CHAPTER 13 SHORT-RUN DECISION MAKING: RELEVANT COSTING

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-orreject 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. 8. 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. If a firm is operating below capacity, then a price that is above variable costs will increase profits.

11.

13-1

MULTIPLE-CHOICE EXERCISES
13–1 13–2 13–3 13–4 13–5 13–6 13–7 13–8 13–9 13–10 13–11 13–12 e d e c a c c c c c a d

13-2

a $12. direct labor.000 15. 2.000 Differential Cost to Make $ 25. There are two alternatives: make the ingredient in-house or purchase it externally.000) $ (2. Relevant costs of purchasing the ingredient externally include the purchase price.000 15.000 = $30.500 — — — — $60.000 $60.500 10. 4.000 12.500) It is cheaper to make the ingredient in-house.500 10.500. 3.000 — $57.000 (60.000 7.000 $60.000 (60. and variable overhead (both manufacturing and marketing in nature).000 7.500 — — — — — $60.000) $ 9.500. This alternative is cheaper by $2. Direct materials Direct labor Variable manufacturing overhead Variable marketing overhead Avoidable fixed plant overhead Purchase cost Total relevant cost Alternatives Make Buy $25.000a — $69.500 10. Relevant costs of making the ingredient in-house include direct materials. This alternative is cheaper by $9.000 7.CORNERSTONE EXERCISES Cornerstone Exercise 13–13 1.000 Differential Cost to Make $ 25.40 13-3 .000 15.000 7.500 10.000 12.000 15.500 Now it is cheaper to purchase the ingredient.000 × 0. Direct materials Direct labor Variable manufacturing overhead Variable marketing overhead Purchase cost Total relevant cost Alternatives Make Buy $25.

000 [($0. the special order should be rejected.00) $ (0.000 250.000) $ 15.000. 2.000 $ 50.50) (2.000 $ 50. None of the relevant benefits and costs of keeping the parquet flooring line would occur under the drop alternative. 3.000 in favor of keeping the parquet flooring line. The two alternatives are to keep the parquet flooring line or to drop it.000 250. and supervision cost of $5.00 (1. No relevant costs or benefits are attached to rejecting the order.000 The difference is $15. 2.00) (1. The relevant benefits and costs of keeping the parquet flooring line include sales of $300.000) (5. Cornerstone Exercise 13–15 1. variable costs of $250.000 Drop $— — $— — — $ 0 Differential Amount to Keep $300.00 (1. direct materials.50) (2.50) Price Direct materials Direct labor Variable overhead Decrease in operating income Accept $ 4. Keep Sales Less: Variable expenses Contribution margin Less: Machine rent Supervision Total relevant benefit (loss) $300. If the problem is analyzed on a unit basis: Differential Benefit to Accept $ 4. costs and benefits of accepting the special order include the sales price of $4.000) $ 15. and variable overhead.000 units] if the special order is accepted.000.000 (30.000. machine rental cost of $30.000.00) (1.Cornerstone Exercise 13–14 1.50) Reject $— — — — $ 0 Operating income will decrease by $5.50) × 10. direct labor.000 (30.000) (5.00) $ (0. 13-4 . therefore.

000) = $4.250 Differential Amount to Keep $109.000).000. Income from further processing = $4. the resulting total contribution margin for Hickory would equal $195.000) = $131.750 (30. Jack’s should process the logs into lumber because the company will make $4.000 – 0.000 Drop $195.750 higher if all three flooring product lines are kept as opposed to dropping the parquet line.000. 2. The reasoning is the same for the plank line.000 – 0.750 Notice that the contribution margin for the drop alternative equals the new contribution margins of the strip and plank lines ($131.000.000. Cornerstone Exercise 13–17 1.000) $ 74. Revenue from further processing = $0.000) $220. so the contribution margin decreases by 25 percent.250 + $64. 13-5 . machine rent and supervision remain relevant across these alternatives. Now the analysis even more heavily favors keeping the parquet line.000) = $64.480. New contribution margin for plank = $80.000). 3.000) $145.250. but the decrease is 20 percent.800.000) (25.000 × 800) = $4.20($80.000 – $320.Cornerstone Exercise 13–16 1.000. Previous contribution margin of the strip line was $175.000.05 × (8. if the parquet floor product line were dropped. Therefore.250 + $64.480.800. Also.000 = $4.000 (55.250 (25. New contribution margin for strip = $175.000 it would make by selling the logs for use in cabins. A 25 percent decrease in sales implies a 25 percent decrease in total variable costs.25($175.250 ($131. Further processing cost = $0. 2.000.000) (30. Revenue from logs = ($500 × 8. In fact.000) (5.000 × 800) = $320.000. company income will be $74.75 × (8. Keep Contribution margin Less: Machine rent Supervision Total $305.000 versus the $4.

