S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

Relevant vs Irrelevant Information

Short Term Decisions

- Special Order
- Drop product or segment
- Product Mix (Constraint)
- Outsourcing (Make vs Buy)

Not covered
- Sell or Process Further

Pricing Decisions
Target Costing
Transfer Pricing
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

a. The price of the new printer is relevant.

The price you paid for the old printer is irrelevant because it is a past (sunk) cost that cannot
b.
decision.
c. The trade-in value of the old printer is relevant.
d. Paper costs are irrelevant because these costs will be the same with either the old printer or the ne
e. The difference between the ink cartridges’ cost for the old printer and ink cartridges’ cost for the
past (sunk) cost that cannot be changed, regardless of your

ither the old printer or the new printer.

ink cartridges’ cost for the new printer is relevant.
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

Contribution Margin

Sales 105,000 54,000 100,000

Variable 60,000 30,000 80,000
C.M. 45,000 24,000 20,000

Knight Fashion should not drop any of the departments. The Men’s Department is earning incom
the Accessories and Women’s Departments appear to be losing money, even though these departm
have a positive contribution margin. The Accessories Department is contributing $20,000 ($100,0
sales revenue − $80,000 variable costs), and the Women’s Department is contributing $24,000 ($
sales revenue − $30,000 variable costs) toward covering fixed costs.

Fixed costs include only building depreciation and utilities, and Knight Fashion intends to remain
same building whether or not it drops any of the departments. Consequently, the company’s total
costs will remain the same whether or not Knight Fashion eliminates the Accessories and Women
Departments. Fixed costs are therefore irrelevant in the decision whether to eliminate the Accesso
and Women’s Departments.

In sum, Knight Fashion should keep the Accessories Department because it contributes $20,000 a
Women’s Department, which contributes $24,000 per quarter toward covering the fixed costs.
Furthermore, the Accessories Department might bring in customers who buy products in other
departments. If so, eliminating the Accessories Department could reduce other departments’ prof
 ment is earning income, while
en though these departments
buting $20,000 ($100,000
ontributing $24,000 ($54,000

hion intends to remain in the

y, the company’s total fixed
ccessories and Women’s
o eliminate the Accessories

t contributes $20,000 and the

ring the fixed costs.
uy products in other
ther departments’ profits.
 S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

1 StoreAll’s production is constrained by the machine hours available for producing the bins. StoreAll
needs to determine its most profitable product mix by considering each size bin’s contribution margin
per machine hour:

Regular (140 L)
Sales price per unit $8
Less: Variable cost per unit -3
Contribution margin per unit $5
× Units per machine hour × 15
Contribution margin per machine hour $75

Fixed expenses are irrelevant since they will be incurred no matter what size bins are produced, so
they should not be considered. Regular bins provide $15 more contribution margin per machine hour
than Large bins ($75 vs. $60), so StoreAll should emphasize production of the Regular bins.

2 StoreAll should make as many Regular bins as possible:

Machine hours available 3,000

Number of Regular bins per machine hour × 15
Maximum production of Regular bins 45,000
 StoreAll should spend all 3,000 machine hours making Regular bins, resulting in 45,000 Regular bins
and 0 Large bins.

3 Given this product mix, StoreAll’s operating income for the period is projected to be:

Number of Regular bins 45,000

Contribution margin per Regular bin × $5.00
Total contribution margin $225,000
Less: Fixed expenses -100,000
Operating income $125,000
e for producing the bins. StoreAll
each size bin’s contribution margin

Large (200 L)
$10
-4
$6
× 10
$60

what size bins are produced, so

ribution margin per machine hour
ction of the Regular bins.

less 1 Hr
Regular Regular Large
CM 5 5 6
45,000 225,000 224925 60 224985

2999 44985 10 1
Less Fixed 100,000
ns, resulting in 45,000 Regular bins
125,000

is projected to be:
 S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

StoreAll should only make as many units of each product as it can sell. It should still emphasize Regular bi
since those are more profitable per machine hour than Large bins. StoreAll should make as many Regular b
as it can sell and then use the remaining machine hours to produce Large bins:

