Chapter 7 Managerial Accounting the Use of Cost Information in Management Decision Making

Document Sample
Chapter 7 Managerial Accounting the Use of Cost Information in Management Decision Making Powered By Docstoc
					                                    Chapter 7
                          The Use of Cost Information in
                          Management Decision Making
QUESTIONS
 1. These are the costs and revenues that differ between decision alternatives.

 2. Sunk costs are the costs that have been incurred in prior periods. They are not incremental
    costs and, hence, they are not relevant in making a decision.

 3. These are the costs that can be avoided if a particular action is undertaken.

 4. Opportunity costs are the values of benefits foregone by selecting one decision alternative
    over another. Since opportunity costs differ depending upon which decision alternative is
    selected, they are relevant in evaluating decision alternatives. Alternatively, since
    opportunity costs are incurred when a decision alternative is selected, they are incremental
    costs related to that decision.

 5. The proper (quantitative) approach to analyzing the question of dropping a product line is
    to calculate the change in income that will result from dropping the product line. If income
    will increase when the line is eliminated, the product line should be dropped; otherwise not.

 6. Common costs which are incurred for the benefit of two or more products, such as the
    company president's salary, are not sunk because they are incurred in current and future
    periods. But they are still irrelevant because they usually do not differ among the decision
    alternatives.

 7. Qualitative advantages of making rather than buying a component usually include
    exercising more control over the production process, quality, delivery schedules, and costs.

 8. The amount of joint cost allocated to a product under relative sales value method cannot
    exceed the product's sales value at the split-off point. Thus, products that make a positive
    contribution to covering joint cost will not look unprofitable.

 9. The value of time in a bottleneck department is generally quite high and equal to the
    contribution margin of all throughput per hour. Therefore, you don’t want to “waste it”
    setting up equipment. Since more set-ups are required with small batch sizes, it is generally
    advisable to have larger batch sizes in bottleneck departments.

10. A bottleneck department is referred to as a drum because it “beats a rhythm” that
    coordinates the production in other departments.
7-2    Jiambalvo Managerial Accounting

EXERCISES


E1. Consider a decision to close a production facility. In this case, heat and light,
    which were fixed costs at the plant, would drop to zero. Thus, heat and light
    would be an incremental cost saving with respect to the decision. Depreciation
    of the facility, which is also a fixed cost, would not be an incremental cost
    saving. Depreciation represents a sunk cost and sunk costs are never
    incremental costs.



E2. If Adrienne drops accessories, she will lose the contribution margin (which in
    this case is also the gross margin) of $31,250. The fixed costs allocated to
    accessories, which total $36,270, are not likely to decline. (Keep in mind that
    Adrienne has only two assistants. It is doubtful that she can do without either
    one of them simply by dropping accessories.)

      With the $36,270 of common fixed costs now assigned to Gowns, that product
      line will show a loss and the company will be broke. This is a good example
      of the “cost allocation death spiral” at work! In analyzing a decision, it is
      important to determine the costs that will change (i.e., the costs that are
      incremental). Allocated common costs are seldom a good measure of
      incremental costs.

E3. According to this Web site, sunk costs are “Costs already incurred which
    cannot be recovered regardless of future events.” Since the costs are
    unaffected by the future, they are never incremental costs and are irrelevant
    for decision making.

      According to this Web site, opportunity costs are “The costs of passing up the
      next best choice when making a decision.” Thus, opportunity costs arise from
      making a decision. Because they are incremental costs (they exist because a
      decision was made), they are always relevant for decision making.
            Chapter 7 The Use of Cost Information in Management Decision Making   7-3


E4. In this solution, supplies and travel are assumed to vary with revenue.

    Supplies as a percent of revenue
       $10,000 ÷ $170,000                          0.0588
    Travel as a percent of revenue
       $1,000 ÷ $170,000                           0.0059

    Increase in revenue                           $30,000
    Less:
       Cost of exhibit space                       10,000
       Increase in supplies (.0588 x $30,000)       1,764
       Increase in travel (.0059 x $30,000)           177
    Increase in profit                            $18,059

    The company should exhibit at the show since the impact on profit is positive.

