AF 210

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EX1-Raw

Place an X in the appropriate column to indicate whether each item is relevant or irrelevant to the decision context described in Case A and Case B (see EX6-1)
Case A Case B On Own
Item Relevant Irrelevant Relevant Irrelevant
a. Sales revenue
b. Direct materials
c. Direct labor
d. Variable manufacturing overhead
e. Depreciation— Model B100 machine
f. Book value— Model B100 machine
g. Disposal value— Model B100 machine
h. Market value—Model B300 machine (cost)
i. Fixed manufacturing overhead (general)
j. Variable selling expense
k. Fixed selling expense
l. General administrative overhead

EX2-Raw

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the lineshould be discontinued.
The special equipment used to produce racing bikes has no resale value and does not wear out.
1 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? On Own
2 Should the production and sale of racing bikes be discontinued?
3 Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.
Total if
Given: Total Dirt Bikes Mountain Bikes Racing Bikes Bikes Dropped Difference
Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000 $ 240,000
Variable expenses 120,000 27,000 60,000 33,000 87,000
Contribution margin 180,000 63,000 90,000 27,000 153,000
Fixed expenses: - 0
Advertising, traceable 30,000 10,000 14,000 6,000 24,000
Depreciation on special equipment 23,000 6,000 9,000 8,000 23,000
Salaries of product-line managers 35,000 12,000 13,000 10,000 25,000
Common allocated costs 60,000 18,000 30,000 12,000 60,000
Total fixed expenses 148,000 46,000 66,000 36,000 132,000
Net operating income $ 32,000 $ 17,000 $ 24,000 $ (9,000) $ 21,000
Alternatively:
Lost contribution margin
Fixed costs that can be avoided:
Advertising, traceable
Salary of the product-line manager
Financial (disadvantage) of discontinuing the Racing Bikes
Hints: the depreciation of the special equipment is a sunk cost and is not relevant to the decision.
common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued; thus, they are not relevant to the decision.
3 Better Analysis Total Dirt Bikes Mountain Bikes Racing Bikes
Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000
Variable expenses 120,000 27,000 60,000 33,000
Contribution margin 180,000 63,000 90,000 27,000
Fixed expenses:
Advertising, traceable 30,000 10,000 14,000 6,000
Depreciation on special equipment 23,000 6,000 9,000 8,000
Salaries of product-line managers 35,000 12,000 13,000 10,000
Hint: eliminate the allocation of the common fixed expenses (see format introduced in Ch6)

EX3-Raw

The company has always produced all of the necessary parts for its engines.
An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit.
The following information is provided (relating internal carburetor production): On Own
MAKE BUY
Given: Per Unit 15000 units/yr 15000
Direct materials $ 14 $ 210,000
Direct labor 10 150,000
Variable manufacturing overhead 3 45,000
Fixed manufacturing overhead, traceable* 6 90,000 <== Hint: only use 1/3 of this cost for your analysis
Fixed manufacturing overhead, allocated 9 135,000
Total cost $ 42 $ 630,000 $ 35
*One-third supervisory salaries; two-thirds depreciation of special equipment(no resale value).
1. Financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?
2. Should the outside supplier’s offer be accepted?
3. If purchased, freed capacity could be used to launch a new product
with segment margin of $150,000 per year; what would be the advantage in this case?
4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

EX4-Raw

Company manufactures and sells a gold bracelet for $189.95; the unit product cost is $149.00 as shown below:
A customer wishes to buy 20 for at a discount of $169.95 and with a customization requiring a $250 (unique) tool,
and increase of $2/unit in direct materials, and $4/unit in added overhead - all other variables will be unaffected.
1 What is the financial advantage (disadvantage) of accepting the special order?
2 Should the company accept the special order? Hint: remember to convert the custom tool to "per unit"
Given: (per unit) On Own
Existing
Direct materials: 84
Direct labor: 45
Manufacturing overhead: 20
Additional Direct Overhead:
Unit product cost: 149
Rev / Unit: 189.95
Cont Margin:
2

