Excel/Accounting Conversion

Problem 7-22

1. The fixed overhead costs are common and will remain the same regardless of whether the cartridges are produced internally or purchased outside. Hence, they are not relevant. The variable manufacturing overhead cost per box of pens is $0.30, as shown below:

The total variable cost of producing one box of Zippo pens is:

If the cartridges for the Zippo pens are purchased from the outside supplier, then the variable cost per box of Zippo pens would be:

The company should reject the outside supplier’s offer. Producing the cartridges internally costs $0.05 less per box of pens than purchasing them from the supplier.

Another approach to the solution is:

Note that the avoidable cost of $0.43 above represents the cost of making one box of cartridges internally.

2. The company would not want to pay any more than $0.43 per box, since it can make the cartridges for this amount internally.

3. The company has three alternatives for obtaining the necessary cartridges. It can:

The costs under the three alternatives are:

Or, in terms of total cost per box of pens, the answer would be:

Thus, the company should accept the outside supplier’s offer, but only for 50,000 boxes of cartridges.

4. In addition to cost considerations, Bronson should take into account the following factors:

a) The ability of the supplier to meet required delivery schedules.

b) The quality of the cartridges purchased from the supplier.

c) Alternative uses of the capacity that is used to make the cartridges.

d) The ability of the supplier to supply cartridges if volume increases in future years.

e) The problem of alternative sources of supply if the supplier proves undependable.

Problem 13-21

* Direct labor cost per unit ÷ $12.00 per direct labor-hour

3. Since the Cari doll has the lowest contribution margin per labor hour, its production should be reduced by 17,000 dolls (11,900 excess DLHs ÷ 0.70 DLH per doll = 17,000 dolls). Thus, production and sales of the Cari doll will be reduced to 23,000 dolls for the year.

4. Since the additional capacity would be used to produce the Cari doll, the company should be willing to pay up to $21.00 per DLH ($12.00 usual labor rate plus $9.00 contribution margin per DLH) for added labor time. Thus, the company could employ workers for overtime at the usual time-and-a-half rate of $18.00 per hour ($12.00 × 1.5 = $18.00) and still improve overall profit.

5. Additional output could be obtained in a number of ways including working overtime, adding another shift, expanding the workforce, contracting out some work to outside suppliers, and eliminating wasted labor time in the production process. The first four methods are costly, but the last method can add capacity at very low cost.

Technical note: Some would argue that direct labor is a fixed cost in this situation and should be excluded when computing the contribution margin per unit. However, when deciding which products to emphasize, no harm is done by misclassifying a fixed cost as a variable cost—providing that the fixed cost is the constraint. If direct labor were removed from the variable cost category, the net effect would be to bump up the contribution margin per direct labor-hour by $12.00 for each of the products. The products will be ranked exactly the same—in terms of the contribution margin per unit of the constrained resource—whether direct labor is considered variable or fixed. However, if labor is not fixed and is not the constraint, including labor cost in the calculation of the contribution margin may lead to incorrect rankings of the products.

Problem 8-24

1. The income statement would be:

*¥180,000 ÷ 5 years = ¥36,000 per year

2. The simple rate of return would be: