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    Chapter 3 Solutions

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    Fathi Radi
    This document summarizes key concepts from Chapter 3 of Atkinson's Management Accounting textbook. It discusses how variable costs increase proportionally with activity level while fixed costs do not vary in the short run. Contribution margin per unit is defined as the difference between revenue per unit and variable cost per unit. Break-even point is the volume at which revenues equal total costs. Mixed costs have both fixed and variable components. Step variable costs increase in fixed increments. Sunk costs cannot be recovered and are therefore not relevant to decision making, though some managers consider them relevant for qualitative reasons. Avoidable costs are relevant if they can be eliminated by a decision.

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    Chapter 3 Solutions

    Uploaded by

    Fathi Radi
    4K views50 pages
    This document summarizes key concepts from Chapter 3 of Atkinson's Management Accounting textbook. It discusses how variable costs increase proportionally with activity level while fixed costs do not vary in the short run. Contribution margin per unit is defined as the difference between revenue per unit and variable cost per unit. Break-even point is the volume at which revenues equal total costs. Mixed costs have both fixed and variable components. Step variable costs increase in fixed increments. Sunk costs cannot be recovered and are therefore not relevant to decision making, though some managers consider them relevant for qualitative reasons. Avoidable costs are relevant if they can be eliminated by a decision.

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    This document summarizes key concepts from Chapter 3 of Atkinson's Management Accounting textbook. It discusses how variable costs increase proportionally with activity level while fixed costs do not vary in the short run. Contribution margin per unit is defined as the difference between revenue per unit and variable cost per unit. Break-even point is the volume at which revenues equal total costs. Mixed costs have both fixed and variable components. Step variable costs increase in fixed increments. Sunk costs cannot be recovered and are therefore not relevant to decision making, though some managers consider them relevant for qualitative reasons. Avoidable costs are relevant if they can be eliminated by a decision.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    4K views50 pages

    Chapter 3 Solutions

    Uploaded by

    Fathi Radi
    This document summarizes key concepts from Chapter 3 of Atkinson's Management Accounting textbook. It discusses how variable costs increase proportionally with activity level while fixed costs do not vary in the short run. Contribution margin per unit is defined as the difference between revenue per unit and variable cost per unit. Break-even point is the volume at which revenues equal total costs. Mixed costs have both fixed and variable components. Step variable costs increase in fixed increments. Sunk costs cannot be recovered and are therefore not relevant to decision making, though some managers consider them relevant for qualitative reasons. Avoidable costs are relevant if they can be eliminated by a decision.

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    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
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    The key takeaways are about using different types of costs like variable, fixed, and mixed costs in decision making processes like pricing, budgeting, and evaluating profitability.

    Variable costs are costs that change with activity level while fixed costs do not change in the short run. Variable costs increase proportionally with production while fixed costs depend on capacity acquired.

    Contribution margin per unit is the difference between revenue per unit and variable cost per unit. It indicates how much total contribution margin increases with an additional unit sold.

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    Chapter 3
    Using Costs in Decision Making

    QUESTIONS 3-1 Cost information is used in pricing, product planning, budgeting, performance evaluation, and contracting. Examples of specific uses of cost information include deciding whether to introduce a new product or discontinue an existing product (given the price structure), assessing the efficiency of a particular operation, and assessing the cost of serving customer segments. Variable costs are costs that increase proportionally with changes in the activity level of some variable. Fixed costs are costs that in the short run do not vary with a specified activity. Fixed costs depend on how much of the resource (capacity) is ac uired, rather than on how much is used. Contribution margin per unit, which is the difference between revenue per unit and variable cost per unit, is the contribution that each unit ma!es to covering fixed costs and generating a profit. "he contribution margin is therefore an important component of the e uation to determine the brea!even point and to understand the effect on profit of proposed changes, such as changes in sales volume in response to changes in advertising or sales prices. Contribution margin per unit is the difference between revenue per unit and variable cost per unit. "he contribution margin per unit indicates how much the total contribution margin will increase with an additional unit of sales. "he contribution margin ratio expresses similar ideas, but as a percentage of sales dollars. #pecifically, the contribution margin ratio is the total contribution margin divided by total sales dollars (or contribution margin per unit divided by sales price per unit), and indicates how much the total contribution margin increases with an additional dollar of sales revenue. $n evaluating whether a business venture will be profitable, the brea!even point is the volume at which the profit e uals %ero, that is, revenues e ual total costs.
    & '( &

    3-2

    3-3

    3-4

    3-5

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-6

    ) mixed cost is a cost that has a fixed component and a variable component. For example, utilities bills may include a fixed component per month plus a variable component that depends on the amount of energy used. ) step variable cost increases in steps as uantity increases. For example, one supervisor may be hired for every (* factory wor!ers. +ixed costs and step variable costs both have elements of fixed and variable costs. ,owever, mixed costs have distinct fixed and variable components, with fixed costs that are constant over a fairly wide range of activity (for a given time period) and variable costs that vary in proportion to activity. #tep variable costs are fixed for a fairly narrow range of activity and increase only when the next step is reached. Step variable costs are fixed for a fairly narrow range of activity and increase when the next step is reached. For example, one supervisor may be hired for every (* factory wor!ers. Fixed costs are costs that in the short run do not vary with a specified activity for a wide range of activity. For example, factory rent per month would li!ely remain unchanged as production increased or decreased, even if by large amounts. Incremental cost is the cost of the next unit of production and is similar to the economist-s notion of marginal cost. $n a manufacturing setting, incremental cost is often defined as a constant variable cost of a unit of production. ,owever, in some situations, the variable cost of a unit of production may be more complicated. For example, the variable cost of labor per unit may decrease over time if wor!ers become more efficient (a learning effect. )lternatively, the variable cost of labor per unit will change during overtime hours if wor!ers receive an overtime premium (commonly '*.). Finally, some costs exhibit step/ variable behavior, as when one supervisor can supervise a uantity of employees but an additional supervisor is needed beyond a certain number of employees. $n evaluating the different alternatives from which managers can choose, it is better to focus only on the relevant costs that differ across different alternatives because it does not divert the manager-s attention with irrelevant facts. $f some costs remain the same regardless of what alternative is chosen, then those costs are not useful for the manager-s decisions, as they are not affected by the decision. "herefore, it is better to omit them from the cost analysis used to support the decision. +oreover, resources are not expended to find or prepare irrelevant information.

    3-7

    3-8

    3-9

    3-10 #un! costs are costs that are based on a previous commitment and cannot be recovered. For example, depreciation on a building reflects the historical cost of the building, which is a sun! cost. "herefore, they are not relevant costs for the decision.
    & '0 &

    Chapter ! "sing Costs in #ecision Making

    3-11 "he general principal is that sun! costs are not relevant costs. 1ut, some managers may consider sun! costs to be relevant because they may be concerned about how others will perceive their original decision to incur these costs, and may want to cover up their initial poor 2udgment. +anagers may also feel that they do not want to waste the sun! costs by giving up on the possibility of some benefit from the invested funds, or may continue to believe in potential success despite overwhelming evidence to the contrary. )lso, managers may be embarrassed and unwilling to admit they made a mista!e. 3-12 3o, fixed cost are not always irrelevant. For example, in comparing the status uo and a proposal to substantially increase the uantity of goods or services provided, additional fixed costs (that is, costs not proportional to volume) may be incurred to provide the increased uantity. #uch costs might include a large expenditure for more e uipment or expanded factory facilities. 3-13 )n opportunity cost is the maximum value forgone when a course of action is chosen. 3-14 4es, avoidable costs are relevant because they can be eliminated when, for example, a part, product, product line, or business segment is discontinued. 3-15 $n the context of a ma!e or buy decision, fixed costs such as production engineering staff salaries are relevant if these costs can be eliminated by assigning the staff to other tas!s, or by laying off the engineers not re uired when a part is outsourced. $f it is possible to find an alternative use for the facilities made available because of the elimination of a product or a component, the associated fixed costs also are relevant. Conversely, fixed costs that cannot be eliminated or used for other productive purposes are not relevant for the decision. For example, if factory facilities would remain idle if the company buys from outside, then the associated costs are not relevant for the decision. 3-16 "here are several ualitative considerations that must be evaluated in a ma!e/or/ buy decision. For example, one must uestion whether the outside supplier has uoted a lower price to obtain the order, and plans to increase the price. )lso, the reliability of the supplier in meeting the re uired uality standards and in ma!ing deliveries on time is important. 3-17 5hen a decision to outsource frees up space to produce an alternative product, then the contribution margin on the alternative product is a relevant opportunity cost for the 6ma!e7 alternative in a ma!e/or/buy decision.
    & '8 &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-18 ) difficulty that arises with respect to revenue when analy%ing whether to drop a product or department is whether sales by one organi%ational unit can affect sales in another organi%ational unit. ) difficulty that arises with respect to cost analysis is that many product costs, such as machine and factory depreciation, are the result of sun! costs that often remain in whole or in part after the product is discontinued. "he analysis of what costs are avoided when a product is dropped can be difficult due to the closing of plants, severance pay and environmental cleanup costs. 3-19 "he answer depends on the time frame and context considered. For example, a one/time order that covers variable production (and selling costs) is advantageous if capacity cannot be changed in the short run and excess capacity exists. )lso, for given capacity with one scare resource, maximi%ing contribution margin per unit of scarce resource will maximi%e profit. $n the long run, prices must cover all their costs, both fixed and variable, in order for the firm to survive. 3-20 3o. 9roducts should be ran!ed by the contribution margin per unit of the constrained resource rather than by the contribution margin per unit of the product. 3-21 4es. 5hen capacity is fixed in the short run, the firm may need to sacrifice the production of some profitable products to ma!e capacity available for a new order. "he contribution margin on the production of profitable products sacrificed for a new order is an opportunity cost that must be considered to evaluate the profitability of the new order. 3-22 "he three components of a linear program are the ob2ective function, the decision variables, and the constraints.

