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Decision Making: Relevant Costs and Benefits: Light Oute Ecision
Decision Making: Relevant Costs and Benefits: Light Oute Ecision
*In columns (a) and (b), parentheses denote costs, and numbers
without parentheses are revenues.
†
In column (c), parentheses denote differential items favoring
option (b).
The owner’s analysis incorrectly includes the following allocated costs that will be
incurred regardless of whether the ice cream counter is operated:
Utilities ............................................................................................... $ 4,350
Depreciation of building ................................................................... 6,000
Deli manager’s salary ....................................................................... 4,500
Total .................................................................................................... $14,850
It is possible that closing the ice cream counter might save a portion of the
utility cost, but that is doubtful.
A better analysis follows:
Sales ................................................................................. $67,500
Less: Cost of food ........................................................... 30,000
Gross profit ...................................................................... 37,500
Less: Operating expenses
Wages of counter personnel .............................. $18,000
Paper products ..................................................... 6,000
Depreciation of counter equipment and 3,750
furnishings* ......................................................................
Total ....................................................................... 27,750
Profit on ice cream counter $ 9,750
1. Relevant data:
Current sales value for unmodified parts .......................................$ 7,000
Sales value for modified parts ......................................................... 20,300
Modification costs ............................................................................. 10,000
Irrelevant data:
Current book value of inventory ...................................................... 19,500
Paint and
Supplies Carpeting Wallpaper
1.
Food
Process
Blender or
Unit cost if purchased from an outside supplier ................. $60 $114
Incremental unit cost if manufactured:
Direct material ......................................................................$18 $ 33
Direct labor ...........................................................................
12 27
Variable overhead
$48 – $30 per hour fixed .................................................. 18
$96 – (2)($30 per hour fixed) ........................................... 36
Total ...................................................................................
$48 $ 96
Unit cost savings if manufactured ......................................... $12 $ 18
Machine hours required per unit ........................................... 1 2
Cost savings per machine hour if manufactured
$12 ÷ 1 hour ..........................................................................
$12
$18 ÷ 2 hours ........................................................................ $ 9
Conclusion:Manufacture....................................20,000 blenders
Manufacture........................15,000 food processors
Purchase 13,000 food processors
2. If the company’s management team is able to reduce the
direct material cost per food processor to $18 ($15 less than
previously assumed), then the cost savings from
manufacturing a food processor are $33 per unit ($18
savings computed in requirement (1) plus $15 reduction in
material cost):
Food
Process
Blender or
New unit cost savings if manufactured ...................... $12.00 $33.00
Machine hours required per unit ................................. 1 MH 2 MH
Cost savings per machine hour if manufactured
$12 ÷ 1 hour ................................................................ $12.00
$33 ÷ 2 hours .............................................................. $16.50
Standard Enhanced
Total contribution margin:
1,000 units x $474; 800 units x $474,000 $480,000
$600…….
Less: Marketing and 20,000 30,000
advertising……………..
Income……………………………… $454,000 $450,000