managerial accounting

1. Plastic Chairs manufactures plastic lawn chairs using a combination of new and recycled plastic.

Varying amounts of each type of plastic can be used to produce a batch of 100 chairs. The following

table lists the various combinations of recycled and new plastic required to produce one batch of

100 chairs.

Pounds of New and Recycled Plastic Required

to Manufacture One Batch of 100 Chairs

POUNDS OF NEW PLASTIC	POUNDS OF RECYCLED PLASTIC
20	72
24	60
30	48
32	45
36	40
40	36
45	32
48	30
60	24
72	20

New plastic costs $16 per pound and recycled plastic costs $10 per pound. The manager of

the chair manufacturing department receives a bonus based on minimizing the cost per batch

of 100 chairs.

Required:

a. What combination of new and recycled plastic will the manager of the chair manufacturing

department choose?

b. Overhead (including plant administration, utilities, property taxes, and insurance) is allocated

to the chair manufacturing department based on the number of pounds of recycled

plastic used in each batch. For each pound of recycled plastic used, the chair manufacturing

department is charged $30 of plant overhead. What combination of new and recycled

plastic will the manager of the chair manufacturing department select if the manager’s

bonus is based on minimizing the total cost per batch, which includes new and recycled

plastic and plant overhead?

c. Why are your answers to parts (a) and (b) either the same or different?

d. Should the plastic chairs manufacturing manager’s bonus be based on minimizing only

the plastic costs or should it also be based on minimizing plastic costs plus allocated plant

overhead?

2. Choosing among alternative cost allocation methodologies typically is based on one of the following criteria: cause-and-effect, benefits derived, fairness, or ability to bear. Discuss how the “fairness” criterion can be used in selecting a cost allocation methodology.