50 $ 30 0.50 $ 30 0.000 units and Rufus—0 units. 7. However.10 = 6 minutes per Swoop unit 30 minutes per Rufus unit . all machine time (i. Contribution margin per unit Required machine time per unit Contribution margin per hour of machine time a Swoop $ 5 ÷ 0.10 hour per Swoops weatshirt = 70.Cornerstone Exercise 13–18 1.10a $ 50 Rufus $ 15 ÷ 0.10a $ 50 Rufus $ 15 ÷ 0. 3.. Contribution margin per unit Required machine time per unit Contribution margin per hour of machine time a Swoop $ 5 ÷ 0.000 hours) should be devoted to the production of Swoop sweatshirts.50 machine hour per Rufus sweatshirt > 0.50 = 60 minutes 60 minutes 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). Rufus’ contribution margin is three times greater than Swoop’s contribution margin ($15 > $5).e. Units of Swoop = 0.000 units Swoop)$5 = $350. because each Rufus sweatshirt requires more than three times as much machine time to produce than each Swoop sweatshirt (. For instance. The point is that when making this relevant decision. Swoop has a higher contribution margin per machine hour than does Rufus ($50 > $30). 0.10 machine hour per Swoop sweatshirt). Total contribution margin of optimal mix = (70. in this exercise.000 total hours Cornerstone Exercise 13–19 1.000 units The optimal mix is Swoop—70. 0.50 = 60 minutes 60 minutes 13-6 .10 = 6 minutes per Swoop unit 30 minutes per Rufus unit .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. 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. 7.

This mix will precisely exhaust the machine time available.10 hours of machine time required per Swoop sweatshirt = 5.000 Cornerstone Exercise 13–20 Price = Cost + Markup percentage × Cost = $95.250 = $109. demands). Remaining machine time for Rufus sweatshirts = 7. Target cost = Target price – Desired profit = $350 – $35 = $315 13-7 . the first priority is to produce all of the Swoop sweatshirts that the market will take (i.000 units Rufus × $15) = $310.15($95. 3. Total contribution margin of optimal mix = (50.000 = 2.000 + 0.000 hours needed to manufacture 50.000 maximum units × 0. Machine time required for maximum amount of Swoop = 50.000 units Swoop × $5) + (4.000 units of Swoop sweatshirts and 4. Since Swoop yields $50 of contribution margin per hour of machine time. Desired profit = 0.000 hours Units of Rufus to be produced in remaining 2.000) = $95.000 units of Rufus sweatshirts.5 = 4.000 units Now the optimal mix is 50.000 hours = 2.000 + $14.10 × $350 = $35 2..10 × Target price = 0.000 Swoop sweatshirts.000 0.Cornerstone Exercise 13–19 (Concluded) 2.250 Cornerstone Exercise 13–21 1.000 – 5.e.

E. (Students may want to include event I—possible study for a graduate degree. and 1. and I. Events C. future events indicate that Austin still defined his problem as in step 1 above. although we can assume that it was done. (Students may also list E and F in step 5—they are included here because they may help Austin estimate future income benefits. Currently. and that three schools were selected as feasible since event J mentions that two of three applications met with success.EXERCISES Exercise 13–22 The correct order is 4. Events A and B. However. He also applied for—and won—summer internships with large West coast companies in the aerospace industry. Identify the alternatives. 5. Event J is certainly relevant to this. F. 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: Step 3: Step 4: Step 5: Step 6: 13-8 . Exercise 13–23 Steps in Austin’s decision: Step 1: Define the problem. 3. E.) Identify costs and benefits associated with each feasible alternative. Make the decision. G. Events D. F. 2. Assess qualitative factors. (What did Austin ultimately decide? He decided to stay at SMWU and finish his engineering degree. 6.) Total the relevant costs and benefits for each feasible alternative. and H. No specific event is listed for this step. he’s applying for jobs and [Plan B] looking into graduate programs.