    & '' &

    Chapter ! "sing Costs in #ecision Making

    EXERCISES 3-23 (a) (b) (c) (d) (e) (f) (g) (h) (i) (2) (!) (l) 3-24 (a) (b) (c) (d) (e) (f) (g) (h) 3-25 1urger ingredients Coo!s- wages #erver-s wages ;anitor-s wages <epreciation on coo!ing e uipment 9aper supplies (wrapping, nap!ins, and supplies) =ent )dvertisement in local newspaper Variable Fixed Fixed Fixed Fixed Variable Fixed Fixed Fixed Variable Variable Fixed Fixed Variable Variable Fixed or variable (if number of production wor!ers can vary in the short run): Fixed Variable Fixed Variable Variable Fixed Fixed or variable (if number of billing cler!s can vary in the short run) Fixed Fixed Variable Fixed Fixed (with respect to a unit of product, as stated in the problem. ,owever, gasoline costs will vary with miles driven.)

    & '> &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-26 (a)

    Contribution margin per unit ? @A,*** & @'** & @A** ? @8** Contribution margin ratio ? (Contribution margin)B#ales ? @8**B@A,*** ? *.8*

    (b)

    Cet $ ? the number of units sold to brea! even #ales revenue & Costs ? $ncome (9rice D Euantity) & Variable costs & Fixed costs ? $ncome @A,***$ & @>**$ & @0,'**,*** ? @* @8**$ & @0,'**,*** ? * $ ? F,G'* units 1ecause the variable cost per unit will decrease, the contribution margin per unit will increase. "he brea!even point e uals (fixed costs)B (contribution margin), so the brea!even point will decrease. #pecifically, the new contribution margin per unit is @A,*** & @8'* & @A** ? @8'* and the new brea!even point is @0,'**,***B@8'* ? G,GGF units (rounded). Cet % = charges per patient/day. (',8** %) (',8** @'**) @(,***,***) ? * ',8** (% @'**) ? @(,***,*** % @'** & @(,***,***B',8** ? @0G*.0G % ? @FG*.0G

    (c)

    3-27 (a)

    (b)

    Cet $ ? the average number of patient days per month necessary to generate a target profit of @8',*** per month =evenue & Costs ? $ncome (9rice D Euantity) & Variable costs & Fixed costs ? $ncome @(,***$ & @'**$ & @(,***,*** ? @8',*** @A,'**$ ? @(,***,*** H @8',*** ? @(,*8',*** $ ? A,0>0 patient days (rounded)

    & 'G &

    Chapter ! "sing Costs in #ecision Making

    3-28 (a)

    Contribution margin per unit ? @0* & @AI.'* ? @A*.'* Contribution margin ratio ? (Contribution margin)B#ales ? @A*.'*B@0* ? *.0'

    (b)

    Cet $ ? the number of units sold to brea! even #ales revenue & Costs ? $ncome (9rice D Euantity) & Variable costs & Fixed costs ? $ncome @0*$ & @AI.'*$ & @A8G,*** ? @* @A*.'*$ & @A8G,*** ? * $ ? A8,*** units Cet $ ? the number of units sold to generate revenue necessary to earn pretax income of (*. of revenue #ales revenue & Costs ? $ncome (9rice D Euantity) & Variable costs & Fixed costs ? $ncome @0*$ & @AI.'*$ & @A8G,*** ? *.( D @0*$ @A*.'*$ & @A8G,*** ? @>$ $ ? 0(,>>G units (rounded) <esired revenue ? @0*$ ? @0* D 0(,>>G ? @IF*,*A* )lternatively, let ' ? sales revenue necessary to earn pretax income of (*. of revenue #ales revenue & Variable costs & Fixed costs ? $ncome ' & *.>'' & @A8G,*** ? *.(' ' ? @A8G,***B*.A' ? @IF*,***

    (c)

    (d)

    Cet $ ? the number of units sold to generate after/tax profit of @A*I,(** (1efore/tax income) (A & *.0') ? @A*I,(** 1efore/tax income ? @A*I,(**B*.>' ? @A>F,*** @0*$ & @AI.'*$ & @A8G,*** ? @A>F,*** @A*.'*$ ? @0A',*** $ ? @0A',***B@A*.'* ? 0*,*** units Cet ( ? necessary increase in sales units $ncremental sales revenue & $ncremental variable costs & $ncremental fixed costs ? @* @0*( & @AI.'*( & @0F,'** ? @* ( ? 0,>>G units (rounded)
    & 'F &

    (e)

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-29 (a)

    Cet ' ? sales dollars necessary for a before/tax target profit of @('*,*** "he contribution margin ratio ? (@A,(>*,*** & @'G*,***)B@A,(>*,*** ? *.'8G>AI (rounded). #ales revenue & Variable costs & Fixed costs ? $ncome Contribution margin & Fixed costs ? $ncome *.'8G>AI ' & @8F*,'** ? @('*,*** ' ? (@('*,*** H @8F*,'**)B*.'8G>AI ' ? @A,000,I'>.>*

    (c) Cet ' ? sales dollars necessary to brea! even Contribution margin & Fixed costs ? * *.'8G>AI ' & @8F*,'** ? @* ' ? @8F*,'**B*.'8G>AI ' ? @FGG,808.F' 3-30 "he sales mix in units is 0B' <omestic and (B' $nternational. "he <omestic C+ ? @'* & @0* ? @(*: the $nternational C+ ? @8* & @A> ? @(8 Cet $ ? total number of units that must be sold in the $nternational mar!et to earn @(**,*** before taxes, assuming the stated sales mix "otal C+ & Fixed costs ? @(**,*** (@(* A.'$) H @(8$ J @',***,*** J @A,(F*,***? @(**,*** @'8$ & @>,8F*,*** $ & @>,8F*,***B@'8 ? A(*,*** units in the $nternational mar!et A.' $ & AF*,*** units in the <omestic mar!et E uivalently, one can compute a weighted average unit C+K (0B') D (@(*) H ((B') D (@(8) ? @(A.>* Cet ( ? total number of units that must be sold to earn @(**,*** before taxes, assuming the stated sales mix "otal C+ & Fixed costs ? @(**,*** @(A.>*( J @',***,*** J @A,(F*,***? @(**,*** @(A.>*( & @>,8F*,*** ( ? 0**,*** units, which consists of 0B' or AF*,*** units in the <omestic mar!et and (B' or A(*,*** units in the $nternational mar!et

    & 'I &

    Chapter ! "sing Costs in #ecision Making

    3-31

    (a) Lnits sold #ales mix percentageM

    )lligators A8*,*** .G 5eighted averageMM

    <olphins >*,*** .0 5eighted averageMM @('.** @A*.** @A'.** @G.'* @0.** @8.'*

    "otal (**,***

    #um of weighted averages @(A.'* @ F.>* @A(.I*

    #ales price per unit Variable costs per unit Lnit C+

    @(*.** @ F.** @A(.**

    @A8.** @ '.>* @ F.8*

    M A8*,***B(A8*,*** H >*,***) ? .G: >*,***B(A8*,*** H >*,***) ? .0 MM @(* D .G ? @A8: @F D .G ? @'.>*: @(' D .0 ? @G.'*: @A* D .0 ? @0

    1rea!even units ? @A,(I*,***B@A(.I* ? A**,*** units. Nf these, A**,*** D .G ? G*,*** will be alligators and A**,*** D .0 ? 0*,*** will be dolphins. (b) Lnits sold #ales mix percentageM )lligators >*,*** .0 5eighted averageMM #ales price per unit Variable costs per unit Lnit C+ @(*.** @ F.** @A(.** @>.** @(.8* @0.>* @('.** @A*.** @A'.** <olphins A8*,*** .G 5eighted averageMM @AG.'* @ G.** @A*.'* #um of weighted averages @(0.'* @ I.8* @A8.A* "otal (**,***

    M >*,***B(A8*,*** H >*,***) ? .0: A8*,***B(A8*,*** H >*,***) ? .G MM @(* D .0 ? @>: @F D .0 ? @(.8*: @(' D .G ? @AG.'*: @A* D .G ? @G

    & >* &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    1rea!even units ? @A,(I*,***[email protected]* ? IA,8FI.0>, which we round up to IA,8I* units. Nf these, IA,8I* D .0 ? (G,88G will be alligators and IA,8I* D .G ? >8,*80 will be dolphins. (c) $n part (b), the sales mix percentage for the higher/C+ product (dolphins) is greater than in part (a). Conse uently, fewer total units are re uired to brea! even (IA,8I* in part (b) versus A**,*** in part (a)). "otal #ales 5ithout #pecial 9romotion @A.*I (*,*** = @(A,F** O "otal #ales 5ith #pecial 9romotion @*.>I (8,*** = @A>,'>* O

    3-32
    9roduct

    ,amburgers Chic!en #andwiches French fries

    <ifference (@',(8*) O (A,*0() (,A0> (@8,A0>)

    A.(I A*,*** = @A(,I** A.(I I,(** = @AA,F>F *.FI (*,*** = @AG,F***.FI ((,8** = @AI,I0>

    9roduct

    ,amburgers Chic!en #andwiches French fries

    Variable Costs 5ithout #pecial 9romotion @*.'A (*,*** = @A*,(** O

    Variable Costs 5ith #pecial 9romotion @*.'A (8,*** = @A(,(8* O

    <ifference (@(,*8*) O '*8 (FFF) (@(,8(8) @8,A0> (,8(8 @>,'>* 8,'** (@AA,*>*)

    *.>0 A*,*** = @>,0** *.>0 I,(** = @',GI> *.0G (*,*** = @G,8** *.0G ((,8** = @F,(FF

    <ecrease in sales with special promotion $ncrease in variable costs with special promotion <ecrease in contribution margin with special promotion $ncremental advertising expenses with special promotion <ecrease in profit with special promotion

    "herefore, )ndrea should not go ahead with this special promotion. ) countervailing argument is the creation of new customers who may stay with the firm and generate additional contribution margin in the future.
    & >A &

    Chapter ! "sing Costs in #ecision Making

    3-33 (a)

    ,ealthy ,earth has sufficient excess capacity to handle the one/time (short/run) order for A,*** meals next month. Conse uently, the analysis focuses on incremental revenues and costs associated with the orderK $ncremental revenue per meal $ncremental cost per meal $ncremental contribution margin per meal 3umber of meals $ncrease in contribution margin and operating income @0.'* 0.** @*.'* D A,*** @ '**

