Professional Documents
Culture Documents
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
11-2
Learning Objective 1
2
1
11-4
Learning Objective 2
Prepare an analysis
showing whether a product
line or other business
segment should be dropped
or retained.
11-18
Adding/Dropping Segments
One of the most important decisions
managers make is whether to add
or drop a business segment, such
as a product or a store.
Adding/Dropping Segments
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
Variable manufacturing costs $ 120,000
Variable shipping costs 5,000
Commissions 75,000 200,000
Contribution margin $ 300,000
Less: fixed expenses
General factory overhead $ 60,000
Salary of line manager 90,000
Depreciation of equipment 50,000
Advertising - direct 80,000
Rent - factory space 70,000
General admin. expenses 30,000 380,000
Net operating loss $ (80,000)
11-22
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
An investigation
Less: variable expenses
has revealed that total fixed
general
Variable factory overhead
manufacturing costs and general
$ 120,000
administrative
Variable shipping expenses
costs would not
5,000be affected if
Commissions 75,000 200,000
the digital watch
Contribution margin
line is dropped. The fixed
$ 300,000
general
Less: fixed factory overhead and general
expenses
administrative
General factory expenses
overhead assigned to this product
$ 60,000
Salary of line manager
would be reallocated to other90,000 product lines.
Depreciation of equipment 50,000
Advertising - direct 80,000
Rent - factory space 70,000
General admin. expenses 30,000 380,000
Net operating loss $ (80,000)
11-23
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
The equipment
Variable usedcosts
manufacturing to manufacture
$ 120,000
digital
Variable watches
shipping costshas no resale
5,000
Commissions 75,000 200,000
value or alternative use.
Contribution margin $ 300,000
Less: fixed expenses
General factory overhead $ 60,000
Salary of line manager 90,000
Depreciation of equipmentShould Lovell
50,000 retain or drop
Advertising - direct 80,000
Rent - factory space
the digital watch segment?
70,000
General admin. expenses 30,000 380,000
Net operating loss $ (80,000)
11-24
Segment Margin
Revenue
Less traceable costs
Segment margin
Segment Margin
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
Variable manufacturing costs $ 120,000
Variable shippingThe
costssegment margin
5,000 is
Commissions $10,000, so the product
75,000 line200,000
Contribution margin should be retained. $ 300,000
Less: traceable fixed expenses
Salary of line manager $ 90,000
Advertising - direct 80,000
Rent - factory space 70,000
Depreciation of equipment 50,000 $ 290,000
Segment margin $ 10,000
Less: common fixed expenses
General factory overhead $ 60,000
General admin. expenses 30,000 90,000
Net operating loss $ (80,000)
11-36
Segment Margin
Segment Income Statement
When the $50,000
Digital Watches
Sales $ 500,000
sunk cost is added to
Less: variable expenses
the $10,000
Variable segment
manufacturing costs $ 120,000
margin,
Variable it yields
shipping costs a 5,000
Commissions
$60,000 net income 75,000 200,000
Contribution margin $ 300,000
that would be realized
Less: traceable fixed expenses
by retaining
Salary Digital
of line manager $ 90,000
Watches.
Advertising - direct 80,000
Rent - factory space 70,000
Depreciation of equipment 50,000 $ 290,000
Segment margin $ 10,000
Less: common fixed expenses
General factory overhead $ 60,000
General admin. expenses 30,000 90,000
Net operating loss $ (80,000)
11-37
Learning Objective 3
Prepare a make
or buy analysis.
11-38
Direct materials $ 9
Direct labor 5
Variable overhead 1
Depreciation of special equip. 3
Supervisor's salary 2
General factory overhead 10
Unit product cost $ 30
11-40
Opportunity Cost
An opportunity cost is the benefit that is foregone as
a result of pursuing a course of action.
Opportunity costs are not actual dollar outlays and
are not recorded in the formal accounts of an
organization.
Learning Objective 4
Prepare an analysis
showing whether a
special order should
be accepted.
11-47
Special Orders
Jet Inc. makes a single product whose
normal selling price is $20 per unit.
A foreign distributor offers to purchase 3,000
units for $10 per unit.
This is a one-time order that would not affect
the company’s regular business.
Annual capacity is 10,000 units, but Jet, Inc.
is currently producing and selling only 5,000
units.
Special Orders
$8 variable cost
11-50
Special Orders
If Jet accepts the offer, net operating income will
increase by $6,000.
Quick Check
Northern Optical ordinarily sells the X-lens for $50.
