7-17 Healthy Hearth has sufficient excess capacity to handle the one-time order for 1000 meals next month. Consequently, the analysis focuses on incremental revenues and costs:
Incremental revenue per meal / $3.50Incremental cost per meal / 3.00
Incremental CM per meal / $0.50
Number of meals / 1,000
Increase in operating income / $ 500
7-18 This order will require 500 (= (10,000/100)*5) machine hours. Since there is excess capacity of 800 (= 4,000*(100%-80%)) machine hours per month, Shorewood Shoes Company can accept this order without expanding its capacity. Therefore, Shorewood should charge at least as much as the incremental variable costs for this order.
Direct material $6.00
Direct labor $4.00
Variable manufacturing support $2.00
Additional cost of embossing the private label $0.50
=
Minimum price to be charged for this order $12.50
Shorewood’s costs stated in the problem are average costs per pair of shoes. Shorewood should determine whether the costs are reasonably accurate for the discount store’s order. Shorewood should also consider how its regular customers might react to the lower price offered to the discount store.
7-19 (a) Superstore faces a problem of maximizing contribution margin per unit of scarce resource. Here, the scarce resource is shelf space. Superstore requires at least 24 square feet for each category. The store manager should assign additional space to the category with the highest contribution margin per square foot.
Ice Cream / Juices / Frozen Dinners / Frozen VegetablesSelling price per unit / $12.00 / $13.00 / $24.00 / $9.00
Variable costs per unit / $8.00 / $10.00 / $20.50 / $7.00
CMU (per sq. ft. package) / $4.00 / $3.00 / $3.50 / $2.00
Minimum required / 24 / 24 / 24 / 24
Maximum allowed / 100 / 100 / 100 / 100
Allocation: Maximize CM / 100 / 26 / 100 / 24
The ice cream is the product with the highest contribution margin per square foot package. After assigning a total of 100 square feet to ice cream, there is sufficient available shelf space to assign a total of 100 square feet to frozen dinners and 26 square feet to juices. The frozen vegetables receive the minimum required assignment of 24 feet.
(b) In setting the minimum required and maximum allowed square footage per category, the manager might consider seasonality (for example, permitting more ice cream space during the summer or more frozen vegetable space during the winter) and the effect on contribution margins of variability in costs and prices.
7-20
Regular / DeluxeSale price per sq. yard / $16.00 / $25.00
Variable costs per sq. yard / $10.00 / $15.00
Contribution margin per sq. yard / $6.00 / $10.00
DLH required per sq. yard / 0.15* / 0.20**
Contribution margin per DLH / $40.00 @ / $50.00 @@
* 15 dlh / 100 sq yds = .15
** 29 dlh / 100 sq yds = .20
@ (6 / 0.15 = $40) @@ (10 / 0.20 = $50)
Because deluxe grade has a higher contribution margin per unit of scarce resource (DLH) than regular grade, Boyd Wood Company should produce the maximum of 8,000 square yards of deluxe grade first and then use the remaining available capacity of 3,000 DLH (= 4,600 – 8,000*0.20) to produce regular grade. Therefore, the optimal production level for each product is:
Deluxe: 8,000 sq. yards
Regular: 20,000 sq. yards (= 3,000 / 0.15)
7-22
Incremental variable costs = ($16 + 5 + 3) x 10,000
= $24 x 10,000
= $240,000
Incremental revenues = $40 x 10,000
= $400,000
Berry’s operating income will increase by $160,000 if it accepts this offer.
7-23 (a)
Incremental Revenue ($9 * 30,000) $270,000
Variable Costs of Order ($5.50^ * 30,000) (165,000)
Income Effect $105,000
Substitution Effect: Loss of Profits from 6,000 units @ $4.50 $(27,000)
Total increase in operating income $ 78,000
^ -- Variable cost per unit
Ritter must consider the long-run effect of displeasing its regular domestic customers by not fulfilling their demand.
