ACC 241 Chapter 8 Homework
1. O’Conner Frozen Foods purchased new computer-controlled production machinery last year from Advanced
Enterprise.
a. Book value of old machine: not relevant
b. Added profits from the increase in production resulting from the new machine: relevant
c. Interest expense on new machine: relevant
d. Trade-in value of old machine: relevant
e. Maintenance cost of new machine: not relevant
f. Variable selling costs: relevant
g. Installation cost old machine: not relevant
h. Fixed selling costs: not relevant
i. Sales tax paid on old machine: not relevant
j. Cost of the new machine: relevant
k. Installation cost of new machine: relevant
2. Suppose the Baseball Hall of Fame in Cooperstown, NY, has approached Rec-Cardz with a special order. The
Hall of Fame wants to purchase 54,000 baseball card packs for a special promotional campaign & offers $0.41
per pack, a total of $22,140.
Rec-Cardz total production cost is $0.61 per pack, as follows:
Variable Costs:
Direct materials $0.14
Direct labor $0.07
Variable overhead $0.10
Fixed overhead $0.30
Total Cost $0.61
(a) prepare an incremental analysis to determine whether Rec-Cardz should accept the special sales order
assuming fixed costs would not be affected by the special order.
Incremental Analysis of Special-Sales Order
Decision
Per unit Total Order (54,000 Units)
Revenue from special order $0.41 (sales price per unit) $22,140
Less: Variable expense associated with the order
Variable manufacturing costs $0.31 (0.14 + 0.07 + 0.10) $16,740
Contribution Margin $0.10 $5400
Less: additional fixed expenses associated with
the order
0
Increase (decrease) in operating income from
the special order
$5400
Decision: Accept the special sales order
(b) now assume that the Hall of Fame wants special hologram baseball cards. Rec-Cardz must spend $4900 to
develop this hologram, which will be useless after the special order is completed. Prepare an incremental
analysis to determine whether Rec-Cardz should accept the special order under these circumstances.
Incremental Analysis of Special-Sales Order
Decision
Per unit Total Order (54,000 Units)
Revenue from special order $0.41 (sales price per unit) $22,140
Less: Variable expense associated with the order
Variable manufacturing costs $0.31 (0.14 + 0.07 + 0.10) $16,740
Contribution Margin $0.10 $5400
Less: additional fixed expenses associated with
the order
$4900
Increase (decrease) in operating income from
the special order
$500
Decision: Accept the special sales order
3. Top managers of Georgia Flooring are alarmed by their operating losses. They are considering dropping the
laminate flooring product line. Company accountants have prepared the following analysis to help make this
decision:
Georgia Flooring
Product Line Contribution Margin Income Statement
For the Year
Product Lines
Wood flooring Laminate flooring Company total
Sales revenue $303,000 $130,000 $433,000
Less: Variable Expenses $157,000 $86,000 $243,000
Contribution margin $146,000 $44,000 $190,000
Less fixed expenses:
Manufacturing $77,000 $59,000 $136,000
Marketing &
Administrative
$50,000 $7,000 $57,000
Operating income (loss) $19,000 $(22,000) $(3,000)
Total fixed costs will not change if the company stops selling laminate flooring
(a) Prepare in incremental analysis to show whether Georgia Flooring should discontinue the laminate flowing
product line. Will discontinuing laminate flooring add $22,000 to operating income? Explain.
Incremental Analysis for Discontinuation Decision Total
Contribution margin lost if laminate flooring product line is dropped $44,000
Less: Fixed cost savings if laminate flooring product line is dropped $0
Operating income (lost) if laminate flooring is dropped $44,000
Decision: do not drop laminate flooring product line.
It is incorrect to conclude that dropping laminate flooring would add $22,000 to operating income. If
the company discontinues the laminate flooring product line, it will still incur fixed expenses allocated
to laminate flooring.
(b) Assume that the company can avoid $26,000 of fixed expenses by discontinuing the laminate flooring
product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental
analysis to show whether the company should stop selling laminate flooring.
Incremental Analysis for Discontinuation Decision Total
Contribution margin lost if laminate flooring product line is dropped $44,00
0
Less: Fixed cost savings if laminate flooring product line is dropped $26,00
0
Operating income (lost) if laminate flooring is dropped $18,00
0
(c) Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be
avoided if the company stops selling laminate flooring. However, marketing has concluded that wood flooring
sales would be adversely affected by discontinuing the laminate flooring line (retailers want to buy both from
the same supplier). Wood flooring production & sales would decline 10%. What should the company do?