The variable production cost is $10, the fixed
production cost is $18 per unit, and the variable selling
cost is $1. A customer has requested a special order
for 10,000 units of the X-lens to be imprinted with the
customer’s logo. This special order would not involve
any selling costs, but Northern Optical would have to
purchase an imprinting machine for $50,000.
(see the next page)
11-52
Quick Check
What is the minimum price below which
Northern Optical should not go in its negotiations
with the customer? In other words, below what
price would Northern Optical actually be losing
money on the sale? There is ample idle capacity
to fulfill the order and the imprinting machine has
no further use after this order.
a. $50
b. $10
c. $15
d. $29
11-53
Quick Check
What is the minimum price below which
Northern Optical should not go in its negotiations
with the customer? In other words, below what
price would Northern Optical actually be losing
money on the sale? There is ample idle capacity
to fulfill theVariable
order and the imprinting
production cost machine has
$100,000
no further Additional
use after this order.
fixed cost 50,000
a. $50 Total relevant cost $150,000
b. $10 Number of units 10,000
c. $15 Average cost per unit $15
d. $29
11-54
Learning Objective 5
Quick Check
How many units of each product can
be processed through Machine A1 in
one minute?
Product 1 Product 2
a. 1 unit 0.5 unit
b. 1 unit 2.0 units
c. 2 units 1.0 unit
d. 2 units 0.5 unit
11-60
Quick Check
How many units of each product can
be processed through Machine A1 in
one minute?
Product 1 Product 2
a. 1 unit 0.5 unit
b. 1 unit 2.0 units
c. 2 units 1.0 unit
Justd.checking
2 units
to make0.5 unityou are with me!
sure
11-61
Quick Check
What generates more profit for the company,
using one minute of machine A1 to process
Product 1 or using one minute of machine A1 to
process Product 2?
a. Product 1
b. Product 2
c. They both would generate the same profit.
d. Cannot be determined.
11-62
Quick Check
With one minute of machine A1, we could make 1
unit of Product 1, with a contribution margin of
What generates more profit for the company,
$24, or 2 units of Product 2, each with a
using one minute of machine A1 to process
contribution margin of $15.
Product 1 or using one minute of machine A1 to
process Product 2? = $30 > $24
2 × $15
q. Product 1
b. Product 2
d. They both would generate the same profit.
d. Cannot be determined.
11-63
Product 1 Product 2
Production and sales (units) 1,300 2,200
Contribution margin per unit $ 24 $ 15
Total contribution margin $ 31,200 $ 33,000
Quick Check
Colonial Heritage makes reproduction colonial
furniture from select hardwoods.
Chairs Tables
Selling price per unit $80 $400
Variable cost per unit $30 $200
Board feet per unit 2 10
Monthly demand 600 100
Quick Check
Colonial Heritage makes reproduction colonial
furniture from select hardwoods.
Chairs Tables
Selling price per unit $80 $400
Variable cost per unit $30 $200
Board feet per unit 2 10
Monthly demand 600 100
Quick Check
Chairs Tables
Selling price $ 80 $ 400
Quick Check Variable cost 30 200
Contribution margin $ 50 $ 200
Board feet 2 10
CM per board foot $ 25 $ 20
Quick Check
As before, Colonial Heritage’s supplier of
hardwood will only be able to supply 2,000
board feet this month. Assume the company
follows the plan we have proposed. Up to how
much should Colonial Heritage be willing to
pay above the usual price to obtain more
hardwood?
a. $40 per board foot
b. $25 per board foot
c. $20 per board foot
d. Zero
11-74
Quick Check
As before, Colonial Heritage’s supplier of
hardwood
The willwood
additional only will
be able to supply
be used to make2,000
tables.
board
In this feet
use, thisboard
each month.foot
Assume the company
of additional wood will
follows
allow thethe plan wetohave
company earnproposed. Up $20
an additional to how
of
much should Colonial
contribution Heritage
margin and be willing to
profit.
pay above the usual price to obtain more
hardwood?
a. $40 per board foot
b. $25 per board foot
c. $20 per board foot
d. Zero
11-75
Managing Constraints
Relax the constraint by:
• Working overtime.
Finding ways to • Subcontracting production.
relax the • Invest in additional
constraint machines.
• Shifting workers.
• Focus on business process
improvements.
• Reduce defective units.
These methods and ideas are all
consistent with the Theory of
Constraints, which is introduced in
the Prologue.
11-76
End of Chapter 11