o
t
a
l
3
a
l
e
s
otal
E.penses
otal
Fi.ed
E.penses
otal 3ales
?reak7even point:
/<< persons or
R)/,<<< total sales
E%ercise -12 (,< minutes*
). Iaria$le e.penses: R/< V ()<<P X ,<P* Y R+B.
+. a. 3elling price............................................................ R/< )<<P
=ess varia$le e.penses........................................... +B @<
"ontri$ution margin................................................ R)+ ,<P
=et 6 Y ?reak7even point in units.
3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R/<6 Y R+B6 \ R)B<,<<< \ R<
R)+6 Y R)B<,<<<
6 Y R)B<,<<< [ R)+ per unit
6 Y )0,<<< units
&n sales dollars: )0,<<< units V R/< per unit Y R2<<,<<<
Alternative solution:
=et S Y
?reak7even point in sales
dollars.
S Y <.@<S \ R)B<,<<< \ R<
<.,<S
Y R)B<,<<<
S Y R)B<,<<< [ <.,<
S Y R2<<,<<<
&n units: R2<<,<<< [ R/< per unit Y )0,<<< units
$. R/<6 Y R+B6 \ R)B<,<<< \ R2<,<<<
R)+6 Y R+/<,<<<
6 Y R+/<,<<< [ R)+ per unit
6 Y +<,<<< units
&n sales dollars: +<,<<< units V R/< per unit Y RB<<,<<<
Alternative solution:
S Y <.@<S \ R)B<,<<< \ R2<,<<<
<.,<S Y R+/<,<<<
S Y R+/<,<<< [ <.,<
S Y RB<<,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 B0
&n units: RB<<,<<< [ R/< per unit Y +<,<<< units
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 B2
E%ercise -12 (continued*
c. he companyGs new costHrevenue relationships will $e:
3elling price............................................................ R/< )<<P
=ess varia$le e.penses (R+B X
R/*........................................................................ +/ 2<
"ontri$ution margin................................................ R)2 /<P
R/<6 Y R+/6 \ R)B<,<<< \ R<
R)26 Y R)B<,<<<
6 Y
R)B<,<<< [ R)2 per
unit
6 Y )),+0< units
&n sales dollars: )),+0< units V R/< per unit Y R/0<,<<<
Alternative solution:
S Y <.2<S \ R)B<,<<< \ R<
<./<S
Y R)B<,<<<
S Y R)B<,<<< [ <./<
S Y R/0<,<<<
&n units: R/0<,<<< [ R/< per unit Y )),+0< units
,. a.
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R)B<,<<<
Y Y )0,<<< units
R)+ per unit
&n sales dollars: )0,<<< units V R/< per unit Y R2<<,<<<
Alternative solution:
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 B@
Fi.ed e.penses
?reak7even point
Y
in sales dollars
"M ratio
R)B<,<<<
Y Y R2<<,<<<
<.,<
&n units: R2<<,<<< [ R/< per unit Y )0,<<< units.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 BB
E%ercise -12 (continued*
$.
Fi.ed e.penses \ arget pro't
Knit sales to attain
Y
target pro't
Knit contri$ution margin
R)B<,<<< \ R2<,<<<
Y Y+<,<<< units
R)+ per unit
&n sales dollars: +<,<<< units V R/< per unit YRB<<,<<<
Alternative solution:
Fi.ed e.penses \ arget pro't
>ollar sales to attain
Y
target pro't
"M ratio
R)B<,<<< \ R2<,<<<
Y YRB<<,<<<
<.,<
&n units: RB<<,<<< [ R/< per unit Y+<,<<< units
c.
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R)B<,<<<
Y Y)),+0< units
R)2 per unit
&n sales dollars: )),+0< units V R/< per unit Y R/0<,<<<
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in sales dollars
"M ratio
R)B<,<<<
Y YR/0<,<<<
<./<
&n units: R/0<,<<< [ R/< per unit Y)),+0< units
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 BC
E%ercise -13 (,< minutes*
). 3ales Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R0<6 Y R,+6 \ R)<B,<<< \ R<
R)B6 Y R)<B,<<<
6 Y R)<B,<<< [ R)B per stove
6 Y
2,<<< stoves, or at R0< per stove, R,<<,<<< in
sales.
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R)<B,<<<
Y Y2,<<< stoves
R)B.<< per stove
or at R0< per stove, R,<<,<<< in sales.
+. An increase in the varia$le e.penses as a percentage of the
selling price would result in a higher $reak7even point. he
reason is that if varia$le e.penses increase as a percentage of
sales, then the contri$ution margin will decrease as a
percentage of sales. A lower "M ratio would mean that more
stoves would have to $e sold in order to generate enough
contri$ution margin to cover the '.ed costs.
,. PresentG
HA::: Stoves
ProposedG
4:A::: Stoves3
,otal
Per
Unit ,otal
Per
Uni
t
3ales
R/<<,<<
< R0<
R/0<,<<
< R/0
ZZ
=ess varia$le
e.penses
+02,<<
< ,+ ,+<,<<< ,+
"ontri$ution margin )//,<<< R)B ),<,<<< R),
=ess '.ed e.penses
)<B,<<
< )<B,<<<
Aet operating
income
R
,2,<<< R ++ ,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C<
ZB,<<< stoves V ).+0 Y )<,<<< stoves
ZZR0< V <.C Y R/0
As shown a$ove, a +0P increase in volume is not enough to
o#set a )<P reduction in the selling price% thus, net operating
income decreases.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C)
E%ercise -13 (continued*
/. 3ales Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R/06 Y R,+6 \ R)<B,<<< \ R,0,<<<
R),6 Y R)/,,<<<
6 Y R)/,,<<< [ R), per stove
6 Y )),<<< stoves
Alternative solution:
Fi.ed e.penses \ arget pro't
Knit sales to attain
Y
target pro't
Knit contri$ution margin
R)<B,<<< \ R,0,<<<
Y Y )),<<< stoves
R), per stove
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C+
E%ercise -14 (+< minutes*
a. Case I4 Case I5
Aum$er of units
sold )0,<<< Z /,<<<
3ales
R)B<,<<
< Z R)+ R)<<,<<< Z R+0
=ess varia$le
e.penses )+<,<<< Z B 2<,<<< )0
"ontri$ution margin 2<,<<< R / /<,<<< R)< Z
=ess '.ed e.penses 0<,<<< Z ,+,<<< Z
Aet operating
income
R
)<,<<< R B,<<< Z
Case I6 Case I7
Aum$er of units
sold )<,<<< Z 2,<<< Z
3ales
R+<<,<<
< R+< R,<<,<<< Z R0<
=ess varia$le
e.penses @<,<<< Z @ +)<,<<< ,0
"ontri$ution margin ),<,<<< R), Z C<,<<< R)0
=ess '.ed e.penses ))B,<<< )<<,<<< Z
Aet operating
income R )+,<<< Z R()<,<<<*Z
$. Case I4 Case I5
3ales R0<<,<<< Z )<<P R/<<,<<< Z )<<P
=ess varia$le
e.penses /<<,<<< B< +2<,<<< Z 20
"ontri$ution margin )<<,<<< +<PZ )/<,<<< ,0P
=ess '.ed e.penses C,,<<< )<<,<<< Z
Aet operating
income R @,<<< Z R/<,<<<
Case I6 Case I7
3ales R+0<,<<< )<<P R2<<,<<< Z )<<P
=ess varia$le
e.penses )<<,<<< /< /+<,<<< Z @<
"ontri$ution margin )0<,<<< 2<P Z )B<,<<< ,<P
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C,
=ess '.ed e.penses ),<,<<< Z )B0,<<<
Aet operating
income R+<,<<< Z R (0,<<<* Z
Z1iven
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C/
E%ercise -15 (,< minutes*
). 3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R,<6 Y R)+6 \ R+)2,<<< \ R<
R)B6 Y R+)2,<<<
6 Y R+)2,<<< [ R)B per unit
6 Y )+,<<< units, or at R,< per unit, R,2<,<<<
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R+)2,<<<
Y Y )+,<<< units
R)B per unit
or at R,< per unit, R,2<,<<<
+. he contri$ution margin is R+)2,<<< since the contri$ution
margin is e4ual to the '.ed e.penses at the $reak7even point.
,. Fi.ed e.penses \ arget pro't
Knits sold to attain
Y
target pro't
Knit contri$ution margin
R+)2,<<< \ RC<,<<<
Y Y )@,<<< units
R)B per unit
,otal Unit
3ales ()@,<<< units V R,< per unit*. .
R0)<,<<
< R,<
=ess varia$le e.penses
()@,<<< units V R)+ per unit*......... +</,<<< )+
"ontri$ution margin.......................... ,<2,<<< R)B
=ess '.ed e.penses.......................... +)2,<<<
Aet operating income.......................
R
C<,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C0
E%ercise -15 (continued*
/. Margin of safety in dollar terms:
Margin of safety
Y otal sales 7 ?reak7even sales
in dollars
Y R/0<,<<< 7 R,2<,<<< Y RC<,<<<
Margin of safety in percentage terms:
Margin of safety in dollars
Margin of safety
Y
percentage
otal sales
RC<,<<<
Y Y +<P
R/0<,<<<
0. he "M ratio is 2<P.
E.pected total contri$ution margin: (R0<<,<<< V
2<P*.....................................................................
R,<<,<<
<
!resent total contri$ution margin: (R/0<,<<< V
2<P*..................................................................... +@<,<<<
&ncreased contri$ution margin................................. R ,<,<<<
Alternative solution:
R0<,<<< incremental sales V 2<P "M ratio Y R,<,<<<.
3ince in this case the companyGs '.ed e.penses will not
change, 4uarterly net operating income will also increase $y
R,<,<<<.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C2
E%ercise -1 ()0 minutes*
).
,otal
Per
Unit
3ales ()0,<<< games*............................................. R,<<,<<< R+<
=ess varia$le e.penses........................................... C<,<<< 2
"ontri$ution margin................................................ +)<,<<< R)/
=ess '.ed e.penses................................................ )B+,<<<
Aet operating income.............................................. R +B,<<<
he degree of operating leverage would $e:
"ontri$ution margin
>egree of operating
Y
leverage
Aet operating income
R+)<,<<<
Y Y @.0
R+B,<<<
+. a. 3ales of )B,<<< games would represent a +<P increase over
last yearGs sales. 3ince the degree of operating leverage is
@.0, net operating income should increase $y @.0 times as
much, or $y )0<P (@.0 V +<P*.
$. he e.pected total dollar amount of net operating income for
ne.t year would $e:
=ast yearGs net operating income............................ R+B,<<<
E.pected increase in net operating
income ne.t year ()0<P V R+B,<<<*.................... /+,<<<
otal e.pected net operating income...................... R@<,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 C@
E%ercise -1! (,< minutes*
).
Flight
!%namic Sure Shot ,otal Compan%
Amount J Amount J Amount J
3ales
!)0<,<<
< )<<
!+0<,<<
< )<<
!/<<,<<
< )<<.<
=ess varia$le
e.penses ,<,<<
< +< )2<,<<< 2/ )C<,<<< /@.0
"ontri$ution
margin
!)+<,<<
< B< ! C<,<<< ,2 +)<,<<< 0+.0Z
=ess '.ed
e.penses
)B,,@0<
Aet operating
income ! +2,+0<
Z!+)<,<<< [ !/<<,<<< Y 0+.0P.
+. he $reak7even point for the company as a whole would $e:
Fi.ed e.penses
?reak7even point in
Y
total dollar sales
Dverall "M ratio
!)B,,@0<
Y Y!,0<,<<<
<.0+0
,. he additional contri$ution margin from the additional sales
would $e computed as follows:
!)<<,<<< V 0+.0P "M ratio Y !0+,0<<
Assuming no change in '.ed e.penses, all of this additional
contri$ution margin of !0+,0<< should drop to the $ottom line
as increased net operating income.
his answer assumes no change in selling prices, varia$le
costs per unit, '.ed e.pense, or sales mi..
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 CB
&ro'lem -1" (2< minutes*
). 3ales Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R,<.<<6 Y R)B.<<6 \ R)0<,<<< \ R<
R)+.<<6 Y R)0<,<<<
6 Y R)0<,<<< [ R)+.<< per pair
6 Y )+,0<< pairs
)+,0<< pairs V R,< per pair Y R,@0,<<< in sales.
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R)0<,<<<
Y Y )+,0<< pairs
R)+.<< per pair
Fi.ed e.penses
?reak7even point
Y
in sales dollars
"M ratio
R)0<,<<<
Y Y R,@0,<<< in sales
<./<
+. 3ee the graph on the following page.
,. he simplest approach is:
?reak7even sales )+,0<< pairs
Actual sales )+,<<< pairs
3ales short of $reak7even 0<< pairs
0<< pairs V R)+ contri$ution margin per pair Y R2,<<< loss
Alternative solution:
3ales ()+,<<< pairs V R,<.<< per pair*.................... R,2<,<<<
=ess varia$le e.penses
()+,<<< pairs V R)B.<< per pair*........................... +)2,<<<
"ontri$ution margin................................................ )//,<<<
=ess '.ed e.penses................................................ )0<,<<<
Aet operating loss................................................... R (2,<<<*
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 CC
&ro'lem -1" (continued*
+. "ost7volume7pro't graph:
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<<
R<
R0<
R)<<
R)0<
R+<<
R+0<
R,<<
R,0<
R/<<
R/0<
R0<<
< +,0<< 0,<<< @,0<< )<,<<< )+,0<< )0,<<< )@,0<< +<,<<<
Aum$er of !airs of 3hoes 3old
o
t
a
l
3
a
l
e
s
(
<
<
<
s
*
?reak7even point:
)+,0<< pairs of shoes or
R,@0,<<< total sales
otal 3ales
otal
E.pense
s
otal
Fi.ed
E.pense
s
&ro'lem -1" (continued*
/. he varia$le e.penses will now $e R)B.@0 (R)B.<< \ R<.@0* per
pair, and the contri$ution margin will $e R)).+0 (R,<.<< X
R)B.@0* per pair.
3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R,<.<<6
Y R)B.@06 \ R)0<,<<< \ R<
R)).+06
Y R)0<,<<<
6 Y R)0<,<<< [ R)).+0 per pair
6 Y ),,,,, pairs (rounded*
),,,,, pairs V R,<.<< per pair Y R/<<,<<< in sales
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
"M per unit
R)0<,<<<
Y Y ),,,,, pairs
R)).+0 per pair
Fi.ed e.penses
?reak7even point
Y
in sales dollars
"M ratio
R)0<,<<<
Y Y R/<<,<<< in sales
<.,@0
0. he simplest approach is:
Actual sales )0,<<< pairs
?reak7even sales )+,0<< pairs
E.cess over $reak7even sales
+,0<< pairs
+,0<< pairs V R)).0< per pairZ Y R+B,@0< pro't
ZR)+.<< present contri$ution margin X R<.0< commission Y
R)).0<
Alternative solution:
3ales ()0,<<< pairs V R,<.<< per pair*.................... R/0<,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<)
=ess varia$le e.penses ()+,0<< pairs V
R)B.<< per pair% +,0<< pairs V R)B.0<
per pair*................................................................ +@),+0<
"ontri$ution margin................................................ )@B,@0<
=ess '.ed e.penses................................................ )0<,<<<
Aet operating income.............................................. R +B,@0<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<+
&ro'lem -1" (continued*
2. he new varia$le e.penses will $e R),.0< per pair.
3ales Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R,<.<<6 Y R),.0<6 \ R)B),0<< \ R<
R)2.0<6 Y R)B),0<<
6 Y R)B),0<< [ R)2.0< per pair
6 Y )),<<< pairs
)),<<< pairs V R,<.<< per pair Y R,,<,<<< in sales.
Although the change will lower the $reak7even point from
)+,0<< pairs to )),<<< pairs, the company must consider
whether this reduction in the $reak7even point is more than
o#set $y the possi$le loss in sales arising from having the sales
sta# on a salaried $asis. Knder a salary arrangement, the sales
sta# has less incentive to sell than under the present
commission arrangement, resulting in a potential loss of sales
and a reduction of pro'ts. Although it is generally desira$le to
lower the $reak7even point, management must consider the
other e#ects of a change in the cost structure. he $reak7even
point could $e reduced dramatically $y dou$ling the selling
price $ut it does not necessarily follow that this would improve
the companyGs pro't.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<,
&ro'lem -1# (2< minutes*
). he "M ratio is ,<P.
,otal
Per
Unit
Percent of
Sales
3ales ()C,0<< units*
R0B0,<<
< R,<.<< )<<P
=ess varia$le
e.penses
/<C,0<
< +).<< @<
"ontri$ution margin
R)@0,0<
< RC.<< ,<P
he $reak7even point is:
3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R,<.<<6
Y R+).<<6 \ R)B<,<<< \ R<
RC.<<6 Y R)B<,<<<
6 Y R)B<,<<< [ RC.<< per unit
6 Y +<,<<< units
+<,<<< units V R,<.<< per unit Y R2<<,<<< in sales.
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R)B<,<<<
Y Y+<,<<< units
RC.<< per unit
Fi.ed e.penses
?reak7even point
Y
in sales dollars
"M ratio
R)B<,<<<
Y Y R2<<,<<< in sales
<.,<
+. &ncremental contri$ution margin:
RB<,<<< increased sales V <.,< "M ratio.............. R+/,<<<
=ess increased advertising cost............................... )2,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )</
&ncrease in monthly net operating income.............. R B,<<<
3ince the company is now showing a loss of R/,0<< per month,
if the changes are adopted, the loss will turn into a pro't of
R,,0<< each month (RB,<<< less R/,0<< Y R,,0<<*.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<0
&ro'lem -1# (continued*
,. 3ales (,C,<<< units _ R+@.<< per unitZ*.................. R),<0,,<<<
=ess varia$le e.penses
(,C,<<< units _ R+).<< per unit*.......................... B)C,<<<
"ontri$ution margin................................................ +,/,<<<
=ess '.ed e.penses (R)B<,<<< \
R2<,<<<*............................................................... +/<,<<<
Aet operating loss................................................... R (2,<<<*
ZR,<.<< X (R,<.<< V <.)<* Y R+@.<<
/. 3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R,<.<<6
Y R+).@06Z \ R)B<,<<< \ RC,@0<
RB.+06 Y R)BC,@0<
6 Y R)BC,@0< [ RB.+0 per unit
6 Y +,,<<< units
ZR+).<< \ R<.@0 Y R+).@0
Alternative solution:
Fi.ed e.penses \ arget pro't
Knit sales to attain
Y
target pro't
"M per unit
R)B<,<<< \ RC,@0<
Y Y+,,<<< units
RB.+0 per unitZZ
ZZR,<.<< X R+).@0 Y RB.+0
0. a. he new "M ratio would $e:
Per Unit
Percent of
Sales
3ales R,<.<< )<<P
=ess varia$le
e.penses )B.<< 2<
"ontri$ution margin R)+.<< /<P
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<2
&ro'lem -1# (continued*
he new $reak7even point would $e:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R)B<,<<< \ R@+,<<<
Y Y+),<<< units
R)+.<< per unit
Fi.ed e.penses
?reak7even point
Y
in sales dollars
"M ratio
R)B<,<<< \ R@+,<<<
Y YR2,<,<
<./<
<<
$. "omparative income statements follow:
(ot Automated Automated
,otal
Per
Unit J ,otal
Per
Unit J
3ales
(+2,<<<
units*
R@B<,<<
<
R,<.<
< )<<P
R@B<,<<
<
R,<.<
< )<<P
=ess
varia$le
e.penses 0/2,<<
< +).<< @< /2B,<<< )B.<< 2<
"ontri$ution
margin +,/,<<< R C.<< ,<P ,)+,<<<
R)+.<
< /<P
=ess '.ed
e.penses )B<,<<
< +0+,<<<
Aet
operating
income
R 0/,<<
<
R
2<,<<<
c. Ohether or not the company should automate its operations
depends on how much risk the company is willing to take
and on prospects for future sales. he proposed changes
would increase the companyGs '.ed costs and its $reak7even
point. ;owever, the changes would also increase the
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<@
companyGs "M ratio (from <.,< to <./<*. he higher "M ratio
means that once the $reak7even point is reached, pro'ts will
increase more rapidly than at present. &f +2,<<< units are
sold ne.t month, for e.ample, the higher "M ratio will
generate R2,<<< more in pro'ts than if no changes are
made.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<B
&ro'lem -1# (continued*
he greatest risk of automating is that future sales may drop
$ack down to present levels (only )C,0<< units per month*,
and as a result, losses will $e even larger than at present due
to the companyGs greater '.ed costs. (Aote the pro$lem
states that sales are erratic from month to month.* &n sum,
the proposed changes will help the company if sales continue
to trend upward in future months% the changes will hurt the
company if sales drop $ack down to or near present levels.