E5. Cost of RBG                                   $25,000
    Less cost savings:
       Mailing                       $12,000
       Printing                        3,000
       Salary of Pat Fisher            1,350       16,350
    Incremental cost of RBG                       $ 8,650

    The incremental cost is less than $10,000, so Craig will accept the RBG offer.
7-4    Jiambalvo Managerial Accounting


E6. a. The incremental profit is $3,060 as follows:

         Revenue
            $75 x 120                                 $ 9,000
         Less cost of unprepared food and beverage
            $30 x 120                                  3,600
                                                       5,400

         Lost revenue
           $45 x 130                                   (5,850)
         Cost savings for food and beverage
           $27 x 130                                    3,510
         Loss profit                                  ( 2,340)

         Net                                          $ 3,060

  b. As indicated above, the opportunity cost of accepting the Wellsworth group is
     $2,340.

  c. The restaurant should consider the fact that it may hurt its business with
     “regulars” who are turned away due to the closure. This could have serious
     long-term effects.

E7. b, c, d, f, g, and i.
             Chapter 7 The Use of Cost Information in Management Decision Making   7-5


E8.                       Cost of Making      Cost of Buying      Incremental
                           1,000 Valves        1,000 Valves       Cost (Savings)
      Variable costs
       Material             $ 800,000                   -0-        ($ 800,000)
       Labor                   500,000                  -0-           (500,000)
       Variable OH             200,000                  -0-           (200,000)
                             1,500,000                  -0-         (1,500,000)
      Fixed costs
       Depr. building          100,000            100,000                  -0-
       Depr. equip.            400,000            400,000                  -0-
       Sup. salaries           200,000                 -0-           (200,000)
                               700,000            500,000            (200,000)
      Other
       Cost savings on
        leased space                -0-           (50,000)            (50,000)
       Cost of buying valves        -0-         1,800,000           1,800,000
                                    -0-         1,750,000           1,750,000
            Total           $2,200,000         $2,250,000          $ 50,000

      The company should make the valves—the incremental cost of buying them is
      $50,000.


E9. a. True                    d. False
    b. False                   e. True
    c. True                    f. False


E10. d, f, g, and h.
7-6   Jiambalvo Managerial Accounting


E11. Incremental benefit (cost) of completing the phone:
     Price                                               $110.00
     Material                                             (10.00)
     Direct Labor                                         (10.00)
     Variable overhead                                     (5.00)
     Benefit                                             $ 85.00

      Incremental benefit of selling partially completed phone:
      Price                                                 $90.00

      The company will be better off by $5 per phone if the company sells the
      partially completed units.


E12. Unit cost of manufacturing pumps                      $ 83.75
     Less: Allocated fixed overhead (irrelevant)            (17.25)
     Add: Warranty cost ($22 × .40)
     (Only 40% pumps are returned for repair)                 8.80
     Unit cost of manufacturing pumps                      $ 75.30

      Unit cost of purchasing pumps                        $ 92.50

      The company should make the pumps.

      The amount of cost savings expected by making pumps in 2003:
      12,800 ($92.50 - $75.30) = $ 220,160.

      Qualitative factors that should be considered in the outsourcing decision
      include product quality of purchased pumps and its effect on whirlpool sales,
      likely improvement in the quality of the company's self-manufactured
      pumps, and strategic effects of outsourcing.
          Chapter 7 The Use of Cost Information in Management Decision Making   7-7


E13.
                             Income Without
                           Home Office Furniture
  Sales                                                    $1,200,000
  Less cost of sales                                          720,000
  Contribution margin                                         480,000
  Less direct fixed costs:
   Salaries                                                   150,000
   Other                                                       50,000
  Less allocated fixed costs
   Rent                                                        20,000
   Insurance                                                    5,000
   Cleaning                                                     6,000
   President’s salary                                         120,000
   Other                                                       10,000
  Net income                                                $ 119,000

  Based on given assumptions, net income will not change. Therefore, the
  company should be indifferent between dropping or not dropping the Home
  Office Furniture product line. However, strategic and other qualitative factors
  should also be considered.
7-8   Jiambalvo Managerial Accounting


E14. a. What is the quality assurance program of the company that will do the
        bottling? Remember the negative influence on Perrier’s sales (circa 1990)
        related to traces of benzene in samples? Sales declined by 14 percent.

      b. The premium brand’s cache may actually increase sales of the less costly
         wines. Thus, sales of the low cost wines may decline if the premium brand
         is dropped.

      c. Quality may decline. Also, the talented workers who produce videos may
         be a resource to software developers who have a variety of “quick
         questions” related to including video in their products (this resource will
         be lost if the facility is closed).


