Chapter 13

Relevant Costs for Decision Making

Learning Objectives
LO1. Identify relevant and irrelevant costs and benefits in a decision situation. LO2. Prepare an analysis showing whether a product line or other organizational segment should be dropped or retained. LO3. Prepare a ma e or buy analysis. LO!. Prepare an analysis showing whether a special order should be accepted. LO". #etermine the most profitable use of a constrained resource and the value of obtaining more of the constrained resource. LO$. Prepare an analysis showing whether %oint products should be sold at the split&off point or processed further.

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New In Business boxes have been added to the chapter.

Chapter Overview
A. Cost Concepts for Decision-Making. '()ercises 13&1* 13&+* and 13&13., (very
decision involves choosing from among at least two alternatives. -he costs and benefits of the alternatives should be compared. 1. !entif"ing relevant costs. Only those costs and benefits that differ between alternatives are relevant in a decision. .ny cost or benefit that does not differ between the alternatives is irrelevant and can be ignored. -his is a tremendously powerful concept that allows us to ignore mounds of data when ma ing decisions since most things are not affected by any given decision. a. .ll sun costs 'i.e.* costs already irrevocably incurred, are irrelevant since they will be the same for any alternative. .ll future costs that do not differ between alternatives are irrelevant. b. .ny cost that is avoidable is potentially relevant. .n avoidable cost is a cost that can be eliminated 'in whole or in part, as a result of choosing one alternative over another. #. Different costs for !ifferent p$rposes. /osts that are relevant in one decision are not necessarily relevant in another. In each situation the manager must e)amine the data and isolate the relevant costs. %$&an frailties. 0ost of us have a great deal of difficulty ignoring irrelevant costs when ma ing decisions. 1e are especially reluctant to ignore sun costs when the sun costs are

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a conse4uence of a past decision that in retrospect was unwise. 1e have a tendency to become committed to courses of action that have not wor ed out.

'. A!!ing or Dropping a (eg&ent. '()ercises 13&2* 13&2* and 13&1!., #ecisions related
to dropping old products 'or segments, and adding new products 'or segments, are among the most difficult that a manager ma es. -wo basic approaches can be used to analyze data in this type of decision. 1. Co&pare contrib$tion &argins an! fi)e! costs. . segment should be added only if the increase in total contribution margin is greater than the increase in fi)ed cost. . segment should be dropped only if the decrease in total contribution margin is less than the decrease in fi)ed cost. Co&pare net operating inco&es. . second approach is to calculate the total net operating income under each alternative. -he alternative with the highest net operating income is preferred. -his approach re4uires more information than the first approach since costs and revenues that don5t differ between the alternatives must be included in the analysis in order to compute net operating incomes. 'eware of allocate! co&&on costs. .llocated common costs can ma e a profitable segment loo unprofitable. .llocated common costs that would not be affected by a decision are irrelevant and should be ignored.

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C. *he Make or '$" Decision. '()ercises 13&3* 13&3* and 13&1"., . ma e or buy decision
is concerned with whether an item should be made internally or purchased from an e)ternal supplier. 1. A!vantages of &aking an ite& internall". a. Producing a part internally reduces dependence on suppliers and may ensure a smoother flow of parts and material for production. b. 6uality control may be easier when parts are produced internally. c. Profits can be realized on the parts and materials. #. A!vantages of b$"ing an ite& fro& an e)ternal s$pplier. a. 7y pooling the re4uirements of a number of users* a supplier can realize economies of scale and may be able to move more 4uic ly up the learning curve. b. . specialized supplier may be able to respond more 4uic ly and at less cost to changing future needs. c. /hanging technology may ma e producing one5s own parts ris ier than purchasing from the outside. 3. Opport$nit" Cost. Opportunity costs should be considered in decisions. -he opportunity cost of using a resource that has e)cess capacity is zero. 8owever* using a resource that has no idle capacity 'i.e.* that is a constraint, does involve an opportunity cost. -he opportunity costs may be far larger than the costs typically recorded in accounting systems.

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D. (pecial Or!er. '()ercises 13&! and 13&19., :pecial orders are one&time orders that do not
affect a company5s normal sales. .s long as the incremental revenue from the order e)ceeds its incremental costs* the order should be accepted. If the special order re4uires a constrained resource* opportunity costs should be included as part of the incremental costs.

+. ,tili-ation of a Constraine! Reso$rce. '()ercises 13&" and 13&11., . constraint is

whatever prevents an individual or organization from getting more of what it wants. -here is always a constraint as long as desires are unsatisfied. -he chapter focuses on one particular ind of constraint;a production constraint. . production constraint can be a raw material* a part* a machine* or a wor station. If the constraint is a machine or wor station* it is called a bottlenec . 1. Contrib$tion Margin per ,nit of the Constraine! Reso$rce. 1henever demand e)ceeds productive capacity* a production constraint e)ists. -he company is unable to fill all orders and some choices have to be made concerning which orders are filled and which are not filled. -he problem is how to most effectively use the constrained resource. a. <egardless of which orders are filled* the fi)ed costs will usually be the same. -herefore* ma)imizing the total contribution margin will also ma)imize profit. b. -o ma)imize contribution margin* ran products on the basis of their contribution margins per unit of the constrained resource. :tarting at the top of the list* produce up to demand or to the point where the constrained resource is e)hausted;whichever comes first. '-his idea is generalized in the new Profitability .ppendi)., #. Managing constraints. Ordinarily* a system has only one constraint. -he capacity of any complete process is determined by the capacity of the constraint* which could be a single machine or wor center. In addition to ma ing sure that the best product mi) is chosen by ran ing products based on the contribution margin per unit of the constrained resource* managers should see ways to increase the effective capacity of the constraint. a. Increasing the capacity of the constraint or bottlenec is called =rela)ing the constraint> or =elevating the constraint.> /onceptually* the capacity of the bottlenec can be increased by increasing the rate of output at the bottlenec or increasing the time available at the bottlenec . :ome specific e)amples of ways to elevate the constraint follow? @ Pay wor ers overtime to eep the bottlenec running after normal wor ing hours. .s discussed below* the potential payoff from ta ing such an action is often well worth the additional e)pense. In contrast* paying wor ers overtime to eep non&bottlenec processes running after normal wor ing hours is a waste of money. @ :hift wor ers from non&bottlenec areas to the bottlenec . @ 8ire more wor ers or ac4uire more machines specifically to augment the bottlenec . @ :ubcontract some of the production that would use the bottlenec . If an unimportant part re4uires a lot of time on the bottlenec and can be purchased cheaply from an e)ternal supplier* this is a great way to increase profits. -he bottlenec can be shifted to more profitable uses. @ :treamline the production process at the bottlenec to eliminate wasted time. Improvement programs such as -60 and 7usiness Process <eengineering should focus on bottlenec s. . decrease in processing time at the bottlenec can have an immediate and dramatic effect on profits. . decrease in processing time at a non&

