BKAM3023 Management Accounting II

Topic 5: Short Term Decision Making

Answer to Exercise 1

(a) Production capacity = 20,000 units (16,000 ÷ 80%).

Units for special order = 4,000 (20,000 — 16,000).

Current selling price = $20 ($320,000 ÷ 16,000).

Special order price = $15 ($20 X 75%).

(b) Variable manufacturing cost per unit $11.00

Fixed manufacturing cost per unit ($48,000 ÷ 16,000) 3.00
Total manufacturing cost per unit $14.00

(c)
Reject Accept Net
Order Order Income
Increase/
(Decrease)
Revenues (4,000 x $15) $0 $60,00 $60,000
Costs: 0
Variable manufacturing (4,000 x $11.00) 0 (44,000)
Sales commission 0 44,000 (3,000)
Shipping (4,000 x $2.00) 0 3,000 (8,000)
Stamping machine 0 8,000 (2,500)
Total costs 0 2,500 57,500
57,500

Net income $0 $2,500 $2,500

Ramos Company should accept the special order because it will produce $2,500
of incremental net income.

(d) The cost of the special order = $57,500 ÷ 4,000 = $14.375 Thus, the minimum
selling price to produce net income of $1.20 per unit is $15.58.

(e) Nonquantitative factors to be considered are:

(i) Possible effects on domestic sales.
(ii) Possible alternative uses of the unused plant capacity.
(iii) Ability to meet customer’s schedule for delivery without increasing costs.

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 BKAM3023 Management Accounting II

Answer to Exercise 2
(a)
Make Buy Net
WISCO WISCO Income
Increase/
(Decrease
)
Direct materials $33,250 $ 0 $33,250
Direct labor 33,600 0 33,600
Indirect labor 3,150 0 3,150
Utilities 2,450 0 2,450
Rent – factory space 2,500 900 1,600
Property taxes 600 200 400
Insurance 1,500 600 900
Purchase price 0 77,000 (77,000)
Freight and inspection 0 2,100 (2,100)
Receiving costs 0 750 (750)
Total annual cost $77,050 $81,550 ($4,500)

(b) The company should continue to make WISCO because net income would be
$4,500 less if WISCO were purchased from the supplier.

(c) The decision would be different. Because of the opportunity cost of $5,000, net
income will be $500 higher if WISCO is purchased as shown below:
Make Buy Net
WISCO WISCO Income
Increase
(Decrease)
Total annual cost $77,050 $81,550 $(4,500)
Opportunity cost 5,000 0 5,000
Total cost $82,050 $81,550 $ 500

(d) Nonquantitative factors include:

(i) The adverse effect on employees if WISCO is purchased.
(ii) How long the supplier will be able to satisfy the Oswego Manufacturing
Company’s quality control standards at the quoted price per unit.
(iii) Will the supplier deliver the units when they are needed by Oswego?

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Answer to Exercise 3

(a) Decision rule: Drop if Total FC saved is more than total CM lost
FC saved = 11,000 + 1,500 + 3,000 = 15,500
Total CM = 47,000 - 29,000 = 18,000

Decision: Since total FC saved is less than total CM lost, then BRSB should
maintain Split Division. In other words, it is not worthwhile to drop Split Division.

(b) Qualitative factors

- Whether it will impact the sale for Fix Division (some company come for both
products)
- The impact to the workers
- Relationship with suppliers and/or loyal customers

Answer to Exercise 4

(a) Costs to be incurred if purchase compared to if produce

Direct material 0
Direct labour 0
Product inspections (50%) 28,000
Utilities (30%) 7,500
Supervision (70%) 35,000
Purchasing costs (30,000 x RM9) 270,000
Material handling 0
Depreciation 0
Total 340,500

Total cost if purchase = 340,500

Total cost if produce = 351,000 – 15,000 (depreciation) = 336,000
Difference = 4,500
If the company buy, their income will reduce by RM4,500

(b) SCSB should continue producing the face cream.