Incremental Analysis for Discontinuation Decision Total
Laminate flooring contribution margin lost if laminate flooring product line is dropped $44,00
0
Wood flooring contribution margin lost if laminate flooring product line is dropped $14,60
0
Less: fixed cost savings if laminate flooring product line is dropped $66,00
0
Operating income (gained) if laminate flooring is dropped $7400
Decision: Drop the laminate flooring product line because, assuming that all fixed costs assigned to the
laminate flooring product line can be avoided but that wood flooring production and sales would
decline 10%, the loss of contribution margin is now less than the fixed cost savings.
4. Each morning, Max Root stocks the drink case at Max’s Beach Hut in Galveston, Texas. Max’s Beach Hut has
115 linear feet of refrigerated display space for cold drinks. Each linear foot can hold either six 12-ounce cans
or three 20-ounce plastic or glass bottles.
The beverage stand sells three types of cold drinks: (1) Right – Cola in 12-oz. cans for $1.45 per can
(2) root beer in 20-oz. plastic bottles for $1.65 per
bottle
(3) tobe – cola in 20-oz. glass bottles for $2.10 per
bottle
Max’s Beach Hut pays its suppliers the following: (1) $0.10 per 12-0z. can of right – cola
(2) $0.45 per 20-oz. can of root beer
(3) $0.65 per 20-oz. bottle of tobe – cola
Max’s Beach Hut’s monthly fixed expenses include the following:
Hut Rental $380
Refrigerator Rental $60
Max’s Salary $1,750
Total Fixed Expenses $2,190
(a) what is the constraining factor at Max’s Beach Hut? What should Max stock to maximize profits? What is
the maximum contribution margin he could generate from refrigerated drinks each day?
The constraining factor is linear feet of shelf space. Max’s should stock the drink with the highest contribution
margin.
Complete the product mix analysis to determine which product would maximize Max’s profits.
Max’s Beach Hut
Product Mix Analysis
Right-cola 12 oz. cans Root beer 20 oz. bottles Tobe-cola 20 oz. bottles
Sales price per unit $1.45 $1.65 $2.10
Variable cost per unit 0.10 0.45 0.65
Contribution margin per
unit
1.35 1.20 1.45
Units per linear foot of
shelf space
X 6 X 3 X 3
Contribution margin per
linear foot of shelf space
$8.10 $3.60 $4.35
Right-Cola 12-oz. cans has the highest contribution margin per linear foot of shelf space. To maximize profits,
Max’s should devote all its shelf space to right-cola 12-oz. cans.
The maximum contribution margin that Max could generate each day from refrigerated drinks is (8.10 X 115) =
$932.
(b) to provide variety to customers, suppose Max refuses to devote more than 65 linear feet and no less than 5
linear feet to any individual product. Under this condition, how many linear feet of each drink should be
stocked? How many units of each product will be available for sale each day?
Show how Max should stock his shelves, based on each product’s contribution margin (CM):
1st stock maximum
constraint of
65 linear ft. with product
having the
Highest CM: 12 oz. cans of right-cola
Next minimum
constraint of
5 linear ft. with product
having the
Lowest CM: 20 oz. bottles of root
beer
Stock the remaining 45 linear ft. with product
having the
Middle CM: 20 oz. bottles of tobe-
cola
Now calculate the units available for sale based on the product mix determined above:
Units for sale
Right-cola in 12 oz. cans: (65 ft. X 6 per feet) = 390 cans
Root beer in 20 oz. bottles: (5 ft. X 3 per feet) = 15 bottles
Tobe-cola in 20 oz. bottles: (45 ft. X 3 per feet) = 135 bottles
(c) assuming the product mix calculated in Requirement 2, what contribution margin will be generated from
refrigerated drinks each day?
Contribution Margin
Right-cola in 12 oz. cans: (8.10 x 65 ft) = 527
Root beer in 20 oz. bottles: (3.60 X 5 ft) = 18
Tobe-cola in 20 oz. bottles: (4.35 X 45 ft) = 196
Total $741
5. Global Systems manufacturers an optical switch that it uses in its final product. Global Systems incurred the
following manufacturing costs when it produced 70,000 units last year:
Direct Materials $560,000
Direct labor $140,000
Variable MOH $70,000
Fixed MOH $420,000
Total Manufacturing cost for 70,000 units $1,190,000
Another company has offered to sell Global Systems the switch for $14.50 per unit
(a) given the same cost structure, should Global Systems make or buy the switch? Show your analysis.
