Chapter 12 Akmen

8/12/2019 Chapter 12 Akmen

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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 strategicdecision involves selecting strategies

that

yield a long-term competitive advantage.

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 expressed

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 animportant bearing on the decision and may,

at times, overrule the quantitative evidence

from a relevant costing analysis.

6.The purchase of equipment needed to produce

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 alternatives.

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.


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10.Yes. Suppose, for example, that sufficient

materials are on hand for producing a part

for two years. After two years, the part will

be replaced by a newly engineered part. If

there is no alternative use of the materials,

then the cost of the materials is a sunk costand not relevant in a make-or-buy decision.

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 produced,

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 increase

profits. A firm may sell a product below

cost as a loss leader, hoping that manycustomers

will purchase additional items

with

greater contribution margins. Grocery

stores

often use this strategy.

18.Different prices can be quoted to customers


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in markets not normally served, to noncompeting

customers, and in a competitive bidding

setting.

19.Linear programming is used to select the

optimal product mix whenever there are multiple

constrained scarce resources.20.An objective function is the one to be maximized

(or minimized) subject to a set of

constraints.

A constraint restricts the possible

values of variables appearing in the objective

function. Usually, a constraint is con-

3

3

9

9

1

1

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

problems constraints. The feasible set of

solutions is the collection of all feasible solutions.

22.To solve a linear programming problem

graphically, use the following four steps: (1)

graph each constraint, (2) identify the feasible

set of solutions, (3) identify all corner

pointsin the feasible set, and (4) select the

corner

point that yields the optimal value for

the

objective function. Typically, when a linear

programming problem has more than

two


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or three products, the simplex method

must

be used.

33

9

9

2

2

121

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

122

EXERCISES

Situation Flexible Resource Committed Resource

Short Term

A Forms & supplies Purchasing agents

Telephone/internet

fees

Office equipment

B Counter staff

FoodUtilities

C Substitute help

Gasoline

123

Paper supplies

Advertising

Committed Resource

Multiple Periods

Building and parking lotlease

Lawn mower oil Power mower

Weed eater

Pickup truck

1. The two alternatives are to make the component in house or to buy it from the

outside supplier.


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2. Alternatives

Differential

Make

Buy Cost to Make

Direct materials $ 2.95 $ 2.95

Direct labor 0.40 0.40Variable overhead 1.80 1.80

Purchase cost

$6.50 (6.50)

Total relevant cost $ 5.15

$6.50 $ (1.35)

Chesbrough should make the component in house because operating income

will decrease by $27,000 ($1.35 20,000) if it is purchased from Berham Elec-

tronics.

3

3

9

9

3

3

124

1. Alternatives Differential

Make

Buy Cost to Make

Direct materials $ 2.95 $ 2.95

Direct labor 0.40 0.40

Variable overhead 1.80 1.80

Avoidable fixed overhead 1.85 1.85

Purchase cost $6.50 (6.50)

Total relevant cost $ 7.00

$6.50 $ (0.50)

2. Chesbrough should purchase the component from Berham Electronics be-

cause operating income will increase by $10,000 ($0.50 20,000).


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125

1. Regulars Seasonals Total

Sales revenue $135,000 $15,000 $150,000

Less: Variable expenses 50,000

8,600 58,600

Contribution margin $85,000 $6,400 $91,400Less: Direct fixed expenses 3,000

1,200 4,200

Segment margin $82,000

$5,200 $ 87,200

Less: Common fixed expenses 60,000

Operating income $ 27,200

2. Dropping the seasonals line will reduce operating income by $5,200.

3

3

9

9

4

4

126

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 relevant.

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).A B Total

Sales revenue $1,800 $1,440 $3,240


900 2,250

Contribution margin $450 $ 540 $990

Less: Direct fixed expenses 150

300 450


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Segment margin $300

$ 240 $ 540

Less: Common fixed expenses 340

Operating income $ 200

Operating income will decrease by $50,000 ($250,000$200,000).

127

1. Direct materials $ 8.00

Direct labor 10.00

Variable overhead 4.00

Relevant cost per unit $22.00

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

will increase by $68,000 [($24 -$22) 34,000].

