Select solutions to Chapter 14

PROBLEM 14-44 (25 MINUTES)

1.

Contemporary Trends will be worse off by $6,400 if it discontinues wallpaper

sales.

Sales..
Less: Variable costs.
Contribution margin.

Paint and
Supplies

Carpeting

Wallpaper

$190,000
114,000
$ 76,000

$230,000
161,000
$ 69,000

$ 70,000
56,000
$ 14,000

If wallpaper is closed, then:

Loss of wallpaper contribution margin... $(14,000)
Remodeling.
(6,200)
Added profitability from carpet sales*
32,500
Fixed cost savings ($22,500 x 40%).
9,000
Decreased contribution margin from paint
and supplies ($76,000 x 20%)..
(15,200)
Increased advertising..
(12,500)
Income (loss) from closure $ (6,400)
* The current contribution margin ratio for carpeting is 30% ($69,000
$230,000). This ratio will increase to 35%, producing a new contribution
for the line of $101,500 [($230,000 + $60,000) x 35%]. The end result is
that carpetings contribution margin will rise by $32,500 ($101,500 $69,000), boosting firm profitability by the same amount.
2.

This cost should be ignored. The inventory cost is sunk (i.e., a past cost that is
not relevant to the decision). Regardless of whether the department is closed,
Contemporary Trends will have a wallpaper inventory of $11,850.

3.

The Internet- and magazine-based firms likely have several advantages:

These companies probably carry little or no inventory. When a customer
places an order, the firm simply calls its supplier and acquires the goods. The
result may be lower expenditures for storage and warehousing.
These firms do not need retail space for walk-in customers.
Internet- and magazine-based firms can conduct business globally.
Contemporary Trends, on the other hand, is confined to a single store in
Baltimore.

PROBLEM 14-45 (50 MINUTES)

1.

Sets result in a 20% increase, or 1,500 dresses (1,250 1.20 = 1,500).

Complete sets..................................
Dress and accessory cape..............
Dress and handbag.........................
Dress only........................................
Total units if additional items are
introduced......................................
Less: Unit sales if additional items
are not introduced.........................
Incremental sales............................
Incremental contribution margin
per unit (excluding material and
cutting costs).................................
Total incremental contribution
margin.............................................

Percent
of Total Dresses
70%
1,050
6%
90
15%
225
9% 135
100%

Total Number of
Accessory
Capes
Handbags
1,050
1,050
90
225

1,500

1,140

1,275

1,250
250

-1,140

--
1,275

$192.00
$48,000

Additional costs:
Additional cutting cost
(1,500 91% $14.40)................
Additional material cost
(250 $80.00)...............................
Lost remnant sales
[(1,250 135) $8.00].................
Incremental cutting for
extra dresses (250 $32.00).......
Incremental profit............................

2.

$12.80
$14,592

Total

$4.80
$6,120

$68,712

$19,656
20,000
8,920
8,000

56,576
$12,136

Qualitative factors that could influence the companys management team in its
decision to manufacture matching accessory capes and handbags include:
accuracy of forecasted increase in dress sales.
accuracy of forecasted product mix.

PROBLEM 14-45 (CONTINUED)

company image of a dress manufacturer versus a more extensive supplier of
womens apparel.
competition from other manufacturers of womens apparel.

 whether there is adequate capacity (labor, facilities, storage, etc.).

PROBLEM 14-46 (25 MINUTES)
1.
Food
Blender Processor
Unit cost if purchased from an outside supplier .......................................
$60
$114
Incremental unit cost if manufactured:
Direct material ..........................................................................................
$18
$ 33
Direct labor ...............................................................................................
12
27
Variable overhead
$48 $30 per hour fixed ......................................................................
18
$96 (2)($30 per hour fixed) ................................................................
36
Total ......................................................................................................
$48
$ 96
Unit cost savings if manufactured .............................................................
$12
$ 18
Machine hours required per unit ................................................................
1
2
Cost savings per machine hour if manufactured
$12 1 hour .............................................................................................
$12
$18 2 hours ............................................................................................
$ 9
Therefore, each machine hour devoted to the production of blenders saves the
company more than a machine hour devoted to food processor production.
Machine hours available .....................................................................................
Machine hours needed to manufacture 20,000 blenders .................................

50,000
20,000

Remaining machine hours .................................................................................

30,000

Number of food processors to be produced (30,000 2) ................................

15,000

Conclusion: Manufacture
Manufacture
Purchase
PROBLEM 14-46 (CONTINUED)
2.

20,000 blenders
15,000 food processors
13,000 food processors

If the companys management team is able to reduce the direct material cost per
food processor to $18 ($15 less than previously assumed), then the cost savings
from manufacturing a food processor are $33 per unit ($18 savings computed in
requirement (1) plus $15 reduction in material cost):

New unit cost savings if manufactured ..........................................

Machine hours required per unit ....................................................

Food
Blender Processor
$12.00
$33.00
1 MH 2 MH

Cost savings per machine hour if manufactured

$12 1 hour .................................................................................
$33 2 hours ................................................................................

$12.00
$16.50

Therefore, devote all 50,000 hours to the production of 25,000 food processors.
Conclusion:

Manufacture: 25,000 food processors

Purchase: 3,000 food processors and 20,000 blenders

PROBLEM 14-47 (25 MINUTES)

1.

2.

Incremental unit cost if purchased:

Purchase price .........................................................................................
Material handling .....................................................................................
Total ..........................................................................................................

