Solution manual managerial accounting 8e by hansen mowen ch 12

Relevant costs are those costs that differ across alternatives.. Past costs can be used as information to help predict future costs.. If a scarce resource is used in producing the two

CHAPTER 12 TACTICAL DECISION MAKING

QUESTIONS FOR WRITING AND DISCUSSION

1 A tactical decision is short-run in nature; it

involves choosing among alternatives with

an immediate or limited end in view A

stra-tegic decision involves selecting strategies

that yield a long-term competitive

advan-tage

2 Depreciation is an allocation of a sunk cost

This cost is a past cost and will never differ

across alternatives

3 The salary of a supervisor in an accept or

reject decision is an example of an irrelevant

future cost

4 If one alternative is to be judged superior to

another alternative on the basis of cash-flow

comparisons, then cash flows must be

ex-pressed as an annual amount (or periodic

amount); otherwise, consideration must be

given to the time value of the nonperiodic

cash flows

5 Disagree Qualitative factors also have an

important bearing on the decision and may,

at times, overrule the quantitative evidence

from a relevant costing analysis

6 The purchase of equipment needed to

pro-duce a special order is an example of a fixed

cost that is relevant

7 Relevant costs are those costs that differ

across alternatives Differential costs are the

differences between the costs of two

alter-natives

8 Depreciation is a relevant cost whenever it is

a future cost that differs across alternatives

Thus, it must involve a capital asset not yet

acquired

9 Past costs can be used as information to

help predict future costs

10 Yes Suppose, for example, that sufficient

11 Complementary effects may make it more

expensive to drop a product, as the dropped product has a negative impact on other products

12 A manager can identify alternatives by using

his or her own knowledge and experience and by obtaining input from others who are familiar with the problem

13 No Joint costs are irrelevant They occur

regardless of whether the product is sold at the split-off point or processed further

14 Yes The incremental revenue is $1,400,

and the incremental cost is only $1,000, creating a net benefit of $400

15 Regardless of how many units are

pro-duced, fixed costs remain the same Thus, fixed costs do not change as product mix changes

16 No If a scarce resource is used in producing

the two products, then the product providing the greatest contribution per unit of scarce resource should be selected For more than one scarce resource, linear programming may be used to select the optimal mix

17 If a firm is operating below capacity, then a

price that is above variable costs will crease profits A firm may sell a product be- low cost as a loss leader, hoping that many customers will purchase additional items with greater contribution margins Grocery stores often use this strategy

in-18 Different prices can be quoted to customers

in markets not normally served, to peting customers, and in a competitive bid- ding setting

noncom-19 Linear programming is used to select the

cerned with a scarce resource A constraint

set is the collection of all constraints for a

given problem

21 A feasible solution is a solution to a linear

programming problem that satisfies the

problem’s constraints The feasible set of

solutions is the collection of all feasible

solu-tions

22 To solve a linear programming problem

graphically, use the following four steps: (1) graph each constraint, (2) identify the feasi- ble set of solutions, (3) identify all corner points in the feasible set, and (4) select the corner point that yields the optimal value for the objective function Typically, when a li- near programming problem has more than two or three products, the simplex method must be used

EXERCISES 12–1

The correct order is: D, E, B, F, C, A

12–2

Situation Flexible Resource Committed Resource

Short Term

Committed Resource Multiple Periods

Telephone/internet fees

Chesbrough should make the component in house because operating income

Elec-tronics

2 Chesbrough should purchase the component from Berham Electronics

12–6

1 If Product C is dropped, profit will decrease by $15,000 since the avoidable

direct fixed costs are only $55,000 ($80,000 – $25,000) Depreciation is not

re-levant

2 A new income statement, assuming that C is dropped and demand for B

de-creases by 10 percent, is given below (amounts are in thousands)

Yes, Thomson should accept the special order, because operating income

will increase by $68,000 [($24 − $22) × 34,000]

Yes, the special order should be accepted because income will increase by

No, Melton should not accept the special order, because operating income will decrease by $8,750 [($19.25 − $18) × 7,000]

The company should process Delta further, because operating profit would

increase by $9,800 if it were processed further (Note: Joint costs are

irrele-vant to this decision, because the company will incur them whether or not

Delta is processed further.)