3

3

9

9

5

5

127 Concluded

2. Additional revenue ($24 34,000) $816,000

Less:

Direct materials ($8 34,000) 272,000

Direct labor ($10 34,000) 340,000

Variable overhead ($4 34,000) 136,000

Contribution margin $68,000

Additional packing cost ($6,000 7)* 42,000

Increase in income $26,000


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* 34,000/5,000 = 6.8, which is rounded up to 7 to reflect the lumpy nature of

the packing capacity (since additional capacity is purchased in 5,000 unit increments)

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

$26,000.128


Direct labor 6.50


Sales commission 1.75


No, Melton should not accept the special order, because operating income

will decrease by $8,750 [($19.25 -$18) 7,000].


Direct labor 6.50



Yes, Melton should accept the special order, because operating income will

increase by $3,500 [($18.00 -$17.50) 7,000].

3

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9

9

6

6

129

1. Sales $ 293,000

Costs 264,000

Operating profit $ 29,000


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2. Sell

Process Further Difference

Revenues $40,000 $73,700 $33,700

Further processing cost 023,900 23,900

Operating income $40,000

$49,800 $ 9,800

The company should process Delta further, because operating profit would

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

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

Delta

is processed further.)

1210

1. ($30 2,000) + ($60 4,000) = $300,000

2. Juno

Hera

Contribution margin $30 $60

Pounds of material 2

5

Contribution margin/pound $15

$12

Norton should make the 2,000 units of Juno, then make Hera.2,000 units of Juno 2 = 4,000 pounds

16,000 pounds4,000 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)

= $204,000

3

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9

7

7


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1211

1. Basic Standard DeluxePrice $ 9.00 $30.00 $35.00

Variable cost 6.00

20.00 10.00

Contribution margin $ 3.00 $10.00 $25.00

Machine hours 0.10

0.50 0.75

Contribution margin/MHr. $30.00

$20.00 $33.33

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 remaining

1,000 machine hours.

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

= $470,0001212

1. COGS + Markup(COGS) = Sales

$144,300 + Markup($144,300) = $206,349

Markup($144,300) = $206,349$144,300

Markup = $62,049/$144,300

Markup = 0.43, or 43%

2. Direct materials $ 800

Direct labor 1,600

Overhead 3,200

Total cost $ 5,600

Add: Markup 2,408

Initial bid $ 8,008


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3

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98

8

1213

1. COGS + Markup(COGS) = Sales

$1,000,000 + Markup($1,000,000) = $1,250,000

Markup($1,000,000) = $1,250,000$1,000,000

Markup = $250,000/$1,000,000

Markup = 0.25, or 25%

2. Price = $43,000 + (0.25 $43,000) = $53,750

1214

1. Model A-4 Model M-3

Contribution margin $24 $ 15

Hours on lathe 6

3Contribution margin/hours on lathe $ 4

$ 5

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 remaining4,500 hours should be spent producing 750 (4,500/6) units of Model A-4.

3

3

9

9


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9

9

1215

1. Model 14-D Model 33-P

Contribution margin $ 12 $ 10

Hours on lathe 4

2

Contribution margin/hours on lathe $ 3

$ 5

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.

1216

1. Let X = Number of Model 14-D produced

Let Y = Number of Model 33-P produced

Maximize Z = $12X + $10Y (objective function)4X + 2Y =12,000 (lathe constraint)

X =2,000 (demand constraint)

Y =5,000 (demand constraint)

X =0

Y =0

4

40

0

0

0


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1216 Continued

2.

Y

6,000

5,000

4,000

3,000

2,000

1,000

A E X

0 1,000 2,000 3,000 4,000 5,000

Solution: The corner points are points A, B, C, D, and E. The point of intersectionof the linear constraints is obtained by solving the two equations simultaneously.

Corner Point

X-Value Y-Value Z = $12X + $10Y

A 0 0 $ 0

B 0 5,000 50,000

C 500 5,000 56,000

D 2,000 2,000 44,000

E 2,000 0 24,000

B

C

D

*The intersection values for X and Y can be found by solving the simultaneous

equations:


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4

4

0

0

11

1216 Concluded

Corner Point C:

Y = 5,000

4X + 2Y = 12,000

4X + 2(5,000) = 12,000

4X = 2,000

X = 500

Z = $12(500) + $10(5,000) = $56,000

Corner Point D:

X = 2,000

4X + 2Y = 12,000

4(2,000) + 2Y = 12,0002Y = 4,000

Y = 2,000

Z = $12(2,000) + $10(2,000) = $44,000

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.

1217

1. Let X = Number of Product A producedLet 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


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X =0

Y =0

4

40

0

2

2

1217 Concluded

2.