    ,ealthy ,earth will be better off by @'** with this one/time order. 3ote that total fixed costs remain unchanged, so it is sufficient to evaluate the change in the contribution margin. $f the order had been long/term, ,ealthy ,earth would need to evaluate whether the price provides the desired profitability considering the fixed costs and whether filling the government order might re uire giving up higher/priced regular sales. (b) ,ealthy ,earth has insufficient excess capacity to handle the one/time order for A,*** meals next month, and must give up regular sales of '** meals at @8.'* each, resulting in an opportunity cost. $ncremental contribution margin from one/time order $ncremental revenue per meal $ncremental cost per meal $ncremental contribution margin per meal 3umber of meals $ncrease in operating income from one/time order Npportunity cost Cost contribution margin on regular salesK '** D (@8.'* & @0.**) Change in contribution margin and operating income @0.'* 0.** @*.'* A,*** @'** @(G'*) @(('*)

    3ow, ,ealthy ,earth will be worse off by @('* with this one/time order. )gain, total fixed costs remain unchanged, so it is sufficient to evaluate the change in the contribution margin. 3-34 (a) =elevant costsK P P P P )c uisition cost of Ford Escort =epairs on the $mpala )nnual operating costs on the Ford Escort )nnual operating costs on the $mpala
    & >( &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    $rrelevant costsK P (b) )c uisition cost of $mpala

    <on will buy the Ford Escort if he bases the decision only on the available cost information. 4ear AK ($f <on buys the Ford Escort) Cash savingsK =epairs on the $mpala Nperating costO$mpala Cash expendituresK )c uisition costOFord Escort Nperating costOFord Escort First 4ear #avings @',8** (,I** F,0** ',8** A,F** G,(** @A,A**

    (c)

    )dditional uantitative considerationsK A. (. 0. 3umber of years before car is replaced (decision hori%on). Expected resale values of both cars when they will be replaced. Cost of capital (interest rate) to consider the time value of money. ("his topic is covered in other courses.) #ub2ective preference for driving an $mpala rather than a Ford Escort. )s $s =ewor! @A*.** @'.'*M @8.'*

    Eualitative considerationK A. 3-35 9er Lnit #ales price =ewor! cost 3et after rewor!
    M'',*** Q A*,***

    Rilmar! should rewor! the lamps. 3-36 (a) "he original cost of @'*,*** and accumulated depreciation of @8*,*** are sun!, and therefore irrelevant, when the choice is between overhauling the
    & >0 &

    Chapter ! "sing Costs in #ecision Making

    old machine and replacing it with a new machine. 3ote that the annual operating costs (before overhaul) of @AF,*** are not sun! costs, yet they are irrelevant. (b) =elevant costs include the ac uisition cost of the new machine, the cost of overhauling the old machine, current salvage of @8,*** for the old machine (all of which are up/front costs), salvage value at the end of five years for the new and overhauled machines, and the annual operating costs for both the new machine and the overhauled old machine. 3et ac uisition cost #alvage value at the end of ' years Nperating costs for ' years "otal relevant costs
    a b c

    (c)

    =eplacement @>>,***a ('**) >',***b @A0*,'**

    Nverhauling @(',*** ((**) G*,***c @I8,F**

    @G*,*** & @8,*** ? @>>,*** @A0,*** ' ? @>',*** @A8,*** ' ? @G*,***

    $t costs +cSinnon Company @0',G** more with the new grinding machine than overhauling the old one. "herefore, the plant manager should overhaul the old grinding machine. ,owever, this analysis is incomplete as it ignores the time value of money, considered in net present value analysis, which is covered in other courses.

    & >8 &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-37 Cash inflow: #ale of old machine #aving because old machine not repaired #alvage value of new machine <ecrease in annual operating costs Cash outflow: 9urchase of new machines

    4ear A @8*,*** (*,***

    4ear (

    4ear 0

    4ear 8

    4ear ' (',***)

    @A*,*** (*,*** @(*,*** @(*,*** @(*,*** @(*,***

    (A(*,***) 3et cash inflow (outflow) Cumulative cash inflow (outflow)

    * *

    * * @(*,*** @(',*** @(*,*** @8',***

    (@8*,***)

    @(*,***

    @(*,*** @ *

    (@8*,***) (@(*,***)

    ;oyce 9rinters should replace the machines if they expect to use the new machines for more than three years. () more complete evaluation would use net present value analysis, which is covered in other courses.) 3-38 #mart phonesK @A8* '*,*** ComponentK @0'.** '*,*** @08.** '*,*** =elevant costs $nsource (+a!e) @G,***,*** A,G'*,*** @F,G'*,*** $nsource (+a!e) @G,***,*** A,'**,***
    & >' &

    Nutsource (1uy) @G,***,***

    A,G**,*** @F,G**,*** Nutsource (1uy) @G,***,***

    #mart phonesK @A8* '*,*** ComponentK @0*.** '*,***

    Chapter ! "sing Costs in #ecision Making

    @08.** '*,*** =elevant costs 3-39 (a) (b)

    A,G**,*** @F,'**,*** @F,G**,***

    )ssumptions need to be made about the avoidability of the fixed overhead costs if Sane outsources the component. $f the variable costs (direct materials, direct labor, and variable overhead) are all avoidable, then Sane will certainly reduce costs by outsourcing the component. Fixed overhead costs may be unavoidable if the facility cannot be converted to alternative uses when the component is outsourced. ,owever, even if the fixed overhead costs are unavoidable, Sane would reduce costs by outsourcing. $n this case, the cost savings per unit if the component is outsourced would beK 9urchase price )voidable costs (@G0.A* & @>.I*) #avings per unit @>8.'* >>.(* @A.G*

    (c)

    Nther factors relevant to the decision are the supplier-s ability to live up to expected uality and delivery standards, and the li!elihood of suppliers increasing prices of components in the near future. 9remier should ma!e the gear model R0G because it costs @FG,*** less to ma!e than to buy. (Fixed overhead is irrelevant and may be dropped from the analysis.)

    3-40

    Cost of purchaseK @A(* (*,*** ? <irect material costK @'' (*,*** ? <irect labor costK @0* (*,*** ? Variable overheadK @(' (*,*** ? Fixed overhead @A' (*,*** ? #avings in facility/sustaining costs =elevant costs

    +a!e @A,A**,*** >**,*** '**,*** 0**,*** O @(,'**,***

    1uy @(,8**,*** O O 0**,*** (AA0,***) @(,'FG,***

    & >> &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-41 (a) "he offer by #uperior Compressor should not be accepted if fixed overhead costs are unavoidable. Cost per unit Cost of purchase Variable costK <irect material <irect labor Variable overhead =elevant cost per unit (b) +a!e 1uy @(**

    @ F* >* '> @AI> @(**

    "he maximum acceptable purchase price is @(A0 per unit if the plant facilities are fully utili%ed at present and the incremental cost of adding more capacity is approximated well by the @AG per unit fixed overhead cost. "he billiards segment currently produces a segment margin of @8*,*** J @(',*** ? @A',***, so the bar-s segment margin would have to increase by at least that amount in order for the grill-s income to be at least as high as it is now.

    3-42 (a)

    (b) Reorge should consider the effect on the other two segments- revenues if he drops the billiards segment. $t may be that the availability of billiards attracts customers to the bar and restaurant segments. "raditional segment margin analysis as in part (a) does not capture such interactive effects. 3-43 $n order to accept the new order for A,'** modules next wee!, +cRee must give up regular sales of '** modules per wee!. Variable costs are @F** per module (@(,8**,***B0,*** modules). "he contribution margin per unit on regular sales is @I** & @F** ? @A** per module. "herefore, the opportunity cost (lost C+) of accepting the new order is '**(@A**) ? @'*,***, and +cRee will be indifferent between filling the special order and not filling the special order when the contribution margins of the two alternatives are e ual (fixed costs will remain unchanged). "hat is, +cRee will be indifferent at a price 9 where A,'**(9 & @F**) ? @'*,***, or 9 ? @F00.00. "his is the floor price that +cRee should charge for the new order.

    & >G &

    Chapter ! "sing Costs in #ecision Making

    3-44 "his order will re uire '** ? ' D (A*,*** Q A**) machine hours. #ince there is excess capacity of F** ? 8,*** D (A**. J F*.) machine hours per month, #horewood #hoes Company can accept this order without expanding its capacity. "herefore, #horewood should charge at least as much as the incremental variable costs for this order. <irect material <irect labor Variable manufacturing overhead )dditional cost of embossing the private label +inimum price to be charged for this order @>.** 8.** (.** *.'* @A(.'*

    #horewood-s costs stated in the problem are average costs per pair of shoes. #horewood should determine whether the costs are reasonably accurate for the discount store-s order. #horewood should also consider how its regular customers might react to the lower price offered to the discount store. 3-45 $ncremental variable costs ? (@A> H @' H @0) D A*,*** ? @(8 D A*,*** ? @(8*,***. $ncremental revenue ? @8* D A*,*** ? @8**,***. 1erry-s operating income will increase by @A>*,*** if it accepts this offer. 3-46 (a) Variable cost per unit ? @AIF,*** Q 0>,*** ? @'.'*. #ales (0*,*** units D @A* and 0*,*** units D @I) Variable manufacturing and selling costs (>*,*** units D @'.'*) Contribution margin Fixed costs Nperating income (00*,***) @(8*,*** (II,***) @A8A,*** @'G*,***

    $f =itter accepts the export order, its operating income will increase by @GF,*** ? @A8A,*** J @>0,***. )lthough =itter-s operating income will increase with the special order, =itter must consider the long/run effect of displeasing its regular domestic customers by not fulfilling their demand.
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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    (b)

    #ales (0>,*** units D @A* and 0*,*** units D @I) Variable manufacturing and selling costs (>>,*** units D @'.'*) Contribution margin Fixed costsK @II,*** + @(',*** Nperating income

    @>0*,*** (0>0,***) @(>G,*** A(8,*** @A80,***

    $f =itter operates the extra shift and accepts the export order, operating income will increase by @F*,***. =itter should consider whether the same uality will be achieved with new operators or existing operators wor!ing overtime (with possible fatigue). $n addition, =itter should understand whether the additional fixed costs will be incurred on a continuing basis or are avoidable when production drops bac! to its previous level. Finally, =itter should also consider the effect of this price reduction on regular customers. 3-47 (a) #uperstore faces a problem of maximi%ing contribution margin per unit of scarce resource. ,ere, the scarce resource is shelf space. #uperstore re uires at least (8 s uare feet for each category. "he store manager should assign additional available space to the category with the highest contribution margin per s uare foot, i.e., ice cream. )fter assigning a total of A** s uare feet to ice cream, there is sufficient available shelf space to assign a total of A** s uare feet to fro%en dinners and (> s uare feet to 2uices. "he fro%en vegetable receives the minimum re uired assignment of (8 s uare feet. $ce Cream ;uices #elling price per unit (s uare/foot pac!age) Variable costs per unit (s uare/foot pac!age) Lnit C+ (s uare/foot pac!age) +inimum re uired +aximum allowed )llocation to maximi%e total C+
    & >I &

