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HW LO 74 76 WA Exercise 7-4 (15 minutes) Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision. Total for 20 Per Unit Bracelets Incremental revenue.......... $169.95 $3,399.00 Incremental costs: Variable costs: Direct materials ........ $ 84.00 1,680.00 Direct labor....... 45.00 900.00 Variable manufacturing overhead ..... 4.00 80.00 Special filigree... 2.00 40.00 Total variable cost. $135.00 2,700.00 Fixed costs: Purchase of special tool 250.00 Total incremental cost.. 2,950.00 Incremental net operating income. $449.00 Even though the price for the special order is below the company's regular price for such an item, the special order would add to the company's net operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource. .... $70 per 1. The most profitable use of the constrained resource is determined by the contribution margin per unit of the constrained resource. In part 1, the constrained resource is time on the plastic injection molding machine. Therefore, the analysis would proceed as follows: Ski Golf Fishing Guard Guard Guard Selling price per unit $200 $300 $255 Variable cost per unit. 60 140 55 Contribution margin per unit (a). $140 $160 $200 Plastic injection molding machine processing time required to produce one unit (b)............... 2 minutes 5 minutes 4 minutes Contribution margin per unit of the constrained resource $32 per $50 per (a) + (b)...... minute minute minute Production of the Ski Guard product would be the most profitable use of the constrained resource which is, in this case, time on the plastic injection molding machine. The contribution margin per minute is $70 for this product, which is larger than for the other two products. 2. In this part, the constraint is the available pounds of plastic pellets. Ski Golf Fishing Guard Guard Guard Selling price per unit $200 $300 $255 Variable cost per unit 60 140 55 Contribution margin per unit (a). $140 $160 $200 Pounds of plastic pellets required to produce one unit (b).. .... 7 pounds 4 pounds 8 pounds Contribution margin per unit of the constrained resource $20 per (a) + (b).......... pound pound pound In this case, production of the Golf Guard would be the most profitable use of the constrained resource. The contribution margin per unit of the constrained resource for this product is $40, which is larger than for the other two products. $40 per $25 per Exercise 7-5 (continued) 3. The Fishing Guard product has the largest unit contribution margin, but it is not the most profitable use of the constrained resource in either case above. This happens because the Fishing Guard uses more of the constrained resources in proportion to its contribution margin than the other two products. In other words, more of the other products can be produced for a given amount of the constrained resource and this more than makes up for their lower contribution margins. Exercise 7-9 (15 minutes) 1. Annual profits will increase by $39,000: 15,000 Per Unit Units Incremental sales........... $14.00 $210,000 Incremental costs: Direct materials. 5.10 76,500 Direct labor 3.80 57,000 Variable manufacturing overhead ..... 1.00 15,000 Variable selling and administrative..... 1.50 22.500 Total incremental costs................. 11.40 171,000 Incremental profits............. $ 2.60 $39.000 The fixed costs are not relevant to the decision because they will be incurred regardless of whether the special order is accepted or rejected. 2. The relevant cost is $1.50 (the variable selling and administrative expenses). All other variable costs are sunk because the units have already been produced. The fixed costs are not relevant because they will not change in total as a consequence of the price charged for the left-over units. Exercise 7-6 (20 minutes) 1. The value of relaxing the constraint can be determined by computing the contribution margin per unit of the constrained resource: Sofa Selling price per unit $1,800 Variable cost per unit 1,200 Contribution margin per unit (a). $ 600 Upholstery shop time required to produce one unit (b).. 10 hours Contribution margin per unit of the constrained resource (a) + (b) $60 per hour The company should be willing to pay up to $60 per hour to keep the upholstery shop open after normal working hours. .. we 2. To answer this question, it is desirable to compute the contribution margin per unit of the constrained resource for all three products: Rediner Sofa Loveseat Selling price per unit $1,400 $1,800 $1,500 Variable cost per unit ...... 800 1,200 1,000 Contribution margin per unit (a) $ 600 $ 600 $ 500 Upholstery shop time required to produce one unit (b).............. 8 hours 10 hours 5 hours Contribution margin per unit of the constrained resource $75 per $60 per $100 per (a) + (b)............ hour hour hour The offer to upholster chairs for $45 per hour should be accepted. The time would be used to upholster Loveseats. If this increases the total production and sales of those chairs, the time would be worth $100 per hour-a net gain of $55 per hour. If Loveseats are already being produced up to demand, then having these chairs upholstered in the other company would free up capacity to produce more of the other two chairs. In both cases, the additional time is worth more than $45 per hour. HW LO 74 76 WA Exercise 7-4 (15 minutes) Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision. Total for 20 Per Unit Bracelets Incremental revenue.......... $169.95 $3,399.00 Incremental costs: Variable costs: Direct materials ........ $ 84.00 1,680.00 Direct labor....... 45.00 900.00 Variable manufacturing overhead ..... 4.00 80.00 Special filigree... 2.00 40.00 Total variable cost. $135.00 2,700.00 Fixed costs: Purchase of special tool 250.00 Total incremental cost.. 2,950.00 Incremental net operating income. $449.00 Even though the price for the special order is below the company's regular price for such an item, the special order would add to the company's net operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource. .... $70 per 1. The most profitable use of the constrained resource is determined by the contribution margin per unit of the constrained resource. In part 1, the constrained resource is time on the plastic injection molding machine. Therefore, the analysis would proceed as follows: Ski Golf Fishing Guard Guard Guard Selling price per unit $200 $300 $255 Variable cost per unit. 60 140 55 Contribution margin per unit (a). $140 $160 $200 Plastic injection molding machine processing time required to produce one unit (b)............... 2 minutes 5 minutes 4 minutes Contribution margin per unit of the constrained resource $32 per $50 per (a) + (b)...... minute minute minute Production of the Ski Guard product would be the most profitable use of the constrained resource which is, in this case, time on the plastic injection molding machine. The contribution margin per minute is $70 for this product, which is larger than for the other two products. 2. In this part, the constraint is the available pounds of plastic pellets. Ski Golf Fishing Guard Guard Guard Selling price per unit $200 $300 $255 Variable cost per unit 60 140 55 Contribution margin per unit (a). $140 $160 $200 Pounds of plastic pellets required to produce one unit (b).. .... 7 pounds 4 pounds 8 pounds Contribution margin per unit of the constrained resource $20 per (a) + (b).......... pound pound pound In this case, production of the Golf Guard would be the most profitable use of the constrained resource. The contribution margin per unit of the constrained resource for this product is $40, which is larger than for the other two products. $40 per $25 per Exercise 7-5 (continued) 3. The Fishing Guard product has the largest unit contribution margin, but it is not the most profitable use of the constrained resource in either case above. This happens because the Fishing Guard uses more of the constrained resources in proportion to its contribution margin than the other two products. In other words, more of the other products can be produced for a given amount of the constrained resource and this more than makes up for their lower contribution margins. Exercise 7-9 (15 minutes) 1. Annual profits will increase by $39,000: 15,000 Per Unit Units Incremental sales........... $14.00 $210,000 Incremental costs: Direct materials. 5.10 76,500 Direct labor 3.80 57,000 Variable manufacturing overhead ..... 1.00 15,000 Variable selling and administrative..... 1.50 22.500 Total incremental costs................. 11.40 171,000 Incremental profits............. $ 2.60 $39.000 The fixed costs are not relevant to the decision because they will be incurred regardless of whether the special order is accepted or rejected. 2. The relevant cost is $1.50 (the variable selling and administrative expenses). All other variable costs are sunk because the units have already been produced. The fixed costs are not relevant because they will not change in total as a consequence of the price charged for the left-over units. Exercise 7-6 (20 minutes) 1. The value of relaxing the constraint can be determined by computing the contribution margin per unit of the constrained resource: Sofa Selling price per unit $1,800 Variable cost per unit 1,200 Contribution margin per unit (a). $ 600 Upholstery shop time required to produce one unit (b).. 10 hours Contribution margin per unit of the constrained resource (a) + (b) $60 per hour The company should be willing to pay up to $60 per hour to keep the upholstery shop open after normal working hours. .. we 2. To answer this question, it is desirable to compute the contribution margin per unit of the constrained resource for all three products: Rediner Sofa Loveseat Selling price per unit $1,400 $1,800 $1,500 Variable cost per unit ...... 800 1,200 1,000 Contribution margin per unit (a) $ 600 $ 600 $ 500 Upholstery shop time required to produce one unit (b).............. 8 hours 10 hours 5 hours Contribution margin per unit of the constrained resource $75 per $60 per $100 per (a) + (b)............ hour hour hour The offer to upholster chairs for $45 per hour should be accepted. The time would be used to upholster Loveseats. If this increases the total production and sales of those chairs, the time would be worth $100 per hour-a net gain of $55 per hour. If Loveseats are already being produced up to demand, then having these chairs upholstered in the other company would free up capacity to produce more of the other two chairs. In both cases, the additional time is worth more than $45 per hour