(b)
Incremental Revenue ($9 * 30,000) $270,000
Variable Costs of Order ($5.50^ * 30,000) (165,000)
Income Effect $105,000
Substitution Effect: Increase in Fixed Costs $(25,000)
Total increase in operating income $ 80,000
^ -- Variable cost per unit
If Ritter operates the extra shift and accepts the export order, operating income will increase by $80,000. Ritter should consider whether the same quality will be achieved with new operators or existing operators working overtime. In addition, Ritter should understand whether the additional fixed costs will be incurred on a continuing basis or are avoidable when production drops back to its previous level.
7-27 / Product / Total sales withoutSpecial promotion / Total sales with
special promotion / Difference
Hamburgers / $1.09 ´ 20,000 = $21,800 / $0.69 ´ 24,000 = $16,560 / ($5,240)
Chicken / 1.29 ´ 10,000 = $12,900 / 1.29 ´ 9,200 = $11,868 / (1,032)
French Fries / 0.89 ´ 20,000 = $17,800 / 0.89 ´ 22,400 = $19,936 / 2,136
($4,136)
Product / Variable costs w/o special promotion / Variable costs w/ special promotion / Difference
Hamburgers / $0.51 ´ 20,000 = $10,200 / $0.51 ´ 24,000 = $12,240 / ($2,040)
Chicken / 0.63 ´ 10,000 = $6,300 / 0.63 ´ 9,200 = $5,796 / 504
French Fries / 0.37 ´ 20,000 = $7,400 / 0.37 ´ 22,400 = $8,288 / (888)
Incremental sales with special promotion = ($4,136)
Incremental variable costs with special promotion = $2,424
Incremental contribution margin with special promotion = ($6,560)
Incremental fixed costs with special promotion = $4,500
Incremental profits with special promotion = ($11,060)
Therefore, Andrea should not proceed with this special promotion. An opposing argument is the creation of new customers who may stay with the firm and generate additional contribution margin in the future.
7-31 (a) / XLl / XL2 / XL3Sales price / $10.00 / $14.00 / $12.00
Direct materials / (4.00) / (4.50) / (5.00)
Direct labor / (2.00) / (3.00) / (2.50)
Variable support / (2.00) / (3.00) / (2.50)
Unit contribution margin / $2.00 / $3.50 / $2.00
Machine hours per unit / 0.20 / 0.35 / 0.25
Contribution margin per machine hour / $10.00 / $10.00 / $8.00
Products XLl and XL2 should be produced first because they have a higher contribution margin per machine hour. Maximum production of these two products requires 110,000 machine hours:
XL1: 200,000 units ´ 0.20 machine hours = 40,000 machine hours
XL2: 200,000 units ´ 0.35 machine hours = 70,000 machine hours
110,000 machine hours
Therefore, a balance of 10,000 machine hours (= 120,000 – 110,000) are available for XL3 production:
10,000 machine hours
.25 machine hours
= 40,000 units of XL3
Optimal Production Levels:
XL1: 200,000 units; XL2: 200,000 units, XL3: 40,000 units
(b) Under the current capacity constraint, Excel Corporation cannot meet all of XL3’s demand. If additional capacity becomes available, it can produce more units of XL3. To determine whether it is worthwhile operating overtime, Excel needs to analyze the contribution margin of XL3 when operating overtime.
XL3Sales price / $12.00
Direct materials / $5.00
Direct labor / 3.75 / @
Variable support / 2.50 / 11.25
Unit contribution margin / $0.75
@ 3.75 = 2.50 ´ 150%
As unit contribution margin of XL3 using overtime is positive, it is worthwhile operating overtime.