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bottlenec is li ely to have no immediate impact on profitsA it %ust creates more e)cess capacity. <educe defects. . part that is processed on the bottlenec and later re%ected because it is defective uses valuable bottlenec processing time.

b. -he benefits from effectively managing constraints 'i.e.* bottlenec s, can be enormous. 0anagers should be given information that signals this potential. #ecide how additional processing capacity at the bottlenec would be used if it were available. In other words* what product or order would be produced that otherwise could not be producedB -his is the marginal %ob. -he contribution margin per unit of the constrained resource for this marginal %ob is the value of elevating the constraint by one unit. 'It is also the opportunity cost of using the constrained resource., 6uite often these calculations reveal that the value of additional time is so valuable that some decisions can be made very easily;such as adding a shift on the bottlenec .

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/oint Costs an! the Contrib$tion Approach. '()ercises 13&$ and 13&12., In some manufacturing processes* several end products are produced from a single input. :uch end products are nown as %oint products. -he costs associated with ma ing these products up to the point where they can be recognized as separate products 'the split&off point, are called %oint costs.
1. *he pitfalls of allocation. Coint costs are really common costs that are incurred to simultaneously produce a variety of end products. Dnfortunately* these common costs are routinely allocated to the %oint products. .llocated %oint costs are often misinterpreted as costs that could be avoided by producing less of one of the %oint products. 8owever* %oint costs can only be avoided by producing less of all of the %oint products simultaneously. If any of the %oint products is made* then all of the %oint costs up to the split&off point will have to be incurred. (ell or process f$rther !ecisions. . decision may need to be made concerning whether to sell a %oint product as is or process it further for a higher price. '-his type of decision is not confined to %oint products. .ny time a product could be sold as is or processed further for additional revenue* this ind of analysis is pertinent., a. It is profitable to continue processing a %oint product after the split&off point so long as the incremental revenue from such processing e)ceeds the incremental processing costs. b. In such decisions* the %oint costs incurred before the split&off point are not relevant. -hey would be relevant in a decision to shut down the %oint process* but they are irrelevant in any decision about what to do with the %oint products once they have reached the split&off point.

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0. Activit"-'ase! Costing an! Relevant Costs. .ctivity&based costing is a resource

consumption model* not a spending model. .ctivity&based costing gives an idea of the magnitude of resources involved in carrying out activities* but it should be used with a great deal of caution in ma ing particular decisions. -he costs assigned to products and other cost ob%ects are only potentially relevant costs. 1hether they are relevant or not in any particular situation should be carefully considered. Eor e)ample* in most activity&based costing systems the fi)ed depreciation costs of a sophisticated milling machine would be allocated to products based on their usage of that

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resource. :uppose you are trying to decide whether to drop a product that uses the milling machine. -he fact that the product uses the milling machine is relevant only if the milling machine is a bottlenec 'and opportunity costs are involved in its use, or somehow future cash flows associated with the machine will be affected by how much it is used. If the machine is not a bottlenec and using some of its e)cess capacity has no effect on future spending* then using the machine costs nothing. In this case* the costs assigned by the activity&based costing system to the product would not be relevant.

Assign&ent Materials
Assignment ()ercise 13&1 ()ercise 13&2 ()ercise 13&3 ()ercise 13&! ()ercise 13&" ()ercise 13&$ ()ercise 13&+ ()ercise 13&2 ()ercise 13&3 ()ercise 13&19 ()ercise 13&11 ()ercise 13&12 ()ercise 13&13 ()ercise 13&1! ()ercise 13&1" Problem 13&1$ Problem 13&1+ Problem 13&12 Problem 13&13 Problem 13&29 Problem 13&21 Problem 13&22 Problem 13&23 Problem 13&2! Problem 13&2" Problem 13&2$ /ase 13&2+ /ase 13&22 /ase 13&23 /ase 13&39 /ase 13&31 /ase 13&32 Topic Identifying relevant costs.................................................... #ropping or retaining a segment......................................... 0a e or buy a component................................................... (valuating a special order................................................... Dtilization of a constrained resource................................... :ell or process further......................................................... Identification of relevant costs............................................ #ropping or retaining a segment......................................... 0a e or buy a component................................................... :pecial order....................................................................... Dtilization of a constrained resource................................... :ell or process further......................................................... Identification of relevant costs............................................ #ropping or retaining a segment......................................... 0a e or buy a component................................................... #ropping or retaining a flight............................................. :ell or process further......................................................... /lose or retain a store......................................................... 0a e or buy analysis.......................................................... <elevant cost analysis in a variety of situations.................. :hutting down or continuing to operate a plant................... 0a e or buy decision.......................................................... .ccept or re%ect a special order........................................... Dtilization of a constrained resource................................... :ell or process further......................................................... #ropping or retaining a product.......................................... (thics and the managerA shut down or continue operations. Plant closing decision......................................................... #ecentralization and relevant costs..................................... :ell or process further decision........................................... Integrative caseA relevant costsA pricing.............................. 0a e or buyA utilization of a constrained resource............. Level of Difficulty 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 7asic 0edium 0edium 0edium 0edium 0edium 0edium #ifficult #ifficult #ifficult 0edium #ifficult #ifficult #ifficult #ifficult #ifficult Suggested Time 1" min. 39 min. 39 min. 1" min. 39 min. 19 min. 29 min. 39 min. 29 min. 1" min. 1" min. 19 min. 39 min. 19 min. 1" min. 39 min. 1" min. $9 min. $9 min. !" min. !" min. $9 min. 39 min. !" min. !" min. !" min. $9 min. $9 min. +" min. 39 min. 39 min. 129 min.

(ssential Problems? Problem 13&1$ or Problem 13&12* Problem 13&1+* Problem 13&13 or Problem 13&22* Problem 13&23* Problem 13&2!. :upplementary Problems? Problem 13&29* Problem 13&21* Problem 13&2"* Problem 13&2$* /ase 13&2+* /ase 13&22* /ase 13&23* /ase 13&39* /ase 13&31* /ase 13&32.