Y

3,000

2,000

1,000

X

0 1,000 2,000 3,000

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 linear

constraints is obtained by solving the two equations simultaneously.

Corner Point X-Value Y-Value Z = $30X + $60Y

A 0 0 $ 0B 1,000 0 30,000

C 1,000 800 78,000*

D 0 1,200 72,000

*The values for X and Y are found by solving the simultaneous equations:

X = 1,000

2X + 5Y = 6,000


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2(1,000) + 5Y = 6,000

Y = 800

C

D

A BZ = $30(1,000) + $60(800) = $78,000

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

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

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1218

1. The amounts Heath has spent on purchasing and improving the Silverado are

irrelevant because these are sunk costs.

2. Alternatives

Cost Item

Restore Silverado Buy Dodge Ram

Transmission $2,400

Water pump 400

Master cylinder 1,700

Sell Silverado $(9,400)

Cost of new car

12,300

Total $4,500$ 2,900

Heath should sell the Silverado and buy the Dodge Ram because it provides a

net savings of $1,600.

Note: Heath should consider the qualitative factors. If he restored the Silverado,

how much longer would it last? What about increased license fees and insurance


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on the newer car? Could he remove the stereo and put it in the

Dodge

Ram without decreasing the Silverados resale value by much?

1219

1. Make BuyDirect materials $360,000

Direct labor 120,000

Variable overhead 100,000

Fixed overhead 88,000

Purchase cost

$640,000 ($16 40,000)

Total relevant costs $668,000

$640,000

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).

4

4

0

0

44

1220

1. Make Buy

Direct materials $360,000


Variable overhead 100,000 Purchase cost

$640,000 ($16 40,000)


$640,000

Sherwood should continue manufacturing the part.


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

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

44

0

0

5

5

1221

PROBLEMS

Steps in Austins 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 recognized

engineering program.

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

event Ipossible 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 5they 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 future

with his long-time girl friend was most important and stayed at his


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current

school. After graduation, he was hired by a major aeronautical

engineering

firm. By the way, he and his girl friend broke up shortly after

his decision to stay was made. )

4

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1222

1. Cost Item Make Buy

Direct materials

a

$372,000

Direct labor

b

102,600

Variable overhead

c30,400

Fixed overhead

d

58,000

Purchase cost

e

$550,000

Total $563,000

$550,000

a


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b

c

d

e

($80 3,000) + ($165 800)

$27 3,800$8 3,800

$26,000 + $32,000

($130 3,000) + ($200 800)

Net savings by purchasing: $13,000. Powell should purchase the crowns rather

than make them.

2. Qualitative factors that Powell should consider include quality of crowns, re-

liability and promptness of producer, and reduction of workforce.

3. It reduces the cost of making the crowns to 531,000, which is less than the

cost of buying. (563,00032,000)

4. Cost Item

Make Buy

Direct materials $419,000


Variable overhead 36,800

Fixed overhead 58,000

Purchase cost

$640,000

Total $638,000$640,000

Powell should produce its own crowns if demand increases to this level because

the fixed overhead is spread over more units.

4

4

0

07

7

1223


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1. @ 600 lbs.

Process Further Sell Difference

Revenues

a

$30,000 $9,000 $21,000Bags

b

(39) 39

Shipping

c

(408) (90) (318)

Grinding

d

(1,500) (1,500)

Bottles

e

(3,000) (3,000)

Total $25,092

$8,871 $16,221

a

600 10 $5 = $30,000; $15 600 = $9,000

b

$1.30 (600/20)

c

[(10 600)/25] $1.70 = $408; $0.15 600 = $90

d$2.50 600

e

10 600 $0.50

Primack should process rhinime further.

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

$27.035 265,000 = $7,164,275

12241. System A System B Headset Total

Sales $45,000 $ 32,500 $8,000 $ 85,500


25,500 3,200 48,700

Contribution margin $25,000 $ 7,000 $4,800 $ 36,800

Less: Direct fixed costs* 526

11,158 1,016 12,700


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Segment margin (loss) $24,474

$ (4,158) $3,784 $ 24,100

Less: Common fixed costs 18,000

Operating income $ 6,100

*$45,000/$85,500 $18,000 = $9,474; $10,000$9,474 = $526

$32,500/$85,500 $18,000 = $6,842; $18,000$6,842 = $11,158

$8,000/$85,500 $18,000 = $1,684; $2,700$1,684 = $1,016

4

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8

1224 Concluded

2. System A Headset Total

Sales $58,500 $6,000 $64,500


2,400 28,400Contribution margin $32,500 $3,600 $36,100

Less: Direct fixed costs 526

1,016 1,542


$2,584 $34,558

Less: Common fixed costs 18,000


System B should be dropped.