Number of machine hours available 3,000 hours

Number of Regular bins demanded 30,000
Divided by number of Regular bins produced per
÷ 15
hour
Number of hours used for Regular bins 2,000 Hours
Number of hours still available 1,000 hours
Multiplied by number of Large bins produced per
× 10
hour
Number of Large bins to produce 10,000

StoreAll should produce 30,000 Regular bins and 10,000 Large bins.
2 Given this product mix, StoreAll’s operating income will be:

Regular Large Total

Number of bins 30,000 10,000
Contribution margin per bin ×$5.00 ×$6.00
Total contribution margin $150,000 $60,000 $210,000
Less: Fixed expenses -100,000
Operating income $110,000

3
StoreAll’s operating income under this product mix is $15,000 less than it was under the optimal product m
($125,000 in S8-8 vs. $110,000). StoreAll had to give up $15 of contribution margin per hour for the 1,000
hours it spent producing Large bins rather than Regular bins. However, StoreAll had no choice. It would ha
lost money had it produced more Regular bins than it could sell.
still emphasize Regular bins,
d make as many Regular bins

Regular Large
CM 5 6 Hrs x CM per Hr (from 8-8)

Units 30,000 10,000 2,000 x 75 1,000x60

150,000 60,000 210,000 150,000 60,000 210,000
100,000 100,000
110,000 110,000
nder the optimal product mix
rgin per hour for the 1,000
had no choice. It would have
 S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

The book value of Frito-Lay’s autos is irrelevant because it will be the same whether the fleet management
Fleet Management Services. Also, Gonzalez’s salary is irrelevant, since she will continue at Frito-Lay whet
management function. As shown below, the relevant items are the software lease costs, the annual maintena
Lay’s five other fleet-management employees, and Fleet Management’s annual fee:

Frito-Lay
Outsourcing Decision Analysis

Outsource to Fleet
Management Services
Retain In-House
Annual leasing fee for software $8,000 $ –
 Annual maintenance of trucks 145,500 –
Total annual salaries of five other
fleet-management employees 150,000 –
Fleet Management Services’ annual
290,000
fee
Total cost $303,500 $290,000
Cost savings from outsourcing $13,500

This analysis shows that outsourcing to Fleet Management Services would be expected to save Frito-L
 Relevant or Irrelevant?

same whether the fleet management is performed by Frito-Lay’s staff or by

she will continue at Frito-Lay whether or not she outsources the fleet
ware lease costs, the annual maintenance of the trucks, the salaries of Frito-
s annual fee:

Difference
$8,000
 145,500

150,000

-290,000

$13,500

would be expected to save Frito-Lay $13,500 per year

S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

Not covered
 S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

1 Sports-Cardz
Incremental Analysis of Special Sales Order
Expected increase in revenues
Sale of 60,000 packs × $0.40 each $24,000
Expected increase in expenses
Variable manufacturing cost: 60,000 packs × $0.36
-21,600
each*
Expected increase in operating income $2,400
Decision: Accept the special sales order.

2 Sports-Cardz
Incremental Analysis of Special Sales Order
Expected increase in revenues
(Sale of 60,000 packs × $0.40 each)
Expected increase in expenses:
Variable manufacturing cost: (60,000 × $0.36)* -$21,600
Fixed manufacturing costs -2,000
Total expected increase in expenses
Expected increase in operating income
Decision: Accept the special sales order.
Relevant

$24,000
-23,600
$400
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50
First, we need to separate the fixed and variable costs:

Fixed Variable
6,400,000 40% 2,560,000 60% 3,840,000

1,400,000 30% 420,000 70% 980,000

2,980,000 4,820,000
if dropped
Sales 7,600,000 7,600,000 or 0
Var Costs 4,820,000 4,820,000 0
CM 2,780,000 2,780,000 0
Fixed Costs 2,980,000 750,000 2,230,000
Operating Loss - 200,000 Income 2,030,000 - 200,000
Lost Net 2,030,000

If McCain drops the sweet potato fries product line, it will lose $2,030,000 of
income. Therefore, McCain should only drop this product line if it can replace
the product line with a different product that would provide more than
$2,030,000 of income.
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50

Lifemaster
Product Mix Analysis
Deluxe
Sale price per unit $1,000
Variable costs per unit 710
Contribution margin per unit 290
Units produced with equivalent number of machine hours × 1
Contribution margin for equivalent number of machine hours $290

Lifemaster should produce only the Regular model.