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Chapter 13 Lect$re 1otes Helpful Hint: Before beginning the lecture, show students the !th segment from the third tape of the "c#raw$Hill%&rwin "anagerial%'ost Accounting video library( This segment introduces students to many of the concepts discussed in chapter )( The lecture notes reinforce the concepts introduced in the video( /hapter theme? 0a ing decisions is one of the basic functions of a manager. -o be successful in decision ma ing* managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in anal"-ing alternatives. -he purpose of this chapter is to develop these s ills by illustrating their use in a wide range of decision&ma ing situations. Cost concepts for !ecision &aking .. !entif"ing relevant costs an! benefits 2 i. . relevant cost is a cost that differs between alternatives. 1. .n avoi!able cost is a cost that can be eliminated in whole or in part by choosing one alternative over another. Avoi!able costs are relevant costs. ,navoi!able costs are irrelevant costs. ii. *wo broa! categories of costs are never relevant in any decision?

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1. . s$nk cost is a cost that has already been incurred and cannot be avoided regardless of what a manager decides to do. 2. . future cost that !oes not !iffer between alternatives is never a relevant cost. In Business Insights "ost people find it very difficult to ignore sun* costs when ma*ing decisions( +or e,ample: -&t &sn.t /asy to Be Smart about "oney0 1page !2)3 Dan Seligman commented -Higher primates do not li*e to admit, even to themselves, that they have screwed up(0 Humans have -the deep$ seated, egoistic human need 4 evidenced in numerous psychological e,periments 4 to 5ustify the sun* costs in one.s life(0 6aula 7a*oria reports: -&f you put your house on the mar*et but refuse offers below the price you paid, you are guilty of 8anchoring(. The amount you paid is irrelevant9 a house li*e a stoc*, is worth what the mar*et will bear at the time of sale( iii. <elevant cost analysis? a two-step process? 1. -he first step is to eli&inate costs an! benefits that !o not !iffer between alternatives. -hese irrelevant costs consist of sun costs and future costs that do not differ between alternatives. In Business Insights

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ma*e use of idle capacity( The fi,ed costs associated

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with providing the capacity will not change whether new customers are ac:uired or not and therefore are viewed as irrelevant( +or e,ample: -'ruising on the 'heap0 1page !2!3 'ruise ship operators, such as 6rincess 'ruises, sometimes offer deep discounts on popular cruises( ;ecently, a 2$day "editerranean cruise on the <orwegian Dream was being offered at =>? off the list price( @hy such deep discountsA -An ambitious fleet e,pansion left the cruise industry grappling with a tidal wave of capacityB "ost cruise costs are fi,ed whether all the ship.s berths are filled or not, so it is better to sell cheap than not at allB&n the current glut, discounting has made it possible for the cruise lines to *eep berths nearly full(0 2. -he second step is to $se the re&aining costs an! benefits that !o !iffer between alternatives in &aking the !ecision. -he costs that remain are the !ifferential* or avoidable* costs. In Business Insights A decision analysis can be flawed by incorrectly including irrelevant costs such as sun* costs and future costs that do not differ between alternatives( &t can also be flawed by omitting future costs that do differ between alternatives( +or e,ample: -/nvironmental 'osts Add Cp0 1page !2D3

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 'onsider the complications posed by a decision of 3 4

whether to install a solvent$based or powder$ based system for spray$painting parts(

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 A solvent$based system can generate annual compliance costs that e,ceed E F2,222 per year for a painting facility that initially costs only EF22,222 to build( A powder$based painting system avoids almost all possible environmental costs( Therefore, even though the cost of building a powder$based system may be higher than the cost of building a solvent$based system, over the long run the costs of the powder$based system may be far lower due to the high environmental costs of a solvent$based system( "anagers need to be aware of such environmental costs and ta*e them fully into account when ma*ing decisions. iv. " Different costs for !ifferent p$rposes 1. /osts that are relevant in one decision situation &a" not be relevant in another conte)t. -hus* in each decision situation* the manager must e)amine the data at hand and isolate the relevant costs. .. An e)a&ple of i!entif"ing relevant costs an! benefits v. $ .ssume the following information with respect to /ynthia* a 7oston student who is considering visiting her friend in Few Gor . /ynthia is trying to decide whether it would

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be less e)pensive to !rive or ta e the train to 4 5 6

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1. :he has assembled the following information with respect to her automobile. 2. :he has also gathered the additional information as shown to aid in her decision. 3. 1hich costs are relevant to her decisionB a. -he cost of the car is irrelevant to the decision because it is a sun cost. b. -he annual cost of auto insurance is irrelevant because it does not differ between alternatives. c. -he cost of the gasoline is relevant because it is avoidable if she ta es the train. d. -he cost of maintenance and repairs is relevant because in the long&run these costs depend upon miles driven. e. -he par ing fee is irrelevant because it is not a differential cost. f. -he decline in resale value is relevant due to the additional miles driven. g. -he round trip train fare is relevant because it is avoidable if she drives her car. h. <ela)ing on the train is relevant* but difficult to 4uantify. i. -he ennel cost is irrelevant because it is not a differential cost. %. -he cost of par ing is relevant because it is avoidable if she ta es the train. . -he benefits of having a car in Few Gor and the problem of finding a
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par ing space are both relevant* but 1# 13 12

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difficult to 4uantify.

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!. Erom a financial standpoint* C"nthia wo$l! be better off taking the train. /. Reconciling the total an! !ifferential approaches i. .ssume the following information for a company considering a new labor&saving machine that rents for 93:888 per "ear. Fotice? 1. -he total approach re4uires constructing two contrib$tion for&at inco&e state&ents H one for each alternative. 2. -he difference between the two income statements of 91#:888 e4uals the differential benefits shown at the bottom of the right& hand column. 3. -he most efficient means of analyzing this decision is to use the !ifferential approach to isolate the relevant costs and benefits as shown. ii. Dsing the differential approach is desirable for two reasons? 1. Only rarely will enough information be available to prepare detailed income statements for both alternatives. 2. 0ingling irrelevant costs with relevant costs may cause confusion and distract attention away from the information that is really critical.