E15. a. Allocation based on physical output:

      Product A                         20 pounds (1/3)
      Product B                         40 pounds (2/3)
      Total                             60 pounds

      This indicates that $333 of the $1,000 joint cost will be allocated to Product
      A and $667 will be allocated to Product B.

      b. Sales of Product A are $1,000 (20 pounds × $50) while sales of Product B
         are $400 (40 pounds × $10). Since product B is showing a loss ($400
         selling price and $667 cost), a manager might think that it should not be
         sold. However, the joint cost is not avoidable (unless the company drops
         both joint products). And product B contributes $400 toward covering
         joint costs and earning a profit.
            Chapter 7 The Use of Cost Information in Management Decision Making       7-9


E16. a. Allocation based on relative sales values:

      Product A (20 pounds × $50)              $1,000 (.7143)
      Product B (40 pounds × $10)                 400 (.2857)
                                               $1,400

      This indicates that $714 of the $1,000 joint cost will be allocated to Product
      A and $286 will be allocated to Product B.

      b. The only time the allocated cost of a joint product will be greater than its
         price will be if the total revenue of all joint products is less than the joint
         costs (in which case the company should drop all of the joint products).


E17. Allocation using physical quantity method:

            Superior grade = $600 × (4,000 ÷ 6,000) = $400
            Economy grade = $600 × (2,000 ÷ 6,000) = $200

      Allocation using relative sales value method:

            Relative Sales Values:
            Superior grade = 4,000 lbs. × $ 0.25 = $1,000
            Economy grade = 2,000 lbs. × $ 0.10 = $200

      Cost Allocation

            Superior grade = $600 × (1,000 ÷ 1,200) = $500
            Economy grade = $600 × (200 ÷ 1,200) = $100
7-10   Jiambalvo Managerial Accounting


E18. Selling price per unit                                   $20.00
     Less variable costs per unit:
        Direct material                              $4.00
        Direct labor                                  1.00
        Variable overhead                              .50      5.50
     Contribution margin per unit                              14.50

       Times number of incremental units                       5,000

       Incremental profit before cost of additional worker    72,500
       Less cost of additional worker                         50,000
       Financial impact of hiring additional worker          $22,500
            Chapter 7 The Use of Cost Information in Management Decision Making   7-11

PROBLEMS


P1. Extrapolating from the information provided, a $1,428,571 incremental profit
    will be generated even if sales are only $6,000,000:

    Incremental sales                   $6,000,000
    Less cost of goods sold
       3/7 x $6,000,000                  2,571,428
    Less cost of TV ads                  2,000,000
       Net                              $1,428,571

    Still, it would be unethical for Sandra to bias her estimate of incremental sales
    simply because she “knows” (or thinks she knows) that the president will not
    go for the ads unless the revenue estimate is biased upwards. Sandra wasn’t
    hired to provide biased information to the president—she was hired to provide
    honest estimates that the president can use to make decisions.

    It may be that the president knows of some incremental costs (including
    opportunity costs) of which Sandra is unaware, and that’s the reason the
    president wants a high revenue figure. In this case, Sandra’s bias may actually
    lead to a decline in shareholder value.

P2. a. Cost savings
          Salary of gardeners                    $185,000
          Plant materials                          65,000
          Fertilizer                                5,000
          Fuel                                      4,000       $ 259,000
       Proceeds from sale of equipment                             20,000
                                                                  279,000
       Less cost of Highline                                      250,000
       Net benefit of outsourcing in year 1                     $ 29,000
7-12    Jiambalvo Managerial Accounting


          In the second year, savings will decrease by $20,000 since the proceeds
          from the sale of equipment only pertain to the first year. Still, there will be
          a net benefit of $9,000 in year two.

       b. The University should consider the impact on employee morale related to
          firing 3 gardeners, especially if they are long time employees. Also, the
          current gardeners may be very familiar with the University’s plants and
          trees and the care by Highline may be inferior, even though they assert that
          it will be comparable to the past.

P3.                                  Do not buy           Buy
                                    Prefabricated    Prefabricated         Difference
       Materials                      $30,000           $34,000             $4,000
       Labor to form                    2,000              -0-*             (2,000)
       Labor to install                 8,000             9,000              1,000
       Misc. variable costs             1,000             1,000                -0-
       Allocated fixed costs            2,500             2,500                -0-
       Penalty                          5,000              -0-              (5,000)
        Total                         $48,500           $46,500            ($2,000)

       Bradley should buy the prefabricated duct-work which will result in a net
       incremental benefit of $2,000.