 This is a product mix decision. Lifemaster should produce the product with
margin per unit of the constraint. (Fixed costs are irrelevant because they w
whichever product Lifemaster produces.) Lifemaster’s constraint is machin

Three times as much overhead cost is allocated to each Deluxe model as to

Thus, it takes three times as many machine hours to produce a Deluxe mod
Deluxe model produced (contributing $290 to operating income), Lifemast
units of the Regular model (contributing 3 × $130 = $390 to operating inco

Variable Costs
Regular Deluxe Regular
$550 DM 280 110 Sales 1000 550
420 DL 90 170 VC 710 420
130 VOH 225 75 CM 290 130
× 3 VOperExp 115 65 3 1 based on hint
$390 710 420
 produce the product with the highest contribution
irrelevant because they will be the same, in total,
ster’s constraint is machine hours.

each Deluxe model as to each Regular model.

to produce a Deluxe model. For each unit of the
erating income), Lifemaster can produce three
0 = $390 to operating income).

based on hint
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50
1 Fibre Systems
Outsourcing Decision

Make Unit
Variable cost per unit:
Direct materials $ 8.00a
Direct labour 1.40b
Variable overhead 2.40c
Purchase price from outsider —
Variable cost per unit $11.80

600,000 75,000
105,000 75,000
180,000 75,000

Fixed overhead does not change and therefore is irrelevant.

Decision: Make the optical switch because the cost is $2.20 per unit lower if Fibre Systems m
switch.

2 Make switches
Variable cost per unit (from Req. 1) $11.80
× Units needed 80,000
Total variable costs $944,000
Fixed costs 455,000
Total relevant costs $1,399,000

Decision: It is still cheaper for Fibre Systems to make its own switches rather than outsource
the switches.

3
Cost if making switches = Cost of outsourcing switches
Variable costs + fixed costs = Variable costs + fixed costs
($11.80 × 80,000) + $455,000 = (x)* (80,000) + $375,000
$944,000 + $455,000 = 80,000x + $375,000
$1,024,000 = 80,000x
$12.80 (rounded) = x
 Fibre Systems would be indifferent between outsourcing and making the switches if the
outsourcing cost was $12.80 per switch. Therefore, Fibre Systems will only be willing to outsource if
the outsourcing cost is less than $12.80 per switch.
ms
ecision
Cost to Make
Buy Unit Minus Cost to Buy

$— $8.00
— 1.4
— 2.4
14 -14
$14.00 ($2.20)

$ 8.00
$ 1.40
$ 2.40

per unit lower if Fibre Systems makes the

Buy switches
$14.00
80,000
1,120 ,000
375,000* 80,000 less
$1,495,000
$96,000
switches rather than outsource

rcing switches
+ fixed costs
00) + $375,000
375,000
d making the switches if the
will only be willing to outsource if
er switch.
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50
 Fibre Systems
Best Use of Facilities Analysis
Buy and Use
Facilities for
Make Other Product
Variable unit cost of obtaining the optical switches $11.80 $14.00
Number of optical switches × 80,000 × 80,000
Total variable cost of obtaining 80,000 optical switches $944,000 $1,120,000
Expected profit contribution from the other product . -220,000
Expected net cost of obtaining 80,000 optical switches $944,000 $900,000
$44,000

Decision: Outsource the switches and use the facilities to manufacture the other product. This
alternative has a $44,000 advantage over the next best alternative, which is to make the
switches ($944,000 − $900,000). (Note: Fixed costs are irrelevant since they are unavoidable.)
From 8-26
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50
1 Security Systems
Incremental Analysis of Dropping a Product Line
Expected decrease in revenues—Dropping industrial
systems sales
Expected decrease in expenses: Savings
Variable expenses: Cost of goods sold $38,000
Marketing and administrative expenses 66,000
Fixed expenses: Cost of goods sold 80,000
Marketing and administrative expenses 12,000
Expected decrease in total expenses
Expected decrease in operating income

Avoidable fixed costs

Decision: Do not drop Industrial Systems.