    Fro%en <inners @(8.** @(*.'* @0.'* (8 A** A**

    Fro%en Vegetables @I.** @G.** @(.** (8 A** (8

    @A(.** @F.** @8.** (8 A** A**

    @A0.** @A*.** @0.** (8 A** (>

    Chapter ! "sing Costs in #ecision Making

    (b)

    $n setting the minimum re uired and maximum allowed s uare footage per category, the manager might consider seasonality (for example, permitting more ice cream space during the summer or more fro%en vegetable space during the winter) and the effect on contribution margins of variability in costs and prices. "he analysis does not ta!e into account the rate at which products are sold within each category. "he analysis should also consider the effect of the mix on other product sales. $f the store offers only a limited selection of fro%en vegetables, for example, shoppers may switch to another store for their regular grocery shopping. =egular <eluxe @(' A' @A* *.(* @'*b

    3-48 #ale price per s . yard Variable costs per s . yard Contribution margin per s . yard <C, re uired per s . yard Contribution margin per <C,
    a b

    @A> A* @> *.A' @8*a

    @> Q *.A' ? @8* @A* Q *.(* ? @'*

    1ecause deluxe grade has a higher contribution margin per unit of scarce resource (<C,) than regular grade, and no more than F,*** s uare yards of deluxe grade can be produced, 1oyd 5ood Company should produce the maximum of F,*** s uare yards of deluxe grade first and then use the remaining available capacity of 0,*** <C, (? 8,>** J TF,*** D *.(*U) to produce regular grade. "herefore, the optimal production level for each product isK <eluxeK F,*** s . yards =egularK (*,*** s . yards (? 0,*** Q *.A').

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    PROBLEMS 3-49 "he following items are variable costsK Carpenter labor to ma!e shelves 5ood to ma!e the shelves #ales commissions based on number of units sold +iscellaneous variable manufacturing overhead "otal variable costs @>**,*** 8'*,*** AF*,*** 0'*,*** @A,'F*,***

    "he variable costs per unit are @A,'F*,***B'*,*** ? @0A.>*. "he following items are fixed costsK #ales staff salaries Nffice and showroom rental expenses <epreciation on carpentry e uipment )dvertising +iscellaneous fixed manufacturing overhead =ent for the building where the shelves are made <epreciation for office e uipment "otal fixed costs @F*,*** A'*,*** '*,*** (**,*** A'*,*** 0**,*** A*,*** @I8*,***

    Cet $ ? the number of units sold to earn a pre/tax profit of @'**,*** =evenue & Costs ? $ncome (9rice D Euantity) & Variable costs & Fixed costs ? $ncome @G*$ & @0A.>*$ & @I8*,*** ? @'**,*** $ & 0G,'** units 3-50 (a) #elling price per unitK Variable cost per unitK <irect material <irect labor Variable overhead Commission Contribution margin per unitK @0*.** (*.** A*.** A*.'* @A*'.**

    G*.'* @08.'*

    & GA &

    Chapter ! "sing Costs in #ecision Making

    Incremental profit: $ncrease in contribution margin from new sales <ecrease in contribution margin from cannibali%ation $ncrease in fixed costs $ncrease in profits if the new model is introduced (b) 3-51 (a)

    @08.'* A(*,*** @(* (0**,*** & (8*,***)

    @8,A8*,*** (A,(**,***) ((,***,***) @I8*,***

    4es. $ntroducing the new product will increase profits by @I8*,***. "he number of miles driven is an important activity measure in estimating the cost of driving. $n comparing the cost of driving to wor! or ta!ing public transportation, #hannon may also want to consider the cost of par!ing at wor!. "he cost of par!ing may vary with the number of days at wor! or may be a flat rate per month. $ncremental costs of driving include gas, oil, maintenance, and tire expenditures. Costs associated with driving also include toll costs and par!ing fees. Fixed costs include taxes, depreciation of the vehicle, car registration, license fees, and insurance. For a two/wee! vacation by car, two li!ely activity measures are number of miles driven and number of days (for lodging and meals). Costs that vary with number of passengersK +eals and refreshments ? @' Cet $ = number of passengers needed to brea! even each wee! "otal revenue per wee! & costs per passenger per wee! & costs per flight per wee! & fixed costs per wee! ? profit per wee! (@(** $ G*) & (@' $ G*) & (@',*** G*) & @8**,*** ? @* @A0,>'*$ ? @G'*,*** $ = @G'*,*** Q @A0,>'* ? '8.I' (i.e., '' passengers per flight)

    (b)

    (c) (d) 3-52 (a)

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    (b)

    Cet ) = number of flights to earn a profit of @'**,*** per wee! 3umber of passengers per flight ? >*. A'* ? I* (@(** I* )) & (@' I* )) & (@',*** )) & @8**,*** ? @'**,*** ) = GA.GA (i.e., G( flights) Fuel costs are fixed once the flights are scheduled, but these costs vary with the number of flights. $n this case, there is no opportunity cost to the airline because the seat would otherwise go empty. "he variable cost for the additional passenger is @' for the meals and refreshments and perhaps a small amount of additional fuel cost. ;ohnson Co. brea!even point in number of rides ? (Fixed costs)B(Lnit contribution margin) ? @0**,***B@> ? '*,*** rides #mith Co. brea!even point in number of rides ? (Fixed costs)B(Lnit contribution margin) ? @A,'**,***B@A' ? A**,*** rides

    (c) (d)

    3-53 (a)

    (b)

    Cet x be the number of rides. ;ohnson Co.-s profit function isK @0*x & @(8x & @0**,*** ? @>x & @0**,*** #mith Co.-s profit function isK @0*x & @A'x & @A,'**,*** ? @A'x & @A,'**,***
    9rofit/Volume Chart 9rofit

    S *
    @* (@0**,***) Coss (@A,'**,***) '*,*** A**,*** A00,000

    3umber of rides

    (c)

    5e cannot say which firm-s cost structure is more profitable as profits depend on sales volume. $f sales drop to below A00,000 rides, ;ohnson Company-s cost structure leads to more profits. ,owever, if sales remain
    & G0 &

    Chapter ! "sing Costs in #ecision Making

    above A00,008 rides, then #mith Company-s cost structure leads to more profits. (d) "he contribution margin generated must first cover the fixed costs and then the balance remaining after the fixed costs are fully covered goes toward profits. $f the contribution margin is not sufficient to cover the fixed costs, then a loss occurs for the period. Nnce the brea!even point has been reached, profit will increase by the unit contribution margin for each additional unit sold. ,ere, #mith Company is more ris!y because it has higher fixed costs to cover and a higher unit contribution margin, which ma!es its profits more sensitive to decreases in the sales activity level. Contribution margin per unitK #elling price Cess variable costsK Variable production costs Variable selling and distribution costs Contribution margin per unit (b) Cet $ = the sales volume at which the profit on sales is A*. 9rofit ? ('* $ A(* $ ((**,*** + >(,'**) = *A . (('* $ ) A0* $ (>(,'** = (' $ A*' $ = (>(,'** $ = (,'** units. (c) (A) #ingle/shift operations (* $ 8,8**) K #elling price Variable costs Contribution margin per unit Fixed costs ? @(**,*** H @>(,'** H @AG,'** ? @(F*,*** 1rea!even point ? @(F*,*** Q @F* ? 0,'** units (noteK * 0,'** 8,8**)
    & G8 &

    3-54 (a)

    @('* @A** (* A(* @A0*

    @(** A(* @F*

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    (()

    "wo/shift operations (8,8** $ F,F**) K #elling price Variable costs Contribution margin per unit @(** A(* @F*

    Fixed costs ? @0A*,*** H @>(,'** H @AG,'** ? @0I*,*** 1rea!even point ? @0I*,*** Q @F* ? 8,FG' units

    (note K 8,8** 8,FG' F,F**)

    (d)

    9rofit to sales ratio in #eptemberK A0* 0, *** (>(, '** ('* 0, *** 0I*, *** (>(, '** = G'*, *** = *.AG = (A) #ingle/shift operations (* $ 8,8**) (** $ A(* $ (F*,*** = *AG . (** $ F* $ (F*,*** = 08 $ 8> $ = (F*,*** $ = >,*FG units (3ot acceptable because $ cannot be more than 8,8** units with single/shift operations) (() "wo/shift operations (8,8** $ F,F**) (** $ A(* $ 0I*,*** = *AG . (** $ F* $ 0I*,*** = 08 $ 8> $ = 0I*,*** $ = F,8GF units

    (note K 8,8** F,8GF F,F**)

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    Chapter ! "sing Costs in #ecision Making

    3-55 "otal labor cost "otal materials cost "otal variable manufacturing overhead cost "otal lease payments "otal #RV) expenses "otal costs M Cabor cost "otal labor hours re uiredK >* D F** D *.*' >* 8 0* A, >** *. *' 0* 8 Cabor hours available Nvertime hours re uired =egular wages (? @(* 8,***) Nvertime wages (? @0* A,A>*) "otal labor cost MM +aterials cost @A.>* >* F** ? @G>,F** @A.>* 0* A,>** ? G>,F** MMM Variable manufacturing overhead cost @F ',A>* labor hours 3-56 (a)

    @AA8,F** M A'0,>** MM 8A,(F* MMM 0>,*** (*,*** @0>',>F*

    (,8** (8* (,8** A(* ',A>* 8,*** A,A>* @ F*,*** 08,F** @AA8,F**

    @A'0,>** @8A,(F*

    "his is a special order where the company has sufficient excess capacity to fill the order. $ncremental revenue F,*** @(( $ncremental VC F,*** (@' H 8HA) $ncremental C+ F,*** (@(( A*) @AG>,*** F*,*** @I>,***

    1ecause fixed costs are unchanged, the @I>,*** incremental C+ is the increase in income if the company accepts the special order.