4ote to the (nstructor2 Although it is not asked for in the
pro$lem, if time permits you may want to compute the point
of indi#erence $etween the two alternatives in terms of units
sold% i.e., the point where pro'ts will $e the same under
either alternative. At this point, total revenue will $e the
same% hence, we include only costs in our e4uation:
=et 6 Y
!oint of indi#erence in units
sold
R+).<<6 \ R)B<,<<<
Y R)B.<<6 \ R+0+,<<<
R,.<<6 Y R@+,<<<
6 Y R@+,<<< [ R,.<< per unit
6 Y +/,<<< units
&f more than +/,<<< units are sold in a month, the proposed
plan will yield the greater pro'ts% if less than +/,<<< units are
sold in a month, the present plan will yield the greater pro'ts
(or the least loss*.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )<C
&ro'lem -2$ (2< minutes*
). 3ales price R+<.<< )<<P
=ess varia$le e.penses
B.<< /<
"ontri$ution margin R)+.<< 2<P
+
.
Fi.ed e.penses
?reak7even point in
Y
total sales dollars
"M ratio
R)B<,<<<
Y YR,<<,<<<
<.2<
,. R@0,<<< increased sales V <.2< "M ratio Y R/0,<<< increased
contri$ution margin. 3ince the '.ed costs will not change, net
operating income should also increase $y R/0,<<<.
/. a. "ontri$ution margin
>egree of
Y
operating leverage
Aet operating income
R+/<,<<<
Y Y /
R2<,<<<
$. / V +<P Y B<P increase in net operating income.
0. )ast -earG
4HA::: units
ProposedG
57A::: units3
Amount
Per
Unit Amount
Per
Unit
3ales
R,2<,<<
< R+<.<<
R/,+,<<
< R)B.<<
ZZ
=ess varia$le
e.penses )//,<<< B.<< )C+,<<< B.<<
"ontri$ution margin +)2,<<< R)+.<< +/<,<<< R)<.<<
=ess '.ed e.penses )B<,<<< +)<,<<<
Aet operating
income R ,2,<<< R ,<,<<<
Z)B,<<< units \ 2,<<< units Y +/,<<< units
ZZR+<.<< V <.C Y R)B.<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))<
Ao, the changes should not $e made.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )))
&ro'lem -2$ (continued*
2. E.pected total contri$ution margin:
)B,<<< units V ).+0 V R)).<< per unitZ................
R+/@,0<
<
!resent total contri$ution margin:
)B,<<< units V R)+.<< per unit............................. +)2,<<<
&ncremental contri$ution margin, and the amount
$y which advertising can $e increased with net
operating income remaining unchanged............... R ,),0<<
ZR+<.<< X (RB.<< \ R).<<* Y R)).<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))+
&ro'lem -21 (,< minutes*
). Product
0hite Fragrant )oonKain ,otal
!ercentage of
total sales /<P +/P ,2P )<<P
3ales
?,<<,<<
<
)<<
P
?)B<,<<
< )<<P
?+@<,<<
< )<<P
?
@0<,<<<
)<<
P
=ess varia$le
e.penses +)2,<<< @+ ,2,<<< +<
)<B,<<
< /<
,2<,<<
< /B
"ontri$ution
margin ? B/,<<< +BP
?)//,<<
< B<P
?)2+,<<
< 2<P ,C<,<<< 0+P
Z
=ess '.ed
e.penses
//C,+B
<
Aet operating
income (loss*
?
(0C,+B<*
Z?,C<,<<< [ ?@0<,<<< Y 0+P.
+. ?reak7even sales would $e:
Fi.ed e.penses
?reak7even point
Y
in total dollar sales
"M ratio
?//C,+B<
Y Y?B2/,<<<
<.0+<
: he Mc1raw7;ill "ompanies, &nc., +<<2
3olutions Manual, "hapter 2 )),
&ro'lem -21 (continued*
,. Memo to the president:
Although the company met its sales $udget of ?@0<,<<< for the
month, the mi. of products changed su$stantially from that
$udgeted. his is the reason the $udgeted net operating
income was not met, and the reason the $reak7even sales were
greater than $udgeted. he companyGs sales mi. was planned
at +<P Ohite, 0+P Fragrant, and +BP =oonzain. he actual
sales mi. was /<P Ohite, +/P Fragrant, and ,2P =oonzain.
As shown $y these data, sales shifted away from Fragrant 8ice,
which provides our greatest contri$ution per dollar of sales, and
shifted toward Ohite 8ice, which provides our least contri$ution
per dollar of sales. Although the company met its $udgeted
level of sales, these sales provided considera$ly less
contri$ution margin than we had planned, with a resulting
decrease in net operating income. Aotice from the attached
statements that the companyGs overall "M ratio was only 0+P,
as compared to a planned "M ratio of 2/P. his also e.plains
why the $reak7even point was higher than planned. Oith less
average contri$ution margin per dollar of sales, a greater level
of sales had to $e achieved to provide suEcient contri$ution
margin to cover '.ed costs.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))/
&ro'lem -22 (/0 minutes*
). 3ales ()0,<<< units V R@< per unit*......................... R),<0<,<<<
=ess varia$le e.penses ()0,<<< units V R/< per
unit*...................................................................... 2<<,<<<
"ontri$ution margin................................................ /0<,<<<
=ess '.ed e.penses................................................ 0/<,<<<
Aet operating loss................................................... R (C<,<<<*
+
.
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R0/<,<<<
Y Y)B,<<< units
R,< per unit
)B,<<< units V R@< per unit Y R),+2<,<<< to $reak even.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))0
&ro'lem -22 (continued*
,.
Unit
Sale
s
Pric
e
Unit
Variabl
e
Expens
e
Unit
Contributio
n Margin
Volume
'Units+
,otal
Contributio
n Margin
Fixed
Expenses
(et
operating
income
R@< R/< R,< )0,<<< R/0<,<<< R0/<,<<< R (C<,<<<*
2B /< +B +<,<<< 02<,<<< 0/<,<<< +<,<<<
22 /< +2 +0,<<< 20<,<<< 0/<,<<< ))<,<<<
2/ /< +/ ,<,<<< @+<,<<< 0/<,<<< )B<,<<<
2+ /< ++ ,0,<<< @@<,<<< 0/<,<<< +,<,<<<
2< /< +< /<,<<< B<<,<<< 0/<,<<< +2<,<<<
0B /< )B /0,<<< B)<,<<< 0/<,<<< +@<,<<<
02 /< )2 0<,<<< B<<,<<< 0/<,<<< +2<,<<<
hus, the ma.imum pro't is R+@<,<<<. his level of pro't can $e earned $y selling
/0,<<< units at a price of R0B each.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))2
&ro'lem -22 (continued*
/. At a selling price of R0B per unit, the contri$ution margin is R)B
per unit. herefore:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R0/<,<<<
Y Y,<,<<< units
R)B per unit
,<,<<< units VR0B per unit Y R),@/<,<<< to $reak even.
his $reak7even point is di#erent from the $reak7even point in
part (+* $ecause of the change in selling price. Oith the change
in selling price the unit contri$ution margin drops from R,< to
R)B, resulting in an increase in the $reak7even point.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))@
&ro'lem -23 (,< minutes*
). ()* >ollars
(+* Iolume of output, e.pressed in units, P of capacity,
sales, or some other measure
(,* otal e.pense line
(/* Iaria$le e.pense area
(0* Fi.ed e.pense area
(2* ?reak7even point
(@* =oss area
(B* !ro't area
(C* 8evenue line
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))B
&ro'lem -23 (continued*
+. a. =ine ,: 8emain unchanged.
=ine C: ;ave a steeper slope.
?reak7even
point:
>ecrease.
$. =ine ,: ;ave a -atter slope.
=ine C: 8emain unchanged.
?reak7even
point:
>ecrease.
c. =ine ,: 3hift upward.
=ine C: 8emain unchanged.
?reak7even
point:
&ncrease.
d. =ine ,: 8emain unchanged.
=ine C: 8emain unchanged.
?reak7even
point:
8emain unchanged.
e. =ine ,: 3hift downward and have a steeper slope.
=ine C: 8emain unchanged.
?reak7even
point:
!ro$a$ly change, $ut the direction is
uncertain.
f. =ine ,: ;ave a steeper slope.
=ine C: ;ave a steeper slope.
?reak7even
point:
8emain unchanged in terms of units%
increase in terms of total dollars of
sales.
g. =ine ,: 3hift upward.
=ine C: 8emain unchanged.
?reak7even
point:
&ncrease.
h. =ine ,: 3hift upward and have a -atter slope.
=ine C: 8emain unchanged.
?reak7even
point:
!ro$a$ly change, $ut the direction is
uncertain.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ))C
&ro'lem -24 (@0 minutes*
). a. 3elling price.................. R+0 )<<P
=ess varia$le e.penses. )0 2<
"ontri$ution margin...... R)< /<P
3ales
Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R+06
Y R)06 \ R+)<,<<< \ R<
R)<6
Y R+)<,<<<
6 Y R+)<,<<< [ R)< per $all
6 Y +),<<< $alls
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R+)<,<<<
Y Y+),<<< $alls
R)< per $all
$. he degree of operating leverage would $e:
"ontri$ution margin
>egree of
Y
operating leverage
Aet operating income
R,<<,<<<
Y Y,.,, (rounded*
RC<,<<<
+. he new "M ratio will $e:
3elling price................... R+0 )<<P
=ess varia$le e.penses.. )B @+
"ontri$ution margin...... R @ +BP
he new $reak7even point will $e:
3ales Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R+06 Y R)B6 \ R+)<,<<< \ R<
R@6 Y R+)<,<<<
6 Y R+)<,<<< [ R@ per $all
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+<
6 Y ,<,<<< $alls
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+)
&ro'lem -24 (continued*
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R+)<,<<<
Y Y,<,<<< $alls
R@ per $all
,. 3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R+06 Y R)B6 \ R+)<,<<< \ RC<,<<<
R@6 Y R,<<,<<<
6 Y R,<<,<<< [ R@ per $all
6 Y /+,B0@ $alls (rounded*
Alternative solution:
Fi.ed e.penses \arget pro't
Knit sales to attain
Y
target pro't
Knit contri$ution margin
R+)<,<<<\RC<,<<<
Y Y/+,B0@ $alls
R@ per $all
hus, sales will have to increase $y )+,B0@ $alls (/+,B0@ $alls,
less ,<,<<< $alls currently $eing sold* to earn the same amount
of net operating income as last year. he computations a$ove
and in part (+* show 4uite clearly the dramatic e#ect that
increases in varia$le costs can have on an organization. he
e#ects on Aorthwood "ompany are summarized $elow:
Present
Expecte
d
"om$ination margin ratio.............................. /<P +BP
?reak7even point (in $alls*............................ +),<<< ,<,<<<
3ales (in $alls* needed to earn a RC<,<<<
pro't........................................................... ,<,<<< /+,B0@
Aote particularly that if varia$le costs do increase ne.t year,
then the company will just $reak even if it sells the same
num$er of $alls (,<,<<<* as it did last year.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )++
&ro'lem -24 (continued*
/. he contri$ution margin ratio last year was /<P. &f we let !
e4ual the new selling price, then:
! Y R)B \ <./<!
<.2<!
Y R)B
! Y R)B [ <.2<
! Y R,<
o verify:
3elling price.................. R,< )<<P
=ess varia$le e.penses
)B 2<
"ontri$ution margin...... R)+ /<P
herefore, to maintain a /<P "M ratio, a R, increase in varia$le
costs would re4uire a R0 increase in the selling price.
0. he new "M ratio would $e:
3elling price...................... R+0 )<<P
=ess varia$le e.penses..... CZ ,2
"ontri$ution margin.......... R)2 2/P
ZR)0 X (R)0 V /<P* Y RC
he new $reak7even point would $e:
3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R+06 Y RC6 \ R/+<,<<< \ R<
R)26 Y R/+<,<<<
6 Y R/+<,<<< [ R)2 per $all
6 Y +2,+0< $alls
Alternative solution:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R/+<,<<<
Y Y+2,+0< $alls
R)2 per $all
Although this new $reak7even is greater than the companyGs
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+,
present $reak7even of +),<<< $alls ]see !art ()* a$ove^, it is
less than the $reak7even point will $e if the company does not
automate and varia$le la$or costs rise ne.t year ]see !art (+*
a$ove^.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+/
&ro'lem -24 (continued*
2. a. 3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R+06 Y RC6 \ R/+<,<<< \ RC<,<<<
R)26 Y R0)<,<<<
6 Y R0)<,<<< [ R)2 per $all
6 Y ,),B@0 $alls
Alternative solution:
Knit sales to attain Fi.ed e.penses \ arget pro't
Y
target pro't Knit contri$ution margin
R/+<,<<< \ RC<,<<<
Y Y,),B@0 $alls
R)2 per $all
hus, the company will have to sell ),B@0 more $alls (,),B@0
X ,<,<<< Y ),B@0* than now $eing sold to earn a pro't of
RC<,<<< per year. ;owever, this is still far less than the
/+,B0@ $alls that would have to $e sold to earn a RC<,<<<
pro't if the plant is not automated and varia$le la$or costs
rise ne.t year ]see !art (,* a$ove^.
$. he contri$ution income statement would $e:
3ales (,<,<<< $alls V R+0 per $all*................... R@0<,<<<
=ess varia$le e.penses (,<,<<< $alls V RC
per $all*.......................................................... +@<,<<<
"ontri$ution margin.......................................... /B<,<<<
=ess '.ed e.penses.......................................... /+<,<<<
Aet operating income....................................... R2<,<<<
"ontri$ution margin
>egree of
Y
operating leverage
Aet operating income
R/B<,<<<
Y YB
R2<,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+0
&ro'lem -24 (continued*
c. his pro$lem illustrates the diEculty faced $y many
companies today. Iaria$le costs for la$or are rising, yet
$ecause of competitive pressures it is often diEcult to pass
these cost increases along in the form of a higher price for
products. hus, companies are forced to automate (to some
degree* resulting in higher operating leverage, often a higher
$reak7even point, and greater risk for the company.
here is no clear answer as to whether one should have $een
in favor of constructing the new plant. ;owever, this
4uestion provides an opportunity to $ring out points such as
in the preceding paragraph and it forces students to think
a$out the issues.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+2
&ro'lem -25 (2< minutes*
). 3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R/<.<<6
Y R)2.<<6 \ R2<,<<< \ R<
R+/.<<6
Y R2<,<<<
6 Y R2<,<<< [ R+/.<< per pair
6 Y +,0<< pairs
+,0<< pairs V R/<.<< per pair Y R)<<,<<< in sales
Alternative solution:
Fi.ed e.penses R2<,<<<
?reak7even point
Y Y Y+,0<< pairs
in unit sales
"M per unit R+/.<< per pair
Fi.ed e.penses R2<,<<<
?reak7even point
Y Y YR)<<,<<<
in dollar sales
"M ratio <.2<<
+. 3ee the graph at the end of this solution.
,. 3ales Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R/<.<<6
Y R)2.<<6 \ R2<,<<< \ R)B,<<<
R+/.<<6
Y R@B,<<<
6 Y R@B,<<< [ R+/.<< per pair
6 Y ,,+0< pairs
Alternative solution:
Fi.ed e.penses \ arget pro't
Knit sales to attain
Y
target pro't
Knit contri$ution margin
R2<,<<< \ R)B,<<<
Y Y,,+0< pairs
R+/.<< per pair
/. &ncremental contri$ution margin:
R+0,<<< increased sales V 2<P "M ratio.............. R)0,<<<
&ncremental '.ed salary cost.................................. B,<<<
&ncreased net income.............................................. R @,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+@
Qes, the position should $e converted to a full7time $asis.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+B
&ro'lem -25 (continued*
0
.
a
.
"ontri$ution margin R@+,<<<
>egree of
Y Y Y2
operating leverage
Aet operating income R)+,<<<
$. 2.<< V 0<P sales increase Y ,<<P increase in net operating
income. hus, net operating income ne.t year would $e:
R)+,<<< \ (R)+,<<< V ,<<P* Y R/B,<<<.
+. "ost7volume7pro't graph:
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )+C
R<
R+<
R/<
R2<
RB<
R)<<
R)+<
R)/<
R)2<
R)B<
R+<<
< 0<< ),<<< ),0<< +,<<< +,0<< ,,<<< ,,0<< /,<<< /,0<< 0,<<<
Aum$er of !airs of 3andals 3old
o
t
a
l
3
a
l
e
s
(
<
<
<
s
*
?reak7even point:
+,0<< pairs of sandals or
R)<<,<<< total sales
otal 3ales
otal
E.pense
s
otal
Fi.ed
E.pense
s
&ro'lem -2 (,< minutes*
). he contri$ution margin per unit on the 'rst )2,<<< units is:
Per Unit
3ales price R,.<<
=ess varia$le e.penses ).+0
"ontri$ution margin R).@0
he contri$ution margin per unit on anything over )2,<<< units
is:
Per Unit
3ales price R,.<<
=ess varia$le e.penses )./<
"ontri$ution margin R).2<
hus, for the 'rst )2,<<< units sold, the total amount of
contri$ution margin generated would $e:
)2,<<< units V R).@0 per unit Y R+B,<<<
3ince the '.ed costs on the 'rst )2,<<< units total R,0,<<<, the
R+B,<<< contri$ution margin a$ove is not enough to permit the
company to $reak even. herefore, in order to $reak even,
more than )2,<<< units will have to $e sold. he '.ed costs
that will have to $e covered $y the additional sales are:
Fi.ed costs on the 'rst )2,<<< units........................ R,0,<<<
=ess contri$ution margin from the 'rst )2,<<<
units..................................................................... +B,<<<
8emaining unrecovered '.ed costs.........................@,<<<
Add monthly rental cost of the additional
space needed to produce more than )2,<<<
units..................................................................... ),<<<
otal '.ed costs to $e covered $y remaining
sales..................................................................... R B,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ),<
&ro'lem -2 (continued*
he additional sales of units re4uired to cover these '.ed costs
would $e:
otal remaining '.ed costs RB,<<<
Y Y0,<<< units
Knit contri$ution margin on added units R).2< per unit
herefore, a total of +),<<< units ()2,<<< \ 0,<<<* must $e
sold in order for the company to $reak even. his num$er of
units would e4ual total sales of:
+),<<< units V R,.<< per unit Y R2,,<<< in total sales.
+
.
arget pro't R)+,<<<
Y Y@,0<< units
Knit contri$ution margin R).2< per unit
hus, the company must sell @,0<< units a$ove the $reak7even
point to earn a pro't of R)+,<<< each month. hese units,
added to the +),<<< units re4uired to $reak even, would e4ual
total sales of +B,0<< units each month to reach the target pro't
'gure.