$ 45,000
9,000
$ 54,000

Incremental unit cost if manufactured:

Direct material ..........................................................................................
Material handling .....................................................................................
Direct labor ...............................................................................................
Variable manufacturing overhead ($36,000 1/3) .................................
Total ..........................................................................................................
Increase in unit cost if purchased ($54,000 $39,600) .............................

$ 3,000
600
24,000
12,000
$ 39,600
$ 14,400

Increase in monthly cost of acquiring part RM67 if purchased

(10 $14,400, as computed above) ..........................................................
Less: rental revenue from idle space .........................................................
Increase in monthly cost .............................................................................

$144,000
75,000
$ 69,000

PROBLEM 14-47 (CONTINUED)

3.

Contribution forgone by not manufacturing alternative product .............

Savings in the cost of acquiring RM67
(10 $14,400 as computed in requirement 1) .........................................
Net cost of using limited capacity to produce part RM67 .........................

$156,000
144,000
$ 12,000

PROBLEM 14-48 (20 MINUTES)

The analysis prepared by the engineering, manufacturing, and accounting departments
of Cincinnati Flow Technology (CFT) was not correct. However, their recommendation
was correct, provided that potential labor-cost improvements are ignored. An
incremental cost analysis similar to the following table should have been prepared to
determine whether the pump should be purchased or manufactured. In the following
analysis, fixed factory overhead costs and general and administrative overhead costs
have not been included because they are not relevant; these costs would not increase,
because no additional equipment, space, or supervision would be required if the pumps
were manufactured. Therefore, if potential labor cost improvements are ignored, CFT
should purchase the pumps because the purchase price of $102 is less than the $108
relevant cost to manufacture.
Incremental cost analysis:

Purchased components ..................................................................

Assembly labor ................................................................................
Variable manufacturing overhead ..................................................
Total relevant cost........................................................................

Cost of
10,000 Unit
Assembly Run Per Unit
$ 180,000
$ 18
450,000
45
450,000
45
$1,080,000
$108

PROBLEM 14-49 (25 MINUTES)

1.

Per-unit contribution margins:

Standard
Selling price..
Less: Variable costs:
Direct material
Direct labor..
Variable manufacturing overhead
Sales commission
$375 x 10%; $495 x 10%.
Total unit variable cost.
Unit contribution margin

Enhanced

$375.00

$495.00

$42.00
22.50
36.00

$67.50
30.00
48.00

37.50

49.50
138.00
$237.00

195.00
$300.00

2.

The following costs are not relevant to the decision:

Development costssunk
Fixed manufacturing overheadwill be incurred regardless of which product
is selected
Sales salariesidentical for both products
Market studysunk

3.

Martinez, Inc. expects to sell 10,000 Standard units (40,000 units x 25%) or 8,000
Enhanced units (40,000 units x 20%). On the basis of this sales forecast, the
company would be advised to select the Standard model.

4.

Standard

Enhanced

Total contribution margin:

10,000 units x $237; 8,000 units x $300. $2,370,000
Less: Marketing and advertising
195,000
Income... $2,175,000

$2,400,000
300,000
$2,100,000

The quantitative difference between the profitability of Standard and Enhanced is

relatively small, which may prompt the firm to look at other factors before a final
decision is made. These factors include:
-

Competitive products in the marketplace

Data validity
Growth potential of the Standard and Enhanced models
Production feasibility
Effects, if any, on existing product sales
Break-even points

PROBLEM 14-50 (20 MINUTES)

1.

When there is no limit on production capacity the Pro model should be

manufactured since it has the highest contribution margin per unit.
Basic
Model
Selling price ......................................................................... $116
Direct material ......................................................................
32
Direct labor ...........................................................................
20
Variable overhead ................................................................
16
Total variable cost ................................................................ $ 68
Contribution margin ............................................................ $ 48

2.

Deluxe
Model
$130
40
30
24
$ 94
$ 36

Pro
Model
$160
38
40
32
$110
$ 50

When labor is in short supply the Basic model should be manufactured, since it
has the highest contribution margin per direct-labor hour.
Basic
Model
Contribution margin per unit .............................................. $48
Direct-labor hours required ................................................. 1
Contribution margin per direct-labor hour ........................ $48

Deluxe
Model
$36
1.5
$24

Pro
Model
$50
2
$25

PROBLEM 14-51 (25 MINUTES)

Yes, the order should be accepted because it generates a profit of $68,100 for the firm.
Note: The fixed administrative cost is irrelevant to the decision, because this cost
will be incurred regardless of whether Mercury accepts or rejects the order.
Selling price
Less: Direct material ($16.40 - $4.20)...
Direct labor..
Variable manufacturing overhead
(.5 hours x $15.00*)..
Unit contribution margin.
Total contribution margin (11,000 units x $7.30)..
Less: Additional setup costs
Special device.
Net contribution to profit.

$31.50
$12.20
4.50
7.50

24.20
$ 7.30
$80,300

$7,400
4,800

12,200
$68,100

* Fixed manufacturing overhead: $1,500,000 60,000

machine hours = $25.00 per hour
Variable manufacturing overhead: $40.00 - $25.00 =
$15.00
No, Mercury lacks adequate machine capacity to manufacture the entire order.
Planned machine hours (5,000 hours x 3 months) 15,000
Current usage (15,000 hours x 70%).. 10,500
Available hours 4,500
Required machine hours (11,000 units x .5 hours)

5,500

Options include the following:

Sacrificing some current business in the hope that a long-term relationship
with Venus can be established and proves to be profitable
Acquiring more machine capacity
Outsourcing some units
Working overtime