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A!!ing an! !ropping pro!$ct lines an! other seg&ents 7. One of the most important decisions managers ma e is whether to a!! or !rop a b$siness seg&ent. Dltimately* a decision to drop an old segment or add a new one is going to hinge primarily on the impact the decision will have on net operating inco&e. -o assess this impact it is necessary to carefully analyze the costs. /. Lovell Co&pan" ; an e)a&ple ii. .ssume that Lovell /ompany5s digital watch line has not reported a profit for several yearsA accordingly* Lovell is considering !iscontin$ing this product line. 1. -o determine how dropping this line will affect the overall profits of the company* Lovell will compare the contrib$tion &argin that wo$l! be lost to the costs that wo$l! be avoi!e! if the line was to be dropped. iii. .ssume a seg&ente! inco&e state&ent for the digital watches line is as shown. .lso* assume the following? 2. .n investigation has revealed that the fi)ed general factory overhead and fi)ed general administrative e)penses will not be affecte! by dropping the digital watch line.

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watches has no resale val$e or alternative $se.

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. contribution margin approach reveals that the contribution margin lost '9388:888, e)ceeds the fi)ed costs avoided '9#48:888, by 928:888. -herefore* Lovell should retain the digital watch segment. /omparative income statements can also be prepared to help ma e the decision. 1. -hese income statements show that if the digital watch line is dropped* the company loses 9388:888 in contribution margin. 2. -he general factory overhead '948:888, would be the same under both alternatives* so it is irrelevant. 3. -he salary of the product line manager '978:888, would disappear* so it is relevant to the decision. !. -he depreciation '938:888, is a sun cost. .lso* remember that the e4uipment has no resale value or alternative use* so the e4uipment and the depreciation e)pense associated with it are irrelevant to the decision. ". -he complete comparative income statements reveal that Lovell would earn 928:888 of additional profit by retaining the digital watch line.

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Lovell5s allocated fi)ed costs can !istort the eepIdrop decision.

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1. Lovell5s managers may as =why eep the 38 31 3#

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digital watch segment when its segmented income statement shows a 9188:888 lossB>

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2. -he answer lies in the way co&&on fi)e! costs are allocated to products. a. Including unavoidable common fi)ed costs in the segmented income statement ma es the digital watch product line appear to be unprofitable* when in fact dropping the product line would !ecrease the company5s overall net operating income.

. *he &ake or b$" !ecision .. <e" ter&s an! strategic aspects i. "" 32 1hen a company is involved in more than one activity in the entire val$e chain* it is vertically integrated. 1. . decision to carry out one of the activities in the value chain internall"* rather than to buy e)ternall" from a supplier* is called a &ake or b$" !ecision. Helpful Hint: Some critics charge that managers have habitually based ma*e or buy decisions on per unit data without determining which costs are relevant and which are not( Since the per unit costs typically include allocated common fi,ed costs, they overstate the costs of producing internally( This creates a bias in favor of outsourcing production( 33 ii. =ertical integration provides certain a!vantages?
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1. .n integrated company may be able to ensure a s&oother flow of parts an! &aterials for production than a nonintegrated company. 2. :ome companies feel that they can control >$alit" better by producing their own parts and materials. 3. Integrated companies reali-e profits from the parts and materials that they choose to ma e instead of buy. iii. -he primary !isa!vantage of vertical integration is that a company may fail to ta e advantage of suppliers who can create an econo&ies of scale a!vantage by pooling demand from numerous companies. 1. 1hile the economies of scale factor can be appealing* a company must be careful to retain control over activities that are essential to &aintaining its co&petitive position. In Business Insights "a*e versus buy decisions are often thought of in a manufacturing conte,t( <onetheless, ma*e versus buy decisions can be made in nonmanufacturing settings( +or e,ample: -/mployee Health Benefits 4 "a*e or Buy0 1page ! )3 Guad%#raphics, a printing company with F,222 employees, hired its own doctors and nurses to provide primary health$care on$site(

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 By -ma*ing0 its own health care for employees rather than -buying0 it through the purchase of insurance, the company claims that its health care costs have risen 5ust !? annually and that their spending on health care is now =? less than the industry average( 7. +sse) Co&pan" ; an e)a&ple 3" iv. .ssume that (sse) /ompany manufactures part !. with a unit product cost as shown. 1. .lso* assume the following information as shown with respect to part !.. Jiven these additional assumptions* sho$l! +sse) &ake or b$" part 2AB v. 3+ -he avoidable costs associated with ma ing part !. include direct materials '9168:888,* direct labor '9188:888,* variable overhead '9#8:888,* and the supervisor5s salary '928:888,. Fotice? 1. -he !epreciation of special e4uipment represents a sun cost. Eurthermore* the e4uipment has no resale value* thus the special e4uipment and its associated depreciation e)pense are irrelevant to the decision. 2. -he general factor" overhea! represents future costs that will be incurred regardless of whether (sse) ma es or buys part !.A hence* it is also irrelevant to the decision.

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-he total avoidable costs of 9328:888 are less than the 9388:888 cost of buying the part* thereby suggesting that (sse) should contin$e to &ake the part.

/. Opport$nit" cost vii. .n opportunity cost is the benefit that is foregone as a result of pursuing a course of action. -hese costs !o not represent act$al cash o$tla"s and they are not recorded in the formal accounts of an organization. viii. In the (sse) /ompany e)ample that we %ust completed* if (sse) had an alternative use for the capacity that it used to ma e part !.* there would have been an opportunity cost to factor into the analysis. 1. -he opportunity cost would have been e4ual to the seg&ent &argin that co$l! have been !erive! fro& the best alternative $se of the space. In Business Insights Hpportunity costs are often a critical aspect of business decision ma*ing( +or e,ample: -Tough 'hoices0 1page ! !3 Brad and 'arole Iarafil own and operate @hite #riJJly Adventures, a snowcat s*iing and snowboarding company in "eadow 'ree*, British 'olumbia( @hile rare, sometimes guests are unable to s*i due to bad weather( Since guests pay about E)22
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per day, they are li*ely to be unhappy if s*iing is cancelled even thought it is no fault of @hite #riJJly( Brad and 'arole wrestle with the issue of whether they should handle these situations by offering a credit voucher good for a day of s*iing at a later date( Since Brad and 'arole and fully boo*ed far in advance of the s*i season, the biggest cost for them to consider when issuing credit vouchers is the opportunity cost of sacrificing E)22 from a paying customer that is denied access to s*iing because a credit voucher has been issued( IK. (pecial or!ers #. <e" ter&s an! concepts i. . special or!er is a one&time order that is not considered part of the company5s normal ongoing business. 1hen analyzing a special order only the incre&ental costs and benefits are relevant. :ince the e)isting fi)ed manufacturing overhead costs would not be affected by the order* they are not relevant.