,. &f a $onus of R<.)< per unit is paid for each unit sold in e.cess
of the $reak7even point, then the contri$ution margin on these
units would drop from R).2< to R).0< per unit.
he desired monthly pro't would $e:
+0P V (R,0,<<< \ R),<<<* Y RC,<<<
hus,
arget pro't RC,<<<
Y Y2,<<< units
Knit contri$ution margin R).0< per unit
herefore, the company must sell 2,<<< units a$ove the $reak7
even point to earn a pro't of RC,<<< each month. hese units,
added to the +),<<< units re4uired to $reak even, would e4ual
total sales of +@,<<< units each month.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 ),)
&ro'lem -2! (,< minutes*
). he contri$ution margin per sweatshirt would $e:
3elling price............................................................ R),.0<
=ess varia$le e.penses:
!urchase cost of the sweatshirts........................... RB.<<
"ommission to the student
salespersons...................................................... ).0< C.0<
"ontri$ution margin................................................ R/.<<
3ince there are no '.ed costs, the num$er of unit sales needed
to yield the desired R),+<< in pro'ts can $e o$tained $y
dividing the target R),+<< pro't $y the unit contri$ution
margin:
arget pro't R),+<<
Y Y,<< sweatshirts
Knit contri$ution margin R/.<< per sweatshirt
,<< sweatshirts VR),.0< per sweatshirt Y R/,<0< in total sales.
+. 3ince an order has $een placed, there is now a M'.edN cost
associated with the purchase price of the sweatshirts (i.e., the
sweatshirts canGt $e returned*. For e.ample, an order of @0
sweatshirts re4uires a M'.edN cost (investment* of R2<< (@0
sweatshirts V RB.<< per sweatshirt Y R2<<*. he varia$le cost
drops to only R).0< per sweatshirt, and the new contri$ution
margin per sweatshirt $ecomes:
3elling price............................................................ R),.0<
=ess varia$le e.penses (commissions
only*..................................................................... ).0<
"ontri$ution margin................................................ R)+.<<
3ince the M'.edN cost of R2<< must $e recovered $efore Mr.
;ooper shows any pro't, the $reak7even computation would
$e:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R2<<
Y Y0< sweatshirts
R)+.<< per sweatshirt
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3olutions Manual, "hapter 2 ),+
0< sweatshirts VR),.0< per sweatshirt Y R2@0 in total sales
&f a 4uantity other than @0 sweatshirts were ordered, the
answer would change accordingly.
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3olutions Manual, "hapter 2 ),,
&ro'lem -2" (2< minutes*
). he income statements would $e:
Present Proposed
Amount
Per
Uni
t J Amount
Per
Unit J
3ales
R/0<,<<
< R,< )<<P R/0<,<<< R,< )<<P
=ess varia$le
e.penses
,)0,<<
< +) @< )B<,<<< )+Z /<
"ontri$ution
margin ),0,<<< R C ,<P +@<,<<< R)B 2<P
=ess '.ed
e.penses
C<,<<
< ++0,<<<
Aet operating
income
R
/0,<<< R/0,<<<
ZR+) X RC Y R)+.
+. Present Proposed
a. >egree of operating
leverage
R),0,<<<
Y,
R/0,<<<
R+@<,<<<
Y2
R/0,<<<
$. ?reak7even point in
dollars
RC<,<<<
Y
<.,<
R,<<,<<<
R++0,<<<
Y
<.2<
R,@0,<<<
c. Margin of safety Y
otal sales X ?reak7
even sales:
R/0<,<<< X
R,<<,<<<
R)0<,<<<
R/0<,<<< X
R,@0,<<<
R@0,<<<
Margin of safety
percentage Y Margin
of safety [ otal
sales:
R)0<,<<< [ ,, )H,P
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3olutions Manual, "hapter 2 ),/
R/0<,<<<
R@0,<<< [
R/0<,<<<
)2 +H,P
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3olutions Manual, "hapter 2 ),0
&ro'lem -2" (continued*
,. he major factor would $e the sensitivity of the companyGs
operations to cyclical movements in the economy. &n years of
strong economic activity, the company will $e $etter o# with
the new e4uipment. he reason is that the new e4uipment will
increase the "M ratio, permitting pro'ts to rise more rapidly in
years that sales are strong. ;owever, in periods of economic
recession, the company will $e worse o# with the new
e4uipment. he greater '.ed costs created $y the new
e4uipment will cause losses to $e deeper and sustained more
4uickly than at present. hus, management must decide
whether the potential for greater pro'ts in good years is worth
the risk of deeper losses in $ad years.
/. Ao information is given in the pro$lem concerning the new
varia$le e.penses or the new contri$ution margin ratio. ?oth of
these items must $e determined $efore the new $reak7even
point can $e computed. he computations are:
Aew varia$le e.penses:
3ales Y Iaria$le e.penses \ Fi.ed e.penses \ !ro'ts
R0B0,<<<ZY Iaria$le e.penses \ R)B<,<<< \ R0/,<<<ZZ
R,0),<<< Y Iaria$le e.penses
ZAew level of sales: R/0<,<<< V ).,< Y R0B0,<<<
ZZAew level of net operating income: R/0,<<< V ).+ Y
R0/,<<<
Aew "M ratio:
3ales
R0B0,<<
< )<<P
=ess varia$le e.penses
,0),<<
< 2<
"ontri$ution margin
R+,/,<<
< /<P
Oith the a$ove data, the new $reak7even point can $e
computed:
Fi.ed e.penses R)B<,<<<
?reak7even point
Y Y YR/0<,<<<
in dollar sales
"M ratio <./
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3olutions Manual, "hapter 2 ),2
&ro'lem -2" (continued*
he greatest risk is that the marketing managerGs estimates of
increases in sales and net operating income will not materialize
and that sales will remain at their present level. Aote that the
present level of sales is R/0<,<<<, which is just e4ual to the
$reak7even level of sales under the new marketing method.
hus, if the new marketing strategy is adopted and sales
remain unchanged, pro'ts will drop from the current level of
R/0,<<< per month to zero.
&t would $e a good idea to compare the new marketing strategy
to the current situation more directly. Ohat level of sales would
$e needed under the new method to generate at least the
R/0,<<< in pro'ts the company is currently earning each
monthF he computations are:
Fi.ed e.penses \ arget pro't
>ollar sales to attain
Y
target pro't
"M ratio
R)B<,<<<\R/0,<<<
Y
<./<
Y R02+,0<< in sales each month
hus, sales would have to increase $y at least +0P (R02+,0<<
is +0P higher than R/0<,<<<* in order to make the company
$etter o# with the new marketing strategy than with the
current situation. his appears to $e e.tremely risky.
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3olutions Manual, "hapter 2 ),@
&ro'lem -2# (/0 minutes*
). a. <a1aiian
Fantas%
,ahitian
9o% ,otal
Amount J Amount J
Amoun
t J
3ales..........................
R,<<,<<
<
)<<.
<
R0<<,<<
<
)<<.
<
RB<<,<<
< )<<.<
=ess varia$le
e.penses................. )B<,<<< 2<.< )<<,<<< +<.<
+B<,<<
< ,0.<
"ontri$ution margin...
R)+<,<<
< /<.<
R/<<,<<
< B<.< 0+<,<<< 20.<
=ess '.ed e.penses. . .
/@0,B<
<
Aet operating
income.....................
R //,+<
<
$. Fi.ed e.penses R/@0,B<<
?reak7even point
Y Y YR@,+,<<<
in dollar sales
"M ratio <.20<
Margin of safetyYActual sales 7 ?reak7even sales
YRB<<,<<< 7 R@,+,<<<YR2B,<<<
Margin of safety Margin of safety in dollars
Y
percentage Actual sales
R2B,<<<
Y YB.0P
RB<<,<<<
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3olutions Manual, "hapter 2 ),B
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3olutions Manual, "hapter 2 ),C
&ro'lem -2# (continued*
+. a.
<a1aiian
Fantas%
,ahitian
9o%
Samoan
!elight ,otal
Amoun
t J Amount J Amount J Amount J
3ales.................
R,<<,<<
< )<<.<
R0<<,<<
< )<<
R/0<,<<
< )<<.<
R),+0<,<<
< )<<.<
=ess varia$le
e.penses........
)B<,<<
< 2<.< )<<,<<< +< ,2<,<<< B<.< 2/<,<<< 0).+
"ontri$ution
margin............
R)+<,<<
< /<.<
R/<<,<<
< B< R C<,<<< +<.< 2)<,<<< /B.B
=ess '.ed
e.penses........ /@0,B<<
Aet operating
income............
R ),/,+<
<
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3olutions Manual, "hapter 2 )/<
&ro'lem -2# (continued*
$. Fi.ed e.penses R/@0,B<<
?reak7even point
Y Y Y RC@0,<<<
in dollar sales
"M ratio <./BB
Margin of safetyYActual sales 7 ?reak7even sales
YR),+0<,<<< 7 RC@0,<<<YR+@0,<<<
Margin of safety Margin of safety in dollars
Y
percentage Actual sales
R+@0,<<<
Y Y++P
R),+0<,<<<
,. he reason for the increase in the $reak7even point can $e
traced to the decrease in the companyGs overall contri$ution
margin ratio when the third product is added. Aote from the
income statements a$ove that this ratio drops from 20P to
/B.BP with the addition of the third product. his product (the
3amoan >elight* has a "M ratio of only +<P, which causes the
average contri$ution margin per dollar of sales to shift
downward.
his pro$lem shows the somewhat tenuous nature of $reak7
even analysis when the company has more than one product.
he analyst must $e very careful of his or her assumptions
regarding sales mi., including the addition (or deletion* of new
products.
&t should $e pointed out to the president that even though the
$reak7even point is higher with the addition of the third
product, the companyGs margin of safety is also greater. Aotice
that the margin of safety increases from R2B,<<< to R+@0,<<<
or from B.0P to ++P. hus, the addition of the new product
shifts the company much further from its $reak7even point,
even though the $reak7even point is higher.
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3olutions Manual, "hapter 2 )/)
&ro'lem -3$ (2< minutes*
).
"A8?ES, &A".
&ncome 3tatement For April
Standard !eluxe ,otal
Amount J Amount J Amount J
3ales..........................
R+/<,<<
< )<<
R)0<,<<
< )<<
R,C<,<<
< )<<.<
=ess varia$le
e.penses:
!roduction................ 2<,<<< +0 2<,<<< /< )+<,<<< ,<.B
3ales commission.... ,2,<<< )0
++,0<
< )0
0B,0<
< )0.<
otal varia$le
e.penses................. C2,<<< /<
B+,0<
< 00
)@B,0<
< /0.B
"ontri$ution margin. . .
R)//,<<
< 2<
R
2@,0<< /0
R+)),0<
< 0/.+
=ess '.ed e.penses:
Advertising.............. )<0,<<<
>epreciation............ +),@<<
Administrative.........
2,,<<
<
otal '.ed e.penses...
)BC,@<
<
Aet operating
income.....................
R
+),B<<
"A8?ES, &A".
&ncome 3tatement For May
Standard !eluxe ,otal
Amoun
t J Amount J Amount J
3ales.........................
R2<,<<
< )<<
R,@0,<<
< )<<
R/,0,<<
< )<<.<
=ess varia$le
e.penses:
!roduction............... )0,<<< +0 )0<,<<< /< )20,<<< ,@.C
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )/+
3ales commission. . . C,<<< )0 02,+0< )0 20,+0< )0.<
otal varia$le
e.penses................ +/,<<< /< +<2,+0< 00 +,<,+0< 0+.C
"ontri$ution margin. .
R,2,<<
< 2<
R)2B,@0
< /0 +</,@0< /@.)
=ess '.ed e.penses:
Advertising.............. )<0,<<<
>epreciation........... +),@<<
Administrative........ 2,,<<<
otal '.ed e.penses. . )BC,@<<
Aet operating
income.................... R)0,<0<
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3olutions Manual, "hapter 2 )/,
&ro'lem -3$ (continued*
+. he sales mi. has shifted over the last year from 3tandard sets
to >elu.e sets. his shift has caused a decrease in the
companyGs overall "M ratio from 0/.+P in April to /@.)P in
May. For this reason, even though total sales (in dollars* are
greater, net operating income is lower.
,. 3ales commissions could $e $ased on contri$ution margin,
rather than on sales price. A -at rate on total contri$ution
margin, as the te.t suggests, might encourage the
salespersons to emphasize the product with the greatest
contri$ution to the pro'ts of the 'rm.
/. a. he $reak7even in dollar sales can $e computed as follows:
Fi.ed e.penses
R)BC,@<<
Y Y R,0<,<<<
<.0/+
"M ratio
$. MayGs $reak7even point is higher than AprilGs. his is $ecause
the companyGs overall "M ratio has gone down, i.e., the sales
mi. has shifted from the more pro'ta$le to the less pro'ta$le
units.
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3olutions Manual, "hapter 2 )//
Case -31 (2< minutes*
). and +. Part 4 Part 5a Part 5b
,otal
Per
Unit ,otal
Per
Unit ,otal
Per
Unit
3ales....................................... R/0<,<<< R)<.<< R2<<,<<<
,
RB.<< R@+<,<<<
/
R)+.<<
=ess varia$le e.penses:
>irect materials.................... C<,<<< +.<< )0<,<<< +.<< )+<,<<< +.<<
>irect la$or........................... @B,,<< ).@/ ),<,0<< ).@/ )</,/<< ).@/
Iaria$le overhead................. ),,0<< <.,< ++,0<< <.,< )B,<<< <.,<
Iaria$le selling:
"ommissions...................... +@,<<< <.2<
)
,2,<<< <./B
)
2/,B<< ).<B
)
3hipping............................. 0,/<< <.)+ C,<<< <.)+ @,+<< <.)+
Iaria$le administrative......... ),B<< <.</ ,,<<< <.</ +,/<< <.</
otal varia$le e.penses........... +)2,<<< /.B< ,0),<<< /.2B ,)2,B<< 0.+B
"ontri$ution margin +,/,<<< R0.+< +/C,<<< R,.,+ /<,,+<< R2.@+
=ess '.ed e.penses:
Manufacturing overhead....... B0,<<<
+
B0,<<< B0,<<<
3elling (advertising, etc.*...... )+<,<<< )+<,<<< ++<,<<<
0
Administrative (salaries,
etc.*.................................... /B,<<< /B,<<< /B,<<<
otal '.ed e.penses................ +0,,<<< +0,,<<< ,0,,<<<
Aet operating income (loss*....
R()C,<<<
* R (/,<<<* R 0<,+<<
)
2P of sales dollars for parts ) and +a% CP for part
+$.
/
/0,<<< units V ) )H, Y 2<,<<<
units%
+
RCB,0<< X (/0,<<< units V R<.,<* Y RB0,<<<. R)<.<< \ (R)<.<< V +<P* Y
R)+.<<%
,
R)<.<< X (R)<.<< V +<P* Y RB.<<% RB.<< V @0,<<< 2<,<<< units V R)+.<< Y
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3olutions Manual, "hapter 2 )/0
units R@+<,<<<.
Y R2<<,<<<.
0
R)+<,<<< \ R)<<,<<< Y
R++<,<<<.
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3olutions Manual, "hapter 2 )/2
Case -31 (continued*
,. 3elling price per unit................................. R)<.<<
Driginal unit varia$le e.pense (from part
)*............................................................ R/.B<
=ess reduction in materials cost................ <.@< /.)<
Aew contri$ution margin per unit............. R0.C<
Fi.ed e.penses\arget pro't
Knit sales to attain
Y
target pro't
Knit contri$ution margin
R+0,,<<<\R,<,+<<
Y Y/B,<<< units
R0.C< per unit
/. "ontri$ution margin generated
(2<,<<< units V R0.+< per unit*................. R,)+,<<<
=ess:
Fi.ed costs to $e covered (from part )*.....
R+0,,<<
<
arget pro't (2<,<<< units V R)< per unit
Y R2<<,<<<% R2<<,<<< V /.0P Y
R+@,<<<*................................................. +@,<<< +B<,<<<
"ontri$ution margin availa$le for
increased advertising................................ R,+,<<<
0. he 4uoted price per unit would $e:
Iaria$le production e.pense (R+.<< \ R).@/ \
R<.,<*................................................................ R/.</
3hipping e.pense (R<.)+ V ).0*........................... <.)B
Iaria$le administrative e.pense (R<.</ V <.@0*... <.<,
3pecial insurance fee (R0,@<< [ C,0<< units*....... <.2<
!resent net operating loss (R)C,<<< [ C,0<<
units*................................................................. +.<<
>esired pro't (R)/,+0< [ C,0<< units*................. ).0<
6uoted price per unit........................................... RB.,0
&t should $e pointed out, however, that the price charged to the
overseas distri$utor should $e determined $y how much the
overseas distri$utor is willing to pay and competitive conditions
rather than $y Ohitney "ompanyGs desired pro't. Any price
greater than the cost of R/.B0 per unit (Y RB.,0 X R).0< X
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )/@
R+.<<* would reduce OhitneyGs net operating loss. Dn the other
hand, if the distri$utor is willing to pay more than RB.,0 per
unit, it would $e foolish to leave the additional pro't on the
ta$le.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )/B
Case -32 (C< minutes*
). a. ?efore the income statement can $e completed, we need to
estimate the companyGs revenues and e.penses for the
month.
he 'rst step is to compute the sales for the month in $oth
units and dollars. 3ales in units would $e:
,,,<<< units (5uly sales* [ ).)< Y ,<,<<< units sold in 5une.
o determine the sales in dollars, we must integrate the
$reak7even point, the margin of safety in dollars, and the
margin of safety percentage. he computations are:
Margin of safety in dollarsYotal sales 7 ?reak7even sales
Yotal sales 7 R)B<,<<<
Margin of safety in dollars
Margin of safety
Y
percentage (+<P*
otal sales
&f the margin of safety in dollars is +<P of total sales, then
the $reak7even point in dollars must $e B<P of total sales.
herefore, total sales would $e:
R)B<,<<<
YB<P
otal sales
otal sales Y R)B<,<<<[B<P
Y R++0,<<<
he selling price per unit would $e:
R++0,<<< total sales [ ,<,<<< units Y R@.0< per unit.
he second step is to determine the total contri$ution margin
for the month of 5une. his can $e done $y using the
operating leverage concept. Aote that a )<P increase in
sales has resulted in a 0<P increase in net operating income
$etween 5une and 5uly:
5 uly increased net income R/<,0<< 7 R+@,<<< R),,0<<
Y Y Y0<P
5 une net income R+@,<<< R+@,<<<
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3olutions Manual, "hapter 2 )/C
Case -32 (continued*
3ince the net operating income for 5uly increased $y 0<P
when sales increased $y )<P, the degree of operating
leverage for 5une must $e 0. herefore, total contri$ution
margin for 5une must have $een:
0 V R+@,<<< Y R),0,<<<.
5uneGs income statement can now $e completed $y simply
inserting known data and computing unknown data:
!Q88;&" "DM!AAQ
Actual &ncome 3tatement
For the Month Ended 5une ,<
,otal
Per
Unit
Percen
t
3ales (,<,<<< units*....
R++0,<<
< R@.0< )<<
=ess varia$le
e.penses.................. C<,<<< Z ,.<< Z /<
Z
"ontri$ution margin.... ),0,<<< R/.0< 2< Z
=ess '.ed e.penses.... )<B,<<< Z
Aet operating
income.....................
R
+@,<<<
Z"omputed $y working from known data.