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    (b)

    "his is a special order where the company has insufficient excess capacity to fill the order, and therefore faces an opportunity cost if it fills the order. $ncremental C+ from (a) Npportunity cost from lost salesM 3et increase in C+ F,*** (@(( A*) ',*** (@(' (' H 8)) @I>,*** F*,*** @A>,***

    M"he opportunity cost is the net benefit from the foregone C+ on ',*** boxes of regular sales. 1ecause fixed costs are unchanged, the @A>,*** net increase in C+ is the increase in income if the company accepts the special order. 3-57 (a) (b) Variable costs per chip ? @G(*,***BA,>** ? @8'* per chip 9rofit ? (@'** J @8'*) D (,*** J @G',*** ? @(',*** Fixed costs per chip ? @G',***B(,*** ? @0G.'* per chip Variable cost per chip Fixed cost per chip =eported cost per unit @8'*.** 0G.'* @8FG.'*

    "here is currently enough surplus capacity to produce the (** units per wee! for the new order. "he estimated increase in the company-s profit if it accepts the order is (@8F* J @8'*) D (** ? @>,*** per wee!. (c) 1ecause there is not enough surplus capacity to produce the >** units per wee! for the new order, the company faces an opportunity cost if it accepts the order. "he company has surplus capacity of (,*** & A>** ? 8** chips per wee!. $f the company accepts the order, it will have to give up (** chips per wee! of regular sales, at @'** revenue per chip. "he company will gain (@8F* & @8'*) >** ? @AF,*** per wee! from the special order, but that gain will be offset by lost contribution margin from regular sales, (@'** & @8'*) (** ? @A*,***, for a net gain of @F,*** per wee!.

    & GG &

    Chapter ! "sing Costs in #ecision Making

    3-58 (a) (b)

    )c uisition cost and depreciation expense for the existing elevator system are irrelevant. =elevant cost )c uisition cost #alvage value of existing system at present Nperating costs for > years #alvage value after > years Existing #ystem O O @I**,*** ((',***) 3ew #ystem @FG',*** (A**,***) 8F,*** (A**,***)

    @FG',*** @G(0,*** "he decision to replace the existing elevator system with the new one will re uire net present value analysis that considers the time value of money. 5ithout considering the time value of money, the new system is less costly. 3-59 #elling price per unit Variable cost per unit Contribution margin per unit 3umber of units $ncrease in operating income @8.** 0.0* @*.G* '*,*** @0',***

    Renis 1attery Company should accept the special order because it is operating under capacity and this order can generate @0',*** in additional operating income. (b) (c) )verage unit costs can be misleading. Fixed costs are not relevant to this decisionOthe decision should be based on incremental costs. Nther customers may also demand a reduced price. "herefore, their reaction to the reduced price for the special order must also be ta!en into account.

    & GF &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-60 (a)

    )et cost saving over + ,ears -ith ne- machine Cash inflow: #alvage value difference <ecrease in annual operating costs (8 years @>*,***) =eduction in rewor! cost Cash outflowK )c uisition of new machine (@0>*,*** & @A**,***) Net cash inflow (outflow):
    a

    @ (,*** (8*,*** A*,***a ((>*,***) (@ F,***)

    *.*' (A**,*** 8) @A ? & *.*(' (A**,*** 8) @A ? =eduction in rewor!

    @(*,*** &@A*,*** @A*,***

    #yd 4oung should not replace the old machine due to net cash outflow of (@F,***). (b) (c) A. "he ac uisition cost of the old machine is a sun! cost. Nther considerationsK 5ill sales increase because of lower defects with the new machine (. 5hat is the cost of capital used to discount future cash flowsW $n this case, discounting will only ma!e the new machine appear worse. ("his topic is covered in other courses.) 3-61 (a) 1ecause the distinctive desserts are a source of competitive advantage, 1eau should carefully consider the uality, freshness, and distinctiveness of the desserts from the outside providers, as well as the providersreliability in delivering the desserts. 1eau will want to consider the possibility of price increases from an outside ba!ery. For the in/house option, 1eau may have concerns about his ability to hire a suitable replacement pastry chef. $f 1eau hires a new pastry chef, the chef may be more responsive than the outside ba!ers to 1eau-s customers- tastes. )lso, there would be no concern about delivery to 1eau-s 1istro. "his uestion is designed to generate discussion about the trade/offs among the options. )lthough the second bid is lower/cost than the first, the first bid promises continual developments of gourmet desserts: the second bid promises only traditional desserts. $n/house pastry production is the highest/cost option. "he ultimate decision should ta!e into account not only the costs of the different options, but also the issues in part (a)
    & GI &

    (b)

    Chapter ! "sing Costs in #ecision Making

    and the anticipated effect on demand and revenue (for pastry and for 1eau-s 1istro) under each option. 3-62 (a) "he costs and benefit shown below are relevant for the outsourcing decision. )ll but the &@(*,*** sale of office e uipment are annual costs. Costs Cabor =ent 9hone Nther overhead Nffice e uipment Nutside call center (b) $n/house Nutside Call Center Call Center @>'*,*** >*,*** 0',*** 8(,*** (@(*,***) G**,*** @GFG,*** @>F*,***

    ,ollenberry must consider the outside call center-s reliability and uality of service in responding to ,ollenberry-s customers. Riven ,ollenberry-s worldwide operations, the greater number of multilingual operators available at the outside call center could be an important feature. Finally, ,ollenberry must factor in the prospect of laying off employees, many of whom have wor!ed at ,ollenberry for over (* years. $f the outside call center can meet ,ollenberry-s expectations for reliability and uality, including better service for international customers, financial considerations point toward ,ollenberry outsourcing the call center function. ,owever, although the outsourcing decision seems financially sound, there is great potential for decreasing the remaining employees- morale because of the layoffs. "his uestion is designed to generate discussion about trade/offs among the company-s sta!eholders, including employees. Nne alternative to firing ,ollenberry-s call center employees is reassigning the employees to other 2obs and relying on attrition to eventually reduce employee costs to ,ollenberry-s desired level. ,owever, this would increase the cost of the outsourcing option and reduce its financial benefits.

    (c)

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    3-63 (a)

    $mpact of dropping ;"8F8 on operating incomeK =eduction in contribution margin Cost savingsK Ltilities #upervision +aintenance )dministrative <ecrease in operating income "herefore, ;"8F8 should not be eliminated. @A**,*** (I,***) (0*,***) (G,***) (0*,***) @(8,***

    (b)

    3o, the decision to retain ;"8F8 will only be reinforced by the sales manager-s comments.

    3-64 #ome examples of articles that describe dropping unprofitable products appear below. "he article by ,ymowit% provides interesting bac!ground for the article in .he Economist on #ony-s unprofitable products. "hese articles describe the need for a turnaround at #ony. "he article in .he Economist states, 6)lmost every product line is unprofitable.7 $mportant issues include strong competition, 6vanity pro2ects that lac!ed a mar!et,7 and cost cutting through layoffs and factory closings. "he article by 1all lays a foundation for activity/based costing through its discussion of high costs and unprofitable products due in part to excessive proliferation of variations of products. ,ymowit%, C. 6+ore )merican Chiefs )re "a!ing "op 9osts )t Nverseas Concerns.7 .he /all Street *ournal, Nctober AG, (**', page 1A. 6Rame onK #ir ,oward #tringer believes he is finally in a position to fix #ony.7 .he Economist, +arch ', (**I. httpKBBwww.economist.comBnodeBA0(08AG0, accessed <ecember A(, (*A*. 1all, <. 6Crunch "imeK )fter 1uying 1inge, 3estlX Roes on a <iet: <eparting CEN #lashes #low #ellers, 1rands: Y3o- to Cow/Carb =olo.7 .he /all Street *ournal, ;uly (0, (**G, page )A. 5ingfield, 3. 6)ma%on to Cut 9roduct Nfferings, 9lans to <rop Lnprofitable $tems.7 .he /all Street *ournal, February (, (**A, page 1>. Sardos, <. and +. )ndre2c%a!. 6Earnings <igest -- Food: Heinz Net i!e! a! "ale! #ff!et $o!t!%& .he /all Street *ournal, 3ovember 0*, (**G, page CAA.
    & FA &

    Chapter ! "sing Costs in #ecision Making

    3-65 (a)

    #ales price <irect materials <irect labor Variable overhead Lnit contribution margin +achine hours per unit Contribution margin per machine hour

    ZCl @A*.** (8.**) ((.**) ((.**) @(.** *.(* @A*.**

    ZC( @A8.** (8.'*) (0.**) (0.**) @0.'* *.0' @A*.**

    ZC0 @A(.** ('.**) ((.'*) ((.'*) @(.** *.(' @F.**

    9roducts ZCl and ZC( should be produced first because they have a higher contribution margin per machine hour. +aximum production of these two products re uires AA*,*** machine hoursK ZCAK (**,*** units *.(* machine hours = 8*,*** machine hours ZC(K (**,*** units *.0' machine hours = G*,*** machine hours AA*,*** machine hours "herefore, a balance of A*,*** = A(*,*** & AA*,*** machine hours are available for ZC0 production, which is sufficient for 8*,*** units of ZC0 (A*,*** machine hours Q *.(' machine hours). Nptimal 9roduction CevelsK ZCAK (**,*** units: ZC(K (**,*** units, ZC0K 8*,*** units (b) Lnder the current capacity constraint, Excel Corporation cannot meet all of ZC0-s demand. $f additional capacity becomes available, it can produce more units of ZC0. "o determine whether it is worthwhile operating overtime, Excel needs to analy%e the contribution margin of ZC0 when operating overtime.

    & F( &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    #ales price <irect materials <irect labor Variable overhead Lnit contribution margin
    M 0.G' = (.'* A'*.