75 — — — $25.000) higher than if the part were purchased from Bryce.500 ($1. Avoidable fixed overhead is relevant because if Zion makes the component.Exercise 13–24 1.00 8. that fixed overhead will not be incurred.00 8.00 8.25) 3. it will incur the cost.25 — — — $25.000) over making it in-house.500 ($0. Exercise 13–25 Alternatives Make Buy Direct materials Direct labor Variable overhead Avoidable fixed overhead* Purchase cost Total relevant cost $12.25 3.00 Differential Cost to Make $ 12.50 (25.25 3.50 — $25.25 3.50 (25.00) $ (1. Direct materials Direct labor Variable overhead Purchase cost Total relevant cost Alternatives Make Buy $12.50 1.50 — $23.25 × 10.00 $25. Zion should make the component in-house because operating income will be $12.25 3.00 Differential Cost to Make $ 12.00) $ 0. 2.25 *Avoidable fixed overhead is the 75% of fixed overhead that would be eliminated if the component were no longer made in-house. but if the component is purchased.25 × 10.00 $25.00 8. 13-9 . Zion should purchase the component from Bryce because it will save $2.50 1. The two alternatives are to make the component in-house or to buy it from Bryce.

...25 × 15.15 $6............... Less labeling machine.......00 – $6.......... Exercise 13–27 In this case....40).....000 as a result of the lost contribution margin ($300....60)..Exercise 13–26 1.... it will remain unchanged whether Conway is kept or dropped)...000).000 (15..000 lost contribution margin. As a result. Direct labor ($2..... 13-10 .60 ($7. overall profit will decrease by $75. Exercise 13–28 If Petoskey drops Conway......000 33......................000 $45..000 × $0......00 2..000). Direct materials Direct labor Variable overhead Total $3.........000. the overall impact of dropping Conway is that profit decreases by the 75..... The two alternatives are (1) to accept the special order or (2) to reject the special order.....000)...40 per unit so the gross profit per unit from the special order is $0. it may be easier to deal with the total costs and revenues of the special order: Revenue ($7.... $105......250 96.000 $ (5. Note that the direct fixed expense for depreciation is a sunk cost and not relevant to the decision (i............... Petoskey should keep Conway because profits are higher with Conway than without Conway.000) Smooth Move should reject the special order because it will reduce income by $5.. Variable overhead ($1... Loss on special order.750 17......000).............. Therefore....25 1.000)... The increase in gross profit is $9.40 Relevant manufacturing costs are $6.000 – $225.......000 14... 2... Less variable costs: Direct materials ($3....................................15 × 15....00 × 15...00 × 15.....e.......

and decreases by the lost Alanson contribution margin of $33. In addition.000 higher ($160.000 = $160. Note that the direct fixed expense for depreciation is a sunk cost and not relevant to the decision (i. Exercise 13–30 If Petoskey drops Conway.000) Less further processing cost Contribution margin $180.Exercise 13–29 If Petoskey drops Conway. 20% of Alanson’s contribution margin.000.000. Note that the direct fixed expense for depreciation is a sunk cost and not relevant to the decision (i.000 – $225.000 as a result of the lost contribution margin ($300. which is a net decrease in profit of $28.20 × $165. Petoskey should drop Conway because profits are higher without Conway than with Conway. In addition..000. if Petoskey drops Conway.000.. the overall impact of dropping Conway is that profit decreases by the lost Conway contribution margin of $75. profit will decrease by $75.000). Contribution margin if HS is processed into CS: Revenue ($45 × 4. profit will decrease by $75. Therefore. Finally. it will remain unchanged whether Conway is kept or dropped).000 as a result of the lost contribution margin ($300.000 – $146. it will remain unchanged whether Conway is kept or dropped). Therefore. Petoskey will avoid the $80.000.e.000 34.000 (i. 13-11 .000 supervisory salary cost if it drops Conway. Contribution margin if HS is sold at split-off 2. Exercise 13–31 1. Petoskey will avoid the $80.000 lost contribution margin but increases by the lost supervisory salary of $80. increases by the lost Conway supervisory salary of $80.000 Bozo should sell HS at split-off.000.. Therefore.000 = $8 × 20. the overall impact of dropping Conway is that profit decreases by the 75. Therefore. profit from selling at split-off will be $14.e.000) than if it were processed into CS. Petoskey should keep Conway because profits are higher with Conway than without Conway.e.000 supervisory salary cost if it drops Conway.000 $146.000). which is a net increase in profit of $5.000). will also be lost as Conway customers shop elsewhere for Alanson. or $33.000 – $225. .