Norton should make the 2,000 units of Juno, then make Hera

16,000 pounds – 4,000 pounds = 12,000 pounds for Hera

Hera production = 12,000/5 = 2,400 units

Product mix is 2,000 Juno and 2,400 Hera

Total contribution margin = (2,000 × $30) + (2,400 × $60)

The company should sell only the deluxe unit with contribution margin per

machine hour of $33.33 Sealing can produce 20,000 (15,000/0.75) deluxe units

per year These 20,000 units, multiplied by the $25 contribution margin per

unit, would yield total contribution margin of $500,000

2 Produce and sell 12,000 deluxe units, which would use 9,000 machine hours

Then, produce and sell 50,000 basic units, which would use 5,000 machine

hours Then produce and sell 2,000 standard units, which would use the

re-maining 1,000 machine hours

Total contribution margin = ($25 × 12,000) + ($3 × 50,000) + ($10 × 2,000)

Model M-3 has the higher contribution margin per hour of drilling machine

use, so all 12,000 hours should be spent producing it If that is done, 4,000

(12,000 hours/3 hours per unit) units of Model M-3 should be produced Zero

units of Model A-4 should be produced

2 If only 2,500 units of Model M-3 can be sold, then 2,500 units should be

pro-duced This will take 7,500 hours of drilling machine time The remaining

4,500 hours should be spent producing 750 (4,500/6) units of Model A-4

12–15

Model 33-P has the higher contribution margin per hour of lathe use, so all

12,000 hours should be spent producing it If that is done, 6,000 (12,000

hours/2 hours per unit) units of Model 33-P should be produced Zero units of

Model 14-D should be produced

2 If only 5,000 units of Model 33-P can be sold, then 5,000 units should be

pro-duced This will take 10,000 hours of lathe time The remaining 2,000 hours

should be spent producing 500 (2,000/4) units of Model 14-D

12–16

1 Let X = Number of Model 14-D produced

Let Y = Number of Model 33-P produced

Maximize Z = $12X + $10Y (objective function)

Solution: The corner points are points A, B, C, D, and E The point of

intersec-tion of the linear constraints is obtained by solving the two equaintersec-tions

Optimal solution is Point C, where X = 500 units and Y = 5,000 units

3 At the optimal level, the contribution margin is $56,000

12–17

1 Let X = Number of Product A produced

Let Y = Number of Product B produced

Maximize Z = $30X + $60Y (objective function)

2X + 5Y ≤ 6,000 (direct material constraint)

3X + 2Y ≤ 6,000 (direct labor constraint)

X ≤ 1,000

Y ≤ 2,000

Solution: The corner points are the origin, the points where X = 0, Y = 0, and

where two linear constraints intersect The point of intersection of the two near constraints is obtained by solving the two equations simultaneously

Optimal solution: X = 1,000 units and Y = 800 units

3 At the optimal level, the contribution margin is $78,000

C

D

Note: Heath should consider the qualitative factors If he restored the

Silvera-do, how much longer would it last? What about increased license fees and surance on the newer car? Could he remove the stereo and put it in the Dodge Ram without decreasing the Silverado’s resale value by much?

Sherwood should purchase the part

2 Maximum price = $668,000/40,000 = $16.70 per unit

3 Income would increase by $28,000 ($668,000 – $640,000)

Sherwood should continue manufacturing the part

2 Maximum price = $580,000/40,000 = $14.50 per unit

3 Income would decrease by $60,000 ($640,000 – $580,000)

PROBLEMS 12–21

Steps in Austin’s decision:

Step 1: Define the problem The problem is whether to continue studying at his

present university, or to study at a university with a nationally nized engineering program

recog-Step 2: Identify the alternatives Events A and B (Students may want to include

event I—possible study for a graduate degree However, future events indicate that Austin still defined his problem as in Step 1 above.)

Step 3: Identify costs and benefits associated with each feasible alternative

Events C, E, F, and I (Students may also list E and F in Step 5—they are included here because they may help Austin estimate future income benefits.)

Step 4: Total relevant costs and benefits for each feasible alternative No

specif-ic event is listed for this step, although we can intuit that it was done, and that three schools were selected as feasible since event J mentions that two of three applications met with success

Step 5: Assess qualitative factors Events D, E, F, G, and H

Step 6: Make the decision Event J is certainly relevant to this (What did Austin

ultimately decide? He decided that a qualitative factor, his possible ture with his long-time girl friend was most important and stayed at his current school After graduation, he was hired by a major aeronautical engineering firm By the way, he and his girl friend broke up shortly af- ter his decision to stay was made )

Primack should process rhinime further

2 $16,221/600 = $27.035 additional income per pound

System B should be dropped

Replacing B with C is better than keeping B, but not as good as dropping B

without replacement with C

2 Pat should accept the $2 price This price will increase the cost of the

bene-fit of $16,000 ($18,400 – $2,400)

8,000), an increase of $7,200 (= 2 × 8,000 × 0.45) over the original offer This

still leaves an increase in profits of $11,200 ($18,400 – $7,200) (See the

an-swer to Requirement 1.)