2 Security Systems
Total Analysis of Dropping a Product Line

Totals with
Industrial
Systems
Sales revenue $610,000
Variable expenses: Cost of goods sold 80,000
Marketing and administrative expenses 137,000
Total variable expenses 217,000
Contribution margin 393,000
Fixed expenses: Cost of goods sold 279,000
Marketing and administrative expenses 62,000
Total fixed expenses 341,000
Operating income (loss) $52,000

a
$279,000 − $80,000
b
$ 62,000 − $12,000
c
This difference column is not required
Security Systems’ operating income with the industrial systems line is $52,000, while without the
company would lose $52,000. The $104,000 difference ($52,000 minus a negative $52,000) equa
expected decrease in operating income if Security Systems drops the industrial systems line as sh
1. This demonstrates that the incremental analysis approach in Req. 1 does yield the same results
longer approach in Req. 2 that compares total operating income under the two alternatives.
t Line

$300,000

196,000
$104,000

duct Line

Decrease if
Industrial
Totals without Systems Is
Industrial Droppedc
Systems
$310,000 $300,000
42,000 38,000
71,000 66,000
113,000 104,000
197,000 196,000
199,000a 80,000
50,000b 12,000
249,000 92,000
($52,000) $104,000
$104,000
 is $52,000, while without the line the
inus a negative $52,000) equals the
e industrial systems line as shown in Req.
1 does yield the same results as the
der the two alternatives.
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50
1 The constraining factor is machine hours of production capacity.

2 Bolton Dental Manufacturer

Product Mix Analysis
Product
Deluxe
Toothbrush
(1) Units produced each hour 16
(2) Contribution margin per unit × $ 140
(3) Contribution margin per machine hour $2,240
Capacity—Number of machine hours × 3,000
Total contribution margin at capacity $6,720,000

Decision: Emphasize standard electric toothbrushes.

acity.

Product
Standard
Toothbrush
45
× $ 55
$2,475
× 3,000
$7,425,000
S8-1, 5, 8, 9, 11, 15, E8-17A, 18A, 22A, 23A, 26A, 27A, 48, 49, 50
1 Krass Snowboard Mfg. Inc.
Outsourcing Analysis

Make
Bindings
Buy Bindings
Total cost:
Direct materials $17,520 -
Direct labour 3,100 -
Variable overhead 2,080 -
Fixed overhead 6,800 $3,600
Purchase price from outsider (1,800
– 25,200
× $14)
Transportation (1,800 × $1.00) – 1,800
Logo (1,800 × $0.20) – 360
Total cost of 1,800 bindings $29,500 $30,960
($1,460)

2 krass Snowboard Mfg. Inc.

Best Use of Facilities Analysis
Buy

Leave
Facilities Idle
Make
Direct materials $17,520 –
Direct labour 3,100 –
Variable overhead 2,080 –
Fixed overhead 6,800 $ 3,600a
Purchase price from outsider (1,800
25,200
× $14)
Transportation (1,800 × $1.00) – 1,800
Logo (1,800 × $0.20) – 360

Expected profit from other product –   –  

Expected net cost of obtaining

$29,500 $30,960
1,800 bindings

Decision: Continue to make the bindings.

Buying the binding, making the new product, and incurring all the fixed costs is the least
attractive alternative.

Relative to buying the bindings and leaving the factory idle, there is a $100 advantage to
buying the bindings and not producing the other product ($30,960 − $31,060).

Relative to buying the bindings and using the factory to make the other product, there is a
$1,560 advantage to making the bindings ($31,060 − $29,500).
 Cost to Make
Minus Cost
to Buy

$17,520
3,100
2,080
3,200 avoidable fixed costs

-25,200

-1,800
-360
($1,460)

Buy
Make
Another
Product
–
–
–
$6,800

25,200

1,800
360

-3,100

$31,060

$1,560
 the fixed costs is the least

ere is a $100 advantage to

60 − $31,060).

he other product, there is a