500 units Tahoe 2. This will take 1.540 Exercise 13–34 1. Unit contribution margin Painting department hours Contribution margin per unit scarce resource Reno $120 ÷ 5 $ 24 Tahoe $75 ÷3 $25 2.500) hours for Reno production. This time will yield 192 ( 960 ) units of Reno. leaving 960 (2. Price of carved bear candle = $12. Total contribution margin = ($120 × 192) + ($75 × 500) = $60.98 13-12 .10) = $1.10 + (0. 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). the optimal mix is zero units of Reno and 820 units of Tahoe. If 500 units of each product can be sold.00 + (0. 5 Optimal mix: 192 units Reno. 3. Price of scented votive candle = $1. Total painting department time is 2. Assuming no other constraints. Contribution margin = ($120 × 0) + ($75 × 820) = $61. if all of them are devoted to Tahoe production.460 ) units of Tahoe can be 3 Exercise 13–33 1.Exercise 13–32 1.8 × $1.500 2.460 hours per year.8 × $12) = $21.60 2. then 820 ( produced.460 – 1.500 (500 units × 3 hours) hours of painting department time.

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? 13-13 .75 2.000 400 1. If she restores the Grand Am. 2.75 = $56.25 × $75 = $18.Exercise 13–35 1.25 Exercise 13–36 1.000 Heather should sell the Grand Am and buy the Neon because it provides a net savings of $500.25 × Target price = 0. Cost Item Transmission Water pump Master cylinder Sell Grand Am Cost of new car Total Alternatives Restore Grand Am Buy Neon $2. Desired profit = 0.400 $ 3.500 $(6.400) 9. Note: Heather should consider the qualitative factors. The amounts Heather has spent on purchasing and improving the Grand Am are irrelevant because these are sunk costs.100 0 0 $3. Target cost = Target price – Desired profit = $75 – $18.

000) $385. Make Direct materials Direct labor Variable overhead Fixed overhead Purchase cost Total relevant costs $210.000 0 $409.50 per unit 3. 2. each variable cost as well as the purchase price will be the unit cost multiplied by 35.500 – $385. 2.500 0 $332.000 $385. The direct fixed overhead of $77.500).000 Blasingham should purchase the part.000 70.000 52.000 52.500 35. 13-14 . Maximum price = $409.000 is avoidable if the part is purchased.500 ($385.500 $ Buy 0 0 0 385.70 per unit 3.000 ($11 × 35.000 = $11.000 units.000).500 35.Exercise 13–37 1.500 ($409. Income would increase by $24.000 Blasingham should continue manufacturing the part.500 $ Buy 0 0 0 0 385. Exercise 13–38 1. Income would decrease by $52. Maximum price = $332.000 70. If the analysis is done using total costs. Direct materials Direct labor Variable overhead Purchase cost Total relevant costs Make $210.000 = $9.500 77.000 – $332.

............000) $ 100..000 0 $367..... Variable overhead ($3 × 100.............. This would also enhance the company’s community image....PROBLEMS Problem 13–39 1......... $27 × 2. If the special order is rejected...000....................000) + ($150 × 600)............................ the likelihood of an adverse impact on regular business is not high....000).......... c $8 × 2............... 2..... Accepting the special order would bring production up to near capacity and allow the company to avoid laying off employees......... e ($125 × 2.............000) + ($130 × 600). 13-15 .. Therefore... the quantitative analysis is $100. Cost Item Raw materials .000 (200.......................... Fixed overheadd......... Direct laborb.............................000)...........................000 $340.................000 + $32............... there will be no impact on income.... a a Make $218..... b Net savings by purchasing: $27... Direct materials ($2 × 100. Fixed overhead and selling costs are irrelevant..............000 ($70 × 2.600.000 Problem 13–40 1........ Hetrick should purchase the crowns rather than make them....000 70..... $ 700............................000)........... 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....000 $ Buy 0 0 0 0 340. Variable overheadc....000) (100..................000... Direct labor ($1 × 100.... The special-order price is well below the company’s normal price.................................000 in favor of accepting the special order............................... The company is faced with a problem of idle capacity............600............200 20. If the special order is accepted: Revenues ($7 × 100........................................ Purchase coste......... The qualitative factors are those that cannot be easily quantified...... d $26.........000) (300.............. Total net benefit............................000)...800 58.....