$. he $reak7even point:
Fi.ed e.penses
?reak7even point
Y
in unit sales
Knit contri$ution margin
R)<B,<<<
Y Y +/,<<<
R/.0< per unit
&n dollars: +/,<<< units V R@.0< per unit Y R)B<,<<<
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3olutions Manual, "hapter 2 )0<
c. Margin of safety in dollarsYotal sales 7 ?reak7even sales
YR++0,<<< 7 R)B<,<<< Y R/0,<<<
Margin of safety in dollars
Margin of safety
Y
percentage
otal sales
R/0,<<<
Y Y +<P
R++0,<<<
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3olutions Manual, "hapter 2 )0)
Case -32 (continued*
d. he degree of operating leverage:
"ontri$ution margin R),0,<<<
Y Y 0
Aet income R+@,<<<
+. a. 5ulyGs income statement can $e completed using data given
in the pro$lem and data derived for 5uneGs income statement
a$ove:
!Q88;&" "DM!AAQ
!rojected &ncome 3tatement
For the Month Ended 5uly ,)
,otal
Per
Unit
Percen
t
3ales (,,,<<< units* R+/@,0<< R@.0< )<<
=ess varia$le e.penses CC,<<< ,.<< /<
"ontri$ution margin )/B,0<< R/.0< 2<
=ess '.ed e.penses )<B,<<<
Aet operating income
R
/<,0<<
$. Margin of safety in dollars Yotal sales 7 ?reak7even sales
YR+/@,0<< 7 R)B<,<<<YR2@,0<<
Margin of safety in dollars
Margin of safety
Y
percentage
otal sales
R2@,0<<
Y Y+@.,P (rounded*
R+/@,0<<
"ontri$ution margin
>egree of operating
Y
leverage
Aet operating income
R)/B,0<<
Y Y,.@ (rounded*
R/<,0<<
he margin of safety has gone up since the companyGs sales
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter 2 )0+
will $e greater in 5uly than they were in 5une, thus moving
the company farther away from its $reak7even point.
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3olutions Manual, "hapter 2 )0,
Case -32 (continued*
he degree of operating leverage operates in the opposite
manner from the margin of safety. As a company moves
farther away from its $reak7even point, the degree of
operating leverage decreases. he reason it decreases is that
$oth contri$ution margin and net operating income are
increasing at the same dollar rate as additional units are
sold, and, mathematically, dividing one $y the other will yield
a progressively smaller num$er.
,. he increased la$or cost will $e R<.2< per unit, )H, of R).B< per
unit. he new varia$le e.pense will therefore total R,.2< per
unit, and the new contri$ution margin ratio will $e:
3ales R@.0< )<<P
=ess varia$le e.penses ,.2< /B
"ontri$ution margin R,.C< 0+P
he target pro't per unit will $e:
+<P V R@.0< Y R).0<.
herefore,
3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
R@.0<6 Y R,.2<6 \ R)<B,<<< \ R).0<6
R+./<6 Y R)<B,<<<
6 Y R)<B,<<< [ R+./< per unit
6 Y /0,<<< units
Alternative solution:
3ales Y
Iaria$le e.penses \ Fi.ed e.penses \
!ro'ts
S Y <./BS \ R)<B,<<< \ <.+<S
<.,+S Y R)<B,<<<
S Y R)<B,<<< [ <.,+
S Y
R,,@,0<<% or, at R@.0< per unit, /0,<<<
units
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3olutions Manual, "hapter 2 )0/
Case -33 (@0 minutes*
?efore proceeding with the solution, it is helpful 'rst to restructure the data into
contri$ution format for each of the three alternatives. (he data in the statements $elow
are in thousands.*
4;J
Commission
5:J
Commission $1n Sales Force
3ales R)2,<<< )<<P R)2,<<< )<<P
R)2,<<<.
< )<<.<P
=ess varia$le e.penses:
Manufacturing @,+<< @,+<< @,+<<.<
"ommissions ()0P, +<P
@.0P* +,/<< ,,+<<
),+<<.
<
otal varia$le e.penses C,2<< 2< )<,/<< 20
B,/<<.
< 0+.0
"ontri$ution margin 2,/<< /<P 0,2<< ,0P
@,2<<.
< /@.0P
=ess '.ed e.penses:
Manufacturing overhead +,,/< +,,/< +,,/<.<
Marketing )+< )+< +,0+<.< Z
Administrative ),B<< ),B<< ),@+0.< ZZ
&nterest 0/< 0/<
0/<.<
otal '.ed e.penses /,B<< /,B<<
@,)+0.
<
&ncome $efore income ta.es ),2<< B<< /@0.<
=ess income ta.es (,<P* /B< +/< )/+.0
Aet income R ),)+< R 02< R ,,+.0
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3olutions Manual, "hapter 2 )00
ZR)+<,<<< \ R+,/<<,<<< Y R+,0+<,<<<.
ZZR),B<<,<<< X R@0,<<< Y R),@+0,<<<.
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3olutions Manual, "hapter 2 )02
Case -33 (continued*
). Ohen the income $efore ta.es is zero, income ta.es will also
$e zero and net income will $e zero. herefore, the $reak7even
calculations can $e $ased on the income $efore ta.es.
a. ?reak7even point in dollar sales if the commission remains
)0P.
Fi.ed costs R/,B<<,<<<
Y YR)+,<<<,<<<
"M ratio <./<
$. ?reak7even point in dollar sales if the commission increases
to +<P.
Fi.ed costs R/,B<<,<<<
Y YR),,@)/,+B2
"M ratio <.,0
c. ?reak7even point in dollar sales if the company employs its
own sales force.
Fi.ed costs R@,)+0,<<<
Y YR)0,<<<,<<<
"M ratio <./@0
+. &n order to generate a R),)+<,<<< net income, the company
must generate R),2<<,<<< in income $efore ta.es. herefore,
Fi.ed e.penses \ arget income $efore ta.es
>ollar sales to
Y
attain target
"M ratio
R/,B<<,<<< \ R),2<<,<<< R2,/<<,<<<
Y Y Y R)B,+B0,@)/
<.,0 <.,0
,. o determine the volume of sales at which net income would $e
e4ual under either the +<P commission plan or the company
sales force plan, we 'nd the volume of sales where costs $efore
income ta.es under the two plans are e4ual.
S Y otal sales revenue
<.20S \
R/,B<<,<<< Y <.0+0S \ R@,)+0,<<<
<.)+0S Y R+,,+0,<<<
S Y R+,,+0,<<< [ <.)+0
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3olutions Manual, "hapter 2 )0@
S Y R)B,2<<,<<<
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3olutions Manual, "hapter 2 )0B
Case -33 (continued*
hus, at a sales level of R)B,2<<,<<< either plan would yield
the same income $efore ta.es and net income. ?elow this sales
level, the commission plan would yield the largest net income%
a$ove this sales level, the sales force plan would yield the
largest net income.
/. a., $., and c.
4;J
Commissio
n
5:J
Commissi
on
$1n
Sales
Force
"ontri$ution margin (!art )*
(.* R2,/<<,<<< R0,2<<,<<< R@,2<<,<<<
&ncome $efore ta.es (!art )*
(y* R),2<<,<<< R B<<,<<< R /@0,<<<
>egree of operating
leverage:
(.* [ (y* / @ )2
0. Oe would continue to use the sales agents for at least one
more year, and possi$ly for two more years. he reasons are as
follows:
>irst. use of the sales agents would have a less dramatic
e#ect on net income.
Second, use of the sales agents for at least one more year
would give the company more time to hire competent people
and get the sales group organized.
-hird. the sales force plan doesnGt $ecome more desira$le
than the use of sales agents until the company reaches sales
of R)B,2<<,<<< a year. his level pro$a$ly wonGt $e reached
for at least one more year, and possi$ly two years.
>ourth. the sales force plan will $e highly leveraged since it
will greatly increase '.ed costs (and decrease varia$le
costs*. Dne or two years from now, when sales have reached
the R)B,2<<,<<< level, the company can $ene't greatly from
this leverage. For the moment, pro'ts will $e greater and
risks will $e less $y staying with the agents, even at the
higher +<P commission rate.
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3olutions Manual, "hapter 2 )0C
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3olutions Manual, "hapter 2 )2<
Case -34 (@0 minutes*
). he total annual '.ed cost of the !ediatric >epartment can $e computed as follows:
Annual
Patient/!a%s Aides (urses
Supervisi
ng (urses
,otal
Personne
l
$ther
Fixed Cost
,otal
Fixed
Cost
L
M4HA:::
L
M5EA:::
L
M6EA:::
)<,<<<7
)/,<<< R,@B,<<< R+B2,<<< R)//,<<< RB<B,<<< R/0/,<<<
R),+2+,<<
<
)/,<<)7
)@,<<< ,C2,<<< ,)+,<<< )//,<<< B0+,<<< /0/,<<< ),,<2,<<<
)@,<<)7
+,,@+0 ,C2,<<< ,,B,<<< )//,<<< B@B,<<< /0/,<<< ),,,+,<<<
+,,@+27
+0,00< /0<,<<< ,2/,<<< )B<,<<< CC/,<<< /0/,<<< ),//B,<<<
+0,00)7
+@,,@0 /2B,<<< ,2/,<<< )B<,<<< ),<)+,<<< /0/,<<< ),/22,<<<
+@,,@27
+C,+<< 0++,<<< /)2,<<< +)2,<<< ),)0/,<<< /0/,<<< ),2<B,<<<
+. he M$reak7evenN can $e computed for each range of activity $y dividing the total '.ed
cost for that range of activity $y the contri$ution margin per patient7day, which is RB<
(YR),< revenue 7 R0< varia$le cost*.
Annual
Patient/!a%s
'a+
,otal
Fixed
Cost
'b+
Contributio
n Margin
NBrea&/
EvenO
'a+ P 'b+
0ithin
2elevant
2angeQ
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3olutions Manual, "hapter 2 )2)
)<,<<<7
)/,<<<
R),+2+,<<
< RB< )0,@@0 Ao
)/,<<)7
)@,<<< ),,<2,<<< B< )2,,+0 Qes
)@,<<)7
+,,@+0 ),,,+,<<< B< )2,20< Ao
+,,@+27
+0,00< ),//B,<<< B< )B,)<< Ao
+0,00)7
+@,,@0 ),/22,<<< B< )B,,+0 Ao
+@,,@27
+C,+<< ),2<B,<<< B< +<,)<< Ao
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3olutions Manual, "hapter 2 )2+
Case -34 (continued*
Ohile a M$reak7evenN can $e computed for each range of activity (i.e., relevant range*,
all $ut one of these $reak7evens is $ogus. For e.ample, within the range of )<,<<< to
)/,<<< patient7days, the computed $reak7even is )0,@00 patient7days. ;owever, this
level of activity is outside this relevant range. o serve )0,@00 patient7days, the '.ed
costs would have to $e increased from R),+2+,<<< to R),,<2,<<< $y adding one more
aide and one more nurse. he only M$reak7evenN that occurs within its own relevant
range is )2,,+0. his is the only legitimate $reak7even.
,. he level of activity re4uired to earn a pro't of R+<<,<<< can $e computed as follows:
Annual
Patient/!a%s
,otal
Fixed
Cost
,arget
Pro.t
'a+
,otal Fixed
Cost R ,arget
Pro.t
'b+
Contributio
n Margin
Activit%
to Attain
,arget
Pro.t
'a+ P 'b+
0ithin
2elevant
2angeQ
)<,<<<7
)/,<<<
R),+2+,<<
<
R+<<,<<
< R),/2+,<<< RB< )B,+@0 Ao
)/,<<)7
)@,<<< ),,<2,<<<
+<<,<<<
),0<2,<<< B< )B,B+0 Ao
)@,<<)7
+,,@+0 ),,,+,<<<
+<<,<<<
),0,+,<<< B< )C,)0< Qes
+,,@+27
+0,00< ),//B,<<<
+<<,<<<
),2/B,<<< B< +<,2<< Ao
+0,00)7
+@,,@0 ),/22,<<<
+<<,<<<
),222,<<< B< +<,B+0 Ao
+@,,@27
+C,+<< ),2<B,<<<
+<<,<<<
),B<B,<<< B< ++,2<< Ao
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3olutions Manual, "hapter 2 )2,
&n this case, the only solution that is within the appropriate relevant range is )C,)0<
patient7days.
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3olutions Manual, "hapter 2 )2/
Case -35 (2< minutes*
Aote: his is a pro$lem that will challenge the very $est studentsG
conceptual and analytical skills.
). he overall $reak7even sales can $e determined using the "M
ratio.
Velcro Metal (%lon ,otal
3ales
R)20,<<
< R,<<,<<<
R,/<,<<
< RB<0,<<<
Iaria$le e.penses )+0,<<< )/<,<<< )<<,<<< ,20,<<<
"ontri$ution margin R /<,<<< R)2<,<<<
R+/<,<<
< //<,<<<
Fi.ed e.penses /<<,<<<
Aet operating income
R /<,<<<
"ontri$ution margin R//<,<<<
"M ratioY <.0/22
3ales RB<0,<<<
Y Y
Fi.ed e.penses R/<<,<<<
?reak7even point in
Y R@,+,<<< (rounded*
total sales dollars
"M ratio <.0/22
Y Y
+. he issue is what to do with the common '.ed cost when
computing the $reak7evens for the individual products. he
correct approach is to ignore the common '.ed costs. &f the
common '.ed costs are included in the computations, the
$reak7even points will $e overstated for individual products and
managers may drop products that in fact are pro'ta$le.
a. he $reak7even points for each product can $e computed
using the contri$ution margin approach as follows:
Velcro Metal (%lon
Knit selling price .................................................... R).20 R).0< R<.B0
Iaria$le cost per unit ............................................. ).+0 <.@< <.+0
Knit contri$ution margin (a* ................................... R<./< R<.B< R<.2<
!roduct '.ed e.penses ($* .....................................
R+<,<<
<
RB<,<<
<
R2<,<<
<
?reak7even point in units sold ($* 0<,<<< )<<,<< )<<,<<
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3olutions Manual, "hapter @ C)
[ (a* ....................................................................< <
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3olutions Manual, "hapter @ C+
Case -35 (continued*
$. &f the company were to sell e.actly the $reak7even 4uantities
computed a$ove, the company would lose R+/<,<<<9the
amount of the common '.ed cost. his can $e veri'ed as
follows:
Velcro Metal (%lon ,otal
Knit sales 0<,<<< )<<,<<< )<<,<<<
3ales RB+,0<<
R)0<,<<
< RB0,<<< R ,)@,0<<
Iaria$le e.penses
2+,0<< @<,<<< +0,<<< )0@,0<<
"ontri$ution
margin R+<,<<< R B<,<<< R2<,<<< )2<,<<<
Fi.ed e.penses /<<,<<<
Aet operating
income
R(+/<,<<<
*
At this point, many students conclude that something is wrong
with their answer to part (a* since a result in which the
company loses money operating at the $reak7evens for the
individual products does not seem to make sense. hey also
worry that managers may $e lulled into a false sense of
security if they are given the $reak7evens computed in part (a*.
otal sales at the individual product $reak7evens is only
R,)@,0<< whereas the total sales at the overall $reak7even
computed in part ()* is R@,+,<<<.
Many students (and managers, for that matter* attempt to
resolve this apparent parado. $y allocating the common '.ed
costs among the products prior to computing the $reak7evens
for individual products. Any of a num$er of allocation $ases
could $e used for this purpose9sales, varia$le e.penses,
product7speci'c '.ed e.penses, contri$ution margins, etc. (Oe
usually take a tally of how many students allocated the
common '.ed costs using each possi$le allocation $ase $efore
proceeding.* For e.ample, the common '.ed costs are
allocated on the ne.t page $ased on sales.
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3olutions Manual, "hapter @ C,
Case -35 (continued*
Allocation of common '.ed e.penses on the $asis of sales
revenue:
Velcro Metal (%lon ,otal
3ales
R)20,<<
< R,<<,<<<
R,/<,<<
<
RB<0,<<
<
!ercentage of total sales +<./C@P ,@.+2@P /+.+,2P )<<.<P
Allocated common '.ed
e.penseZ R/C,)C, R BC,//)
R)<),,2
2
R+/<,<<
<
!roduct '.ed e.penses +<,<<< B<,<<< 2<,<<< )2<,<<<
Allocated common and
product '.ed e.penses
(a* R2C,)C, R)2C,//)
R)2),,2
2
R/<<,<<
<
Knit contri$ution margin
($* R<./< R<.B< R<.2<
M?reak7evenN point in
units sold (a* [ ($* )@+,CB, +)),B<) +2B,C/,
Zotal common '.ed e.pense V percentage of total sales
&f the company sells )@+,CB, units of the Ielcro product, +)),B<)
units of the Metal product, and +2B,C/, units of the Aylon
product, the company will indeed $reak even overall. ;owever,
the apparent $reak7evens for two of the products are higher than
their normal annual sales.
Velcro Metal (%lon
Aormal annual sales
volume
)<<,<<< +<<,<<< /<<,<<<
M?reak7evenN annual sales )@+,CB, +)),B<) +2B,C/,
M3trategicN decision drop drop retain
&t would $e natural for managers to interpret a $reak7even for a
product as the level of sales $elow which the company would $e
'nancially $etter o# dropping the product. herefore, we should
not $e surprised if managers, $ased on the a$ove erroneous
$reak7even calculation, would decide to drop the Ielcro and Metal
products and concentrate on the companyGs Mcore competency,N
which appears to $e the Aylon product.
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3olutions Manual, "hapter @ C/
Case -35 (continued*
&f the managers drop the Ielcro and Metal products, the company
would face a loss of R2<,<<< computed as follows:
Velcro Metal (%lon ,otal
3ales dropped dropped
R,/<,<<
< R,/<,<<<
Iaria$le e.penses )<<,<<< )<<,<<<
"ontri$ution margin
R+/<,<<
< +/<,<<<
Fi.ed e.pensesZ ,<<,<<<
Aet operating income
R(2<,<<<*
Z ?y dropping the two products, the company reduces its '.ed
e.penses $y only R)<<,<<< (YR+<,<<< \ RB<,<<<*. herefore,
the total '.ed e.penses are R,<<,<<< rather than R/<<,<<<.
?y dropping the two products, the company would go from
making a pro't of R/<,<<< to su#ering a loss of R2<,<<<. he
reason is that the two dropped products were contri$uting
R)<<,<<< toward covering common '.ed e.penses and toward
pro'ts. his can $e veri'ed $y looking at a segmented income
statement like the one that will $e introduced in a later chapter.
Velcro Metal (%lon ,otal
3ales
R)20,<<
<
R,<<,<<
<
R,/<,<<
< RB<0,<<<
Iaria$le e.penses )+0,<<< )/<,<<< )<<,<<< ,20,<<<
"ontri$ution margin /<,<<< )2<,<<< +/<,<<< //<,<<<
!roduct '.ed e.penses
+<,<<< B<,<<< 2<,<<< )2<,<<<
!roduct segment margin
R +<,<<< R B<,<<<
R)B<,<<
< +B<,<<<
"ommon '.ed e.penses
+/<,<<<
Aet operating income
R /<,<<<
R)<<,<<<
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3olutions Manual, "hapter @ C0
,roup E%ercise -3
). he answer to this 4uestion will vary from school to school.
+. Managers will hire more support sta#, such as security and
vending personnel, for $ig games that predicta$ly draw more
people. hese costs are varia$le with respect to the num$er of
expected attendees, $ut are '.ed with respect to the num$er
of people who actually $uy tickets. Most other costs are '.ed
with respect to $oth the num$er of e.pected and actual tickets
sold9including the costs of the coaching sta#, athletic
scholarships, uniforms and e4uipment, facilities, and so on.
,. he answer to this 4uestion will vary from school to school, $ut
a clear distinction should $e drawn $etween the costs that are
varia$le with respect to the num$er of tickets sold (i.e., actual
attendees* versus the costs that are varia$le with respect to
the num$er of tickets that are e.pected to $e sold. he costs
that are varia$le with respect to the num$er of tickets actually
sold, given the num$er of e.pected tickets sold, are pro$a$ly
inconse4uential since, as discussed a$ove, staEng is largely
decided $ased on e.pectations.
/. he answer to this 4uestion will vary from school to school. he
lost pro't is the di#erence $etween the ticket price and the
varia$le cost of 'lling a seat multiplied $y the num$er of unsold
seats.
0. he answer to this 4uestion will vary from school to school.
2. he answer to this 4uestion will vary from school to school, $ut
should $e $ased on the answers to parts (/* and (0* a$ove.
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3olutions Manual, "hapter @ C2
,roup E%ercise -3!
). &f CP increases continue for ten years, then the cost of tuition
and room and $oard at a private college will cost +.,@ times as
much as today ().<C
)<
Y+.,@*. hus, a college education that
costs R)<<,<<< today would cost R+,@,<<< in ten years. his
appears to $e 4uite una#orda$le9particularly if family incomes
increase at much less than the CP rate.