       *When the workers are reassigned to the other project, they will still be paid
       $2,000. However, I assume that $2,000 of wages that would ultimately have
       been paid to other workers on that project will no longer need to be paid.
       Thus, there is a net $2,000 benefit.
            Chapter 7 The Use of Cost Information in Management Decision Making   7-13


P4. Incremental cost of purchasing containers
     (100,000 packages × $1.75)                        $175,000

    Cost savings:
    Direct material
     (.10 × $6.50 × 100,000)            $65,000
    Direct labor
     (.2 × $3.50 × 100,000)              70,000
    Variable overhead*
     (.15 × $1 × 100,000)                15,000
    Leased space savings                 15,000
    Supervisor salary                    70,000          235,000

    Net benefit                                        $ 60,000

    The company should purchase the containers—there is an expected net benefit
    of $60,000.

    *Fixed overhead is $2 per package ($200,000 ÷ 100,000 packages). Therefore,
    variable overhead is $1 ($3 total overhead - $2 fixed overhead).
7-14    Jiambalvo Managerial Accounting


P5. a.                               Reprocess           Sell
                                      and Sell        to United        Difference
       Sales                         $10,000           $7,000           ($3,000)
       Less:
       Variable costs already
        incurred                          5,000         5,000               -0-
       Fixed costs already
        incurred                          3,000         3,000               -0-
       Variable reprocessing costs        2,000          -0-              2,000

        Total                         $ -0-           ($1,000)          ($1,000)

       The company should repeat the coloring process—the net incremental benefit
       of this action is $1,000 compared to selling the carpet to United Home
       Discount Store for $7 per square yard.

       b. A payment by United of $9 per square yard (rather than $7), would result
          in $2,000 of additional income [($9 - $7) × 1,000 square yards]. In this
          case, selling to United would result in a $1,000 net benefit. However, the
          company should consider an important qualitative factor. Selling
          “defective” carpeting, with the Carpets Unlimited brand identified, may
          more than offset the relatively small incremental benefit of $1,000.
              Chapter 7 The Use of Cost Information in Management Decision Making   7-15


P6.                                                                   ZylexA
      Selling price                                                    $9.75
      Less:
       Material                                    $2.25
       Labor                                        1.80
       Variable overhead                            2.60                6.65
      Contribution margin                                              $3.10
      Time to produce in minutes                                     20 minutes
      Contribution margin per minute                                   $0.155

                                                                      ZylexB
      Incremental revenue ($13.50 - 9.75)                              $3.75
      Less:
       Incremental material cost                   $1.90
       Incremental labor cost                        .70
       Incremental variable overhead                1.20                3.80
      Incremental profit (loss)                                       ($0.05)
      Incremental time to produce in minutes                         10 minutes
      Incremental loss per minute                                      ($.005)

      There is no question that ZylexA has to be produced, because the company
      cannot make ZylexB without starting with ZylexA. The question is, “If you
      have a unit of ZylexA, should you take up production time converting it into
      ZylexB or should you just make more ZylexA?”

      The analysis indicates that production of ZylexB actually reduces profit at a
      rate of $.005 per minute. Thus, no ZylexB should be produced.
7-16    Jiambalvo Managerial Accounting


P7. a. Effect of dropping communications products:
       Lost contribution margin                    $(191,000)
       Savings of direct salaries                     56,000
       Net effect                                  $(135,000)

          The company will be worse off by $135,000 if it drops communications
          products.

       b. Conceivably, dropping communications products would decrease sales of
          other products. Most likely, some customers come into the store to buy
          communications products and end up buying audio or video products. This
          adds further weight to the argument for keeping communications.



P8. Contribution margin of Fescue
     ($1.90 - $.40)                               $1.50 per square yard

       Contribution margin of Bermuda
        ($2.65 – $1.00)                           $1.65 per square yard

       Dedicating an additional 50,000 square yards to Bermuda grass would lead to
       an additional $7,500 of profit [($1.65 - 1.50) × 50,000]. Thus, the president’s
       decision to stick with an equal mix has a $7,500 opportunity cost.
            Chapter 7 The Use of Cost Information in Management Decision Making   7-17


P9. a. Effect of dropping Model 301 Pump:
    Lost revenue ($13,000 × 500)                     ($6,500,000)
    Cost savings
    Material ($6,000 × 500)               $3,000,000
    Direct labor ($4,000 × 500)            2,000,000
    Direct fixed costs                       500,000   5,500,000
    Net effect                                       ($1,000,000)

    The Model 301 pump should not be dropped—dropping would reduce profit
    by $1,000,000.