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Helpful Hint: /mphasiJe the incremental concept in the decision$ma*ing process( &f a company accepts a special order to produce an item without carefully determining e,isting capacity, it might have to cut into regular production( The effects of lost sales from ongoing products might be devastating(

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(. /et nc. ; an e)a&ple !3 iii. .ssume the following information with respect to a special order opportunity for Cet Inc. (ho$l! /et accept the offerB . contribution format income statement for Cet Inc.5s normal sales of 3:888 $nits is as shown. If Cet accepts the special order* the incremental revenue of 938:888 will e)ceed the incremental costs of 9#2:888 by 94:888. -his suggests that Cet should accept the order. Fotice? 1. -his answer assumes that the fi)ed costs are $navoi!able and that variable mar eting costs &$st be inc$rre! on the special order. !$&!2 Guic* 'hec* 4 special order decision ma*ing In Business Insights Airlines regularly consider incremental revenues and costs when managing their flight capacity( +or e,ample: -+ly the +riendly Aisles0 1page ! D3 Shoppers at Safeway can earn Cnited Airlines fre:uent flier miles when they buy their groceries( Airlines charge mar*eting partners such as Safeway about KL per mile(

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flier miles for a domestic round trip tic*et, Cnited

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is earning about E>22 per fre:uent flier tic*et issued to Safeway customers( Cnited carefully manages its fre:uent flier program so that few fre:uent flier passengers displace regular fare$paying customers( Since the only incremental costs of adding a passenger to a flight may be food, a little e,tra fuel and some administrative costs, the E>22 per fre:uent flier tic*et is almost pure profit( =. ,tili-ation of a constraine! reso$rce E. <e" ter&s an! concepts i. !3 1hen a limited resource of some type restricts the company5s ability to satisfy demand* the company is said to have a constraint. -he machine or process that is limiting overall output is called the bottleneck H it is the constraint.

Helpful Hint: A production process can be thought of as a chain9 each lin* in the chain represents a step in the process( A chain is only as strong as its wea*est lin*( Li*ewise, the capacity of a production process is determined by its wea*est lin*, which is the constraint( To increase the strength of a chain, its wea*est lin* must be strengthened( To increase the output of the entire process, the output of the constraint must be increased( Strengthening the stronger lin*s has no effect on the strength of the entire chain( The moral is

123

to identify the constraint and concentrate management 38 31 3#

33

32

33

34

35

attention on effectively increasing its capacity(

12!

ii.

Ei)ed costs are usually unaffected in these situations* so the product mi) that ma)imizes the company5s total contrib$tion &argin should ordinarily be selected. . company should not necessarily promote those products that have the highest $nit contribution margins. <ather* total contribution margin will be ma)imized by promoting those products or accepting those orders that provide the highest contrib$tion &argin in relation to the constraining reso$rce.

iii. "9

J. +nsign Co&pan" ; an e)a&ple iv. "1 .ssume that (nsign /ompany produces two pro!$cts and selected data is as shown. In addition assume that? 1. Machine A1 is the constraint. 2. -here is e)cess capacit" on all other machines. 3. 0achine .1 has a capacity of #:288 &in$tes per week. !. (nsign is trying to decide if it should focus its efforts on product 1 or 2. Guic* 'hec* 4 constrained resource calculations v. "+ .s suggested by the answer to the 6uic /hec 4uestion* (nsign should emphasize
12"

"2

"3&"$

pro!$ct # because it generates a 35 36 37

48

41

4#

contrib$tion &argin of 938 per &in$te of

12$

"+ vi. "2

the constraine! reso$rce relative to 9#2 per &in$te for pro!$ct 1. (nsign can ma)imize its contribution margin by first pro!$cing pro!$ct # to meet customer demand and then using an" re&aining capacit" to pro!$ce pro!$ct 1. -he calculations would be performed as follows? 1. :atisfying the wee ly demand of #:#88 $nits for product 2 would consume 1:188 &in$tes of available capacity on machine .1. 2. -his implies that 1:388 constraint &in$tes wo$l! still be available to satisfy demand for product 1. 3. :ince each unit of product 1 re4uires one minute of .1 machine time* (nsign could produce 1:388 $nits of pro!$ct 1 with its remaining capacity. !. -his mi) of production 'e.g.* 2*299 units of product 2 and 1*399 units of product 1, would yield a total contrib$tion &argin of 942:#88.

"3

$9

$1

$2

12+

43

42

43

44

45

46

122

$3&$2

Guic* 'hec* 4 constrained resource calculations In Business Insights /ompanies fre:uently manage using constrained optimiJation and TH' concepts( +or e,ample: -'oping with 6ower Shortages0 1page !K 3 Tata &ron and Steel 'ompany is one of the largest companies in &ndia employing about =>,222 people( The company has had to cope with electrical power shortages severe enough to force it to shut down some of its mills( But which onesA &n this situation, electrical power was the company.s constraint( Their first step was to estimate the electrical loads of running each of the company.s mills using least$s:uares regression( These data were used to calculate the contribution margin per *ilowatt hour for each mill( The model indicated which mills should be shut down, and in what order, and which products should be cut bac*( The model also indicated that it would be profitable for the company to install its own diesel generating units 4 the contribution margin from the additional output more than paid for the costs of buying and running the diesel generators( -Theory of 'onstraints Software0 1page !M23

123

 &ndale, Aluminum Solutions #roup is the largest 47

producer of soft alloy e,trusions in <orth America( The company has installed a new

139

generation of business intelligence software created by pNelocity, &nc(, of Toronto, 'anada( The software -provides decision ma*ers across our entire manufacturing enterprise with time$ based financial metrics using TH' concepts to identify bottlenec*s(0 &t also -shifts the focus of a manufacturing company from traditional cost accounting measurements to measuring the generation of dollars per unit of time( +or e,ample, instead of emphasiJing products with the largest gross margins or contribution margins, the software helps managers to identify and emphasiJe the products that ma,imiJe the contribution margin per unit of the constraining resource( 8. Managing constraints vii. It is often possible for a manager to increase the capacity of a bottlenec * which is called rela)ing ?or elevating@ the constraint* in numerous ways such as? 1. 1or ing overti&e on the bottlenec . 2. ($bcontracting some of the processing that would be done at the bottlenec . 3. nvesting in a!!itional &achines at the bottlenec . !. (hifting workers from non&bottlenec processes to the bottlenec . ". .oc$sing b$siness process i&prove&ent efforts on the bottlenec .
131

$3

$. Re!$cing !efective $nits processed through 47 58 51

5#

the bottlenec .

