MUHAMMAD FERNALDY ANGGHADA N.

RACHMAN

A062211303

EXERCISES 11-33 SPECIAL ORDER

1. Should Alton produce the special order for SHC? Why or why not?

Current Special Order

Revenue per unit $45.00 $35.00
Variable costs per unit:
Direct materials $9.00 $9.00
Direct labor $8.00 $8.00
Variable factory overhead $4.00 $4.00
Variable nonmanufacturing costs $8.00 $4.00
Total variable costs per unit $29.00 $25.00
Contribution margin per unit $16.00 $10.00
Contribution margin for 5,000 units $80,000 $50,000

The difference in favor of contunuing with current production and turning down the special order
is $30,000 ($80,000 − $50,000).

Thus, the special sales order should be turned down

Alternatively, the following relevant cost analysis can be used:

Revenue from the special sales order (@ $35 per unit offering price) = $175,000
Less: Relevant cost to fill the special sales order:
Out-of-pocket costs ($9 + $8 + $4 + $4 = $25 per unit) = $125,000
Opportunity costs:
# units of lost sales (to regular customers) = 5,000
cm per unit on regular sales ($45.00 − $29.00) = $16.00 $80,000
Impact on operating income, accepting the special order = ($30,000)

2. Suppose that Alton Inc. had been working at less than full capacity to produce 16,000
units of the product when SHC made the offer. What is the minimum price that Alton
should accept for the modified product under those conditions?

At 16,000 units of current output and 20,000 units of capacity, Alton does not have enough
capacity to produce the entire order for SHC. But, the contribution margin on regular sales
($16.00 per unit) exceeds the contribution margin on sales to SHC ($10.00 per unit), so Alton
should try to reduce or delay 1,000 units of the SHC order to get an order for 4,000 units. Then
the special order could be accepted without a loss of regular sales.
If SHC insists on the full order of 5,000 units, then Alton must figure the contribution margin on
lost sales ($ 16.00 × 1,000 units = $16,000). This loss of contribution margin is less than the
contribution margin on the special order ($50,000), so the special order would still be accepted
at the $35.00 offering price.

The minimum price would be $28.20 per unit, the total variable cost per unit ($25.00) plus the
contribution margin of lost sales, allocated per-unit to the special order ($3.20 = $16,000 ÷
5,000 units).

In general, the minimum acceptable price = total relevant costs = out-of-pocket costs +
opportunity costs, as shown below:

Out-of-Pocket Costs:
Direct materials $9.00
Direct labor $8.00
Variable mfg overhead $4.00
Variable nonmanufacturing costs $4.00 $25.00
Opportunity Cost:
No. units of lost sales 1,000
Cm per unit--regular sales
($45.00 − $9 − $8 − $4 − $8) $16.00
Total opportunity cost $16,000
No. units in special order 5,000 $3.20
Minimum acceptable price $28.20

Note that instead of incurring the opportunity cost Alton might try to reduce the order from SHC
or to delay 1,000 units of the SHC order. This way, the special order can be done without loss of
regular sales.

3. Goal Seek Solution

Revenue from special sales order:

# units in special sales order = 5,000
selling price per unit = $28.20 $141,000
Total cost from special sales order:
No. of units in special order = 5,000
Relevant cost to fill the order:
Out-of-pocket cost/ unit = $25.00 $125,000
Opportunity cost:
Total lost units = 1,000
cm/unit, reg. sales = $16.00 $16,000
Revenue − relevant costs: Special Order = $0
EXERCISES 11-37 RELEVANT COST EXERCISE

a. Make or Buy

Dik:

Subcontractor:
Number of units 2.000
Subcontractor bid price 120.000
Full production:
Direct materials $28
Direct labor 18
Variable overhead 16
Fixed overhead 4
Allocation overhead $66

Peny:

Relevant cost to manufacture

Direct materials $28
Direct labor 18
Variable overhead 16
Total $62

Relevant cost to buy $60

b. Disposal of Assets

Dik:

Inventory 2.000
NBV Inventory $50.000
Additional cost 25.000
Sold 30.000
Sold as is 2.500

Peny:

Incremental Revenues:
Estimated sales $30.000
Current disposal value 2.500
Incremental revenue $27.500
c. Replacement of Asset

Dik:

Boat costing $90.000

Sold as is 9.000
Cost of new boat 92.000
Refurbishing cost 75.000

Peny:
Net cost of new boat:
Gross cost of new boat $92.000
(-) Current salbage value 9.000
Net cost of new boat $83.000
Refurbishing cost – old boat $75.000
Difference 8.000

d. Profit from Processing Further

Join production cost = $120.000

A B C Total
Sales values 12.000 8.000 4.000 24.000
Relativw sales values $240.000 $100.000 $60.000 $400.000
Allocation of joint costs 60% 25% 15% 100%
Ultimate sales value $144.000 $60.000 $36.000 $240.000
Separable processing cost $280.000 $120.000 $70.000 $470.000
Total $28.000 $20.000 $12.000 $60.000

Which if any of product A, B, C should be processed further and then sold?

Incremental Revenue: Ultimate sales values
(given) Sales value @ split-off (given)

Incremental revenue A B C
Incremental Cost (given) $280,000 $120,000 $70,000
Increm. Revenue - Increm. Cost $240,000 $100,000 $60,000
$40,000 $20,000 $10,000
$28,000 $20,000 $12,000
$12,000 $0 ($2,000)

Deaton Corp. is indifferent about the further processing for B since the net benefitis zero. There
would be a positive benefit for further processing of A ($12,000) and a loss from further
processing of C ($2,000). Note that the joint production costs of $240,000 are sunk with
respect to the decision whether individual products should be sold at the split-off point or
processed further and then sold.

For financial reporting and tax purposes, accountants need to value inventory on a "full cost"
basis. Thus, in the present case for income-statement preparation purposes and for purposes of
preparing an end-of-period balance sheet, a portion of the joint production cost of $240,000
must be assinged to each unit sold during the period and each unit on hand at the end of the
period. There are alternative ways to allocate joint production costs to outputs. Regardless of
how these costs are handled for financial reporting and tax purposes, they are irrelevant to the
sell-or-process further decision.