+. he cost of adding an additional student to a class is virtually
zero. ?asically, all of a collegeGs costs are '.ed with respect to
how many students are enrolled in a particular scheduled class.
,. &ncreasing enrollment will lead to more eEcient use of the
currently underutilized capacity of higher education. &f more
students are enrolled in a college whose enrollments are $elow
capacity, then the cost per student should decrease.
"onse4uently, tuition should decrease as well, unless capacity
is e.panded to accommodate the additional students.
/. !rivate colleges should $ene't more than pu$lic colleges from
increasing enrollments $ecause tuition is generally higher at
private institutions% therefore, more revenue will $e received
from additional students. he revenue stream tends to $e much
more constant at pu$lic colleges, which rely on funds provided
$y the state. his shields pu$lic colleges somewhat during
periods of decreasing enrollments, $ut prevents them from
realizing the full $ene'ts of increasing enrollments.
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3olutions Manual, "hapter @ C@
,roup E%ercise -3"
!arts ), +, and ,
A#ected
b% adding
service to
an
airportQ
A#ected
b% adding
a SightQ
Variable
1ith
respect to
seats
.lledQ
Fuel and oil.............................. Qes Qes 3omewhat
Flying operations la$or (-ight
crews9pilots, copilots,
navigators, and -ight
engineers*............................. Qes Qes Ao
!assenger service la$or (-ight
attendants*............................ Qes Qes 3omewhat
Aircraft traEc and servicing
la$or (personnel servicing
aircraft and handling
passengers at gates,
$aggage, and cargo*.............. Qes Qes 3omewhat
!romotions and sales la$or
(reservations and sales
agents, advertising and
pu$licity*............................... 3omewhat Ao Ao
Maintenance la$or
(maintenance of -ight
e4uipment and ground
property and e4uipment*....... Qes 3omewhat Ao
Maintenance materials and
overhead............................... Qes Qes Ao
1round property and
e4uipment (landing fees,
and rental e.penses and
depreciation for ground
property and e4uipment*....... Qes 3omewhat Ao
Flight e4uipment (rental
e.penses and depreciation
on aircraft frames and
engines*................................ Qes Qes Ao
1eneral overhead 3omewhat Ao Ao
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3olutions Manual, "hapter @ CB
(administrative personnel,
utilities, insurance,
communications, etc.*...........
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3olutions Manual, "hapter @ CC
,roup E%ercise -3" (continued*
/. he varia$le cost of 'lling a seat on an already7scheduled -ight
is very small. he num$er of -ight attendants on a -ight might
have to $e augmented and the num$er of meals served would
have to $e increased, $ut $eyond that there would $e very little
varia$le cost. Fuel costs would increase $ecause of the added
weight, $ut not $y very much. "onse4uently, almost all of the
ticket price falls directly to the $ottom line as increased net
operating income. his makes airline pro'ts very sensitive to
the load factor. As the percentage of seats 'lled $y paying
passengers increases, pro'ts increase dramatically. he
downside of this is that if the load factor declines, losses can
happen very 4uickly.
Airlines have very high '.ed costs and very low varia$le costs,
which gives them a lot of operating leverage. Ohen operating
leverage is high, pro'ts are sensitive $ecause each item sold
contri$utes more to revenue, a$ove '.ed costs. hus, $eyond
the $reak7even point, pro'ts grow more rapidly than they
would if operating leverage was low. ;owever, if the $reak7
even point is not reached, then losses are greater, $ecause a
higher proportion of costs is '.ed.
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3olutions Manual, "hapter @ )<<
Chapter !
<aria'le Costing2 A -ool 7or
Management
Solutions to Questions
!-1 he $asic di#erence $etween
a$sorption and varia$le costing is due to
the handling of '.ed manufacturing
overhead. Knder a$sorption costing, '.ed
manufacturing overhead is treated as a
product cost and hence is an asset until
products are sold. Knder varia$le costing,
'.ed manufacturing overhead is treated
as a period cost and is charged in full
against the current periodGs income.
!-2 3elling and administrative
e.penses are treated as period costs
under $oth varia$le costing and
a$sorption costing.
!-3 Knder a$sorption costing, '.ed
manufacturing overhead costs are
included in product costs, along with direct
materials, direct la$or, and varia$le
manufacturing overhead. &f some of the
units are not sold $y the end of the period,
then they are carried into the ne.t period
as inventory. he '.ed manufacturing
overhead cost attached to the units in
ending inventory follow the units into the
ne.t period as part of their inventory cost.
Ohen the units carried over as inventory
are 'nally sold, the '.ed manufacturing
overhead cost that has $een carried over
with the units is included as part of that
periodGs cost of goods sold.
!-4 A$sorption costing advocates
$elieve that a$sorption costing does a
$etter jo$ of matching costs with revenues
than varia$le costing. hey argue that all
manufacturing costs must $e assigned to
products to properly match the costs of
producing units of product with the
revenues from the units when they are
sold. hey $elieve that no distinction
should $e made $etween varia$le and
'.ed manufacturing costs for the purposes
of matching costs and revenues.
!-5 Advocates of varia$le costing argue
that '.ed manufacturing costs are not
really the cost of any particular unit of
product. &f a unit is made or not, the total
'.ed manufacturing costs will $e e.actly
the same. herefore, how can one say that
these costs are part of the costs of the
productsF hese costs are incurred to have
the capacity to make products during a
particular period and should $e charged
against that period as period costs
according to the matching principle.
!- &f production and sales are e4ual,
net operating income should $e the same
under a$sorption and varia$le costing.
Ohen production e4uals sales, inventories
do not increase or decrease and therefore
under a$sorption costing '.ed
manufacturing overhead cost cannot $e
deferred in inventory or released from
inventory.
!-! &f production e.ceeds sales,
a$sorption costing will usually show higher
net operating income than varia$le
costing. Ohen production e.ceeds sales,
inventories increase and therefore under
a$sorption costing part of the '.ed
manufacturing overhead cost of the
current period will $e deferred in inventory
to the ne.t period. &n contrast, all of the
'.ed manufacturing overhead cost of the
current period will $e charged immediately
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter @ )<)
against income as a period cost under
varia$le costing.
!-" &f '.ed manufacturing overhead
cost is released from inventory, then
inventory levels must have decreased and
therefore production must have $een less
than sales.
!-# &nventory decreased. he decrease
resulted in '.ed manufacturing overhead
cost $eing released from inventory and
charged against income as part of cost of
goods sold. his added '.ed
manufacturing overhead cost resulted in a
loss even though the company operated
at its $reakeven.
!-1$ Knder a$sorption costing it is
possi$le to increase net operating income
simply $y increasing the level of
production without any increase in sales. &f
production e.ceeds sales, units of product
are added to inventory. hese units carry a
portion of the current periodGs '.ed
manufacturing overhead costs into the
inventory account, there$y reducing the
current periodGs reported e.penses and
causing net operating income to increase.
!-11 1enerally speaking, varia$le
costing cannot $e used e.ternally for
'nancial reporting purposes nor can it $e
used for ta. purposes. &t can, however, $e
used in internal reports.
!-12 >i#erences in reported net
operating income $etween a$sorption and
varia$le costing arise $ecause of changing
levels of inventory. Knder 5&, goods are
produced strictly to customersG orders.
Oith production geared to sales,
inventories are largely (or entirely*
eliminated. &f inventories are completely
eliminated, they cannot change from one
period to another and a$sorption costing
and varia$le costing will report the same
net operating income.
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3olutions Manual, "hapter @ )<+
E%ercise !-1 ()0 minutes*
(Aote: All currency values are in thousands of rupiah.*
). Knder a$sorption costing, all manufacturing costs (varia$le and
'.ed* are included in product costs.
>irect materials.......................................................
8p)<
<
>irect la$or............................................................. ,+<
Iaria$le manufacturing overhead........................... /<
Fi.ed manufacturing overhead (8p2<,<<< [ +0<
units*....................................................................
+/
<
Knit product cost.....................................................
8p@<
<
+. Knder varia$le costing, only the varia$le manufacturing costs
are included in product costs.
>irect materials.......................................................
8p)<
<
>irect la$or............................................................. ,+<
Iaria$le manufacturing overhead........................... /<
Knit product cost.....................................................
8p/2
<
Aote that selling and administrative e.penses are not treated
as product costs under either a$sorption or varia$le costing%
that is, they are not included in the costs that are inventoried.
hese e.penses are always treated as period costs and are
charged against the current periodGs revenue.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter @ )<,
E%ercise !-2 (,< minutes*
(Aote: All currency values are in thousands of rupiah.*
). +0 units V 8p+/< per unit '.ed manufacturing overhead per
unit Y 8p2,<<<
+. he varia$le costing income statement appears $elow:
3ales......................................................... 8p)C),+0<
=ess varia$le e.penses:
Iaria$le cost of goods sold:
?eginning inventory............................. 8p<
Add varia$le manufacturing costs
(+0< units V 8p/2< per unit*.............
))0,<<
<
1oods availa$le for sale....................... ))0,<<<
=ess ending inventory
(+0 units V 8p/2< per unit*...............
)),0<
<
Iaria$le cost of goods soldZ.................... )<,,0<<
Iaria$le selling and administrative
e.penses (++0 units V 8p+< per unit*. . /,0<< )<B,<<<
"ontri$ution margin.................................. B,,+0<
=ess '.ed e.penses:
Fi.ed manufacturing overhead............... 2<,<<<
Fi.ed selling and administrative
e.penses.............................................. +<,<<< B<,<<<
Aet operating income............................... 8p ,,+0<
Z he varia$le cost of goods sold could $e computed more
simply as: ++0 units sold V 8p/2< per unit Y 8p)<,,0<<.
he di#erence in net operating income $etween varia$le and
a$sorption costing can $e e.plained $y the deferral of '.ed
manufacturing overhead cost in inventory that has taken place
under the a$sorption costing approach. Aote from part ()* that
8p2,<<< of '.ed manufacturing overhead cost has $een
deferred in inventory to the ne.t period. hus, net operating
income under the a$sorption costing approach is 8p2,<<<
higher than it is under varia$le costing.
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3olutions Manual, "hapter @ )</
E%ercise !-3 (+< minutes*
). -ear 4 -ear 5 -ear 6
?eginning inventories
(units*............................ +<< )@< )B<
Ending inventories
(units*............................ )@< )B< ++<
"hange in inventories
(units*............................ (,<* )< /<
Iaria$le costing net
operating income...........
R),<B<,/<
<
R),<,+,/<
< RCC2,/<<
Add: Fi.ed
manufacturing
overhead cost deferred
in inventory under
a$sorption costing ()<
units V R02< per unit%
/< units V R02< per
unit*............................... 0,2<< ++,/<<
>educt: Fi.ed
manufacturing
overhead cost released
from inventory under
a$sorption costing (,<
units V R02< per unit*.... ()2,B<<*
A$sorption costing net
operating income...........
R),<2,,2<
<
R),<,B,<<
<
R),<)B,B
<<
+. 3ince a$sorption costing net operating income was greater
than varia$le costing net operating income in Qear /,
inventories must have increased during the year and hence
'.ed manufacturing overhead was deferred in inventories. he
amount of the deferral is just the di#erence $etween the two
net operating incomes or R+B,<<< Y R),<)+,/<< X RCB/,/<<.
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3olutions Manual, "hapter @ )<0
E%ercise !-4 (,< minutes*
). a. ?y assumption, the unit selling price, unit varia$le costs, and
total '.ed costs are constant from year to year.
"onse4uently, varia$le costing net operating income will
vary with sales. &f sales increase, varia$le costing net
operating income will increase. &f sales decrease, varia$le
costing net operating income will decrease. &f sales are
constant, varia$le costing net operating income will $e
constant. 3ince varia$le costing net operating income was
R0)<,2<< each year, unit sales must have $een the same in
each year.
he same is not true of a$sorption costing net operating
income. 3ales and a$sorption costing net operating income
do not necessarily move in the same direction since changes
in inventories also a#ect a$sorption costing net operating
income.
$. Ohen varia$le costing net operating income e.ceeds
a$sorption costing net operating income, sales e.ceed
production. &nventories shrink and '.ed manufacturing
overhead costs are released from inventories. &n contrast,
when varia$le costing net operating income is less than
a$sorption costing net operating income, production e.ceeds
sales. &nventories grow and '.ed manufacturing overhead
costs are deferred in inventories. he year7$y7year e#ects
are shown $elow.
-ear 4 -ear 5 -ear 6 -ear 7
Iaria$le
costing AD&
a
A$sorption
costing AD&
Iaria$le
costing AD&
a
A$sorption
costing AD&
Iaria$le
costing AD&
b
A$sorption
costing AD&
Iaria$le
costing AD&
b
A$sorption
costing AD&
!roduction
b 3ales
!roduction
b 3ales
!roduction
a 3ales
!roduction
a 3ales
&nventories
grow
&nventories
grow
&nventories
shrink
&nventories
shrink
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter @ )<2
E%ercise !-4 (continued*
+. a. As discussed in part () a* a$ove, unit sales and varia$le
costing net operating income move in the same direction
when unit selling prices and the cost structure are constant.
3ince varia$le costing net operating income varied from year
to year, unit sales must have also varied from year to year.
his is true even though the a$sorption costing net operating
income was the same for all four years. ;ow can that $eF ?y
manipulating production (and inventories* it may $e possi$le
for some time to keep a$sorption costing net operating
income rock steady or on an upward path even though unit
sales -uctuate from year to year. ;owever, if this is done in
the face of falling sales, eventually inventories will grow to
$e so large that they cannot $e ignored.
$. As stated in part () $* a$ove, when varia$le costing net
operating income e.ceeds a$sorption costing net operating
income, sales e.ceed production. &nventories shrink and
'.ed manufacturing overhead costs are released from
inventories. &n contrast, when varia$le costing net operating
income is less than a$sorption costing net operating income,
production e.ceeds sales. &nventories grow and '.ed
manufacturing overhead costs are deferred in inventories.
he year7$y7year e#ects are shown $elow.
-ear 4 -ear 5 -ear 6 -ear 7
Iaria$le
costing AD&
b
A$sorption
costing AD&
Iaria$le
costing AD&
b
A$sorption
costing AD&
Iaria$le
costing AD&
a
A$sorption
costing AD&
Iaria$le
costing AD&
a
A$sorption
costing AD&
!roduction
a 3ales
!roduction
a 3ales
!roduction
b 3ales
!roduction
b 3ales
&nventories
shrink
&nventories
shrink
&nventories
grow
&nventories
grow
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3olutions Manual, "hapter @ )<@
E%ercise !-4 (continued*
,. Iaria$le costing appears to provide a much $etter picture of
economic reality than a$sorption costing in the e.amples
a$ove. &n the 'rst case, a$sorption costing net operating
income -uctuates wildly even though unit sales are the same
each year and there are no changes in unit selling prices, unit
varia$le costs, or total '.ed costs. &n the second case,
a$sorption costing net operating income is rock steady from
year to year even though unit sales -uctuate signi'cantly.
A$sorption costing is much more su$ject to manipulation than
varia$le costing. 3imply $y changing production levels (and
there$y deferring or releasing costs from inventory* a$sorption
costing net operating income can $e manipulated upward or
downward.
Aote: his e.ercise is $ased on the following data:
"ommon data:
Annual '.ed manufacturing costs R),/,2,/
<<
"ontri$ution margin per unit........ R),<
Annual '.ed 31A costs................ R20,,<<<
!art ):
-ear 4 -ear 5 -ear 6 -ear 7
?eginning
inventory............ 0<< ),0<< ,,0<< +,0<<
!roduction.............. +),<<< ++,<<< )C,<<< )B,<<<
3ales...................... +<,<<< +<,<<< +<,<<< +<,<<<
Ending.................... ),0<< ,,0<< +,0<< 0<<
Iaria$le costing net
operating
income...............
R0)<,2
<<
R0)<,2
<<
R0)<,2
<<
R0)<,2
<<
Fi.ed
manufacturing
overhead in
$eginning
inventoryZ..........
R,0,C)
<
R)<+,2
<<
R++B,0
)B
R)BC,<
<<
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3olutions Manual, "hapter @ )<B
Fi.ed
manufacturing
overhead in
ending inventory
R)<+,2
<<
R++B,0
)B
R)BC,<
<<
R,C,C<
<
A$sorption costing
net operating
income...............
R0@@,+
C<
R2,2,0
)B
R/@),<
B+
R,2),0
<<
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3olutions Manual, "hapter @ )<C
E%ercise !-4 (continued*
!art +:
-ear 4 -ear 5 -ear 6 -ear 7
?eginning
inventory............ 2,<<< +,<<< ),@@0 0,/2,
!roduction.............. )B,<<< +<,@@0 ++,2BB +<,C,2
3ales...................... ++,<<< +),<<< )C,<<< +<,<<<
Ending.................... +,<<< ),@@0 0,/2, 2,,CC
Iaria$le costing net
operating
income...............
R@@<,2
<<
R2/<,2
<<
R,B<,2
<<
R0)<,2
<<
Fi.ed
manufacturing
overhead in
$eginning
inventoryZ..........
R,+2,/
00
R)0C,2
<<
R)++,@
/0
R,/0,B
C<
Fi.ed
manufacturing
overhead in
ending inventory
R)0C,2
<<
R)++,@
/0
R,/0,B
C<
R/,C,<
,0
A$sorption costing
net operating
income...............
R2<,,@
/0
R2<,,@
/0
R2<,,@
/0
R2<,,@
/0
Z Fi.ed manufacturing overhead in $eginning inventory is
assumed in $oth parts ) and + for Qear ). A F&FD inventory -ow
assumption is used.
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3olutions Manual, "hapter @ ))<
E%ercise !-5 (,< minutes*
). a. he unit product cost under a$sorption costing would $e:
>irect materials........................................................ R 2
>irect la$or............................................................... C
Iaria$le manufacturing overhead............................. ,
otal varia$le costs................................................... )B
Fi.ed manufacturing overhead (R,<<,<<< [ +0,<<<
units*...................................................................... )+
Knit product cost....................................................... R,<
$. he a$sorption costing income statement:
3ales (+<,<<< units V R0< per unit*........
R),<<<,<<
<
=ess cost of goods sold:
?eginning inventory.............................
R <
6uantity Iariance,
R),<<< K
Z,,<<< toys V 2 microns per toy Y )B,<<< microns
Alternatively:
Materials price variance Y A6 (A! X 3!*
+0,<<< microns (R<./B per micron X R<.0< per micron* Y
R0<< F
Materials 4uantity variance Y 3! (A6 X 36*
R<.0< per micron (+<,<<< microns X )B,<<< microns* Y
R),<<< K
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3olutions Manual, "hapter )) )/)
E%ercise 1$-# (continued*
$. >irect la$or variances:
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
/,<<< hours V
RB.<< per hour
,,C<< hoursZ V
RB.<< per hour
R,2,<<< Y R,+,<<< Y R,),+<<
8ate Iariance,
R/,<<< K
EEciency Iariance,
RB<< K
otal Iariance,
R/,B<< K
Z,,<<< toys V )., hours per toy Y ,,C<< hours
Alternatively:
=a$or rate variance Y A; (A8 X 38*
/,<<< hours (RC.<< per hourZ X RB.<< per hour* Y R/,<<< K
ZR,2,<<< [ /,<<< hours Y RC.<< per hour
=a$or eEciency variance Y 38 (A; X 3;*
RB.<< per hour (/,<<< hours X ,,C<< hours* Y RB<< K
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3olutions Manual, "hapter )) )/+
E%ercise 1$-# (continued*
+. A variance usually has many possi$le e.planations. &n
particular, we should always keep in mind that the standards
themselves may $e incorrect. 3ome of the other possi$le
e.planations for the variances o$served at >awson oys appear
$elow:
Materials Price Variancek3ince this variance is favora$le, the
actual price paid per unit for the material was less than the
standard price. his could occur for a variety of reasons including
the purchase of a lower grade material at a discount, $uying in
an unusually large 4uantity to take advantage of 4uantity
discounts, a change in the market price of the material, or
particularly sharp $argaining $y the purchasing department.