7-32 (a) DLH required per unit of HCD2 = $100 (direct labor cost) / $20 (wage rate) = 5DLH. The new order requires 1,000 (200*5) DLH, so the existing capacity is adequate. Contribution margin per unit of HCD2 for the new order = $400 – (75 + 100 + 125) = $100. Change in profit = 200 units * $100 Contribution margin = $20,000 (increase)
(b)
Sales price / $400 / $500
Variable costs:
Direct material / $60 / $75
Direct labor / $80 / $100
Variable support / $100 / $240 / $125 / $300
CM per unit / $160 / $200
DLH per unit / 4^ / 5^^
Contribution per DLH / $40 per DLH / $40 per DLH
^ ($80 DL Cost / $20 Wage Rate) = $4
^^ ($100 DL Cost / $20 Wage Rate) = $5
The new order requires a total of 1,500 DLH (= 5*300), but only 1,000 DLH (= 15,000 – 14,000) are available. This will leave capacity short for 500 DLH (= 1,500 – 1,000). You can sacrifice sales of either (1) HCD1 (500 DLH / 4 DLH per unit of HCD1) = 125 units of HCD1 sacrificed; or (2) HCD2 (500 DLH / 5 DLH per unit of HCD2) = 100 units of HCD2 sacrificed.
The change in profit where 125 units of HCD1 are sacrificed:
= Total contribution margin – Opportunity cost
= 300 units * $100 contribution per unit – 125 units * $160 contribution per DLH
= $30,000 - $20,000
= $10,000 increase
The change in profit where 100 units of HCD2 are sacrificed:
= Total contribution margin – Opportunity cost
= 300 units * $100 contribution per unit – 100 units * $200 contribution per DLH
= $30,000 - $20,000
= $10,000 increase
(c) If the plant is worked overtime to manufacture HCD2 for the new order, the contribution margin is negative $12.50 as shown below:
Unit Variable Cost for OvertimeMaterial / 1 * 75 = / $75.00
Labor / $30 * 5 DLH = / $150.00
Variable Support / 1.5 * 125 = / $187.50
Total Variable Costs / $412.50
Sales Price / $400.00
Contribution Margin / $(12.50)
Change in profit during
200 units * $100CM = / $20,000 regular hours
100 units * ($12.50)CM in OT = / $(1,250) overtime hours
$18,750 Increase
7-34 (a)
“Large” / “Small”Sales price per unit / $32 / $21
Variable cost per unit
Direct material / ($12) / ($10)
Direct labor / ($6) / ($2)
Support / ($2) / ($1)
C.M. per unit / $12 / $8
Machine hours per unit / (10/100)=0.10 / (10/200)=0.05
C.M. per MH / $120 / $160
(b) Small stuffed animals are more profitable to make under constrained capacity than the large stuffed animals.
“Large” / “Small”MH require per batch / 10 / 10
Estimated # of batches / 150(=15,000/100) / 125(=25,000/200)
Estimated MH required / 1,500 / 1,250
Since total machine hour capacity is adequate to fill the estimated demand for both large and small stuffed animals, Barney should produce 15,000 and 25,000 units of large and small stuffed animals, respectively.
(c) Special order:
Price per unit $37
Variable cost per unit (=$12+6+2) $20
Contribution margin per unit $17
Large / Small / Special OrderSales price per unit / $32 / $21 / $37
Variable cost per unit
Direct material / ($12) / ($10) / ($12)
Direct labor / ($6) / ($2) / ($6)
Support / ($2) / ($1) / ($2)
C.M. per unit / $12 / $8 / $17
Machine hours per unit / (10/100)=0.10 / (10/200)=0.05 / (10/100)=0.10
C.M. per MH / $120 / $160 / $170
Based on contribution margin per MH, Barney should produce the special order first, then small stuffed animals and last, other large stuffed animals.
Total available MH 3,000
MH required:
Special order (5,000/100)*10mh= 500
Small (25,000/200)*10mh= 1,250
MH available for Large 1,250
# of Large that can be produced: (1,250/10)*100= 12,500
Unfilled demand 15,000-12,500= 2,500
Opportunity cost 2,500*$12 CM per unit= $30,000
(d) Yes, Barney should accept the special order because the contribution margin obtained from this order is $85,000 (=$17*5,000) which is greater than the opportunity cost of $30,000, resulting in a net increase in profit of $55,000.
1
Chapter 7 Solutions