Chapter 4

32 Special Orders: Maria’s Food Service.

a.
Status Quo Alternative
3,000 Units 3,300 Units Difference
Sales revenue $ 18,000 $19,050 $1,050 (higher)
Variable costs:
 Mealsa 9,000 9,900 900 (higher)
 Administrativeb......... 1,500 1,500 0
Contribution margin $ 7,500 $7,650 $ 150 (higher)
Fixed costs 5,100 5,100 0
Operating profit............ $ 2,400 $ 2,550 $ 150 (higher)

a Variable costs per meal = ($13,500 – $4,500) ÷ 3,000 units

= $3.00 per unit.
Alternatively, variable costs per meal:
$4.50  [($13,500 – $4,500) ÷ $13,500] = $3.00 per unit.
$3.00 per unit x 300 = $900 additional cost.

b No additional administrative costs according to the exercise.

Alternative presentation.
Per Unit 300 Meals
Sales revenue $3.50 $1,050
Variable costs:
Meal costs:
$4.50  [($13,500 – $4,500) ÷ $13,500] = 3.00 900
Contribution to operating profit...................................................... $0.50 $150

Accepting this order would increase operating profits by $150.

b. The difference is relatively small, so Maria might want to consider how confident she is in the
estimates. In addition, she should consider whether accepting this order will lead to regular customers
asking for special prices.
 33 Special Orders: Carlsbad Enterprises.
Carlsbad should accept the offer; profit is higher by $160,000.

a.
(All costs in $000)
Status Quo Alternative
320,000 Units 340,000 Units Difference
Sales revenue $ 25,600 $26,600 $1,000 (higher)
Variable costs:
 Manufacturing.............................. 10,240 10,880 640 (higher)
 Selling and administrative........... 5,120 5,320 200 (higher)

Contribution margin......................... $ 10,240 $10,400 $ 160 (higher)

Fixed costsa 3,840 3,840 0

Operating profit.............................. $ 6,400 $ 6,560 $ 160 (higher)

a $3,840,000 = 320,000 units x ($8 fixed manufacturing + $4 fixed selling).

Alternative presentation.
Per Unit 20,000 Units
($000)
Sales revenue $50 $1,000
Variable costs
Manufacturing costs.................................................................... 32 640
Selling and administrative costs.................................................. 10 200
Contribution to operating profit...................................................... $8 $160

b. Based on incremental profits, the company should accept the offer. However, it should consider the
impact of accepting the order on its regular customers and the possibility that the customer with the
special order will expect special pricing on future orders.
34 Pricing Decisions: Cold Rock.

a. Status Quo Alternative

20,000 gallons 20,400 gallons Difference

Sales revenue $96,000a $97,440b $1,440 (higher)

Less variable costs:
 Materials 36,000 36,720 720 (higher)
 Labor 12,000 12,240 240 (higher)
 Variable overhead.............. 6,000 6,120 120 (higher)
  Total variable cost.......... $54,000 $55,080 $ 1,080 (higher)
Contribution margin............... $42,000 $42,360 $ 360 (higher)
Less fixed costs..................... 24,000 24,000 0 (higher)
Operating profit..................... $18,000 $18,360 $ 360 (higher)

Operating profits would be higher with the additional order by $360.

a. $96,000 = 20,000 gallons x $4.80 per gallon.
b. $97,440 = (20,000 gallons x $4.80 per gallon) + (400 gallons x $3.60 per gallon).

b. The lowest price the ice cream could be sold without reducing profits is $2.70 per gallon, which would
just cover the variable costs of the ice cream.

c. An important factor to consider would be the effect on the regular business once other customers
learn of the special price. It is also important for the manager to understand that this customer will
expect this price concession in the future and at that time the company may be operating at capacity.
35 Pricing Decisions: Mother’s Bottlers.

a. Status Quo Alternative

20,000 Bottles 22,000 Bottles Difference

Sales revenue $100,000a $107,000b $7,000 (higher)

Less variable costs:
 Materials 30,000 33,000 3,000 (higher)
 Labor 20,000 22,000 2,000 (higher)
 Variable overhead.............. 10,000 11,000 1,000 (higher)
  Total variable cost.......... $60,000 $66,000 $6,000 (higher)
Contribution margin............... $40,000 $41,000 $1,000 (higher)
Less fixed costs..................... 20,000 20,000 0 (higher)
Operating profit..................... $ 20,000 $ 21,000 $1,000 (higher)

Operating profits would be higher with the additional order by $1,000.

a$100,000 = 20,000 bottles x $5.00 per bottle.
b$107,000 = (20,000 bottles x $5.00 per bottle) + (2,000 bottles x $3.50 per bottle).
b. The lowest price the bottled tea could be sold without reducing profits is $3.00 per bottle, which would
just cover the variable costs of the tea.

c. An important factor to consider would be the effect on the regular business once other customers
learn of the special price. It is also important for the manager to understand that this customer will
expect this price concession in the future and at that time the company may be operating at capacity.

38 Target Costing and Pricing: Sid’s Skins.

Profit = (Price – Costs) = 20% Costs

Price
= Highest acceptable costs
1.20
$21.00
= Highest acceptable costs
1.20

$17.50 = Highest acceptable costs

The highest acceptable manufacturing cost for which Sid would be willing to produce the covers is
$17.50.
 39 Target Costing and Pricing: Dino’s Inc.

Profit = (Price – Costs) = 25% Costs

Price
= Highest acceptable costs
1.25
$36.00
= Highest acceptable costs
1.25

$28.80 = Highest acceptable costs

The highest acceptable manufacturing cost for which Dino’s would be willing to produce the sweatshirts is
$28.80.

40 Target Costing: Terracotta, Inc.

0.5 hours.

The target cost for Terracotta is calculated as follows:

Profit = (Price – Costs) = 30% Costs

Price
= Highest acceptable costs
1.30
$65.00
= Highest acceptable costs
1.30

$50.00 = Highest acceptable costs

The target labor cost is $14 per unit (= $50 total cost − $16 material cost − $20 overhead cost). Given a
wage rate of $28 per direct labor hour, the maximum direct labor time per unit is 0.5 hours (= $14 ÷ $28).
 41 Make-or-Buy Decisions: Mobility Partners.
The $20,000 savings could not be achieved. The cost to make is only $16,000 more than the cost to
purchase from Trailblazers.

Status Quoa Alternative Difference

Trailblazers’ offer......................... $    –0– $440,000 $440,000 (higher)
Materials 100,000 100,000 (lower)
Labor 212,000 212,000 (lower)
Variable overhead........................ 64,000 64,000 (lower)
Fixed overhead applied............... 188,000 b 108,000 b 80,000 (lower)
  Total costs............................ $564,000 $548,000 $ 16,000 (lower)
aBased on 2,000 units.
b$94  2,000 = $188,000; or $94 x 2,000 units – $80,000 = $108,000.

Alternative presentation.

Differential costs to make:

Direct materials............................ $ 50
Direct labor 106
Variable overhead........................ 32
Avoidable fixed overhead............ 40 (= $80,000 ÷ 2,000 units)
$228

This is more than the $220 purchase price from Trailblazers.

($228 – $220)  2,000 units = $16,000 lower than the cost to make, which is $4,000 less than
management’s required savings.