Global Systems
Incremental Analysis for Outsourcing Decision
Make Unit Buy Unit Difference
Variable cost per unit:
Direct materials (560,000/70,000) = $8 $0 $8
Direct labor (140,000/70,000) = $2 $0 $2
Variable overhead (70,000/70,000) = $1 $0 $1
Purchase price from
outsider
$0 $14.50 $(14.50)
Total variable cost per $11.00 $14.50 $(3.50)
unit
Decision: Make the optical switch because the variable cost per unit to make the switch is less than the
variable cost per unit to buy the switch.
(b) Now assume that Global Systems can avoid $105,000 of fixed costs a year by outsourcing production. In
addition, because sales are increasing, Global Systems needs 75,000 switches a year rather than 70,000
switches. What should the company do now?
Complete an outsourcing analysis assuming fixed costs can be avoided by outsourcing production and the
number of units needed have increased.
Global Systems
Outsourcing Decision
Make Switches Buy Switches
Variable cost per unit $11 $14.50
Units needed 75,000 75,000
Total variable costs 825,000 1,087,500
Fixed costs 420,000 (420,000-105,000) = 315,000
Total relevant costs $1,245,000 $1,402,500
Decision: make the optical switch because the total relevant costs to make the switches are less than the total
relevant costs to buy the switches.
(c) given the last scenario, what is the most Global Systems would be willing to pay to outsource the switches?
Cost of making switches = cost of outsourcing switches
Variable costs + fixed costs = variable costs + fixed costs
Using the basic formula, you determined above, solve for the outsourcing cost at which Global Systems would
be indifferent between outsourcing and making the switches.
Cost if Making switches = Cost if outsourcing switches
(variable cost per unit X units) + Fixed Costs = (variable cost per unit X units) + Fixed costs
(11 X 75,000) + 420,000 = ( X x 75,000) + 315,000
Solve for X
825,000 + 420,000 = 75,000X + 315,000
1,245,000 = 75,000X + 315,000
930,000 = 75,000X
X = 12.4
Global Systems would be indifferent between outsourcing and making the switches if the outsourcing cost was
$12.40 per switch. Therefore, systems will only be willing to outsource if the outsourcing cost is less than
$12.40 per switch.
6. Best Systems manufacturers an optical switch that it uses in its final product. Best Systems incurred the
following manufacturing costs when it produced 72,000 units last year:
Direct materials $576,000
Direct labor $108,000
Variable MOH $72,000
Fixed MOH $504,000
Total Manufacturing Cost for 72,000 units $1,260,000
Another company has offered to sell Best Systems the switch for $12.50 per unit. If Best Systems buys the
switch from the outside supplier, none of the fixed costs are avoidable. The company prepared an outsourcing
decision analysis to show the cost per unit of making the switches vs the cost per unit of buying (outsourcing)
the switches.
Best Systems
Incremental Analysis for Outsourcing Decision
Make unit Buy unit Difference
Variable cost per unit:
Direct materials $8 $0 $8
Direct labor $1.50 $0 $1.50
Variable overhead $1 $0 $1
Purchase price from
outsider
0 $12.50 $(12.50)
Variable cost per unit $10.50 $12.50 $(2.00)
Best System needs 84,000 optical switches next year (assume same relevant range). By outsourcing them, Best
Systems can use its idle facilities to manufacture another product that will contribute $110,000 to operating
income, but none of the fixed costs will be avoidable. Should Best Systems make or buy the switches?
Best Systems
Best Use of Facilities Analysis
Make Buy & Use Facilities for Other
Product
Variable unit cost of obtaining the
optical switches
$10.50 $12.50
Number of optical switches X 84,000 X 84,000
Total variable cost of obtaining the
optical switches
$882,000 $1,050,000
Expected profit contribution from
the other product
0 (110,000)
Expected net cost of obtaining the
optical switches
$882,000 $940,000
Decision: make the optical switches
7. each batch processed at a cost of $820, yields 585 gallons of plain yogurt. The company sells the one-gallon
tubs for $5.00 each and spends $0.10 for each plastic tub. Management wonders if it would be more profitable
to sell individual-sized portions of fruited organic yogurt at local food stores. Organic maid could further
process each batch of plain yogurt into 12,490 individual portions (3/4 cup each) of fruited yogurt. A recent
market analysis indicates that demand for the product exists. Organic maid would sell each individual portion
for $0.40. packaging would cost $0.08 per portion, and fruit would cost $0.11 per portion. Fixed costs would
not change.
Sell as gallon-size containers Sell as individual portions
Sales revenue per unit $5 $0.40
Less: Additional processing costs
per unit – packaging
(0.10) (0.08)
Additional processing costs per
unit – adding fruit
0 (0.11)
Net benefit per unit $4.90 $0.21
Number of units produced per
batch
585 12,480
net benefit per batch $2,867 $2,621