EX5-Raw

Data concerning three of a company’s most popular (luggage) models appear below.
1 Assume Time Constraint (use of plastic injection molding machine); determine Contribution Margin / Constraint Unit
2 Which product offers the most profitable use of the plastic injection molding machine?
3 Assume Pellet Constraint (assume shortage in plastic); determine Contribution Margin / Constraint Unit
4 Which product offers the most profitable use of the plastic pellets?
5 Which product has the largest (constraint free) contribution margin per unit?
Why wouldn’t this product be the most profitable use of the constrained resource in either case?
Given:
per unit Ski Guard Golf Guard Finishing Guard
Selling price: 200 300 255
Variable cost: 60 140 55
Processing time: 2 5 4 minutes
Pellets used: 7 4 8 pounds of pellets
5

EX6-Raw

The only variable cost (below) is direct materials and Demand > Manufacturing Capacity
The demand for the company’s (upholstery) products far exceeds its manufacturing capacity.
The bottleneck (constraint) is labor-hours.
1 How much overtime per hour should the company pay to run extra hours?
Hint: they should be willing to pay up to the Contribution Margin of the Constrained Resource
2 How much additional contribution margin per hour if Love Seats are jobbed out at $45/hour?
Hint: how much of the Cont Margin / Labor Hour will remain if subtracting an additional $45?
3 Should the nearby upholstering company (even if demand for the Love Seat levels out)? Explain.
Given: per unit Recliner Sofa Love Seat On Own
Selling price: 1400 1800 1500
Variable cost: 800 1200 1000
Labor-hours: 8 10 5
1
2
3

EX7-Raw

Three products are manufactured from a common input in a joint processing operation.
Joint processing costs up to the split-off point total $350,000 per quarter.
The company allocates these costs to the joint products on the basis of their relative sales value at the split-off point.
Unit selling prices and total output at the split-off point are below:
1 Financial advantage (disadvantage) of processing each beyond the split-off point?
2 which sold at the split-off point and which should be processed further?
Further Processing
Given: Product Selling Price Quart'ly Output Addnl Proc Costs Selling Price
A 16 15000 pounds 63000 20 per pound
B 8 20000 pounds 80000 13 per pound
C 25 4000 pounds 36000 32 per gallon
On Own (partial)
2

EX8-Raw

The selling price, variable costs, and contribution margin for one unit of each of products A, B, and C follow:
Direct materials (at $8 per lb) are limited so only the most profitable should be produced.
1 Calculate the contribution margin per pound of the constraining resource for each product.
2 What is the max contribution margin when using 6,000 pounds of raw materials on hand?
3 If demand is 500 units per product, what is the max contrib margin with 6,000 pounds raw materials on hand?
4 What is the highest price Barlow Company should be willing to pay for an additional pound of materials? Explain.
Given: Product A Product B Product C On Own (partial)
Selling Price: 180 270 240
Direct Materials: 24 80 32
Other Variable: 102 90 148
Total Variable: 126 170 180
Contribution margin per unit: 54 100 60
1 Direct material cost per pound: 8 8 8
Pounds of material required per unit: (Dir Mat Cost / Mat Cost per lb)
Contribution margin per pound: (Cont Margin per Unit / lbs of Mat Required per Unit)
2 Pounds of Material Available: 6,000 6,000 6,000
Total Contribution:
3 Units Demanded: 500 500 500 Max lbs: 6,000
Pound of material used: (Unit Demanded * Required lbs / Unit; but:
Total Contribution: first use A, then C, then remaining allocated to B)
Total:
4

EX9-Raw

The cost of producing and selling a single unit at the normal activity level of 60,000 units per year is below:
Selling price is $21 per unit, capacity is 75,000 units per year, and 15,000 have been ordered at special price of $14/Unit
1 What is the financial advantage (disadvantage) of accepting the special order?
2 Assume inventory includes 1,000 inferior units (previously made); what is the minimum selling price?
Given: Per Unit 15000 units On Own
Incremental sales 14
Incremental costs:
Direct materials 5.10
Direct labor 3.80
Variable manufacturing overhead 1.00
Variable selling and administrative 1.50
Total incremental costs
Financial advantage of accepting the special order
fixed selling and administrative are not relevant as they will occur regardless
2