132

viii. -hese methods and ideas are all consistent with the *heor" of Constraints* which is introduced in /hapter 1. $3 i). If a company has more than one potential constraint* the proper =mi)> of products can be found using a 4uantitative method nown as linear progra&&ing* which is covered in 4uantitative methods and operations management courses.

I.

/oint pro!$ct costs an! the contrib$tion approach I. <e" ter&sAconcepts ). In some industries* a number of end products are produced from a single raw material input. 1hen two or more products are produced from a common input these products are nown as joint pro!$cts. -he split-off point is the point in the manufacturing process at which the %oint products can be recognized as separate products. 1. Eor e)ample* in the petrole$& refining in!$str" a large number of products are e)tracted from crude oil* including gasoline* %et fuel* home heating oil* lubricants* asphalt* and various organic chemicals. )i. -he term joint cost is used to describe costs incurred up to the split&off point. Coint costs

+9

+1

+2

133

are common costs incurred to simultaneously 53 52 53

54

produce a variety of end products.

13!

+3

1. Coint costs are traditionally allocated among different products at the split&off point. . typical approach is to allocate %oint costs according to the relative sales val$e of the end products. 2. .lthough allocation is needed for some purposes such as balanced sheet inventory valuation* allocations of this ind are ver" !angero$s for decision ma ing. C. (ell or process f$rther !ecisions )ii. Coint costs are irrelevant in decisions regarding what to do with a product from the split&off point forward. -herefore* these costs should not be allocate! to end products for decision ma ing purposes.

+!

)iii. 1ith respect to sell or process further decisions* it is profitable to continue processing a %oint product after the split&off point so long as the incre&ental reven$e fro& s$ch processing e)cee!s the incre&ental processing costs inc$rre! after the split-off point. L. (ell or process f$rther !ecisions ; an e)a&ple

+"

)iv. .ssume the facts as shown with respect to :awmill* Inc.

13"

1. :awmill has two %oint products H l$&ber +$ 55 56 57

68

an! saw!$st. :elected financial information is shown for each %oint product.

13$

++

+2 +3

2. -he incre&ental reven$e from further processing of the lumber and sawdust is 9138 and 918* respectively. 3. -he profit ?loss@ from further processing is 968 for the lumber and ?918@ for the sawdust. !. -he lumber sho$l! be processe! f$rther and the sawdust sho$l! be sol! at the splitoff point. In Business Insights 'ompanies often consider irrelevant costs when ma*ing decisions related to 5oint products( +or e,ample: -#etting &t All @rong0 1page !K)3 A company located on the #ulf of "e,ico produces si, main soap product lines( A waste product results from the production of the si, main product lines( The company, which used to dump the waste product into the #ulf of "e,ico, discovered that with E =>,222 of e,tra processing costs per year, the waste product could be sold as a fertiliJer ingredient for E)22,222 per year( An accountant that wor*ed for the company allocated E >2,222 of 5oint product costs to the waste product, thereby ma*ing the further processing of the waste appear to be unprofitable( The company went bac* to dumping the waste in the #ulf(

13+

L. Activit"-base! costing an! relevant costs 68

29

)v.

.ctivity&based costing can be used to help identify potentiall" relevant costs for

132

29

decision&ma ing purposes. 8owever* managers should e)ercise caution against reading more into this =traceability> than really e)ists. People have a tendency to assume that if a cost is traceable to a segment* then the cost is automatically avoidable* which is $ntr$e. 7efore ma ing a decision* managers must decide which of the potentially relevant costs are actually avoidable.

133

Chapter 13 *ransparenc" Masters

1!9

TM 13-1 AGENDA: RELEVANT COSTS FOR DECISION MAKING 1. 2. 3. 4. ". $. Identification of relevant costs. Drop or retain a segment. Make or buy decision. tili!ation of constrained resources. #pecial order. %oint products.

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TM 13-2 RELEVANT COSTS &very decision involves c'oosing from among at least t(o alternatives. ) relevant cost or benefit is a cost or benefit t'at differs* in total* bet(een t'e alternatives. )ny cost or benefit t'at does not differ bet(een t'e alternatives is irrelevant and can be ignored. +elevant costs and benefits are also kno(n as differential costs and benefits. )voidable costs are t'ose costs t'at can be eliminated in ('ole or in part by c'oosing one alternative over anot'er. )voidable costs are relevant costs. T(o broad categories of costs are never relevant in decisions, 1. #unk costs 2. -uture costs t'at do not differ bet(een alternatives. To make a decision, 1. &liminate costs and benefits t'at do not differ* in total* bet(een alternatives. 2. .ase t'e decision on t'e remaining costs and benefits.

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TM 13-3 DROP OR RETAIN A SEGMENT &/)M01&, Due to t'e declining popularity of digital (atc'es* #(ei! 2ompany3s digital (atc' line 'as not reported a profit for several years. )n income statement for last year follo(s, Segment Income StatementDigital Watches #ales........................................... 1ess variable e6penses, 7ariable manufacturing costs. . . 7ariable s'ipping costs............. 2ommissions............................ 2ontribution margin.................... 1ess fi6ed e6penses, 9eneral factory over'ead:....... #alary of product line manager. Depreciation of e<uipment::.... 0roduct line advertising............ +ent=factory space:::............. 9eneral administrative e6pense:................................ >et operating loss....................... 4125*55 5 "*555 8"*555 $5*555 ;5*555 "5*555 155*555 85*555 35*555 455*555 4?155*555 @ 4 "55*555

255*555 355*555

: )llocated common costs t'at (ould be redistributed to ot'er product lines if digital (atc'es (ere dropped. :: T'is e<uipment 'as no resale value and does not (ear out t'roug' use. ::: T'e digital (atc'es are manufactured in t'eir o(n facility. #'ould t'e company retain or drop t'e digital (atc' lineA

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TM 13-4 DROP OR RETAIN A SEGMENT (contd) )pproac' B1, If by dropping digital (atc'es t'e company is able to avoid more in fi6ed costs t'an it loses in contribution margin* t'en it (ill be better off if t'e product line is eliminated. T'e solution (ould be, 2ontribution margin lost if digital (atc'es are dropped...................... 1ess fi6ed costs t'at can be avoided, #alary of t'e product line manager 0roduct line advertising.................. +ent=factory space....................... >et disadvantage of dropping t'e line 4?355*555@ 4 ;5*555 155*555 85*555

2$5*555 4? 45*555@

T'e digital (atc' line s'ould not be dropped. If it is dropped* t'e company (ill be 445*555 (orse off eac' year. >ote t'e follo(ing points, C Depreciation on t'e old e<uipment is not relevant to t'e decision. It relates to a sunk cost. C 9eneral factory over'ead and general administrative e6pense are allocated common costs t'at (ould not be avoided if t'e digital (atc' line (ere dropped. T'ese costs (ould be reallocated to ot'er product lines.