    ZC0 @A(.** @'.** 0.G'M (.'* AA.(' @*.G'

    1ecause the unit contribution margin of ZC0 using overtime is positive, it is worthwhile operating overtime. 3-66 (a) ,C<( re uires @A** Q @(* ? ' direct labor hours per unit. "he new order re uires A,*** ? (** D ' direct labor hours, so the existing capacity is ade uate. "he contribution margin per unit of ,C<( for the new order ? @8** J (G' H A** H A(') ? @A**. "he increase in profit is @(*,*** ? (** units D @A** contribution margin. #ales price Variable costK <irect material <irect labor Variable overhead Contribution margin per unit <C, per unit Contribution margin per <C, @>* F* A** @A>* 8 @G' A** (8* A(' 0** @(** ' ,C<A @8** ,C<( @'**

    (b)

    @8* per <C, @8* per <C,

    "he new order re uires a total of A,'** = ' 0** <C,, but only A,*** = A',*** & A8,*** <C, are available. "his will leave a capacity shortage of '** = A,'** & A,*** <C,. "he contribution margin per <C, is @8* for each product, so the company can forego sales of either product with the same effect. "herefore, the change in profit is

    & F0 &

    Chapter ! "sing Costs in #ecision Making

    "otal contribution margin & opportunity cost ? (0** units @A** contribution margin per unit) & ('** <C, @8* contribution margin per <C,) ? @0*,*** & @(*,*** ? @A*,*** increase. (c) $f the plant is wor!ed overtime to manufacture ,C<( for the new order, the contribution margin is negative @A(.'* as shown belowK +aterial Cabora Variable overhead "otal variable cost #ales price Contribution margin
    a

    Lnit Variable Cost for Nvertime A G' = @G'.** A.' A** = A.' A(' = A'*.** AFG.'* @8A(.'* 8**.** @(A(.'*)

    or ' hours @0* per hour

    Change in 9rofit (** A** = A** (A(.'*) = $ncrease 3-67 (a) @(*,*** (A,('*) @AF,G'*

    <uring =egular hours Nvertime hours

    $n order to produce A0,*** standard doors and ',*** deluxe doors, the following number of direct labor hours and machine hours are re uiredK Cutting! <irect labor hoursK *.' A0,*** + A ',*** = AA,'** [ F,*** capacity +achine hoursK ( A0,*** + 0 ',*** = 8A,*** [ 8*,*** capacity Assembl,! <irect labor hoursK A A0,*** + A.' ',*** = (*,'** [ AG,'** capacity +achine hoursK ( A0,*** + 0 ',*** = 8A,*** [ 8*,*** capacity

    & F8 &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    Finishing! <irect labor hoursK *.' A0,*** + *.' ',*** = I,*** [ F,*** capacity +achine hoursK A A0,*** + A.' ',*** = (*,'** [ A',*** capacity "he direct labor hour capacity in each department and the machine hour capacity in each department are not ade uate to meet the next month-s demand. (b) Cinear programming can be used to solve this problem. "he product contribution margins needed for the ob2ective function areK #ales price per unit Variable cost per unit Contribution margin per unit #tandard @A'* AA* @8* <eluxe @(** A'' @8'

    Cet # denote the number of standard doors to produce and < denote the number of deluxe doors to produce. "he linear programming problem isK +aximi%e @8*# H @8'< #ub2ect to the following constraintsK Cutting! <irect labor hoursK *.'# + < \ F,*** +achine hoursK (# + 0< \ 8*,*** Assembl,! <irect labor hoursK # + A.'< \ AG,'** +achine hoursK (# + 0< \ 8*,*** Finishing! <irect labor hoursK *.'# + *.'< \ F,*** +achine hoursK # + A.'< \ A',*** Maximum demand! # \ A0,*** < \ ',*** )onnegativit,! # [ *, < [ *
    & F' &

    Chapter ! "sing Costs in #ecision Making

    Lsing the 6#olver7 function in Excel to solve the linear programming problem, the optimal solution is to produce A0,*** standard doors and A,000 (rounded down) deluxe doors. "hough not re uired, the contribution margin with this solution is @'GI,IF'. (c) "he contribution margin for standard doors remains the same, but the contribution margin for deluxe doors is now @'*K <eluxe #ales price per unit @(** Variable cost per unit (@F* H @'> H @A8) Contribution margin per unit "he linear programming problem is nowK +aximi%e @8*# H @'*< #ub2ect to the following constraintsK Cutting! <irect labor hoursK *.'# + *.F< \ F,*** +achine hoursK (# + 0< \ 8*,*** Assembl,! <irect labor hoursK # + A.'< \ AG,'** +achine hoursK (# + 0< \ 8*,*** Finishing! <irect labor hoursK *.'# + *.'< \ F,*** +achine hoursK # + A.(< \ A',*** Maximum demand! # \ A0,*** < \ ',*** )onnegativit,! # [ *, < [ * Lsing the 6#olver7 function in Excel to solve the linear programming problem, the optimal solution is to produce A(,*** standard doors and (,'** deluxe doors. "hough not re uired, the contribution margin with this solution is @>*',***, as compared to @'GI,IF' in part (b). "he slight
    & F> &

    A'* @'*

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    increase in efficiency with respect to deluxe door production has increased the number of deluxe doors in the optimal product mix and increased the total contribution margin. (d) "he following alternatives may be consideredK A. (. 3-68 (a) )dd more machines in the finishing department. Lse overtime or add a second shift in the cutting department.

    "o maximi%e monthly commissions while wor!ing A>* hours per month, #pencer should devote the maximum allowable time (I* hours) to customer group 1 because that group provides the largest average commission per hour of #pencer-s time. #pencer should next allocate the maximum of >* hours to customer group ) because that group provides the next largest average commission per hour. Finally, #pencer should devote the remaining A* hours of his A>* hours to group C. Customer Rroup ) 1 C )verage monthly sales per customer Commission )verage commission ,ours per customer per monthly visit )verage commission per hour Current hours ,ours per month @I** @>** @(** >. @'8 0 @AF >* >* '. @0* A.' @(* I* I* 8. @F *.' @A> >* A* "otalK A>* hours (8* hours per wee!)

    (b)

    #pencer should also consider the probable future increased profitability from customers in group C, as well as li!ely future profitability of customers in the other groups.

    & FG &

    Chapter ! "sing Costs in #ecision Making

    C SES 3-69 5age rate ? @0,>** Q A'* hours ? @(8Bhour. 3eighboring laboratory charges @F* Q ( hours ? @8*Bhour, which also e uals @A** Q (.' and @A>* Q 8. (a) +onth ;une ;uly )ugust #imple =outine F** >** G'* #imple 3onroutine Complex ('* 8'* (** 8** ((' 8'* "otal ,ours 8,*('.* 0,0**.* 0,F>(.' E uivalent 5or!ers (>.F0 ((.** ('.G'

    5or!ers $n/house ,ours #hort Nutside Nutside "otal ,ired 5agesM ;une ;uly )ugust ,ours Charges Cost (* @(A>,*** A,*(' 0** F>(.' (,AFG.' @FG,'** @0*0,'** (A ((>,F** FG' A'* GA(.' A,G0G.' >I,'** (I>,0** (( (0G,>** G(' * '>(.' A,(FG.' 'A,'** (FI,A** (0 (8F,8** 'G' * 8A(.' IFG.' 0I,'** (FG,I** (8 ('I,(** 8(' * (>(.' >FG.' (G,'** (F>,G** (' (G*,*** (G' * AA(.' 0FG.' A','** (F','** (> (F*,F** A(' * *.* A('.* ',*** (F',F** (G (IA,>** * * *.* *.* * (IA,>**
    M@0,>** per month D 0 months ? @A*,F** for one wor!er for a uarter.

    $n/house wages e ual @A*,F** times the number of wor!ers hired. <r. 1ar!er should employ (' wor!ers at a total cost of @(F','**. (b) Nutside charges will exceed the monthly wages of an additional wor!er hired by 1arrington if the number of outside hours exceeds @0,>** Q @8* ? I*. "herefore, 1arrington should hire an additional employee when the outside services are expected to exceed I* hours in any month, which corresponds to I* Q A'* ? *.> e uivalent wor!ers. +onth ;une ;uly )ugust #imple =outine F** >** G'* #imple 3onroutine Complex ('* 8'* (** 8** ((' 8'* "otal ,ours 8,*('.* 0,0**.* 0,F>(.' E uivalent 5or!ers (>.F0 ((.** ('.G'

    "herefore, 1arrington should hire (G wor!ers in ;une, (( in ;uly, and (> in )ugust.
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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    +onth ;une ;uly )ugust "otal cost

    5or!ers ,ired (G (( (>

    Fixed Nutside Cost ,ours @IG,(** * GI,(** * I0,>** *

    Nutside Charges * * *

    "otal Cost @IG,(** GI,(** I0,>** @(G*,***

    3-70 (3umbers in s uare brac!ets below refer to reference numbers that appear at the end of the solution for this case.) (a) )n organi%ation-s value proposition defines what the organi%ation tries to deliver to its customers. )s described in Chapter (, the value proposition is the uni ue mix of product performance, price, uality, availability, ease of purchase, service, relationship, and image that a company offers its targeted group of customers. "he value proposition represents the 6advantage7 of a company-s strategy: it should communicate what it intends to deliver to its customers better or differently from competitors. 3ordstrom is an upscale retailer, often included among lists of luxury retailers. 3ordstrom-s value proposition can be described as 6 uality, value, selection, and service7 (httpKBBabout.nordstrom.comBaboutusBWorigin?hp?leftnav, <ecember 0, (**() or 6superior service and high uality, distinctive merchandise7 (httpKBBabout.nordstrom.comBaboutusBinvestor.aspWorigin?footer, )pril G, (**0). 3ordstrom-s sales force is legendary for its customer service. )s mentioned below in part (c), sales staff !ept handwritten notes about customers- si%es and designer preferences, as well as special occasions, in loose/leaf binders T(U. #ales staff would then match the information with new merchandise arrivals and store promotions. #a!s Fifth )venue is a luxury retailer that can be described much li!e 3eiman/+arcus is described in Chapter (. 1oth stores target fashion/ conscious customers with high disposable incomes who are willing to pay more for high/end merchandise. Fred 5ilson, former #a!s Fifth )venue divisional CEN, viewed 3eiman +arcus as #a!s- closest competitor T8U. #a!s Fifth )venue offers a wide assortment of distinctive luxury fashion apparel, shoes, accessories, 2ewelry, cosmetics and gifts (A*/S =eport, #a!s Fifth )venue, Fiscal year ending February 0, (***). #a!s Fifth )venue-s web site statesK 6#a!s Fifth )venue today is renowned for its
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    Chapter ! "sing Costs in #ecision Making

