Chapter 23 - Relevant Costing for Managerial Decisions

PROBLEM SET B

Problem 23-1B (45 minutes)

WINDTRAX Company

Comparative Income Statements

(1) / (2) / (3)
Normal / New
Volume / Business / Combined
Sales...... / $200,000 / $16,000 / $216,000
Costs and expenses
Direct materials...... / 30,000 / 3,000 / 33,000
Direct labor...... / 12,000 / 2,400 / 14,400
Overhead...... / 50,000 / 1,000 / 51,000
Selling expenses...... / 7,500 / 7,500
Administrative expenses...... / 31,500 / 750 / 32,250
Total costs and expenses...... / 131,000 / 7,150 / 138,150
Operating income...... / $ 69,000 / $ 8,850 / $ 77,850

Supporting computations

Normal direct material cost...... / $ 30,000
Units of output...... / 200,000
Cost per unit...... / $ 0.15
New business volume...... / 20,000
New business direct material cost...... / $ 3,000
Normal direct labor cost...... / $ 12,000
Units of output...... / 200,000
Cost per unit...... / $ 0.06
Overtime per unit (100%)...... / 0.06
New business direct labor cost per unit...... / $ 0.12
New business volume...... / 20,000
New business direct labor cost...... / $ 2,400
Total overhead...... / $ 50,000
Fixed overhead (80%)...... / 40,000
Variable overhead...... / $ 10,000
Units of output...... / 200,000
Cost per unit...... / $ 0.05
New business volume...... / 20,000
New business variable overhead cost...... / $ 1,000

Problem 23-3B (30 minutes)

Part 1

Incremental Cost of Making TH1

Variable costs:
Direct materials (400,000 units x $1.20 per unit)...... / $ 480,000
Direct labor (400,000 units x $1.50 per unit)...... / 600,000
Variable overhead (2,400,000* x 25%)...... / 600,000
Total incremental cost of making 50,000 units...... / $1,680,000

* Total overhead = 400,000 units x $6 per unit = $2,400,000

Incremental Cost of Buying the Part

Cost per unit to buy...... / $ 4.00
Total incremental cost of buying 400,000 units...... / $1,600,000

Alto is better off buying the TH1 from the outside supplier.

Part 2

Other factors Alto should consider besides cost are:

  • Will the supplier provide the quality that Alto needs?
  • Will the supplier provide the TH1 on a timely basis?
  • Will the supplier’s cost remain at $4 per unit or will it go up or down?
  • What can Alto do in the space that is now used to produce TH1? Can they produce something that will provide additional income?

Problem 23-4B (45 minutes)

Alternative 1: Sell to a wholesaler

Incremental revenue (7,500 x $75.00)...... / $ 562,500
Incremental cost...... / 0
Incremental income...... / $ 562,500

Alternative 2: Disassemble and sell to a recycler

Incremental revenue (7,500 x $130.00)...... / $ 975,000
Incremental cost...... / 400,000
Incremental income...... / $ 575,000

Alternative 3: Rework and sell at regular prices

Incremental revenue (7,500 x $500.00)...... / $3,750,000
Incremental cost...... / 3,200,000
Incremental income...... / $ 550,000

Decision: Micron should choose alternative 2, as this provides the highest incremental income.

Problem 23-5B(55 minutes)

Part 1

Product 22 / Product 44
Selling price per unit...... / $ 175 / $ 200
Variable costs per unit...... / 100 / 150
Contribution margin per unit...... / $ 75 / $ 50
Machine hours to produce 1 unit...... / 0.8 / 0.5
Contribution per machine hour
(or contribution/[hours per unit])...... / $93.75 / $ 100

Part 2

Sales Mix Recommendation To the extent allowed by production and market constraints, the company should produce as much of Product 44 as possible. With a single shift yielding 184 hours per month (8 x 23), the company can produce these units of Product 44:

Maximum output of 44 = = 368 units per month

Contribution Margin at Recommended Sales Mix

Contribution margin = 368 units x $50 per unit = $18,400 per month

Problem 23-5B (Continued)

Part 3

Sales Mix Recommendation with Second Shift If the second shift is added, the maximum possible output of 44 will double:

Maximum possible output of 44 = = 736 units per mo.