000.60 = $384.... $12..... Qualitative factors that Hetrick should consider include quality of crowns.000 58....................... $12 × 600. and reduction of workforce... Make $316...025 × 265........ e 10 × 600 × $0.101 Difference $ 16.716 Sell $7.......... Revenuesa Bagsb Shippingc Grindingd Bottlese a Process Further $ 24.. Direct labor... It reduces the cost of making the crowns to $335..000 = $5..........615 = $21..................................40.....000 $515...615 600 × 10 × $4 = $24.................... 4...000..............500) (2. Variable overhead... 2..... Cost Item Raw materials............000 0 (384) (1............. Purchase cost.... 25 d $2. reliability and promptness of producer..800 39 (324) (1...200 (39) (60) 0 0 $7...000 $ Buy 0 0 0 0 515.. $0......000 32...10 × 600 = $60.500) (2........000 108...........000 Hetrick should produce its own crowns if demand increases to this level because the fixed overhead is spread over more units.... c Zanda should process depryl further...... 20 b 10 × 600 × $1.400) $ 19....... @ 600 lbs..........025 additional income per pound 600 $21.... 3.400) $ 12..571........ Fixed overhead.......000 $514.................. which is less than the cost of buying......... $1..30 × 600 ......50 × 600...625 13-16 .....Problem 13–40 (Concluded) 2. Problem 13–41 1.

842. Sales Variable expenses Contribution margin Direct fixed costs Segment margin Common fixed costs Operating income System A $ 45.000 3.800 12.500 48.000 20.620 18.320 1.684 = $1.842 = $11.016 $3. c $8.500 $ 7.158) Headset $8.Problem 13–42 1.000 13.500 28.974 Headset $6.558 18. Sales Variable expenses Contribution margin Direct fixed cost Segment margin Common fixed cost Operating income a b System A $ 45.000 2.474.016c $3.000 526 $ 24.000 $ 25.016 $2. $2.000 11.000 526a $ 24.700 $ 24.158.500 26.000 $ 6.558 Replacing B with C is better than keeping B.000 $ 11.320 12.000 $ 13.400 $ 36.842 Headset $7.700 $ 36.000 $ 32.620 System A $ 58.880 $ 42.000/$85.000 $ 25.000 – $6. $18.000 11.500/$85.000 $ 16. 2.000 – $9.500 × $18.880 $4.784 Total $ 85.500 × $18.800 1.016.158 $ 1. but not as good as dropping B without replacement with C.542 $ 34.600 1.158b $ (4.000 = $9. 3.000 = $6. $10. 13-17 .584 Total $ 64.100 $45.100 1.200 35.400 $3.700 – $1.500 × $18.100 18.474 System B $ 32.500 526 $ 31.474 System C $ 26. Sales Variable expenses Contribution margin Direct fixed costs Segment margin Common fixed costs Operating income System B should be dropped.000 = $1.700 $ 29.500 25.200 $4.684.000/$85.000 20.474 = $526.304 Total $ 78.200 2. $32.

000) (56.400 – $2.000) Variable expenses Total $29.800 $12.85 × 8.600 to $32.30 × 8. At full price. Steve should consider selling the part for $1.400 – $7.000 (136.000).200 2. or 63% $130.85 × 8. 3. Pat should accept the $2 price.600 16.000) (29. an increase of $7.000) and yield an incremental benefit of $16.400 Reject $0 0 $0 Reject $0 0 0 0 0 $0 Pat’s divisional profits would increase by $18.200 over the original offer.000) Variable expenses: Direct materials ($17 × 8.400).600 800 $4.400: 2. Steve’s division will see an increase in profit of $15.000) Component (2 × $1. Direct materials Direct labor Overhead Total cost Add: Markup Initial bid 13-18 . This still leaves an increase in profits of $11.000) Total relevant benefits $ 256.600) $ 18.95 contribution margin per component).200).200 (8. (See the answer to Requirement 1.800 1.85 because his division’s profits would increase $12.000 $1. Markup = $46.000 ($18.600 = 0.800 (2 × $2. This price will increase the cost of the component from $29.000) Overhead ($2 × 8.800: Accept Revenues (2 × $1.63.646 $6.846 2.) Problem 13–44 1.Problem 13–43 1. Yes.800 Accept Revenues ($32 × 8.000) (16.000 (2 × $2 × 8. the total cost of the component is $36.300 + $35.000) Direct labor ($7 × 8.000 units × 2 components per unit × $0.200 ($18.