3. System A

System C Headset Total

Sales $45,000 $ 26,000 $7,200 $78,200



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13,000 2,880 35,880

Contribution margin $25,000 $ 13,000 $4,320 $42,320

Less: Direct fixed costs 526

11,158 1,016 12,700


$ 1,842 $3,304 $29,620Less: Common fixed costs 18,000


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

without replacement with C.

4

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1225

1. Steve should consider selling the part for $1.85 because his divisions profits

would increase by $12,800:Accept

Reject

Revenues (2 $1.85 8,000) $29,600 $0

Variable expenses 16,800

0

Total $12,800

$0

Pats divisional profits would increase by $18,400:

Accept Reject

Revenues ($32 8,000) $ 256,000 $0

Variable expenses:

Direct materials ($17 8,000) (136,000) 0

Direct labor ($7 8,000) (56,000) 0

Variable overhead ($2 8,000) (16,000) 0

Component (2 $1.85 8,000) (29,600


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) 0

Total relevant benefits $ 18,400

$0

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

from $29,600 to $32,000 (2 $2

8,000) and yield an incremental bene-

fit of $16,000 ($18,400$2,400).

Steves division will see an increase in profit of $15,200 (8,000 units 2 components

per unit

$0.95 contribution margin per component).

3. Yes. At full price, the total cost of the component is $36,800 (2 $2.30

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 answer

to Requirement 1.)

4

4

1

1

0

0

1226

1. Sales

a

$ 3,751,500

Less: Variable expenses

b

2,004,900Contribution margin $ 1,746,600

Less: Direct fixed expenses

c

1,518,250

Divisional margin $ 228,350

Less: Common fixed expenses

c


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299,250

Operating (loss) $ (70,900

)

a

Based on sales of 41,000 units

Let X = Units sold

$83X/2 + $100X/2 = $3,751,500

$183X = $7,503,000

X = 41,000 units

b

$83/1.25 = $66.40 Manufacturing cost

20.00

Fixed overhead

$46.40 Per internal unit variable cost

5.00

Selling

$51.40

Per external unit variable cost

Variable costs = ($46.40 20,500) + ($51.40 20,500)

= $2,004,900

c

Fixed selling and admin: $1,100,000$5(20,500) = $997,500

Direct fixed selling and admin: 0.7 $997,500 = $698,250Direct fixed overhead: $20 41,000 = $820,000

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

Common fixed expenses = 0.3 $997,500 = $299,250

2. Keep

Drop

Sales $ 3,751,500 $

Variable costs (2,004,900) (2,050,000)*

Direct fixed expenses (1,518,250)

Annuity 100,000

Total $ 228,350

$(1,950,000)

*$100 20,500 (The units transferred internally must be purchased externally.)

The company should keep the division.


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4

4

1

11

1

1227

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.

2. Let X = Boxes of napkins; Y = Boxes of tissues

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

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

X =150,000 (demand constraint)


X =0

Y =0

4

4

1

1

2

2

1227 Concluded

b. and c.

(in thousands)

Y


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400

300

200

100

X

0 100 200 300 400

Corner Point

X-Value Y-Value Z = $1.00X + $0.75Y

A 0 0 0

B 150,000 0 150,000

C* 150,000 100,000 225,000

D* 50,000 300,000 275,000*

E 0 300,000 225,000

*Point C: Point D:

X = 150,000 Y = 300,000

X + 0.5Y = 200,000 X + 0.5Y = 200,000

150,000 + 0.5Y = 200,000 X + 0.5(300,000) = 200,000Y = 100,000 X = 50,000

D

E

A B

C

The optimal mix is D: 50,000 packages of napkins and 300,000 boxes of

tissues. The maximum profit is $275,000.