    b. The Model 301 pump has relatively high direct labor cost per unit. Since
       all overhead costs are in one cost pool allocated using direct labor costs,
       the relatively high direct overhead costs associated with other models will
       be transferred to the Model 301! Also, Model 301 will receive a relatively
       large share of common overhead costs.
7-18    Jiambalvo Managerial Accounting


P10. a.                               Standard            Deluxe         Total
     Yards of carpet                    30,000            50,000        80,000

       Sales                          $450,000      $1,000,000      $1,450,000
       Less variable costs             270,000         600,000         870,000
       Less fixed costs                206,250         343,750         550,000
       Profit (loss)                 ($ 26,250)     $ 56,250        $ 30,000

                                                 Deluxe
       b. Yards of carpet                        50,000

          Sales                             $1,000,000
          Less variable costs                  600,000
          Less fixed costs                     550,000
          Profit (loss)                    ($ 150,000)


       c. In many if not most cases, common costs will not be reduced when a
          product or product line is dropped. The costs are simply “passed on” to the
          remaining products, which may in turn appear unprofitable!
           Chapter 7 The Use of Cost Information in Management Decision Making   7-19


P11. a. Joint cost ($20 + $80)                      $100.00

        Allocation based on weight
        Veneer (10 lbs. ÷ 70 lbs.) × $100           $ 14.29
        Peeler (60 lbs. ÷ 70 lbs.) × $100             85.71
                                                    $100.00
        Profit per sheet of Veneer:
        Selling price                               $140.00
        Cost                                          14.29
        Profit per sheet                            $125.71

        Profit per Peeler:
        Selling price                                 $40.00
        Cost                                           85.71
        Profit (loss) per sheet                      ($45.71)

    Total profit for both joint products
     ($125.71 - $45.71)                          $80.00

    b. No. The product is making a contribution of $40 toward covering joint
       cost.
7-20    Jiambalvo Managerial Accounting


       c. Allocation based on relative sales value:
          Veneer ($140 ÷ $180) × $100                   $ 77.78
          Peeler ($40 ÷ $180) × $100                      22.22
                                                        $100.00
          Profit per sheet of Veneer:
          Selling price                                 $140.00
          Cost                                            77.78
          Profit per sheet                              $ 62.22

          Profit per Peeler:
          Selling price                                  $40.00
          Cost                                            22.22
          Profit (loss) per sheet                        $17.78

       Total profit for both joint products
        ($62.22 + $17.78)                                $80.00

       d. The relative sales value is preferred because it will not make a joint
          product appear unprofitable (unless for all joint products, the sum of the
          sales values is less than the joint costs).
             Chapter 7 The Use of Cost Information in Management Decision Making   7-21


P12. a. Allocation based on relative sales values at the split-off point:

        Sales value of 100 pounds of orange peels                   $300
        Sales value of 300 pints of juice
         (300 × $.30)                                                 90
        Total                                                       $390

        Joint cost ($400 + $40)                                     $440

        Allocation to peels ($300÷ $390) × $440                     $338

        Allocation to juice ($90 ÷ $390) × $440                      102
        Total                                                       $440

        Profit per 100-pound box of candied peels:
        Selling price                                               $500
        Less joint cost                                              338
        Less cost of sugar coating and packaging                      50
        Profit                                                      $112

        Profit per pint of juice:
        Selling price                                           $1.00
        Less joint cost per pint
         ($102 ÷ 300)                                              .34
        Less cost of pasteurizing and packaging
         ($150 ÷ 300)                                             .50
        Profit                                                  $0.16

     b. Incremental revenue of sugar coating:
         ($500 - $300)                                           $200
        Incremental cost                                           50
        Net incremental benefit of sugar coating                 $150

     c. Incremental revenue of packaged juice
         ($300 - $90)                                       $210
        Incremental cost                                     150
        Net incremental benefit of pasteurizing
         and packaging                                      $ 60 ÷ 300 = $.20/pint
7-22   Jiambalvo Managerial Accounting


P13. a. Allocation based on weight:

        Type                      Weight (lbs.)      Percent
        Salmon                      10,000             25%
        Halibut                     10,000             25%
        Flounder                    20,000             50%
                                    40,000            100%

        Salmon
        Revenue
         (10,000 lbs. × $4.00)                    $40,000
        Cost (.25 × $54,000)                       13,500
        Profit                                     26,500

        Halibut
        Revenue
         (10,000 lbs. × $3.00)                     30,000
        Cost (.25 × $54,000)                       13,500
        Profit                                     16,500