......... Total contribution margin = ($3 × 50.......... Rehiring and retraining costs ($150 × 20)....... 13-19 . would yield a total contribution margin of $500........................000) + ($10 × 2..100 $ 4.......................20 4....Problem 13–45 1.........000 ( 15......00 20...... with the remaining 1... Price Variable cost Contribution margin ÷ Machine hours Contribution margin per machine hour Basic $ 9... Sealing can produce 20.............000 units.000 machine hours......000 $ 18......... Loss per box...... Total.. Notification costs ($25 × 20)....460... Finally........50 $20....000) + ($25 × 12....... Then....... 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...... 2... These 20... Incremental cost per box. produce 2..600 500 3.................00 ÷ 0..000..05 × 5..000 standard units.33....000 basic units......000).100 savings by not laying off employees...............33 The company should sell only the deluxe unit with contribution margin per machine hour of $33........ Total loss: $0..00 $ 3..... multiplied by the $25 contribution margin per unit.....000 ) deluxe units per 0...... produce and sell 12.....10 $30.....00 Standard $30......00 $25.......... produce and sell 50.. The loss of $250 on the order is more than offset by the $18....000) = $470. First...00 $10.................000 deluxe units..........00 ÷ 0. $ 14....01 × $1..............75 year....... which would use 9......................05) The order should be accepted....000 machine hours.......... Costs associated with the layoff: Increase state UI premiums (0.............000 Problem 13–46 1......75 $33............000 = $250 2.00 Deluxe $35...00 6...25 $(0......00 ÷ 0....... which would use 5.000 machine hours......00 10..

..............000 Process Further $ 75............................000 pounds 16..................... Operating profit.........000 $ 40..........000 2... ($30 × 2.100 The company should process Delta further because gross profit would increase by $11..................... Total contribution margin = (2....................900 $ 51.....000 13-20 .....000 0 $ 40...000) + ($60 × 4... 2.000 23.......000 pounds = 12.....000 Difference $ 35.. 2....000 Juno and 2..... Sales....400 × $60) = $204...............Problem 13–47 1... Revenues Further processing cost Operating income (loss) Sell $ 40..000 pounds for Hera Hera production = 12... (Note: Joint costs are irrelevant to this decision because the company will incur them whether or not Delta is processed further...000 units of Juno × 2 = 4..000) = $300...000 × $30) + (2...................................400 Hera.......000 = 2... Costs....000 223....400 units 5 Product mix is 2........900 $ 11...000 23...100 if it were processed further.) Problem 13–48 1..000 pounds – 4.....100 $263.. Contribution margin ÷ Pounds of material Contribution margin/pound Juno $30 ÷ 2 $15 Hera $60 ÷ 5 $12 Norton should make as much of Juno as can be sold and then make Hera..............

....000 — $ 24. Total monthly charges.. Credit card fees ($0...10 × 200).000 4........900 Differential Amount to Process Further $9.......... Problem 13–50 1....000 (4.000)..000 liters............000 Process Further $ 33............50 × 4............ further reducing the attractiveness of making geraiten.....50 × 300)...... 13-21 .................. Note that the liability issue was not quantified so it would need to be considered as a qualitative factor...........000 — — — $ 24............ Wire transfers [($15 × 40) + ($50 × 60)].. Sell Revenues Processing cost Total $ 24..300) $ 24..........900 Germain should be processed further as it will increase profit by $4....... 12 $ 30 20 75 (150) $ (25) 2...........000). Earnings on deposits ($0....................100 $ 28........ Line of credit charges 0..800 Differential Amount to Process Further $ 9.................. One-time Internet setup fees ($15 × 6 accounts)......100 $4...............000 Process Further $ 33...600 500 20 $6................300) $ 800 Germain should be processed further as it will increase profit by $800 for every 1..06 ($100...100) (800) (3.000 liters..............000 4...000 (4..................Problem 13–49 1. Monthly cost for FirstBank: Checking accounts: Maintenance fees ($5 × 6)...900 for every 1... Foreign DR/CR ($0.......... Returned checks ($3 × 25).. 2......100) (800) (3.......000 3............. Sell Revenues Processing cost Distribution cost Commissions Total $ 24...095 $ 90 Internet banking charges.