    superlative selling services and merchandise offerings. "he best of European and )merican designers for men and women are sold throughout its 8G stores servicing customers in (0 states.7 (httpKBBwww.sa!sfifthavenue.comBhtmlBaboutusBsa!s]history.2spW bmL$<?i#Zpd1i). (b) 3ordstrom centrali%ed purchasing in an attempt to leverage its buying power. 9reviously, 3ordstrom-s buying transpired through more than A( offices T>U. 3ordstrom negotiated with suppliers to reduce mar!ups on merchandise TGU. "hese measures should reduce 3ordstrom-s costs without adversely affecting the company-s ability to fulfill its value proposition. 3ordstrom also laid off (,'** employees between #eptember A and Nctober AI, (**A. +indful of the importance of its sales staff, 3ordstrom-s layoffs focused on 6bac!/office employees7 TGU. =etaining most of the sales staff would help 3ordstrom continue to fulfill its value proposition. 3evertheless, a retail analyst noted that 3ordstrom needed to dramatically cut costs, pointing out that 3ordstrom-s annual selling, general, and administrative expenses of approximately @A** per s uare foot overshadowed the @>* industry average T(U. (c) 3ordstrom invested in computeri%ed inventory/trac!ing systems T', >U. "he previous system relied partly on sales staff-s handwritten notes in loose/ leaf binders T(U. $n addition to inventory management, new technology was introduced to improve customer serviceK 3ordstrom-s salespeople are getting ready to throw out their little blac! boo!s. $nstead of filling pages with handscrawled notes about customers- si%es and designer preferences, (*,*** sales cler!s at the #eattle chain-s A0G stores soon will be using new software and mobile devices to trac! their customerstastes and match them to new merchandise arrivals and store promotions. For 3ordstrom, what ma!es sense is getting customer information to retail sales personnel in real time, whether those customers are conducting business on the 5eb, in the store or over the telephone T0U.

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    #ales staff could also contact customers as soon as a desired item arrived in the store and better serve repeat customers with readily available information on si%es and preferences T0U. 3ordstrom-s (**A )nnual =eport (p. 8) reports that implementation of the perpetual inventory system is 6going very well,7 with the expectation that the system will help buyers improve decision/ma!ing, manage inventory, and respond uic!ly to trends. "he (**A )nnual =eport covers the fiscal year from February (**A to ;anuary (**(. (d) 3ordstrom-s efforts affected the classic cost/volume/profit elements of sales prices, product costs, product mix, and selling, general, and administrative expenses. "he ob2ective was to increase net income. $n an effort to move excess inventory, 3ordstrom ran a clearance sale, unusual for the company TGU. 3ordstrom also altered its product mix by expanding its offerings of lower/priced merchandise. 3ordstrom-s efforts to decrease selling, general, and administrative expenses are described in part (b). 3et sales increased about G. in (*** (comparing fiscal years ending ;anuary (*** and ;anuary (**A) due to new store openings: comparable store sales were flat (3ordstrom (**A )nnual =eport, p. I). Nperating income decreased '*. and gross profit as a percent of sales decreased. $n (**A (comparing fiscal years ending ;anuary (**A and ;anuary (**(), net sales increased about (. due to new store openings: comparable store sales decreased during the year. Nperating income increased A*. after declining '*. the year before. "he following year, net sales increased >. and operating income increased 0*.. Rross profit as a percent of sales decreased in (**A and increased in (**( (httpKBBabout.nordstrom.comBaboutusBinvestorBA*yr]stats]printable.asp, )pril G, (**0). (e) 6=einvent 4ourself7 was an advertising campaign that began in February (*** (see T'U for details). "he advertising campaign was 3ordstrom-s first national television advertising campaign and targeted younger shoppers than its traditional clientele, concurrent with 3ordstrom-s push to appeal to a younger clientele with 6flashing lights and fun!y clothes7 TAU and store columns painted orange for a more youthful loo! TGU. "he ads did not emphasi%e 3ordstrom-s customer service. $nstead, 3ordstrom planned to impress customers with its service once they had ventured into the store T'U.

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    Chapter ! "sing Costs in #ecision Making

    "he campaign was less than successful: the company announced that it had 6overreached.7 3ordstrom had 6alienated its faithful clientele7 TGU by trying to appeal to younger shoppers. "hat is, there was an opportunity cost to targeting younger shoppers. #ome financial results appear in part (d). 3ordstrom may need to reconsider its value proposition. =eference T(U commentsK ..the retail world has changed since 3ordstrom-s heyday. 5ith the rise of such speciality retailers as "albots, "he Cimited, and )nn "aylor, competition is ferocious. )nd its old winning formulaOgreat customer serviceOisn-t the easy advantage it once was. 3eiman +arcus Rroup $nc is now 3o. A in service among department/store chains. $t generates annual sales of @8I* per s uare foot, handily eclipsing second/place 3ordstrom at @08(. )nd "albots $nc also too! a page from 3ordstrom-s playboo!. "he ,ingham (+ass.) chain improved its service and stuc! to classic merchandise. "he resultK $t ended last year as one of the best/performing retailers in the nation, with same/ store sales 2umping AG.. "he same article points out that in response to growing customer focus on value, 3ordstrom needs excellence in inventory management and control of expenses in addition to its recogni%ed excellence in the 6art7 of retailing. #a!s Fifth )venue-s 65ild )bout Cashmere7 campaign offered a wide range of products in cashmere and was designed to appeal to young, fashion/hungry customers. "he campaign not only alienated loyal 8'/'8 year/old customers with 6edgy, midriff/baring fashion,7 but also confused customers who did reali%e the connection between cashmere and the goat manne!ins in the store, or why there were audios of goats bleating T8U. Ci!e 3ordstrom, #a!s appears to have suffered some opportunity cost from this effort to expand its customer base. =eferences TAU )nonymous. (**A. 3ordstrom $nc. "o 1e )s +uch as '*. 1elow Expectations. .he /all Street *ournal (;anuary F), 1F.
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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    T(U T0U T8U T'U T>U TGU

    )nonymous. (**A. Can 3ordstroms Find "he =ight #tyleW 0usiness /eek (;uly 0*), 'I&>(. 1ednar%, ). (**(. "he Customer $s Sing. )et-ork /orld (<ecember (), >'&>>. 1yron, E. (**>. #truggling #a!s "ries )lternations $n +anagement. /all Street *ournal (;anuary A*), 1A. Cuneo, ). ^. (***. 3ordstrom 1rea!s with "raditional +edia 9lan. Advertising Age (February A8), 8, GA. Cee, C. (***. 3ordstrom Cleans Nut $ts Closets. 0usiness /eek (+ay ((), A*'. +erric!, ). (**A. 3ordstrom )ccelerates 9lans to #traighten Nut 1usinessK Lpscale =etailer Nffers Cower/priced Roods, Cays Nff #taff and ,olds Clearance #ale. /all Street *ournal (Nctober AI), 18.

    3ordstrom previously provided the following list of references at its web site httpKBBabout.nordstrom.comBaboutusBfa Bfa .asp_A(K `5ith a 3ew location in <adeland +all, 3ordstrom #ee!s to 1ecome a Florida $nstitution,` "he +iami ,erald, 3ovember A(, (**8 `)uthor of 1oo!s on 3ordstrom Culture to )ddress Virginia "rade #how,` =ichmond "imes/<ispatch, #eptember (0, (**8 `3ordstrom =egains $ts Custer / Challenge )waits as =ivals Encroach on $mage of )ffordable Cuxury,` "he 5all #treet ;ournal, )ugust AI, (**8 `#hoppers put ,eart, #oles $nto 4early 3ordstrom #ale,` "he #eattle "imes, ;uly AG, (**8 `EV) with 1la!e 3ordstrom / 8th Reneration Ceads Rrowth of 3ordstrom,` "he Charlotte Nbserver, +arch A(, (**8 `3ordstrom aCacheta ,its 5ellington Friday,` 9alm 1each 9ost, 3ovember A*, (**0 `1ac! in the Family: Fourth Reneration "a!es Control )fter a 1rief Change in Company Ceadership,` #eattle 9ost/$ntelligencer, ;une (G, (**A `) "ime of Change: Company +a!es ,uge Ceaps with Expansion, 9ublic #toc! Nffering,` #eattle 9ost/$ntelligencer, ;une (>, (**A `#till in #tyle: From #mall #hoe #tore, to Lpscale =etailer, Company has Sept Founderas Values,` #eattle 9ost/$ntelligencer, ;une (', (**A

    & I0 &

    Chapter ! "sing Costs in #ecision Making

    `#uccess Came a #tep at a "ime: Company =ose From #mall #eattle #hoe #tore to =etail Riant with 3ational )ppeal,` #eattle "imes, +ay (I, (**A 1oo!sK "he 3ordstrom 5ay by =obert #pector and 9atric! <. +cCarthy Fabled #erviceK Nrdinary )cts, Extraordinary Nutcomes by 1onnie ;ameson and 1etsy #anders 3-71 (a) Lnit cost <irect materialsK Chem. V frag. <irect materialsK )) A** <irect labor Variable mfg. overhead "otal variable mfg. cost Variable selling cost "otal variable cost #ales price Contribution margin per ton ,ours per ton Contribution margin per hour (b) ))A** @'>* O >* >* @>F* (* @G** I8* @(8* 8 hrs @>* ))A*A @8** >F* 0* 0* @A,A8* 0* @A,AG* A,'** @00* > hrs @'' ))A*( @8G* >F* >* >* @A,(G* 0* @A,0** A,G** @8** F hrs @'*

    ))A** has a higher contribution margin per hour than ))A*A and )A*(. )ramis should produce ))A** up to >** tons. #ince the production of >** tons of ))A** re uires (,8** ? >** D 8 hours, which e uals available capacity, no other products will be manufactured. "herefore, the optimal production levels areK ))A**K >** tons: ))A*AK * tons: and ))A*(K * tons. Npportunity cost is @>* per hour (the contribution margin per hour for ))A** production that must be sacrificed) and each ton of ))A*A re uires > hours.