Materials 8uantit% Variancek3ince this variance is unfavora$le,
more materials were used to produce the actual output than
were called for $y the standard. his could also occur for a
variety of reasons. 3ome of the possi$ilities include poorly
trained or supervised workers, improperly adjusted machines,
and defective materials.
)abor 2ate Variancek3ince this variance is unfavora$le, the
actual average wage rate was higher than the standard wage
rate. 3ome of the possi$le e.planations include an increase in
wages that has not $een re-ected in the standards,
unanticipated overtime, and a shift toward more highly paid
workers.
)abor EVcienc% Variancek3ince this variance is unfavora$le,
the actual num$er of la$or hours was greater than the standard
la$or hours allowed for the actual output. As with the other
variances, this variance could have $een caused $y any of a
num$er of factors. 3ome of the possi$le e.planations include
poor supervision, poorly trained workers, low 4uality materials
re4uiring more la$or time to process, and machine $reakdowns.
&n addition, if the direct la$or force is essentially '.ed, an
unfavora$le la$or eEciency variance could $e caused $y a
reduction in output due to decreased demand for the companyGs
products.
&t is worth noting that all of these variances could have $een
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3olutions Manual, "hapter )) )/,
caused $y the purchase of low 4uality materials at a cut7rate
price.
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3olutions Manual, "hapter )) )//
E%ercise 1$-1$ (+< minutes*
). &f the total variance is RC, unfavora$le, and the rate variance
is RB@ favora$le, then the eEciency variance must $e R)B<
unfavora$le, since the rate and eEciency variances taken
together always e4ual the total variance. Unowing that the
eEciency variance is R)B< unfavora$le, one approach to the
solution would $e:
EEciency variance Y 38 (A; X 3;*
RC.<< per hour (A; X )+0 hoursZ* Y R)B< K
RC.<< per hour V A; X R),)+0 Y R)B<ZZ
RC.<< per hour V A; Y R),,<0
A; Y R),,<0 [ RC.<< per hour
A; Y )/0 hours
Z0< jo$s V +.0 hours per jo$ Y )+0 hours
ZZOhen used with the formula, unfavora$le variances are
positive and favora$le variances are negative.
+. 8ate variance Y A; (A8 X 38*
)/0 hours (A8 X RC.<< per hour* Y RB@ F
)/0 hours V A8 X R),,<0 Y XRB@Z
)/0 hours V A8 Y R),+)B
A8 Y R),+)B [ )/0 hours
A8 Y RB./< per hour
ZOhen used with the formula, unfavora$le variances are
positive and favora$le variances are negative.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )/0
E%ercise 1$-1$ (continued*
An alternative approach to each solution would $e to work from
known to unknown data in the columnar model for variance
analysis:
Actual ;ours of
&nput, at the Actual
8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
)/0 hours V
RB./< per hour
)/0 hours V
RC.<< per hourZ
)+0 hours
l
V
RC.<< per hourZ
Y R),+)B Y R),,<0 Y R),)+0
8ate Iariance,
RB@ FZ
EEciency Iariance,
R)B< K
otal Iariance,
RC, KZ
l
0< tune7upsZ V +.0 hours per tune7upZ Y )+0 hours
Z1iven
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3olutions Manual, "hapter )) )/2
E%ercise 1$-11 (,< minutes*
). Aum$er of units manufactured................................ +<,<<<
3tandard la$or time per unit................................... V<.,Z
otal standard hours of la$or time allowed.............. 2,<<<
3tandard direct la$or rate per hour......................... VR)+
otal standard direct la$or cost............................... R@+,<<<
Z)B minutes [ 2< minutes per hour Y <.,
hours
Actual direct la$or cost............................................ R@,,2<<
3tandard direct la$or cost....................................... @+,<<<
otal variance9unfavora$le.................................... R),2<<
+. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
0,@0< hours V
R)+.<< per hour
2,<<< hoursZ V
R)+.<< per hour
R@,,2<< Y R2C,<<< Y R@+,<<<
8ate Iariance,
R/,2<< K
EEciency Iariance,
R,,<<< F
otal Iariance,
R),2<< K
Z+<,<<< units V <., hours per unit Y 2,<<< hours
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
0,@0< hours (R)+.B< per hourZ X R)+.<< per hour* Y R/,2<< K
ZR@,,2<< [ 0,@0< hours Y R)+.B< per hour
=a$or eEciency variance Y 38 (A; X 3;*
R)+.<< per hour (0,@0< hours X 2,<<< hours* Y R,,<<< F
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3olutions Manual, "hapter )) )/@
E%ercise 1$-11 (continued*
,. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
0,@0< hours V
R/.<< per hour
2,<<< hours V
R/.<< per hour
R+),B0< Y R+,,<<< Y R+/,<<<
3pending Iariance,
R),)0< F
EEciency Iariance,
R),<<< F
otal Iariance,
R+,)0< F
Alternative 3olution:
Iaria$le overhead spending variance Y A; (A8 X 38*
0,@0< hours (R,.B< per hourZ X R/.<< per hour* Y R),)0< F
ZR+),B0< [ 0,@0< hours Y R,.B< per hour
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R/.<< per hour (0,@0< hours X 2,<<< hours* Y R),<<< F
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3olutions Manual, "hapter )) )/B
E%ercise 1$-12 (+< minutes*
). Actual 6uantity
of &nput, at
Actual !rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard
6uantity Allowed
for Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
+<,<<< pounds V
R+.,0 per pound
+<,<<< pounds V
R+.0< per pound
)B,/<< poundsZ V
R+.0< per pound
Y R/@,<<< Y R0<,<<< Y R/2,<<<
!rice Iariance,
R,,<<< F
6uantity Iariance,
R/,<<< K
otal Iariance,
R),<<< K
Z/,<<< units V /.2 pounds per unit Y )B,/<< pounds
Alternatively:
Materials price variance Y A6 (A! X 3!*
+<,<<< pounds (R+.,0 per pound X R+.0< per pound* Y
R,,<<< F
Materials 4uantity variance Y 3! (A6 X 36*
R+.0< per pound (+<,<<< pounds X )B,/<< pounds* Y R/,<<<
K
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3olutions Manual, "hapter )) )/C
E%ercise 1$-12 (continued*
+. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
@0< hours V
R)+.<< per hour
B<< hoursZ V
R)+.<< per hour
R)<,/+0 Y RC,<<< Y RC,2<<
8ate Iariance,
R),/+0 K
EEciency Iariance,
R2<< F
otal Iariance,
RB+0 K
Z/,<<< units V <.+ hours per unit Y B<< hours
Alternatively:
=a$or rate variance Y A; (A8 X 38*
@0< hours (R),.C< per hourZ X R)+.<< per hour* Y R),/+0 K
Z)<,/+0 [ @0< hours Y R),.C< per hour
=a$or eEciency variance Y 38 (A; X 3;*
R)+.<< per hour (@0< hours X B<< hours* Y R2<< F
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0<
E%ercise 1$-13 ()0 minutes*
Aotice in the solution $elow that the materials price variance is
computed for the entire amount of materials purchased,
whereas the materials 4uantity variance is computed only for
the amount of materials used in production.
Actual 6uantity of
&nput, at Actual
!rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for
Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
+<,<<< pounds V
R+.,0 per pound
+<,<<< pounds V
R+.0< per pound
),,B<< poundsZ V
R+.0< per pound
Y R/@,<<< Y R0<,<<< Y R,/,0<<
!rice Iariance,
R,,<<< F
)/,@0< pounds V R+.0< per pound
Y R,2,B@0
6uantity Iariance,
R+,,@0 K
Z,,<<< units V /.2 pounds per unit Y ),,B<< pounds
Alternatively:
Materials price variance Y A6 (A! X 3!*
+<,<<< pounds (R+.,0 per pound X R+.0< per pound* Y
R,,<<< F
Materials 4uantity variance Y 3! (A6 X 36*
R+.0< per pound ()/,@0< pounds X ),,B<< pounds* Y R+,,@0
K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0)
E%ercise 1$-14 (/0 minutes*
). 3tudentsG answers may di#er in some details from this solution.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0+
8evenue per employee 3ales
!ro't margin
>inancial
8atio of $illa$le
hours to total hours
Average num$er of
errors per ta.
return
Average time needed
to prepare a return
!ercentage of jo$
o#ers accepted
Employee
morale
Amount of compensation
paid a$ove industry
average
Average num$er of
years to $e promoted
Customer
(nternal Business
&rocesses
;earning
And ,ro5th
\ X
\ \
\
X
"ustomer
satisfaction
with
e#ectiveness
"ustomer
satisfaction
with
eEciency
"ustomer
satisfaction
with
service
Aum$er of new
customers
ac4uired
\ \ \
\
\ \
\
X
E%ercise 1$-14 (continued*
+. he hypotheses underlying the $alanced scorecard are
indicated $y the arrows in the diagram. 8eading from the
$ottom of the $alanced scorecard, the hypotheses are:
h &f the amount of compensation paid a$ove the industry
average increases, then the percentage of jo$ o#ers
accepted and the level of employee morale will increase.
h &f the average num$er of years to $e promoted decreases,
then the percentage of jo$ o#ers accepted and the level of
employee morale will increase.
h &f the percentage of jo$ o#ers accepted increases, then the
ratio of $illa$le hours to total hours should increase while the
average num$er of errors per ta. return and the average
time needed to prepare a return should decrease.
h &f employee morale increases, then the ratio of $illa$le hours
to total hours should increase while the average num$er of
errors per ta. return and the average time needed to prepare
a return should decrease.
h &f employee morale increases, then the customer satisfaction
with service 4uality should increase.
h &f the ratio of $illa$le hours to total hours increases, then the
revenue per employee should increase.
h &f the average num$er of errors per ta. return decreases,
then the customer satisfaction with e#ectiveness should
increase.
h &f the average time needed to prepare a return decreases,
then the customer satisfaction with eEciency should
increase.
h &f the customer satisfaction with e#ectiveness, eEciency and
service 4uality increases, then the num$er of new customers
ac4uired should increase.
h &f the num$er of new customers ac4uired increases, then
sales should increase.
h &f revenue per employee and sales increase, then the pro't
margin should increase.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0,
E%ercise 1$-14 (continued*
Each of these hypotheses is 4uestiona$le to some degree. For
e.ample, ArielGs customers may de'ne e#ectiveness as a
function of minimizing their ta. lia$ility which is not necessarily
the same as minimizing the num$er of errors in a ta. return. &f
some of ArielGs customers $ecame aware through a
knowledgea$le third party that Ariel overlooked legal ta.
minimizing opportunities, it is likely that the Mcustomer
satisfaction with e#ectivenessN measure would decline. his
decline would pro$a$ly puzzle Ariel $ecause, although the 'rm
prepared what it $elieved to $e error7free returns, it overlooked
important ta. minimization strategies. &n this e.ample, ArielGs
internal $usiness process measure related to the average
num$er of errors per ta. return does not capture all of the
factors that drive the customersG satisfaction with
e#ectiveness. he fact that each of the hypotheses mentioned
a$ove can $e 4uestioned does not invalidate the $alanced
scorecard. &f the scorecard is used correctly, management will
$e a$le to identify which, if any, of the hypotheses are invalid
and then modify the $alanced scorecard accordingly.
,. he performance measure Mtotal dollar amount of ta. refunds
generatedN would motivate ArielGs employees to aggressively
search for ta. minimization opportunities for its clients.
;owever, employees may $e too aggressive and recommend
4uestiona$le or illegal ta. practices to clients. his undesira$le
$ehavior could generate unfavora$le pu$licity and lead to
major pro$lems for the company as well as its customers.
Dverall, it would pro$a$ly $e unwise to use this performance
measure in ArielGs scorecard.
;owever, if Ariel wanted to create a scorecard measure to
capture this aspect of its client service responsi$ilities, it may
make sense to focus the performance measure on its training
process. !roperly trained employees are more likely to
recognize via$le ta. minimization opportunities.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0/
E%ercise 1$-14 (continued*
/. Each oEceGs individual performance should $e $ased on the
scorecard measures only if the measures are controlla$le $y
those employed at the $ranch oEces. &n other words, it would
not make sense to attempt to hold $ranch oEce managers
responsi$le for measures such as the percent of jo$ o#ers
accepted or the amount of compensation paid a$ove industry
average. 8ecruiting and compensation decisions are not
typically made at the $ranch oEces. Dn the other hand, it
would make sense to measure the $ranch oEces with respect
to internal $usiness process, customer, and 'nancial
performance. 1athering this type of data would $e useful for
evaluating the performance of employees at each oEce.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )00
E%ercise 1$-15 (/0 minutes*
). a.
Actual 6uantity
of &nput, at
Actual !rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for Dutput,
at 3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
)<,<<< yards V
R),.B< per yard
)<,<<< yards V
R)/.<< per yard
@,0<< yardsZ V
R)/.<< per yard
Y R),B,<<< Y R)/<,<<< Y R)<0,<<<
!rice Iariance,
R+,<<< F
B,<<< yards V R)/.<< per yard
Y R))+,<<<
6uantity Iariance,
R@,<<< K
Z,,<<< units V +.0 yards per unit Y @,0<< yards
Alternatively:
Materials price variance Y A6 (A! X 3!*
)<,<<< yards (R),.B< per yard X R)/.<< per yard* Y R+,<<< F
Materials 4uantity variance Y 3! (A6 X 36*
R)/.<< per yard (B,<<< yards X @,0<< yards* Y R@,<<< K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )02
E%ercise 1$-15 (continued*
$. he journal entries would $e:
8aw Materials
()<,<<< yards V )/.<< per yard*........................... )/<,<<<
Materials !rice Iariance
()<,<<< yards V R<.+< per yard F*................ +,<<<
Accounts !aya$le
()<,<<< yards V R),.B< per yard*................. ),B,<<<
Oork in !rocess
(@,0<< yards V R)/.<< per yard*........................... )<0,<<<
Materials 6uantity Iariance
(0<< yards K V R)/.<< per yard*.......................... @,<<<
8aw Materials
(B,<<< yards V R)/.<< per yard*................... ))+,<<<
+. a.
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
0,<<< hours V
RB.<< per hour
/,B<< hoursZ V
RB.<< per hour
R/,,<<< Y R/<,<<< Y R,B,/<<
8ate Iariance,
R,,<<< K
EEciency Iariance,
R),2<< K
otal Iariance,
R/,2<< K
Z,,<<< units V ).2 hours per unit Y /,B<< hours
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0@
E%ercise 1$-15 (continued*
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
0,<<< hours (RB.2< per hourZ X RB.<< per hour* Y R,,<<< K
ZR/,,<<< [ 0,<<< hours Y RB.2< per hour
=a$or eEciency variance Y 38 (A; X 3;*
RB.<< per hour (0,<<< hours X /,B<< hours* Y R),2<< K
$. he journal entry would $e:
Oork in !rocess
(/,B<< hours V RB.<< per hour*............................ ,B,/<<
=a$or 8ate Iariance
(0,<<< hours V R<.2< per hour K*......................... ,,<<<
=a$or EEciency Iariance
(+<< hours K V RB.<< per hour*............................ ),2<<
Oages !aya$le
(0,<<< hours V RB.2< per hour*....................
/,,<<
<
,. he entries are: entry (a*, purchase of materials% entry ($*,
issue of materials to production% and entry (c*, incurrence of
direct la$or cost.
8aw Materials Oork in !rocess
(a* )/<,<<< ))+,<<< ($* ($* )<0,<<<
?al.Z +B,<<< (c* ,B,/<<
Accounts !aya$le Oages !aya$le
),B,<<< (a* /,,<<< (c*
Materials !rice Iariance Materials 6uantity Iariance
+,<<< (a* ($* @,<<<
=a$or 8ate Iariance =a$or EEciency Iariance
(c* ,,<<< (c* ),2<<
Z+,<<< yards of material at a standard cost of R)/.<< per yard
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0B
&ro'lem 1$-1 (/0 minutes*
). he standard 4uantity of plates allowed for tests performed
during the month would $e:
?lood tests................................. ),B<<
3mears...................................... +,/<<
otal........................................... /,+<<
!lates per test............................ V +
3tandard 4uantity allowed......... B,/<<
he variance analysis for plates would $e:
Actual 6uantity of
&nput, at Actual
!rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for
Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
)+,<<< plates V
R+.0< per plate
B,/<< plates V
R+.0< per plate
R+B,+<< Y R,<,<<< Y R+),<<<
!rice Iariance,
R),B<< F
)<,0<< plates V R+.0< per plate
Y R+2,+0<
6uantity Iariance,
R0,+0< K
Alternative 3olution:
Materials price variance Y A6 (A! X 3!*
)+,<<< plates (R+.,0 per plateZ X R+.0< per plate* Y R),B<< F
ZR+B,+<< [ )+,<<< plates Y R+.,0 per plate.
Materials 4uantity variance Y 3! (A6 X 36*
R+.0< per plate ()<,0<< plates X B,/<< plates* Y R0,+0< K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )0C
&ro'lem 1$-1 (continued*
Aote that all of the price variance is due to the hospitalGs 2P
4uantity discount. Also note that the R0,+0< 4uantity variance
for the month is e4ual to +0P of the standard cost allowed for
plates.
+. a. he standard hours allowed for tests performed during the
month would $e:
?lood tests: <., hour per test V ),B<< tests.... 0/< hours
3mears: <.)0 hour per test V +,/<< tests....... ,2< hours
otal standard hours allowed........................... C<< hours
he variance analysis would $e:
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
),)0< hours V
R)/.<< per hour
C<< hours V
R)/.<< per hour
R),,B<< Y R)2,)<< Y R)+,2<<
8ate Iariance,
R+,,<< F
EEciency Iariance,
R,,0<< K
otal Iariance,
R),+<< K
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
),)0< hours (R)+.<< per hourZ X R)/.<< per hour* Y R+,,<< F
ZR),,B<< [ ),)0< hours Y R)+.<< per hour
=a$or eEciency variance Y 38 (A; X 3;*
R)/.<< per hour (),)0< hours X C<< hours* Y R,,0<< K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2<
&ro'lem 1$-1 (continued*
$. he policy pro$a$ly should not $e continued. Although the
hospital is saving R+ per hour $y employing more assistants
than senior technicians, this savings is more than o#set $y
other factors. oo much time is $eing taken in performing la$
tests, as indicated $y the large unfavora$le la$or eEciency
variance. And, it seems likely that most (or all* of the
hospitalGs unfavora$le 4uantity variance for plates is
tracea$le to inade4uate supervision of assistants in the la$.
