of Kona and one pound of
Malaysian coffee are calculated as follows:
Kona

2.

Malaysian

Direct material........................................

$3.20

$4.20

Direct labor.............................................

.30

.30

Overhead (.30 $5)...............................

1.50

1.50

Full product cost...................................

$5.00

$6.00

Markup (30%).........................................

1.50

1.80

Selling price...........................................

$6.50

$7.80

A new product cost, under an activity-based costing approach, is $7.46 per pound of
Kona and $4.82 per pound of Malaysian coffee, calculated as follows:

Activity

Cost Driver

Budgeted
Activity

Budgeted
Cost

Unit Cost

Purchasing

Purchase orders

1,158

$579,000

$500

Material handling

Setups

1,800

720,000

400

Quality control

Batches

720

144,000

200

Roasting

Roasting hours

96,100

961,000

10

Blending

Blending hours

33,600

336,000

10

Packaging

Packaging hours

26,000

260,000

10

Kona Coffee
Standard cost per pound:
Direct material.......................................................................................

$3.20

Direct labor............................................................................................

.30

Purchasing (4 orders $500/2,000 lb.)................................................

1.00

Material handling (12 setups $400/2,000 lb.)...................................

2.40

Quality control (4 batches $200/2,000 lb.).......................................

.40

Roasting (20 hours $10/2,000 lb.).....................................................

.10

Blending (10 hours $10/2,000 lb.).....................................................

.05

Packaging (2 hours $10/2,000 lb.)....................................................

.01

Total cost...............................................................................................

$7.46

Malaysian Coffee
Standard cost per pound:
Direct material.......................................................................................

$4.20

Direct labor............................................................................................

.30

Purchasing (4* orders $500/100,000 lb.)..........................................

.02

Material handling (30 setups $400/100,000 lb.)...............................

.12

Quality control (10 batches $200/100,000 lb.).................................

.02

Roasting (1,000 hours $10/100,000 lb.)............................................

.10

Blending (500 hours $10/100,000 lb.)...............................................

.05

Packaging (100 hours $10/100,000 lb.)............................................

.01

Total cost...............................................................................................

$4.82

*Budgeted sales purchase order size


100,000 lbs. 25,000 lbs. = 4 orders

3.

a.

The ABC analysis indicates that several activities other than direct labor drive
overhead. The cost computations show that the current system significantly
undercosted Kona coffee, the low-volume product, and overcosted the high-volume
product, Malaysian coffee.

b.

The implication of the ABC analysis is that the low-volume products are using
resources but are not covering their share of the cost of those resources. The Kona
blend is currently priced at $6.50 [see requirement 1(b)], which is significantly below
its activity-based cost of $7.46. The company should set long-run prices above cost. If
there is excess capacity and many of the costs are fixed, it may be acceptable to price
some products below full activity-based cost temporarily in order to build demand for
the product. Otherwise, the high-volume, high-margin products are subsidizing the
low-volume, low-margin products.