        Flounder
        Revenue
         (20,000 lbs. × $1.00)                     20,000
        Cost (.50 × $54,000)                        27,000
        Profit (loss)                             ( 7,000)

        Total profit
         ($26,500 + $16,500 - $7,000)             $36,000
        Chapter 7 The Use of Cost Information in Management Decision Making   7-23


b. Allocation based on relative sales value:

   Type                Sales Value                 Percent
   Salmon                $40,000                    44.444%
   Halibut                30,000                    33.334%
   Flounder               20,000                    22.222%
                         $90,000                   100.000%

   Salmon
   Revenue
    (10,000 lbs. × $4.00)              $40,000
   Cost (.44444 × $54,000)              24,000
   Profit                               16,000

   Halibut
   Revenue
    (10,000 lbs. × $3.00)              $30,000
   Cost (.33333 × $54,000)              18,000
   Profit                               12,000

   Flounder
   Revenue
    (20,000 lbs. × $1.00)              $20,000
   Cost (.22222 × $54,000)              12,000
   Profit (loss)                         8,000

   Total profit
    ($16,000 + $12,000 + $8,000)       $36,000
7-24    Jiambalvo Managerial Accounting


       c. Incremental revenue
          Revenue of paste
           (10,000 lbs. × $3)                         $30,000
          Original revenue of flounder
           (20,000 lbs. × $1)                          20,000
          Incremental revenue                          10,000

       Incremental cost                                 7,000

       Net incremental benefit                         $3,000

       Given that there is a net incremental benefit of $3,000, Robert should convert
       the flounder into fish paste. Note that the joint costs allocated to the fish are
       not relevant to the analysis. These costs are not incremental costs. They exist
       whether or not the flounder is converted into fish paste.
            Chapter 7 The Use of Cost Information in Management Decision Making   7-25


P14. a. Allocation based on weight:

       Type                Weight (lbs.)              Percent
       Copper                50,000                    99.80%
       Gold                     100                    00.20%
                             50,100                   100.00%

       Copper
       Revenue
        (50,000 lbs. × $0.68)             $ 34,000
       Cost (.9980 × $400,000)             399,200
       Profit (loss)                     ($365,200)

       Gold
       Revenue
        (100lbs. × 16 × $270)              $432,000
       Cost (.0020 × $400,000)                  800
       Profit                              $431,200

       Total profit
        (-$365,200 + $431,200)              $66,000

    The drawback of this method is that it may make a product (like copper), that
    is making a positive contribution toward covering joint cost, show a loss
    suggesting that it should be dropped.
7-26    Jiambalvo Managerial Accounting


       b. Allocation based on relative sales value:

          Type                Sales Value                 Percent
          Copper               $ 34,000                     7.30%
          Gold                   432,000                   92.70%
                               $466,000                   100.00%

          Copper
          Revenue
           (50,000 lbs. × $0.68)               $34,000
          Cost (.0730 × $400,000)               29,200
          Profit                               $ 4,800

          Gold
          Revenue
           (100lbs. × 16 × $270)              $432,000
          Cost (.9270 × $400,000)              370,800
          Profit                              $ 61,200

          Total profit
           ($4,800 + $61,200)             $66,000

       c. If the joint cost is any value greater than $466,000, then, with the relative
          sales value approach to allocation, both copper and gold will show a loss.
            Chapter 7 The Use of Cost Information in Management Decision Making   7-27


P15. a. Additional units in 8 hour shift                  500
        Times average contribution margin            $     40
        Additional profit per 8 hour shift with
          larger batch sizes                         $20,000

     b. Larger batch sizes may reduce flexibility to respond quickly to new
        orders. Also, an error in the production process may result in a larger
        number of defects compared to a small batch size.



P16. a. Based on the company president’s comment that the two workers will be
        sitting around for 30 hours per week, it appears that they will be working
        for 10 hours per week. The machine packages 2,000 bottles per hour but
        it is 10 percent faster than the workers. Thus, the workers will be packing
        1,818 bottles per hour (2,000 ÷ 1.1 = 1,818).

         With a contribution margin of $0.50 per bottle, the workers will be
         generating an incremental profit of $9,090 per week.

         1,818 bottles per hour x 10 hours per week x $0.50 = $9,090 per week

         With 52 weeks per year, this amounts to $472,680—much higher than
         the $100,000 salary of the two workers combined.

				
DOCUMENT INFO
Description: Chapter 7 Managerial Accounting the Use of Cost Information in Management Decision Making document sample