,. he varia$le overhead variances follow:
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
),)0< hours V
R2.<< per hour
C<< hours V
R2.<< per hour
R@,B+< Y R2,C<< Y R0,/<<
3pending Iariance,
RC+< K
EEciency Iariance,
R),0<< K
otal Iariance,
R+,/+< K
Alternative 3olution:
Iaria$le overhead spending variance Y A; (A8 X 38*
),)0< hours (R2.B< per hourZ X R2.<< per hour* Y RC+< K
ZR@,B+< [ ),)0< hours Y R2.B< per hour
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R2.<< per hour (),)0< hours X C<< hours* Y R),0<< K
Qes, the two variances are closely related. ?oth are computed
$y comparing actual la$or time to the standard hours allowed
for the output of the period. hus, if the la$or eEciency
variance is favora$le (or unfavora$le*, then the varia$le
overhead eEciency variance will also $e favora$le (or
unfavora$le*.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2)
&ro'lem 1$-1! (/0 minutes*
). a. &n the solution $elow, the materials price variance is
computed on the entire amount of materials purchased
whereas the materials 4uantity variance is computed only on
the amount of materials used in production:
Actual 6uantity
of &nput, at
Actual !rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for Dutput,
at 3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
)+,<<< ounces V
R+<.<< per ounce
C,,@0 ouncesZ V
R+<.<< per ounce
R++0,<<< Y R+/<,<<< Y R)B@,0<<
!rice Iariance,
R)0,<<< F
C,0<< ounces V R+<.<< per ounce
Y R)C<,<<<
6uantity Iariance,
R+,0<< K
Z,,@0< units V +.0 ounces per unit Y C,,@0 ounces
Alternatively:
Materials price variance Y A6 (A! X 3!*
)+,<<< ounces (R)B.@0 per ounceZ X R+<.<< per ounce* Y
R)0,<<< F
ZR++0,<<< [ )+,<<< ounces Y R)B.@0 per ounce
Materials 4uantity variance Y 3! (A6 X 36*
R+<.<< per ounce (C,0<< ounces X C,,@0 ounces* Y R+,0<< K
$. Qes, the contract pro$a$ly should $e signed. he new price of
R)B.@0 per ounce is su$stantially lower than the old price of
R+<.<< per ounce, resulting in a favora$le price variance of
R)0,<<< for the month. Moreover, the material from the new
supplier appears to cause little or no pro$lem in production
as shown $y the small materials 4uantity variance for the
month.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2+
&ro'lem 1$-1! (continued*
+. a.
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
0,2<< hoursZ V
R)+.<< per hour
0,2<< hours V
R)+.0< per hour
0,+0< hoursZZ V
R)+.0< per hour
Y R2@,+<< Y R@<,<<< Y R20,2+0
8ate Iariance,
R+,B<< F
EEciency Iariance,
R/,,@0 K
otal Iariance,
R),0@0 K
Z,0 technicians V )2< hours per technician Y 0,2<<
hours
ZZ,,@0< units V )./ hours per technician Y 0,+0< hrs
Alternatively:
=a$or rate variance Y A; (A8 X 38*
0,2<< hours (R)+.<< per hour X R)+.0< per hour* Y R+,B<< F
=a$or eEciency variance Y 38 (A; X 3;*
R)+.0< per hour (0,2<< hours X 0,+0< hours* Y R/,,@0 K
$. Ao, the new la$or mi. pro$a$ly should not $e continued.
Although it decreases the average hourly la$or cost from
R)+.0< to R)+.<<, there$y causing a R+,B<< favora$le la$or
rate variance, this savings is more than o#set $y a large
unfavora$le la$or eEciency variance for the month. hus,
the new la$or mi. increases overall la$or costs.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2,
&ro'lem 1$-1! (continued*
,. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
0,2<< hoursZ V
R,.0< per hour
0,+0< hoursZZ V
R,.0< per hour
R)B,+<< Y R)C,2<< Y R)B,,@0
3pending Iariance,
R),/<< F
EEciency Iariance,
R),++0 K
otal Iariance,
R)@0 F
Z ?ased on direct la$or hours:
,0 technicians V )2< hours per technician Y 0,2<<
hours
ZZ ,,@0< units V )./ hours per unit Y 0,+0< hours
Alternatively:
Iaria$le overhead spending variance Y A; (A8 X 38*
0,2<< hours (R,.+0 per hourZ X R,.0< per hour* Y R),/<< F
ZR)B,+<< [ 0,2<< hours Y R,.+0 per hour
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R,.0< per hour (0,2<< hours X 0,+0< hours* Y R),++0 K
?oth the la$or eEciency variance and the varia$le overhead
eEciency variance are computed $y comparing actual la$or7
hours to standard la$or7hours. hus, if the la$or eEciency
variance is unfavora$le, then the varia$le overhead eEciency
variance will $e unfavora$le as well.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2/
&ro'lem 1$-1" (2< minutes*
). a.
Actual 6uantity of
&nput, at Actual
!rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for Dutput,
at 3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
,+,<<< feet V
R/.B< per foot
,+,<<< feet V
R0.<< per foot
+C,2<< feetZ V
R0.<< per foot
Y R)0,,2<< Y R)2<,<<< Y R)/B,<<<
!rice Iariance,
R2,/<< F
6uantity Iariance,
R)+,<<< K
otal Iariance,
R0,2<< K
ZB,<<< foot$alls V ,.@ ft. per foot$all Y +C,2<< feet
Alternative 3olution:
Materials price variance Y A6 (A! X 3!*
,+,<<< feet (R/.B< per foot X R0.<< per foot* Y R2,/<< F
Materials 4uantity variance Y 3! (A6 X 36*
R0.<< per foot (,+,<<< feet X +C,2<< feet* Y R)+,<<< K
$.
8aw Materials (,+,<<< feet V R0.<< per
foot*...................................................................... )2<,<<<
Materials !rice Iariance
(,+,<<< feet V R<.+< per foot F*................... 2,/<<
Accounts !aya$le
(,+,<<< feet V R/.B< per foot*...................... )0,,2<<
Oork in !rocess
(+C,2<< feet V R0.<< per foot*.............................. )/B,<<<
Materials 6uantity Iariance
(+,/<< feet K V R0.<< per foot*............................. )+,<<<
8aw Materials
(,+,<<< feet V R0.<< per foot*...................... )2<,<<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )20
&ro'lem 1$-1" (continued*
+. a.
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
2,/<< hoursZ V
RB.<< per hour
2,/<< hours V
R@.0< per hour
@,+<< hoursZZ V
R@.0< per hour
Y R0),+<< Y R/B,<<< Y R0/,<<<
8ate Iariance,
R,,+<< K
EEciency Iariance,
R2,<<< F
otal Iariance,
R+,B<< F
Z B,<<< foot$alls V <.B hours per foot$all Y 2,/<<
hours
ZZ B,<<< foot$alls V <.C hours per foot$all Y @,+<<
hours
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
2,/<< hours (RB.<< per hour X R@.0< per hour* Y R,,+<< K
=a$or eEciency variance Y 38 (A; X 3;*
R@.0< per hour (2,/<< hours X @,+<< hours* Y R2,<<< F
$.
Oork in !rocess (@,+<< hours V R@.0< per
hour*.....................................................................
0/,<<
<
=a$or 8ate Iariance
(2,/<< hours V R<.0< per hour K*......................... ,,+<<
=a$or EEciency Iariance
(B<< hours F V R@.0< per hour* ................... 2,<<<
Oages !aya$le
(2,/<< hours V RB.<< per hour*....................
0),+<
<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )22
&ro'lem 1$-1" (continued*
,. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
2,/<< hours V
R+.@0 per hour
2,/<< hours V
R+.0< per hour
@,+<< hours V
R+.0< per hour
Y R)@,2<< Y R)2,<<< Y R)B,<<<
3pending Iariance,
R),2<< K
EEciency Iariance,
R+,<<< F
otal Iariance,
R/<< F
Alternative 3olution:
Iaria$le overhead spending variance Y A; (A8 X 38*
2,/<< hours (R+.@0 per hour X R+.0< per hour* Y R),2<< K
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R+.0< per hour (2,/<< hours X @,+<< hours* Y R+,<<< F
/. Ao. ;e is not correct in his statement. he company has a
large, unfavora$le materials 4uantity variance that should $e
investigated. Also, the overhead spending variance e4uals )<P
of standard, which should also $e investigated.
&t appears that the companyGs strategy to increase output $y
giving raises was e#ective. Although the raises resulted in an
unfavora$le rate variance, this variance was more than o#set
$y a large, favora$le eEciency variance.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2@
&ro'lem 1$-1" (continued*
0. he variances have many possi$le causes. 3ome of the more
likely causes include the following:
Materials variancesG
Favora$le price variance: Fortunate purchase, inferior 4uality
materials, unusual discount due to 4uantity purchased, drop in
market price, less costly method of freight, outdated or
inaccurate standards.
Knfavora$le 4uantity variance: "arelessness, poorly adjusted
machines, unskilled workers, inferior 4uality materials,
outdated or inaccurate standards.
)abor variancesG
Knfavora$le rate variance: Kse of highly skilled workers,
change in pay scale, overtime, outdated or inaccurate
standards.
Favora$le eEciency variance: Kse of highly skilled workers,
high 4uality materials, new e4uipment, outdated or inaccurate
standards.
Variable overhead variancesG
Knfavora$le spending variance: &ncrease in costs, waste, theft,
spillage, purchases in uneconomical lots, outdated or
inaccurate standards.
Favora$le eEciency variance: 3ame as for la$or eEciency
variance.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2B
&ro'lem 1$-1# (/0 minutes*
). a.
Actual 6uantity of
&nput, at Actual
!rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for
Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
2<,<<< pounds V
R).C0 per pound
2<,<<< pounds V
R+.<< per pound
/0,<<< poundsZ V
R+.<< per pound
Y R))@,<<< Y R)+<,<<< Y RC<,<<<
!rice Iariance,
R,,<<< F
/C,+<< pounds V R+.<< per pound
Y RCB,/<<
6uantity Iariance,
RB,/<< K
Z)0,<<< pools V ,.< pounds per pool Y /0,<<< pounds
Alternative 3olution:
Materials price variance Y A6 (A! X 3!*
2<,<<< pounds (R).C0 per pound X R+.<< per pound* Y
R,,<<< F
Materials 4uantity variance Y 3! (A6 X 36*
R+.<< per pound (/C,+<< pounds X /0,<<< pounds* Y RB,/<<
K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )2C
&ro'lem 1$-1# (continued*
$.
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
)),B<< hours V
R@.<< per hour
)),B<< hours V
R2.<< per hour
)+,<<< hoursZ V
R2.<< per hour
Y RB+,2<< Y R@<,B<< Y R@+,<<<
8ate Iariance,
R)),B<< K
EEciency Iariance,
R),+<< F
otal Iariance,
R)<,2<< K
Z)0,<<< pools V <.B hours per pool Y )+,<<< hours
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
)),B<< hours (R@.<< per hour X R2.<< per hour* Y R)),B<< K
=a$or eEciency variance Y 38 (A; X 3;*
R2.<< per hour ()),B<< hours X )+,<<< hours* Y R),+<< F
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@<
&ro'lem 1$-1# (continued*
c.
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
0,C<< hours V
R,.<< per hour
2,<<< hoursZ V
R,.<< per hour
R)B,+C< Y R)@,@<< Y R)B,<<<
3pending Iariance,
R0C< K
EEciency Iariance,
R,<< F
otal Iariance,
R+C< K
Z)0,<<< pools V <./ hours per pool Y 2,<<< hours
Alternative 3olution:
Iaria$le overhead spending variance Y A; (A8 X 38*
0,C<< hours (R,.)< per hourZ X R,.<< per hour* Y R0C< K
ZR)B,+C< [ 0,C<< hours Y R,.)< per hour
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R,.<< per hour (0,C<< hours X 2,<<< hours* Y R,<< F
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@)
&ro'lem 1$-1# (continued*
+. 3ummary of variances:
Material price variance..................... R ,,<<< F
Material 4uantity variance................ B,/<< K
=a$or rate variance.......................... )),B<< K
=a$or eEciency variance.................. ),+<< F
Iaria$le overhead spending
variance......................................... 0C< K
Iaria$le overhead eEciency
variance......................................... ,<< F
Aet variance..................................... R)2,+C< K
he net unfavora$le variance of R)2,+C< for the month caused
the plantGs varia$le cost of goods sold to increase from the
$udgeted level of R)B<,<<< to R)C2,+C<:
?udgeted cost of goods sold at R)+ per pool. .
R)B<,<<
<
Add the net unfavora$le variance, as a$ove... )2,+C<
Actual cost of goods sold................................
R)C2,+C
<
his R)2,+C< net unfavora$le variance also accounts for the
di#erence $etween the $udgeted net operating income and the
actual net operating income for the month.
?udgeted net operating income...................... R,2,<<<
>educt the net unfavora$le variance added
to cost of goods sold for the month............... )2,+C<
Aet operating income...................................... R )C ,@)<
,. he two most signi'cant variances are the materials 4uantity
variance and the la$or rate variance. !ossi$le causes of the
variances include:
Materials 4uantity
variance:
Dutdated standards, unskilled
workers, poorly adjusted
machines, carelessness, poorly
trained workers, inferior 4uality
materials.
=a$or rate variance: Dutdated standards, change in
pay scale, overtime pay.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@+
&ro'lem 1$-2$ (2< minutes*
). ?oth companies view training as important% $oth companies
need to leverage technology to succeed in the marketplace%
and $oth companies are concerned with minimizing defects.
here are numerous di#erences $etween the two companies.
For e.ample, Applied !harmaceuticals is a product7focused
company and >estination 8esorts &nternational (>8&* is a
service7focused company. Applied !harmaceuticalsG training
resources are focused on their engineers $ecause they hold the
key to the success of the organization. >8&Gs training resources
are focused on their front7line employees $ecause they hold
the key to the success of their organization. Applied
!harmaceuticalsG technology investments are focused on
supporting the innovation that is inherent in the product
development side of the $usiness. >8&Gs technology
investments are focused on supporting the day7to7day
e.ecution that is inherent in the customer interface side of the
$usiness. Applied !harmaceuticals de'nes a defect from an
internal manufacturing standpoint, while >8& de'nes a defect
from an e.ternal customer interaction standpoint.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@,
&ro'lem 1$-2$ (continued*
+. 3tudentsG answers may di#er in some details from this solution.
Applied &harmaceuticals
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@/
8eturn on
3tockholdersG
E4uity
>inancial
"ustomer perception of
'rst7to7market
capa$ility
"ustomer perception
of product 4uality
Customer
8J> Qield >efect rates
(nternal
Business
&rocess
>ollars invested in
engineering
technology
!ercentage of jo$
o#ers accepted
>ollars invested in
engineering training per
engineer
;earning
and
,ro5th
\
\ \
\ X
\ \
\
&ro'lem 1$-2$ (continued*
1estination =esorts (nternational
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@0
3ales
>inancial
Aum$er of repeat customers
Customer
!ercentage of
error7free repeat
customer check7ins
Average time to
resolve customer
complaint
8oom
cleanliness
(nternal
Business
&rocess
Aum$er of employees
receiving data$ase
training
Employee
turnover
3urvey of
employee
morale
;earning
and
,ro5th
X
\
\
\
\
X
\
\
&ro'lem 1$-2$ (continued*
,. he hypotheses underlying the $alanced scorecards are
indicated $y the arrows in each diagram. 8eading from the
$ottom of each $alanced scorecard, the hypotheses are:
Applied &harmaceuticals
o &f the dollars invested in engineering technology increase,
then the 8J> yield will increase.
o &f the percentage of jo$ o#ers accepted increases, then the
8J> yield will increase.
o &f the dollars invested in engineering training per engineer
increase, then the 8J> yield will increase.
o &f the 8J> yield increases, then customer perception of 'rst7
to7market capa$ility will increase.
o &f the defects per million opportunities decrease, then the
customer perception of product 4uality will increase.
o &f the customer perception of 'rst7to7market capa$ility
increases, then the return on stockholdersG e4uity will
increase.
o &f the customer perception of product 4uality increases, then
the return on stockholdersG e4uity will increase.
1estination =esort (nternational
o &f the employee turnover decreases, then the percentage of
error7free repeat customer check7ins and room cleanliness
will increase and the average time to resolve customer
complaints will decrease.
o &f the num$er of employees receiving data$ase training
increases, then the percentage of error7free repeat customer
check7ins will increase.
o &f employee morale increases, then the percentage of error7
free repeat customer check7ins and room cleanliness will
increase and the average time to resolve customer
complaints will decrease.
o &f the percentage of error7free repeat customer check7ins
increases, then the num$er of repeat customers will
increase.
o &f the room cleanliness increases, then the num$er of repeat
customers will increase.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@2
o &f the average time to resolve customer complaints
decreases, then the num$er of repeat customers will
increase.
o &f the num$er of repeat customers increases, then sales will
increase.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@@
&ro'lem 1$-2$ (continued*
Each of these hypotheses is 4uestiona$le to some degree. For
e.ample, in the case of Applied !harmaceuticals, 8J> yield is
not the sole driver of the customersG perception of 'rst7to7
market capa$ility. More speci'cally, if Applied !harmaceuticals
e.perimented with nine possi$le drug compounds in year one
and three of those compounds proved to $e successful in the
marketplace it would result in an 8J> yield of ,,P. &f in year
two, it e.perimented with four possi$le drug compounds and
two of those compounds proved to $e successful in the
marketplace it would result in an 8J> yield of 0<P. Ohile the
8J> yield has increased from year one to year two, it is 4uite
possi$le that the customerGs perception of 'rst7to7market
capa$ility would decrease. he fact that each of the
hypotheses mentioned a$ove can $e 4uestioned does not
invalidate the $alanced scorecard. &f the scorecard is used
correctly, management will $e a$le to identify which, if any, of
the hypotheses are invalid and the $alanced scorecard can
then $e appropriately modi'ed.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@B
&ro'lem 1$-21 (,< minutes*
). a., $., and c.
Month
4 5 6 7
hroughput time9days:
!rocess time (.*............................. +.) +.< ).C ).B
&nspection time.............................. <.2 <.@ <.@ <.2
Move time...................................... <./ <., <./ <./
6ueue time.................................... /., 0.< 0.B 2.@
otal throughput time (y*................ @./ B.< B.B C.0
Manufacturing cycle eEciency
(M"E*:
!rocess time (.* [
hroughput time (y*..................... +B./P+0.<P
+).2
P )B.CP
>elivery cycle time9days:
Oait time from order to start of
production.................................... )2.< )@.0 )C.< +<.0
hroughput time............................. @./ B.< B.B C.0
otal delivery cycle time................. +,./ +0.0 +@.B ,<.<
+. All of the performance measures display unfavora$le trends.
hroughput time per unit is increasing9largely $ecause of an
increase in 4ueue time. Manufacturing cycle eEciency is
declining and delivery cycle time is increasing. &n addition, the
percentage of on7time deliveries has dropped as has the total
throughput.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )@C
&ro'lem 1$-21 (continued*
,. a. and $.
Month
; E
hroughput time9days:
!rocess time (.*.................................................... ).B ).B
&nspection time..................................................... <.2 <.<
Move time............................................................. <./ <./
6ueue time........................................................... <.< <.<
otal throughput time (y*...................................... +.B +.+
Manufacturing cycle eEciency (M"E*:
!rocess time (.* [ hroughput time (y*................ 2/.,P B).BP
As a company reduces non7value7added activities, the
manufacturing cycle eEciency increases rapidly. he goal, of
course, is to have an eEciency of )<<P. his will $e achieved
when all non7value7added activities have $een eliminated and
process time is e4ual to throughput time.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B<
&ro'lem 1$-22 (,< minutes*
). 3ale. 4uantity standard:
8e4uired per )<7liter $atch (C.2 liters [ <.B*. )+.< liters
=oss from rejected $atches ()H0 V )+ liters*. . +./ liters
otal 4uantity per good $atch........................ )/./ liters
Ayclyn 4uantity standard:
8e4uired per )<7liter $atch ()+ kilograms [
<.B*.............................................................. )0.<
kilogram
s
=oss from rejected $atches ()H0 V )0
kilograms*................................................... ,.<
kilogram
s
otal 4uantity per good $atch........................ )B.<
kilogram
s
!rotet 4uantity standard:
8e4uired per )<7liter $atch............................ 0.<
kilogram
s
=oss from rejected $atches ()H0 V 0
kilograms*................................................... ).<
kilogram
s
otal 4uantity per good $atch........................ 2.<
kilogram
s
+. otal minutes per B7hour day............................ /B< minutes
=ess rest $reaks and cleanup........................... 2< minutes
!roductive time each day................................. /+< minutes
!roductive time each day /+< minutes per day
Y Y)+ $atches per day
ime re4uired per $atch ,0 minutes per $atch
ime re4uired per $atch................................... ,0 minutes
8est $reaks and clean up time
(2< minutes [ )+ $atches*............................ 0 minutes
otal................................................................. /< minutes
=oss from rejected $atches ()H0 V /<
minutes*........................................................ B minutes
otal time per good $atch................................ /B minutes
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B)
&ro'lem 1$-22 (continued*
,. 3tandard cost card:
Standard
8uantit% or
,ime
Standard Price
or 2ate
Standar
d Cost
3ale.................... )/./ liters R).0< per liter R+).2<
Ayclyn................. )B.<
kilogram
s R+.B< per kilogram 0<./<
!rotet.................. 2.<
kilogram
s R,.<< per kilogram )B.<<
=a$or time...........