4

4

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1

3

3


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1228

1. Dept. 1 Dept. 2 Dept. 3 Total

Product 401 (500 units):Labor hours

a

1,000 1,500 1,500 4,000

Machine hours

b

500 500 1,000 2,000

Product 402 (400 units):

Labor hours

c

400 800 1,200

Machine hours

d

400 400 800

Product 403 (1,000 units):

Labor hours

e

2,000 2,000 2,000 6,000

Machine hours

f2,000 2,000 1,000 5,000

Total labor hours 3,400 4,300 3,500 11,200

Total machine hours 2,900 2,900 2,000 7,800

a

b

c

2 500; 3 500; 3 500

1 500; 1 500; 2 500

1 400; 2 400

de

f

1 400; 1 400

2 1,000; 2 1,000; 2 1,000

2 1,000; 2 1,000; 1 1,000

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

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


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available.

4

41

1

4

4

1228 Continued

2. Product 401: CM/unit = $196$103 = $93

CM/DLH = $93/3 = $31

Direct labor hours needed (Dept. 3): 3 500 = 1,500

Product 402: CM/unit = $123$73 = $50

Requires no hours in Department 3.

Product 403: CM/unit = $167$97 = $70

CM/DLH = $70/2 = $35

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 demand,

any additional labor hours in Department 3 should be used to produce

Product

401 (2,7502,000 = 750; 750/3 = 250 units of 401).

Contribution to profits:

Product 401: 250 $93 = $ 23,250Product 402: 400 $50 = 20,000

Product 403: 1,000 $70 = 70,000

Total contribution margin $113,250

3. Let X = Number of Product 401 produced


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Let W = Number of Product 402 produced = 400 units

Let Y = Number of Product 403 produced

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

2X + Y =1,500 (machine constraint)

3X + 2Y =2,750 (labor constraint)X =500 (demand constraint)


X =0

Y =0

4

4

1

1

5

5

1228 Concluded

Corner Point X Y W Z = $93X + $70Y + $50W

A 0 0 400 $ 20,000

B 500 0 400 66,500

C 500 500 400 101,500D 250 1,000 400 113,250*

E 0 1,000 400 90,000

*The optimum output is:

Product 401: 250 units

Product 402: 400 units

Product 403: 1,000 units

At this output, the contribution to profits is $113,250.

Y

1,500


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1,000

500

X

0 500 1,000

D

E

A

B

C

4

4

1

1

6

6

1229

1. Cost Item Lease and Make Buy

Purchase cost $50,000

Variable manufacturing costs $14,000*

Lease 27,000

Supervisor salary 10,000


$50,000

*$7 2,000

Drop B and Make

Purchase cost


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Variable manufacturing costs $14,000

Lost contribution margin 34,000


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:

Make Buy

Lost sales for A

a

$ 9,000

Cost of making component

b

13,160

Reduction of other variable costs

c

(1,800)

Lost contribution margin for B 34,000

Cost to purchase

d

$50,000

Total relevant costs $54,360$50,000

a

b

c

d

0.06 $150,000

0.94 2,000 $7.00

0.06($80,000$50,000); since sales decrease by 6 percent if the componentis manufactured, the other variable costs (those other than the cost of the

component) will decrease proportionately.

If the buy alternative is chosen, there is no reduction in sales and the same

number of components will be needed.

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


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4

4

1

1

7

7

1229 Concluded

3. Lease and Make Buy

Variable manufacturing costs $19,600

a

Lease 27,000

Supervisor salary 10,000

Purchase cost

$70,000


$70,000

a

b

$7 2,800

$25 2,800

Drop B and Make

Lost sales from A $ 9,000

Variable cost of manufacturing

a

18,424

Reduction of other variable costs

b

(600)Loss in contribution margin for B 34,000

Purchase cost



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a

b

0.94 2,800 $7.00

0.06 ($80,000$70,000)

The correct decision now is to lease and make the component.

4

4

1

1

8

8

b

1230

1. To maximize the companys profitability, Sportwayshould purchase 9,000

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

manufacture 1,000 tackle boxes. This combination of purchased and manufactured

goods maximizes the contribution per direct labor hour, as calculated

below.