................................. Credit card fees ($0...............................000)... the banking relationship..000)............ on the interest rate on the line of credit........ some further negotiation would probably be done—for example.............. Total monthly charges....... it would be chosen...30 × 300).............. On quantitative factors alone.307 for RegionalOne...... This leaves FirstBank and RegionalOne Bank..... 13-22 ............... Community Bank has the lowest overall monthly fees..307 ($100..700 542 20 $6. Earnings on deposits ($0...............50 × 4............ Wire transfers ($30 × 100)...........000 140 50 2.... Batch processing ($7 × 20)..............................07 ($100.......................80 × 25)............................000 3........ Line of credit charges 0........ $6.....000)....140 3... Wire transfers [($10 × 40) + ($55 × 60)]............................000 583 $5..... Additionally............. 12 $ $2........ Now........ Credit card fees Per item ($0..........065 12 $ 40 95 (90) $ 45 2...... Internet banking charges... Returned checks ($3...095 for FirstBank versus $6......20 × 200)......Problem 13–50 (Concluded) Monthly cost for Community Bank: Checking accounts: Returned checks ($2 × 25).... If the full online banking access were crucial...000)...................773 Total monthly charges..... and confidence in the bank’s ability to respond quickly and appropriately to Kicker’s needs will be the deciding factors. 2... Line of credit charges 0. Community Bank would be eliminated immediately. The two sets of monthly costs are similar... Monthly cost for RegionalOne Bank: Checking accounts: Foreign DR/CR ($0.........50 × 4. comfort level of Kicker with the loan officer..............

community relations. 2. 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. The effects on workers. and any ethical commitments the company may have to its workers should all enter into the decision. Pamela should not have told Roger about the deliberations concerning the power department because this is confidential information. 13-23 . She had been explicitly told to keep the details quiet but deliberately informed the head of the unit affected by the potential decision. she should definitely provide the information she currently has about the cost of eliminating the power department. Pamela should communicate the short-term quantitative effects and express her concerns about the qualitative factors. however. 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. Pamela should discuss the qualitative effects of eliminating the power department. Moreover. To not do so would be active subversion of the organization’s legitimate and ethical objectives. (Standard II: 1) Her revelation may be interpreted as actively or passively subverting the attainment of the organization’s legitimate and ethical objectives. reliability of external service. 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.CASES Case 13–51 1. In addition.

00 $51.000 units Let X = Units sold $83X $100X + = $3. Case 13–53 Answers will vary.000) 2.) The company should keep the division.503.00 $46.25 = $66.500) + ($51.500 (2.900) (1.250 Direct fixed overhead: $20 × 41.Case 13–52 1.000 Total direct fixed expenses = $698.900) Based on sales of 41.500 (The units transferred internally must be purchased externally.350 Drop $ — (2.600 1.900 $ 1. 13-24 .050. Sales Variable costs Direct fixed expenses Annuity Total *$100 × 20.004.000 units b $83 1.518.250) — $ 228.000 – $5(20.000 = $1.000 X = 41.250 $ (70.350 299.000 = $820.250 $ 228.40 5.500 2 2 $183X = $7.518.500 = $698.250 + $820.004.100.004.40 Fixed overhead Per internal unit variable cost Selling Per external unit variable cost Variable costs = ($46.746.751.751.500 = $299.40 Manufacturing cost 20. Salesa Less: Variable expensesb Contribution margin Less: Direct fixed expensesc Divisional margin Less: Common fixed expensesc Operating (loss) a $ 3.40 × 20.40 × 20.518.000)* — 100.900 c Fixed selling and admin: $1.950.250 Keep $ 3.500) = $997.250 Common fixed expenses = 0.000 $(1.751.7 × $997.500) = $2.500 2.3 × $997.500 Direct fixed selling and admin: 0.

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