a Based on sales of 41,000 units

Let X = Units sold

Direct fixed selling and admin: 0.7 × $997,500 = $698,250

Direct fixed overhead: $20 × 41,000 = $820,000

Total direct fixed expenses = $698,250 + $820,000 = $1,518,250

The company should keep the division

12–27

1 Napkins: CM/machine hour = ($2.50 – $1.50)/1 = $1.00

Tissues: CM/machine hour = ($3.00 – $2.25)/0.5 = $1.50

Tissues provide the greatest contribution per machine hour, so the company should produce 400,000 packages of tissues (200,000 machine hours times 2 packages per hour) and zero napkins

a Z = $1.00X + $0.75Y (objective function)

X + 0.5Y ≤ 200,000 (machine constraint)

X ≤ 150,000 (demand constraint)

Y ≤ 300,000 (demand constraint)

X ≥ 0

Y ≥ 0

b 1 × 500; 1 × 500; 2 × 500 e 2 × 1,000; 2 × 1,000; 2 × 1,000

The demand can be met in all departments except for Department 3

Produc-tion requires 3,500 labor hours in Department 3, but only 2,750 hours are

available

Direct labor hours needed (Dept 3): 2 × 1,000 = 2,000

Production should be equal to demand for Product 403 because it has the highest contribution margin per unit of scarce resource After meeting de- mand, any additional labor hours in Department 3 should be used to produce Product 401 (2,750 – 2,000 = 750; 750/3 = 250 units of 401)

Contribution to profits:

3 Let X = Number of Product 401 produced

Let W = Number of Product 402 produced = 400 units

Let Y = Number of Product 403 produced

Max Z = $93X + $70Y + $50(400) (objective function)

Note: The $38,000 of direct fixed expenses is the same across all alternatives

The most favorable alternative is to drop B and make the subassembly

2 Analysis with complementary effect:

a 0.06 × $150,000

b 0.94 × 2,000 × $7.00

is manufactured, the other variable costs (those other than the cost of the

component) will decrease proportionately

number of components will be needed

The correct decision now is to keep B and buy the component

12–29 Concluded

12–30

1 To maximize the company’s profitability, Sportway should purchase 9,000

tackle boxes from Maple Products, manufacture 17,500 skateboards, and

manufacture 1,000 tackle boxes This combination of purchased and

manu-factured goods maximizes the contribution per direct labor hour, as

a Variable overhead per unit

Tackle boxes:

Skateboards:

b $6 of selling and administrative costs are fixed

12–30 Concluded

Optimal Use of Sportway’s Available Direct Labor

2 Some qualitative factors to be considered include quality and reliability of

vendor, quality of market data for skateboards, and problems in switching

from tackle boxes to skateboards in the Plastics Department

MANAGERIAL DECISION CASES 12–31

1 Pamela should not have told Roger about the deliberations concerning the Power Department She is obligated by Standard II-1 to “keep information confidential except when disclosure is authorized or legally required.” She had been explicitly told to keep the details quiet but deliberately informed the head of the unit affected by the potential decision By revealing the informa- tion, Pamela also initiated an activity that would prejudice her ability to carry out her duties ethically (III-2)

2 The romantic relationship between Pamela and Roger sets up a conflict of terest for this particular decision, and Pamela should have withdrawn from any active role in it However, she should definitely provide the information she currently has about the cost of eliminating the Power Department This is required by standard IV-2, which states that “all relevant information that could reasonably be expected to influence an intended user’s understanding” should be disclosed Moreover, she has the obligation to communicate infor- mation fairly and objectively (IV-1) These ethical requirements, however, do not in any way prevent Pamela from discussing the qualitative effects of eli- minating the Power Department The effects on workers, community relations, reliability of external service, and any ethical commitments the company may have to its workers should all enter into the decision If I were Pamela, I would communicate the short-term quantitative effects and express my concerns about the qualitative factors I might also project what the costs of operating internally would be for the next five years and compare that with estimates of the costs of external acquisition

in-12–32

MEMO

SUBJECT: Decentralization of Continuing Education

In recommending whether to centralize or decentralize continuing education (CE),

I have first focused on the economic implications The income statements, ing a favorable trend for CE, are misleading, at least in terms of their implications for centralization Tuition revenues will be present whether we centralize or de- centralize and, therefore, are not relevant to the decision Department heads are already heavily involved in scheduling and staffing off-campus and evening courses, and individual faculty are largely responsible for generating our noncre- dit offerings Thus, it would be difficult to argue that decentralizing CE would have any adverse impact on the level of tuition revenues

show-In a similar vein, one can argue that the operating costs for evening and dit courses and the direct costs for off-campus offerings are also irrelevant These costs, which consist of instructional wages, rental of facilities, and sup- plies, will be incurred regardless of whether CE is centralized or decentralized This leaves two categories of costs, indirect costs and administration, which af- fect the decision These categories include advertising, secretaries, assistants, and other support personnel If we choose to decentralize, all of these costs, with the exception of the director’s salary and advertising, can be avoided Further- more, because the director will be teaching in her department, some of her salary

noncre-is avoidable as well ($20,000) The total avoidable costs are outlined as follows