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.

Paint and
Supplies Carpeting Wallpape
r

Sales…………………… $190,000 $230,000 $ 70,000

..
Less: Variable 114,000 161,000 56,000
costs….
Contribution margin…. $ 76,000 $ 69,000 $ 14,000

If wallpaper is closed, then:

Loss of wallpaper contribution $(14,000)

margin…...
Remodeling………………………………… (6,200)
….
Added profitability from carpet 32,500
sales*……
Fixed cost savings ($22,500 x 40%) 9,000
……….
Decreased contribution margin from
paint and supplies ($76,000 x 20%) (15,200)
……………..
Increased (12,500)
advertising………………………..
Income (loss) from $ (6,400)
closure…………………

* 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 carpeting’s 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).

Total Number of
Percen
t Accessory Handbag
of Total Dresses Capes s Total
Complete sets............................ 70% 1,050 1,050 1,050
Dress and accessory cape..........  6%   90   90
Dress and handbag..................... 15%  225  225
Dress only..................................   9 %     135
Total units if additional items are
 introduced ................................ 100 % 1,500 1,140 1,275
Less: Unit sales if additional
items
are not introduced.....................    1,250 -- --  
Incremental sales.......................  250 1,140 1,275
Incremental contribution margin
 per unit (excluding material and
 cutting costs) ............................  $192 .00   $12 .80   $4 .80
Total incremental contribution $68,71
 margin ...................................... $48,000 $14,592 $6,120 2

Additional costs:
 Additional cutting cost
  (1,500  91%  $14.40).......... $19,656
 Additional material cost
  (250  $80.00)........................ 20,000
 Lost remnant sales
  [(1,250 – 135)  $8.00]........... 8,920
 Incremental cutting for  
  extra dresses (250  $32.00)...   8,000 56,576
Incremental profit........................ $12,13
6
 2. Qualitative factors that could influence the company’s 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 women’s apparel.
 competition from other manufacturers of women’s 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 ....................................................................... 50,000

Machine hours needed to manufacture 20,000 blenders ......................... 20,000

Remaining machine hours ..................................................................... 30,000

Number of food processors to be produced (30,000 ÷ 2) ........................ 15,000

 Conclusion: Manufacture 20,000 blenders
Manufacture 15,000 food processors
Purchase 13,000 food processors
PROBLEM 14-46 (CONTINUED)

2. If the company’s 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):
Food
Blender Processor
New unit cost savings if manufactured .................................. $12.00 $33.00
Machine hours required per unit ...........................................   1 MH   2 MH
Cost savings per machine hour if manufactured
 $12 ÷ 1 hour .................................................................... $12.00
 $33 ÷ 2 hours .................................................................. $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. Incremental unit cost if purchased:

 Purchase price ........................................................................... $ 45,000
 Material handling ........................................................................    9,000
 Total .......................................................................................... $ 54,000

Incremental unit cost if manufactured:

 Direct material ............................................................................ $  3,000
 Material handling ........................................................................ 600
 Direct labor ................................................................................ 24,000
 Variable manufacturing overhead ($36,000  1/3) ........................   12,000
 Total .......................................................................................... $ 39,600
Increase in unit cost if purchased ($54,000 – $39,600) .................... $ 14,400

2. Increase in monthly cost of acquiring part RM67 if purchased

 (10  $14,400, as computed above) .............................................. $144,000
Less: rental revenue from idle space ...............................................  75,000
Increase in monthly cost ................................................................. $ 69,000
 PROBLEM 14-47 (CONTINUED)

3. Contribution forgone by not manufacturing alternative product ......... $156,000

Savings in the cost of acquiring RM67
 (10  $14,400 as computed in requirement 1) ................................  144,000
Net cost of using limited capacity to produce part RM67 .................. $ 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:

Cost of
10,000 Unit
Assembly Run Per Unit
Purchased components ........................................................ $ 180,000 $ 18
Assembly labor ....................................................................   450,000 45
Variable manufacturing overhead ..........................................   450,000 45
 Total relevant cost............................................................. $1,080,000 $108
PROBLEM 14-49 (25 MINUTES)

1. Per-unit contribution margins:

Standard Enhanced

Selling $375.0 $495.0

price………………………………….. 0 0
Less: Variable costs:
Direct $42.00 $67.50
material…………………………
Direct 22.50 30.00
labor……………………………..
Variable manufacturing overhead 36.00 48.00
…
Sales commission
$375 x 10%; $495 x 10% 37 .50 49 .50
………….
Total unit variable 138.00 195.00
cost……………….
Unit contribution $237 .0 $300 .0
margin…………………… 0 0

2. The following costs are not relevant to the decision:

 Development costs—sunk
 Fixed manufacturing overhead—will be incurred regardless of which product
is selected
 Sales salaries—identical for both products
 Market study—sunk

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.

Standard Enhanced
Total contribution margin:
10,000 units x $237; 8,000 units x $2,370,00 $2,400,00
$300…. 0 0
Less: Marketing and 195,00 300,00
advertising……………… 0 0
Income………………………………………… $2,175,00 $2,100,00
…... 0 0

4. 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 Deluxe Pro

Model Model Model
Selling price .............................................................. $116 $130 $160
Direct material ........................................................... 32 40 38
Direct labor ............................................................... 20 30 40
Variable overhead ...................................................... 16 24 32
Total variable cost ..................................................... $ 68 $ 94 $110
Contribution margin ................................................... $ 48 $ 36 $ 50

2. When labor is in short supply the Basic model should be manufactured, since it
has the highest contribution margin per direct-labor hour .

Basic Deluxe Pro

Model Model Model
Contribution margin per unit ....................................... $48 $36 $50   
Direct-labor hours required ........................................   1 1.5   2   
Contribution margin per direct-labor hour .................... $48 $24 $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 $31.50
price…………………………………………………
Less: Direct material ($16.40 - $4.20) $12.2
…………………... 0
Direct 4.50
labor…………………………………………..
Variable manufacturing overhead
(.5 hours x $15.00*) 7.50 24.20
……………………………..
Unit contribution $
margin…………………………………. 7.30

Total contribution margin (11,000 units x $7.30) $80,30

…….. 0
Less: Additional setup $7,40
costs…………………………… 0
Special 4,80 12,20
device………………………………………. 0 0
Net contribution to $68,10
profit…………………………………. 0

* 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 4,500
hours………………………………………………

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