Unit contribution:

Purchased Manufactured

Tackle Boxes

Tackle Boxes Skateboards

Selling price $86.00 $ 86.00 $ 45.00

Less:

Direct material (68.00) (17.00) (12.50)

Direct labor (18.75) (7.50)

Variable overhead

a(6.25) (2.50)

Mktg. and admin.

b

(4.00) (11.00) (3.00)

Contribution margin $14.00

$ 33.00 $ 19.50


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DLH/unit none 1.25 0.50

Contribution margin/hour none $ 26.40

$ 39.00

a

Variable overhead per unit

Tackle boxes:

Direct labor hours = $18.75/$15.00 = 1.25 hours

Overhead/DLH = $12.50/1.25 = $10.00

Capacity = 8,000 boxes 1.25 = 10,000 hours

Total overhead = 10,000 hours $10 = $100,000

Total variable overhead = $100,000$50,000 = $50,000

Variable overhead per hour = $50,000/10,000 = $5.00

Variable overhead per box = $5.00 1.25 = $6.25

Skateboards:

Direct labor hours = $7.50/$15.00 = 0.5 hour

Variable overhead per skateboard = $5.00 0.5 = $2.50

b

$6 of selling and administrative costs are fixed.

4

4

11

9

9

1230 Concluded

Optimal Use of Sportways Available Direct LaborUnit DLH Total Balance Total

Item

Quantity Contrib. per Unit DLH of DLH Contrib.

Total hours 10,000

Skateboards 17,500 $19.50 0.50 8,750 1,250 $341,250

Make boxes 1,000 33.00 1.25 1,250 33,000

Buy boxes 9,000 14.00 126,000


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Total CM $500,250

Less:

Contribution margin from manufacturing

8,000 boxes (8,000 $33) 264,000

Improvement in CM $236,250

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.

4

4

2

2

0

0

1231

MANAGERIAL DECISION CASES

1. Pamela should not have told Roger about the deliberations concerning thePower 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 information,

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 in-

terest for this particular decision, and Pamela should have withdrawn fromany 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 users understanding

should be disclosed. Moreover, she has the obligation to communicate information

fairly and objectively (IV-1). These ethical requirements, however, do

not


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in any way prevent Pamela from discussing the qualitative effects of eliminating

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 wouldcommunicate

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.

4

4

2

2

1

1

1232MEMO

TO: Central University President

DATE: November 15, 2008

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, showing

a favorable trend for CE, are misleading, at least in terms of their implications

forcentralization. Tuition revenues will be present whether we centralize or decentralize

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 noncredit

offerings. Thus, it would be difficult to argue that decentralizing CE would


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have

any adverse impact on the level of tuition revenues.

In

a similar vein, one can argue that the operating costs for evening and noncreditcourses and the direct costs for off-campus offerings are also irrelevant.

These

costs, which consist of instructional wages, rental of facilities, and supplies,

will be incurred regardless of whether CE is centralized or decentralized.

This

leaves two categories of costs, indirect costs and administration, which affect

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 directors salary and advertising, can be avoided. Furthermore,

because the director will be teaching in her department, some of her salary

is

avoidable as well ($20,000). The total avoidable costs are outlined as follows.

Administration

a

$ 82,000Indirect

b

410,000

Total $492,000

a

b

[$112,000($50,000$20,000)] = $82,000

Indirect costsAdvertising = $440,000$30,000

4

4

2

2

2


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2

1232 ConcludedI have retained the budget for advertising and would recommend that this amount

be allocated to the individual colleges in proportion to the evening and offcampus

revenues generated by each college.

As

you can see, the savings from decentralization are significant. This presumes,

of

course, that the overhead of the individual units will not increase because of

the

added responsibilities. I have discussed this matter with my department

heads

and with the deans of the other colleges. They all seem to feel that the additional

administrative work can be easily absorbed by their existing staff. Thus, it

seems

that the promised savings are real.

In

choosing to decentralize, however, we do lose some intangible benefits. First,

weno longer have one individual who can be contacted by outside parties. Instead,

we have numerous individuals involved. This may prove to be frustrating

for

some of those whom we serve, and it is possible that they will perceive a drop

in

service quality.

There

is also a risk that some units will not exert the effort needed to providegood

service. Accountability is more diffuse, and some department heads may

feel

that they have more than enough to do without continuing education. This

problem

can be alleviated to some extent by localizing the CE responsibility at

the


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college level, rather than at the departmental level.

I

am personally convinced that a decentralized CE will work as well, if not better,

thanour current arrangement. Given our current budgetary crisis, I would rather

risk

reducing the quality of service for CE than risk reducing the quality of service

for

our main programs. Therefore, I strongly recommend that CE be decentralized

and

that the savings from this action be used to maintain the quality of our oncampus

programs.

1233

Answers will vary.

1234

Answers will vary.

RESEARCH ASSIGNMENTS

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4

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3

3

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2

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Chapter 12 Akmen

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