However, this level of output exceeds the company’s market constraint of 450 units of Product 44 per month. This means the company should produce 450 units of Product 44, and commit the remainder of the productive capacity to Product 22. This is computed as follows:

Units of Product 44...... / = 450 units per month
Hours per unit...... / 0.5
Hours used for Product 44...... / 225 / hours
Hours available for Product 22 (368 hrs - 225 hrs)... / 143 / hours

The output of Product 22 with 143 production hours is

Units of Product 22 = = 178 units per month

(rounded down to whole units)

Contribution Margin at This Sales Mix

Units / CM/unit / Total
From 44...... / 450 / $50 / $22,500
From 22...... / 178 / 75 / 13,350
Total contribution margin......
Less extra shift costs...... / 35,850
(5,000)
Change in income...... / $30,850

Management decision: The increase in income of $30,850 exceeds the contribution margin of $18,400 generated by one shift alone (see part 2). Therefore, management should add the second shift.

Problem 23-5B (Continued)

Part 4

Sales Mix Recommendation By incurring additional marketing cost, the company can relax the market constraint for sales of Product 44 up to the point where 500 units can be sold. This means the company can produce 500 units of Product 44, and commit the remainder of its productive capacity to Product 22. These computations are:

Units of Product 44...... / = 500 units per month
Hours per unit...... / 0.5
Hours used for Product 44...... / 250 / hours
Hours available for Product 22
(368 hrs less 250 hrs)...... / 118 / hours

The output of Product 22 with 118 production hours is

Units of Product 22 = = 147 units per month*

*Rounded down to whole units

Contribution Margin with This Sales Mix

Units / Contr./unit / Total
From 44...... / 500 / $50 / $25,000
From 22...... / 147 / 75 / 11,025
Less extra shift costs...... / (5,000)
Less extra marketing costs...... / (500)
Change in income...... / $30,525

Management decision: The change in income of $30,525 is less than the $30,850 generated under the existing market constraint (see part 3). Therefore, management should not undertake this marketing strategy.

Problem 23-6B (60 minutes)

Part 1

TURFTIME COMPANY
Analysis of Expenses under Elimination of Department Z
Total / Eliminated / Continuing
Expenses / Expenses / Expenses
Cost of goods sold...... / $293,200 / $62,550 / $230,650
Direct expenses
Advertising...... / 15,000 / 1,500 / 13,500
Store supplies used...... / 3,500 / 700 / 2,800
Depreciation of store equip...... / 10,500 / 10,500
Allocated expenses
Sales salaries*...... / 46,800 / 23,400 / 23,400
Rent expense...... / 13,800 / 13,800
Bad debts expense...... / 12,500 / 2,000 / 10,500
Office salary*...... / 13,000 / 13,000
Insurance expense*...... / 2,800 / 455 / 2,345
Miscellaneous office expenses*...... / 2,100 / 375 / 1,725
Total expenses...... / $413,200 / $90,980 / $322,220

Computation Notes Closing Department Z will eliminate 65% of its insurance expense and 30% of its miscellaneous office expense. Sales salaries will be reduced by the amounts paid to the two clerks who will not be replaced. The office salary will not be eliminated, but it will be reclassified so that one-half will be reported as sales salary and one-half as office salary.

Problem 23-6B (Continued)

Part 2

TURFTIME COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department Z
Sales...... / $350,000
Cost of goods sold...... / 230,650
Gross profit from sales...... / 119,350
Operating expenses
Advertising...... / 13,500
Store supplies used...... / 2,800
Depreciation of store equipment...... / 10,500
Sales salaries...... / 29,900*
Rent expense...... / 13,800
Bad debts expense...... / 10,500
Office salary...... / 6,500*
Insurance expense...... / 2,345
Miscellaneous office expenses...... / 1,725
Total operating expenses...... / 91,570
Net income...... / $ 27,780

* Office salary reassignment

Total / Sales / Office
Salaries / Salaries / Salary
Salesclerks...... / $23,400 / $23,400
Office clerk...... / 13,000 / $13,000
Reassign office clerk to sales...... / 0 / 6,500 / (6,500)
Revised salaries...... / $36,400 / $29,900 / $ 6,500

Problem 23-6B (Continued)

Part 3

TURFTIME COMPANY
Reconciliation of Combined Income with Forecasted Income
Combined net income ...... / $ 24,300
Less Dept. Z's lost sales...... / (87,500)
Plus Dept. Z’s eliminated expenses...... / 90,980
Forecasted net income...... / $ 27,780

Analysis

Department Z's avoidable expenses of $90,980 are $3,480 greater than its revenues of $87,500. This means the company's annual net income would be $3,480 higher from eliminating Department Z. This analysis suggests management should probably go ahead with the elimination of the department as planned.

23-1