    (c)

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    =e uired contribution margin per ton (? @>* D >) Variable cost per ton =e uired minimum sales price per ton (d)

    @0>* A,AG* @A,'0*

    $t is worthwhile operating the plant overtime. "he optimal production level is ))A**K >** tons: ))A*AK A** tons: and ))A*(K * tons. ExplanationK "he regular capacity of (,8** hours (before operating the plant overtime) is used to produce >** tons of ))A**. ,ow should >** hours of overtime be usedW 5e !now that the demand for ))A** has been filled fully. "herefore, we consider ))A*A and ))A*(. ))A*A has a higher contribution margin per hour than )A*(. 5ith >** hours of overtime, the company can produce A** tons of )A*A (>** hours > hours per ton), which is less than the maximum demand. "his leaves no hours for )A*(. Lnder overtimeK <irect materialsK Chem. V frag. <irect materialsK )))A** <irect labor Variable mfg. overhead "otal variable mfg. cost Variable selling cost "otal variable cost #ales price Contribution margin per ton ,ours per ton Contribution margin per hour ))A** @'>* O I* I* @G8* (* @G>* I8* @AF* 8 @8' ))A*A @8** G8* 8' 8' @A,(0* 0* @A,(>* A,'** @(8* > @8* ))A*( @8G* G8* I* I* @A,0I* 0* @A,8(* A,G** @(F* F @0'

    #ince contribution margins per hour for ))A*A and ))A*( are positive, it is worthwhile operating the plant overtime.

    & I' &

    Chapter ! "sing Costs in #ecision Making

    3-72 '()$HIN* N#'(: ) +#' ( ")N', "he ) Votre #antX ()V#) case is multi/faceted in that it re uires students to incorporate operational measures into product costing results, and also to understand cost accounting from a variety of perspectives, such asK 9roduct versus period costs Variable versus fixed costs )ctivity based costing =elevant costs and opportunity costs )dditionally, the case uestions re uire both uantitative and ualitative analyses of the business issues faced by )V#. )V# has been used in a graduate/ level managerial accounting class for +1)s, and would be most appropriate for an advanced undergraduate or a graduate/level accounting or +1) course. "he detail in the case is rich enough to support a variety of analyses. )lternative uses could be to have the student construct a cost of goods manufactured statement or a traditional financial statement, both of which reinforce the differences between product and period costs. )dditionally, alternative decision analysis uestions could be developed using the variable and fixed cost structures described in the case. Case uestion number two is only one example of a potential decision analysis uestion. (a) Contribution +argin $ncome #tatement "o develop the contribution margin income statement, you first have to calculate the number of bottles of wine produced by )V#. "his number is dependent upon the yield from the grapes. "he relevant calculations are as followsK 4ieldK 9ounds harvested Coss in processing 4ieldK Chardonnay Rrapes A**,*** A*,*** A*. I*,*** Reneric Rrapes >*,*** 0,*** '. 'G,***

    b (*A* 9riscilla #. 5isner. )dapted and used by permission of 9riscilla #. 5isner.

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    1ottles of wine producedK Chardonnay Estate =egular 9ounds of grapesK Chardonnay grapes Reneric grapes "otal pounds of grapes 1ottles (0 lb.Bbottle) G(,*** * G(,*** (8,*** AF,*** I,*** (G,*** I,*** 1lanc de 1lanc "otal * 8F,*** 8F,*** A>,*** I*,*** 'G,*** A8G,*** 8I,***

    "he contribution margin income statement ("eaching 3ote Exhibit A) is fairly straightforward, with the following concepts or calculations causing the most difficultyK "he inclusion of li uor taxes and sales commissions in variable costsK "hese are both period expenses, but are clearly based upon the number of bottles sold, and therefore are included in the variable costs. 5here to include the wine master expenseK #ince the wine master is paid according to number of blends, not number of bottles, this expense is listed as a fixed cost. )rguably, it could be listed as a variable cost, given that the cost will be based on the number of wines produced. )s part of the discussion we will examine the rationale behind listing wine master as a fixed or a variable expense. 1arrel expenseK "he case states that the barrels produce the e uivalent of 8* cases of wine. ) case of wine is post/fermentationBbottling and therefore after the A*. loss has occurred. "he barrels contain the wine at the start of the process. "herefore, there have to be enough barrels to hold all the wine at the beginning of the process, not at the end. "his factor results in >0 (>(.') barrels being re uired for the harvest(.

    Each case of wine re uires 0> pounds of grapes (post/fermenting). ) barrel holds the e uivalent of 8* cases of wine (post/fermenting), or A,88* pounds of grapes (8* D 0>). "o convert the post/fermenting grapes to pre/fermenting grapes, they must be divided by *.I, or A,88*B*.I e uals A,>** pounds of grapes. "he harvest of A**,*** pounds of grapes therefore re uires >(.' barrels for storage (A**,***BA,>**). & IG &

    Chapter ! "sing Costs in #ecision Making

    "eaching 3ote Exhibit AK Contribution +argin $ncome #tatement 3umber #ales 9rice of 1ottles Chardonnay / Estate @ (( (8,*** @'(F,*** Chardonnay (non/Estate) @ A> I,*** @A88,*** 1lanc de 1lanc @ AA A>,*** @AG>,*** "otal =evenues 8I,*** @F8F,*** Variable Costs Rrapes @A(8,*** 1ottle, labels, cor!s A((,'** ,arvest labor A8,'** Crush labor (,8** $ndirect materials >,0(I Ci uor taxes A8G,*** #ales distribution IF,*** 1arrels 8,G(' "otal Variable Costs @'AI,8'8 >A.0. Contribution +argin @0(F,'8> 0F.G. Fixed Costs )dmin. rent and office @ (*,*** <epreciation F,A** Cab expenses F,*** 9roduction office A(,*** #ales 0*,*** #upervisor '',*** Ltilities ','** 5aste treatment (,*** 5ine master A',*** )dministrative salary G',*** "otal Fixed Costs @(0*,>** Nperating +argin @ IG,I8> AA.>.

    )verage revenue per bottle @ AG.0A

    of sales of sales

    of sales @ (.** per bottle

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    Atkinson, Solutions Manual t/a Management Accounting, 6E

    (b) )dditional 9urchase Npportunity, Euantitative )nalysis 9art b as!s, 65hat is the maximum amount that )V# would pay to buy an additional pound of Chardonnay grapesW7 "here are three parts to calculating this answerK the benefit from the additional Chardonnay wine to be sold, the relevant costs related to producing this wine and the opportunity cost of not producing as much 1lanc de 1lanc wine. "eaching 3oteK Exhibit ( displays the calculations relevant to this decision. Chardonnay regular wine re uires a ( to A mixture of Chardonnay and generic white grapes. "herefore, the AF,*** pounds of Chardonnay grapes will be combined with I,*** pounds of generic white grapes. "he (G,*** pounds of grapes will result in an additional I,*** bottles of new Chardonnay regular wine being produced. ,owever, it will also result in a 0,***/bottle decrease in the amount of 1lanc de 1lanc wine produced, since some generic grapes will now be used for the Chardonnay/regular wine. =ecall that only Chardonnay wine is processed in barrels.
    "eaching 3ote Exhibit (K <ecision )nalysis, )dditional Rrape 9urchase Chardonnay Rrapes (*,*** (,*** AF,*** I,***

    4ieldK 9ounds Coss in processing 4ieldK 1ottles of wineK

    A*.

    ( lbs. of Chardonnay grapes per bottle (along with A lb. of generic grapes)

    )dditional Chardonnay 9roduct Cine #ales =evenue @ A(>,*** Costs Reneric grapes @ >,*GI 1ottle, labels, cor!s ((,'** $ndirect materials A,A>0 Ci uor taxes (G,*** #ales distribution AF,*** 1arrels IG' 5ine master ',***
    & II &

    I,*** bottles D @A8Bbottle I,*** pounds D @*.>G'8Bpound _ bottles D @(.'* _ bottles D @A.''BA( @0Bbottle @(Bbottle A0 barrels D @0**B8 years

    Chapter ! "sing Costs in #ecision Making

    "otal costs Rain from new Chardonnay Cost #ales of 1lanc de 1lanc 5ine #ales =evenue Costs Reneric grapes 1ottle, labels, cor!s $ndirect materials Ci uor taxes #ales distribution "otal costs Cost Contribution +argin 3et $mpact =e uired A'. =eturn on #ales "otal 3et 1enefit 9ounds of Rrapes +aximum 9rice per 9ound

    @ @

    F*,GAG 8',(F0

    @ 00,*** @ >,*GI G,'** 0FF I,*** >,*** @ (F,I>G @ 8,*00 @ 8A,('* @ AF,I** @ ((,0'* (*,*** @ A.AAG'

    0,*** bottles D @AABbottle I,*** pounds D @*.>G'8Bpound _ bottles D @(.'* _ bottles D @A.''BA( @0Bbottle @(Bbottle

    A'.

    (c) )dditional 9urchase Npportunity, Eualitative )nalysis "he following factors would support )V#-s decision to purchase the additional grapesK 9otential increase in mar!et share <iversification of suppliers )bility to leverage fixed costs over more production $f uality of purchased grapes is perceived to be better "o bloc! a competitor from buying the grapes )bility to focus time and effort on wine ma!ing (rather than harvesting and crushing) Creates an incentive for the current grower to control costs
    & A** &

    Atkinson, Solutions Manual t/a Management Accounting, 6E

    "he following factors would support )V#-s decision to re2ect the grape purchaseK 9oor uality of the grapes )n additional )V# Chardonnay wine creates confusion in the mar!etplace Cac! of control over the harvest and crush process Cac! of confidence in the additional sales forecast $nability of the current capacity (e.g. bottling line, space) to support additional production $nability to use the additional barrels purchased in future years Cannibali%ation of the current Chardonnay, Chardonnay/Estate or 1lanc de 1lanc sales =eliability concerns with the new supplier Nther hidden costs "-mmar. "he )V# case is based upon actual wine industry data, although the data has been simplified to reinforce the teaching points and concepts. $t is also true to the wine ma!ing process, with the exception of )V#-s process of ma!ing the Chardonnay regular wine from the fermented Chardonnay and 1lanc de 1lanc wines. "his can be done, but most commonly the 2uice from the wine grapes is combined at the start of the fermenting process, so that they can ferment together. 1ecause of the different yield rates in the fermenting process, the case had the wines ferment separately and blend at the end. 3oteK "he full case, which includes activity/based cost analysis, can be taught in a G'/minute class, or by omitting the decision analysis uestion '* minutes would be sufficient. "he case author has also used it to teach the differences between the financial income statement reporting (product and period costs) and the contribution margin income statement reporting (variable and fixed costs), and then assigned decision analysis andBor the )1C costing as an additional assignment.

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