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TM 13-" DROP OR RETAIN A SEGMENT (contd) )pproac' B2, T'e solution can also be obtained by preparing comparative income statements s'o(ing results (it' and (it'out t'e digital (atc' line. Keep Digital Watches #ales..................................... 4 "55*555 1ess variable e6penses, 7ariable manufacturing e6pense........................... 125*555 7ariable s'ipping costs....... "*555 2ommissions...................... 8"*555 Total variable e6penses........ 255*555 2ontribution margin.............. 355*555 1ess fi6ed e6penses, 9eneral factory over'ead... $5*555 #alary of product line manager........................... ;5*555 Depreciation....................... "5*555 0roduct line advertising...... 155*555 +ent=factory space........... 85*555 9eneral administrative e6pense........................... 35*555 Total fi6ed e6penses............. 455*555 Drop Digital Watches 4 5 5 5 5 5 5 $5*555 5 "5*555 5 5 Difference: Increase or (Decrease) 4?"55*555@ 125*555 "*555 8"*555 255*555 ?355*555@ 5 ;5*555 5 155*555 85*555

35*555 5 145*555 2$5*555 4?145*555 >et operating loss................. 4?155*555@ @ 4 ?45*555@

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TM 13-$ MAKE OR BUY DECISION ) decision concerning ('et'er an item s'ould be produced internally or purc'ased from an outside supplier is called a Dmake or buyE decision. &/)M01&, &sse6 2ompany is presently making a part t'at is used in one of its products. T'e unit product cost is, Direct materials............................. 4 ; Direct labor.................................... " 7ariable manufacturing over'ead.. 1 Depreciation of special e<uipment:................................. 3 #upervisor3s salary........................ 2 9eneral factory over'ead::........... 15 Total unit product cost................... 435 : T'e special e<uipment 'as no resale value. :: 2ommon costs allocated on t'e basis of direct labor-'ours. T'e costs above are based on 25*555 parts produced eac' year. )n outside supplier 'as offered to provide t'e 25*555 parts for only 42" per part. #'ould t'is offer be acceptedA

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TM 13-8 MAKE OR BUY DECISION (contd) T'e solution to &sse6 2ompany3s make or buy decision follo(s, Total Differential Costs of 20,000 units a!e "u# 4"55*555 41G5*55 5 155*555 25*555 45*555 4345*55 5

Futside purc'ase price.................... Direct materials............................... Direct labor...................................... 7ariable manufacturing over'ead.... Depreciation of e<uipment ?not relevant@........................................ #upervisor3s salary.......................... 9eneral factory over'ead ?not relevant@........................................ Total cost.........................................

4"55*555

T'is solution assumes t'at none of t'e general factory over'ead costs (ill be saved if t'e parts are purc'ased from t'e outsideH t'ese costs (ould be reallocated to ot'er items made by t'e company.

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TM 13-G SPECIAL ORDERS ) special order is a one-time order t'at does not affect t'e company3s normal sales. &/)M01&, %amesto(n 2andle(orks 'as Iust received a re<uest from t'e Jilliamsburg -oundation for G55 candles to be used in a special event for maIor donors. T'e candles (ill be used as t'e only illumination in t'e reception room and (ill be given out as gifts to t'e donors as t'ey leave. T'e candles (ill be imprinted (it' t'e Jilliamsburg -oundation logo. T'is sale (ill 'ave no effect on t'e company3s normal sales to retail outlets. T'e normal selling price of a candle of about t'e si!e and (eig't of t'e special candles is 43.;" and its unit product cost is 42.35* as s'o(n belo(, Direct materials.............. Direct labor..................... Manufacturing over'ead. nit product cost............ 41.3" 5.1" 5.G5 42.35

T'e variable portion of t'e manufacturing over'ead is 45.5" per candleH t'e ot'er 45.8" represents fi6ed manufacturing costs t'at (ould not be affected by t'is special order. %amesto(n 2andle(orks (ould 'ave to order a special candle mold in ('ic' t'e Jilliamsburg -oundation logo is inscribed. #uc' a mold (ould cost 4G55. In addition* t'e Jilliamsburg -oundation (ants a special (ick containing gold-like t'read t'at (ould add 45.25 to t'e cost of eac' candle. .ecause of t'e large si!e of t'e order and t'e c'aritable nature of t'e (ork* t'e Jilliamsburg -oundation 'as asked to pay only 42.;" eac' for t'is candle. If accepted* ('at effect (ould t'is order 'ave on t'e company3s net operating incomeA

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TM 13-; SPECIAL ORDERS Fnly t'e incremental costs and benefits are relevant. T'e e6isting fi6ed manufacturing over'ead costs (ould not be affected by t'e order and are irrelevant. Total for &00 Can'les 42*3$5 1*5G5 125 45 1$5 1*455 G55 2*255 4 1$5

$er %nit Incremental revenue................... 42.;" Incremental costs, 7ariable costs, Direct materials..................... 1.3" Direct labor........................... 5.1" 7ariable manufacturing over'ead............................. 5.5" #pecial (ick........................... 5.25 Total variable cost.................... 41.8" -i6ed cost, #pecial mold.......................... Total incremental cost................ Incremental net operating income.....................................

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TM 13-15 UTILIZATION OF CONSTRAINED RESOURCES C )nyt'ing t'at prevents an organi!ation from getting more of ('at it (ants ?for e6ample* profits@ is a constraint. C ) particular mac'ine may not 'ave enoug' capacity to satisfy current demand. C #upplies of a critical part may not be sufficient to satisfy current demand. C J'en t'e constraint is a mac'ine or a (ork center* it is called a bottleneck. C J'en capacity is not sufficient to satisfy demand* somet'ing must be cut back. J'ic' products s'ould be cut back and by 'o( muc'A C -i6ed costs are not usually affected by t'e decision of ('ic' products s'ould be emp'asi!ed in t'e s'ort run. )ll of t'e mac'ines and ot'er fi6ed assets are in place= it is Iust a <uestion of 'o( t'ey s'ould be used. C J'en fi6ed costs are unaffected by t'e c'oice of ('ic' product to emp'asi!e* ma6imi!ing t'e total contribution margin (ill ma6imi!e total profits. C T'e total contribution margin is ma6imi!ed by emp'asi!ing t'e products (it' t'e greatest contribution margin per unit of t'e constrained resource.

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TM 13-11 UTILIZATION OF CONSTRAINED RESOURCES (contd) &/)M01&, &nsign 2ompany makes t(o products* / and K. T'e current constraint is Mac'ine >34. #elected data on t'e products follo(, #elling price per unit................. 1ess variable e6penses per unit 2ontribution margin.................. 2ontribution margin ratio.......... 2urrent demand per (eek ?units@ 0rocessing time re<uired on Mac'ine >34 per unit............. ( 4$5 3$ 424 45L 2*555 1.5 minute ) 4"5 3" 41" 35L 2*255 5." minute

Mac'ine >34 is available for 2*455 minutes per (eek* ('ic' is not enoug' capacity to satisfy demand for bot' product / and product K. #'ould t'e company focus its efforts on product / or product KA 2M 0&+ >IT F- TM& 2F>#T+)I>&D +&#F +2& ( 2ontribution margin per unit ?a@ 2onstrained resource re<uired to produce one unit ?b@........... 2ontribution margin per unit of t'e constrained resource ?a@N ?b@ 424 1.5 minute 424 per minute ) 41" 5." minute 435 per minute

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TM 13-12 UTILIZATION OF CONSTRAINED RESOURCES (contd) C 0roduct K s'ould be emp'asi!ed since it 'as t'e larger contribution margin per unit of t'e constrained resource. ) minute of processing time on Mac'ine >34 can be used to make 1 unit of 0roduct /* (it' a contribution margin of 424* or 2 units of 0roduct K* (it' a combined contribution margin of 435. C In t'e absence of ot'er considerations ?suc' as satisfying an important customer@* t'e best plan (ould be to produce to meet current demand for 0roduct K and t'en use any remaining capacity to make 0roduct /. )11FTI>9 TM& 2F>#T+)I>&D +&#F +2& Total time available on Mac'ine >34 ?a@.... 0lanned production and sales of 0roduct K Time re<uired to process one unit............. Total time re<uired to make 0roduct K ?b@. Time available to process 0roduct / ?a@ P ?b@ Time re<uired to process one unit............. 0lanned production and sales of 0roduct / +&# 1T# F- -F11FJI>9 TM& ).F7& 01)> ( 0lanned production and sales ?units@ 2ontribution margin per unit........... Total contribution margin............... ) Total 2*455 2*255 O 5." 1*155 1*355 N1 1*355 minute s units minute minute s minute s minute per unit units

1*355 2*255 O 424 O 41" 431*25 433*55 5 5

4$4*25 5

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TM 13-13 UTILIZATION OF CONSTRAINED RESOURCES (contd) MANAGING CONSTRAINTS 0rocessing more units t'roug' t'e bottleneck t'at customers (ant is a key to increased profits, C 0roduce only ('at can be sold. C 0ay (orkers overtime to keep t'e bottleneck running after normal (orking 'ours. C #'ift (orkers from non-bottleneck areas to t'e bottleneck. C Mire more (orkers or ac<uire more mac'ines for t'e bottleneck. C #ubcontract some of t'e production t'at (ould use t'e bottleneck. C -ocus business process improvement efforts on t'e bottleneck. C +educe defects. T'e potential payoff to effectively managing t'e constraint can be enormous. &/)M01&, #uppose t'e available time on Mac'ine >34 can be increased by paying t'e mac'ine3s operator to (ork overtime. Jould t'is be (ort'('ileA )>#J&+, #ince t'e additional time (ould be used to make more of 0roduct /* eac' minute of overtime is (ort' 424 to t'e company and 'ence eac' 'our is (ort' 41*445 ?$5 minutes O 424 per minute@Q

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TM 13-14 OINT PRODUCT COSTS C #ome companies manufacture a number of end products from a single ra( material input. #uc' products are kno(n as Ioint products. C T'e split-off point is t'e point in t'e manufacturing process at ('ic' t'e Ioint products can be recogni!ed as separate products. C T'e term Ioint cost is used to describe t'ose costs t'at are incurred up to t'e split-off point. C It is profitable to continue processing a Ioint product after t'e split-off point if t'e incremental revenue from furt'er processing e6ceeds t'e incremental processing costs. C In practice* Ioint costs incurred up to t'e split-off point are almost al(ays allocated to t'e Ioint products. &6treme caution s'ould be e6ercised in interpreting t'ese allocated Ioint costs. T'ey are not relevant in decisions concerning ('et'er Ioint products s'ould be processed furt'er since t'ey are incurred ('et'er or not t'ere is furt'er processing.

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TM 13-1" OINT PRODUCT COSTS (contd) &/)M01&, >J #a(mill buys logs and t'en runs t'em t'roug' a sa( t'at produces unfinis'ed lumber and scrap ?i.e.* sa(dust* c'ips* and bark@. T'e unfinis'ed lumber can be sold Das isE or processed furt'er into finis'ed lumber. T'e scrap can also be sold Das isE to gardening supply ('olesalers or processed furt'er into prestologs. Data concerning t'ese Ioint products appear belo(, $er *og *um+e Scrap r s #ales value at t'e split-off point. . . 4145 4" #ales value after furt'er processing.................................. 4285 425 )llocated Ioint costs:.................... 418$ 424 2ost of furt'er processing............. 4"5 44 :)llocated on t'e basis of (eig't. )nalysis of #ell or 0rocess -urt'er $er *og *um+e Scrap r s #ales value after furt'er processing.................................. #ales value at t'e split-off point. . . Incremental revenue..................... 2ost of furt'er processing............. 0rofit from furt'er processing....... 4285 145 135 "5 4 G5 425 " 1" 4 411

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