/B
or <.B
minutes,
hour RC.<< per hour @.+<
otal standard
cost per
accepta$le
$atch................ RC@.+<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B+
&ro'lem 1$-23 (/0 minutes*
). Materials price variance Y (A6 V A!* X (A6 V 3!*
(R/+/,B<<* X ()B<,<<< yards V R+./< per yard* Y R@,+<< F
+. a. and $.
)ot (umber
7H 7= ;: ,otal
3tandard yards:
Knits in lot (dozen* ),0<< C0< +,)<< /,00<
3tandard yards per
dozen V ,+ V ,+ V ,+ V ,+
otal yards allowed
/B,<<
<
,<,/<
< 2@,+<< )/0,2<<
Actual yards used
/B,,<
<
,<,)/
< 2@,+0< )/0,2C<
6uantity variance in yards ,<< K +2< F 0< K C< K
6uantity variance in
dollars
_ R+./< per yard R@+< K R2+/ F R)+< K R+)2 K
,. =a$or rate variance Y (A; V A8* X (A; V 38*
(R)C+,+B<* X (+0,,<< hoursZ V R@.0< per hour* Y R+,0,< K
ZB,C<< hours \ 2,),< hours \ )<,+@< hours Y +0,,<< hours
/. a. and $.
)ot (umber
7H 7= ;: ,otal
3tandard hours:
Knits in lot (dozen* ),0<< C0< +,)<< /,00<
3tandard hours per
dozen V 2 V 2 V 2 V 2
otal standard hours
C,<<< 0,@<< )+,2<<
+@,,<
<
!ercentage completed
V )<<P V )<<P
V B<
P
otal standard hours
allowed C,<<< 0,@<< )<,<B<
+/,@B
<
Actual hours worked B,C<< 2,),< )<,+@<
+0,,<
<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B,
=a$or eEciency
variance in hours )<< F /,< K )C< K
0+
< K
=a$or eEciency
variance in dollars _
R@.0< per hour R@0< F R,,++0 K R),/+0 K
R,,C<
< K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B/
&ro'lem 1$-23 (continued*
0. 3ome supervisors and managers rarely deal with, or think in
terms of, dollars in their daily work. &nstead they think in terms
of hours, units, eEciency, and so on. For these managers, it
may $e $etter to e.press 4uantity variances in units (hours,
yards, etc.* rather than in dollars. For other managers, 4uantity
variances e.pressed in terms of dollars may $e more useful9
particularly to convey a notion of the materiality of the
variance. &n some cases, managers may prefer that the
variances $e e.pressed in terms of $oth dollars and units.
Dn the other hand, price variances e.pressed in units (hours,
yards* would make little sense. 3uch variances should always
$e e.pressed in dollars.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B0
&ro'lem 1$-24 (/0 minutes*
). a. Materials 4uantity variance Y 3! (A6 X 36*
R0.<< per foot (A6 X C,2<< feetZ* Y R/,0<< K
R0.<< per foot V A6 X R/B,<<< Y R/,0<<ZZ
R0.<< per foot V A6 Y R0+,0<<
A6 Y )<,0<< feet
Z R,,+<< units V , foot per unit
ZZ Ohen used with the formula, unfavora$le variances
are positive and favora$le variances are
negative.
herefore, R00,20< [ )<,0<< feet Y R0.,< per foot
$. Materials price variance Y A6 (A! X 3!*
)<,0<< feet (R0.,< per foot X R0.<< per foot* Y R,,)0< K
he total variance for materials would $e:
Materials price variance.......................................... R,,)0< K
Materials 4uantity variance..................................... /,0<< K
otal variance.......................................................... R@,20< K
Alternative approach to parts (a* and ($*:
Actual 6uantity of
&nput, at Actual
!rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for Dutput,
at 3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
)<,0<< feet V
R0.,< per foot
)<,0<< feet V
R0.<< per footZ
C,2<< feetZZ V
R0.<< per footZ
Y R00,20<Z Y R0+,0<< Y R/B,<<<
!rice Iariance,
R,,)0< K
6uantity Iariance,
R/,0<< KZ
otal Iariance,
R@,20< K
Z 1iven
ZZ ,,+<< units V , foot per unit Y C,2<< feet
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B2
&ro'lem 1$-24 (continued*
+. a. =a$or rate variance Y A; (A8 X 38*
/,C<< hours (R@.0< per hourZ X 38* Y R+,/0< FZZ
R,2,@0< X /,C<< hours V 38 Y XR+,/0<ZZZ
/,C<< hours V 38 Y R,C,+<<
38 Y RB.<<
Z R,2,@0< [ /,C<< hours
ZZ R),20< F \ RB<< K.
ZZZ Ohen used with the formula, unfavora$le
variances are positive and favora$le variances
are negative.
$. =a$or eEciency variance Y 38 (A; X 3;*
RB per hour (/,C<< hours X 3;* Y RB<< K
R,C,+<< X RB per hour V 3; Y RB<<Z
RB per hour V 3; Y R,B,/<<
3; Y /,B<< hours
Z Ohen used with the formula, unfavora$le variances are
positive and favora$le variances are negative.
Alternative approach to parts (a* and ($*:
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
/,C<< hoursZ V
RB.<< per hour
/,B<< hours V
RB.<< per hour
R,2,@0<Z Y R,C,+<< Y R,B,/<<
8ate Iariance,
R+,/0< F
EEciency Iariance,
RB<< KZ
otal Iariance,
R),20< FZ
Z1iven.
c. he standard hours allowed per unit of product would $e:
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )B@
/,B<< hours [ ,,+<< units Y ).0 hours per unit
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )BB
&ro'lem 1$-25 (@0 minutes*
). a. ?efore the variances can $e computed, we must 'rst
compute the standard and actual 4uantities of material per
hockey stick. he computations are:
>irect materials added to work in
process (a*............................................................
R))0,+<
<
3tandard direct materials cost per foot
($*......................................................................... R,.<<
3tandard 4uantity of direct materials (a*
[ ($*..................................................................... ,B,/<< feet
3tandard 4uantity of direct materials (a*................. ,B,/<< feet
Aum$er of sticks produced ($*................................ B,<<<
3tandard 4uantity per stick (a* [ ($*....................... /.B feet
Actual 4uantity of direct materials used per stick last year:
/.B feet \ <.+ feet Y 0.< feet.
Oith these 'gures, the variances can $e computed as follows:
Actual 6uantity
of &nput, at
Actual !rice
Actual 6uantity of
&nput, at 3tandard
!rice
3tandard 6uantity
Allowed for Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
2<,<<< feet V
R,.<< per foot
,B,/<< feet V
R,.<< per foot
R)@/,<<< Y R)B<,<<< Y R))0,+<<
!rice Iariance,
R2,<<< F
/<,<<< feetZ V R,.<< per foot
Y R)+<,<<<
6uantity Iariance,
R/,B<< K
ZB,<<< units V 0.< feet per unit Y /<,<<< feet
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )BC
&ro'lem 1$-25 (continued*
Alternative 3olution:
Materials price variance Y A6 (A! X 3!*
2<,<<< feet (R+.C< per footZ X R,.<< per foot* Y R2,<<< F
ZR)@/,<<< [ 2<,<<< feet Y R+.C< per foot
Materials 4uantity variance Y 3! (A6 X 36*
R,.<< per foot (/<,<<< feet X ,B,/<< feet* Y R/,B<< K
$.
8aw Materials (2<,<<< feet V R,.<< per
foot*......................................................................
)B<,<<
<
Materials !rice Iariance
(2<,<<< feet V R<.)< per foot F*...................... 2,<<<
Accounts !aya$le
(2<,<<< feet V R+.C< per foot*.........................
)@/,<<
<
Oork in !rocess (,B,/<< feet V R,.<< per
foot*......................................................................
))0,+<
<
Materials 6uantity Iariance
(),2<< feet K V R,.<< per foot*............................. /,B<<
8aw Materials (/<,<<< feet V R,.<< per
foot*.................................................................
)+<,<<
<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C<
&ro'lem 1$-25 (continued*
+. a. ?efore the variances can $e computed, we must 'rst
determine the actual direct la$or hours worked for last year.
his can $e done through the varia$le overhead eEciency
variance, as follows:
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R).,< per hour V (A; X )2,<<< hoursZ* Y R20< K
R).,< per hour V A; X R+<,B<< Y R20<ZZ
R).,< per hour V A; Y R+),/0<
A; Y R+),/0< [ R).,< per hour
A; Y )2,0<< hours
Z B,<<< units V +.< hours per unit Y )2,<<< hours
ZZ Ohen used in the formula, an unfavora$le variance is
positive.
Oe must also compute the standard rate per direct la$or
hour. he computation is:
=a$or rate variance Y (A; V A8* X (A; V 38*
R@C,+<< X ()2,0<< hours V 38* Y R,,,<< F
R@C,+<< X )2,0<< hours V 38 Y XR,,,<<Z
)2,0<< hours V 38 Y RB+,0<<
38 Y RB+,0<< [ )2,0<< hours
38 Y R0.<< per hour
Z Ohen used in the formula, a favora$le variance is negative.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C)
&ro'lem 1$-25 (continued*
1iven these 'gures, the variances are:
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
)2,0<< hours V
R0.<< per hour
)2,<<< hours V
R0.<< per hour
R@C,+<< Y RB+,0<< Y RB<,<<<
8ate Iariance,
R,,,<< F
EEciency Iariance,
R+,0<< K
otal Iariance,
RB<< F
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
)2,0<< hours (R/.B< per hourZ X R0.<< per hour* Y R,,,<< F
Z@C,+<< [ )2,0<< hours Y R/.B< per hour
=a$or eEciency variance Y 38 (A; X 3;*
R0.<< per hour ()2,0<< hours X )2,<<< hours* Y R+,0<< K
$. Oork in !rocess
()2,<<< hours V R0.<< per hour*.......................... B<,<<<
=a$or EEciency Iariance
(0<< hours K V R0.<< per hour*............................ +,0<<
=a$or 8ate Iariance
()2,0<< hours V R<.+< per hour F*................... ,,,<<
Oages !aya$le
()2,0<< hours V R/.B< per hour*..................... @C,+<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C+
&ro'lem 1$-25 (continued*
,. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
)2,0<< hours V
R).,< per hour
)2,<<< hours V
R).,< per hour
R)C,B<< Y R+),/0< Y R+<,B<<
3pending Iariance,
R),20< F
EEciency Iariance,
R20< K
otal Iariance,
R),<<< F
Alternative 3olution:
Iaria$le overhead spending variance Y A; (A8 X 38*
)2,0<< hours (R).+< per hourZ X R).,< per hour* Y R),20< F
ZR)C,B<< [ )2,0<< hours Y R).+< per hour
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R).,< per hour ()2,0<< hours X )2,<<< hours* Y R20< K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C,
&ro'lem 1$-25 (continued*
/. For materialsG
Favora$le price variance: >ecrease in outside purchase price%
fortunate $uy% inferior 4uality materials% unusual discounts
due to 4uantity purchased% less costly method of freight%
inaccurate standards.
Knfavora$le 4uantity variance: &nferior 4uality materials%
carelessness% poorly adjusted machines% unskilled workers%
inaccurate standards.
For laborG
Favora$le rate variance: Knskilled workers (paid lower rates*%
piecework% inaccurate standards.
Knfavora$le eEciency variance: !oorly trained workers% poor
4uality materials% faulty e4uipment% work interruptions% '.ed
la$or and insuEcient demand to 'll capacity% inaccurate
standards.
For variable overheadG
Favora$le spending variance: >ecrease in supplier prices% less
usage of lu$ricants or indirect materials than planned%
inaccurate standards.
Knfavora$le eEciency variance: 3ee comments under direct
la$or eEciency variance a$ove.
0.
Standard
8uantit% or
<ours
Standard
Price or 2ate
Standard
Cost
>irect materials /.B feet R,.<< per foot R)/./<
>irect la$or +.< hours R0.<< per hour )<.<<
Iaria$le overhead +.< hours R).,< per hour +.2<
otal standard cost R+@.<<
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C/
&ro'lem 1$-2 (2< minutes*
). 3tandard cost for March production:
Materials................................................................. R)2,B<<
>irect la$or............................................................. )<,0<<
Iaria$le manufacturing overhead............................ /,+<<
otal standard cost (a*............................................. R,),0<<
Aum$er of $ackpacks produced ($*......................... ),<<<
3tandard cost of a single $ackpack (a* [ ($*........... R,).0<
+. 3tandard cost of a single $ackpack (a$ove*............. R,).0<
>educt di#erence $etween standard and actual
cost...................................................................... <.)0
Actual cost per $ackpack........................................ R,).,0
,.
otal standard cost of materials used during
March (a*.............................................................. R)2,B<<
Aum$er of $ackpacks produced during March ($*. . ),<<<
3tandard materials cost per $ackpack (a* [ ($*..... R)2.B<
3tandard materials cost per $ackpack R)2.B< per $ackpack
Y
3tandard materials cost per yard R2.<< per yard
Y +.B yards per $ackpack
/. 3tandard cost of material used.......
R)2,B<
<
Actual cost of material used............ )0,<<<
otal variance..................................
R
),B<< F
he price and 4uantity variances together e4ual the total
variance. &f the 4uantity variance is R),+<< K, then the price
variance must $e R,,<<< F:
!rice variance.................................
R
,,<<< F
6uantity variance............................ ),+<< K
otal variance..................................
R
),B<< F
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C0
&ro'lem 1$-2 (continued*
Alternative 3olution:
Actual 6uantity
of &nput, at
Actual !rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for
Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
,,<<< yards V
R0.<< per yard
,,<<< yards V
R2.<< per yardZ
+,B<< yardsZZ V
R2.<< per yardZ
Y R)0,<<<Z Y R)B,<<< Y R)2,B<<Z
!rice Iariance,
R,,<<< F
6uantity Iariance,
R),+<< KZ
otal Iariance,
R),B<< F
Z 1iven.
ZZ ),<<< units V +.B yards per unit Y +,B<< yards
0. he 'rst step in computing the standard direct la$or rate is to
determine the standard direct la$or7hours allowed for the
monthGs production. he standard direct la$or7hours can $e
computed $y working with the varia$le manufacturing
overhead costs, since they are $ased on direct la$or7hours
worked:
3tandard varia$le manufacturing overhead cost for
March (a*......................................................................
R/,+<
<
3tandard varia$le manufacturing overhead rate per
direct la$or7hour ($*...................................................... R,.<<
3tandard direct la$or7hours for March (a* [ ($*............... ),/<<
otal standard direct la$or cost for March R)<,0<<
Y
otal standard direct la$or7hours for March ),/<< >=;s
YR@.0< per >=;
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C2
&ro'lem 1$-2 (continued*
2. ?efore the la$or variances can $e computed, it is necessary to
compute the actual direct la$or cost for the month:
Actual cost per $ackpack produced (part
+*.......................................................................... R,).,0
Aum$er of $ackpacks produced.............................. V ),<<<
otal actual cost of production................................. R,),,0<
=ess: Actual cost of materials.................................. R)0,<<<
Actual cost of varia$le manufacturing
overhead...................................................... ,,2<< )B,2<<
Actual cost of direct la$or........................................ R)+,@0<
Oith this information, the variances can $e computed:
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for Dutput,
at the 3tandard
8ate
(A; V A8* (A; V 38* (3; V 38*
),0<< hoursZ V
R@.0< per hour
R)+,@0< Y R)),+0< R)<,0<<Z
8ate Iariance,
R),0<< K
EEciency Iariance,
R@0< K
otal Iariance,
R+,+0< K
Z1iven.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )C@
&ro'lem 1$-2 (continued*
@. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
),0<< hoursZ V
R,.<< per hourZ
R,,2<<Z Y R/,0<< R/,+<<Z
3pending Iariance,
RC<< F
EEciency Iariance,
R,<< K
otal Iariance,
R2<< F
Z1iven.
B.
Standard
8uantit% or
<ours
Standard
Price or
2ate
Standar
d
Cost
>irect materials +.B yards
)
R2 per yard R)2.B<
>irect la$or )./ hours
+
R@.0< per
hour
,
)<.0<
Iaria$le
manufacturing
overhead )./ hours R, per hour /.+<
otal standard cost R,).0<
)
From part ,.
+
),/<< standard hours (from part 0* [ ),<<< $ackpacks
Y )./ hours per $ackpack.
,
From part 0.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )CB
&ro'lem 1$-2! (@0 minutes*
).
Actual 6uantity of
&nput, at Actual
!rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for
Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
0)<,<<< feet V
R,.+< per foot
0)<,<<< feet V
R,.<< per foot
0/<,<<< feetZ V
R,.<< per foot
Y R),2,+,<<< Y R),0,<,<<< Y R),2+<,<<<
!rice Iariance,
R)<+,<<< K
6uantity Iariance,
RC<,<<< F
otal Iariance,
R)+,<<< K
Z,<,<<< units V )B feet per unit Y 0/<,<<< feet
Alternative 3olution:
Materials price variance Y A6 (A! X 3!*
0)<,<<< feet (R,.+< per foot X R,.<< per foot* Y R)<+,<<< K
Materials 4uantity variance Y 3! (A6 X 36*
R, per foot (0)<,<<< feet X 0/<,<<< feet* Y RC<,<<< F
Qes, the decrease in waste is apparent $ecause of the RC<,<<<
favora$le 4uantity variance.
&f the company wants to continue to compute the material price
variance, then the standard price per foot should $e changed
to re-ect current 5& purchase costs. he old standard price of
R,.<< per foot is no longer relevant.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) )CC
&ro'lem 1$-2! (continued*
+. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
C<,<<< hours V
R@.B0 per hour
C<,<<< hours V
RB.<< per hour
@0,<<< hoursZ V
RB.<< per hour
Y R@<2,0<< Y R@+<,<<< Y R2<<,<<<
8ate Iariance,
R),,0<< F
EEciency Iariance,
R)+<,<<< K
otal Iariance,
R)<2,0<< K
Z,<,<<< units V +.0 hours per unit Y @0,<<< hours
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
C<,<<< hours (R@.B0 per hour X RB.<< per hour* Y R),,0<< F
=a$or eEciency variance Y 38 (A; X 3;*
RB.<< per hour (C<,<<< hours X @0,<<< hours* Y R)+<,<<< K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<<
&ro'lem 1$-2! (continued*
Ao, the la$or eEciency variance is not appropriate as a
measure of performance in this situation. he reasons are:
L =a$or is largely a '.ed cost rather than a varia$le cost since the
company maintains a sta$le workforce to operate its -ow line.
hus, the variance is not an e#ective measure of eEciency.
L &n a 5& environment the goal is to produce only as needed to
meet demand. his often con-icts with the goal of having high
la$or eEciency, which re4uires that la$or $e fully utilized
producing output. &f that output is not really demanded $y
customers, the result of fully utilizing la$or is a $uildup of
e.cess work in process and 'nished goods inventories. his is
anathema in a 5& environment. Knfortunately, the situation
posed in the pro$lem is a common one as companies switch
from a traditional system to 5&, and sometimes 5& doesnGt work
$ecause of misplaced emphasis on eEciency variances. &n a 5&
setting, it is an interesting parado. that one of the McostsN of
greater eEciency on the production line is greater MineEciencyN
on the part of la$or as it is occasionally idle or as it spends time
at various tasks other than producing goods.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<)
&ro'lem 1$-2! (continued*
,. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
C<,<<< hours V
R+.B< per hour
@0,<<< hoursZ V
R+.B< per hour
R+<@,<<< Y R+0+,<<< Y R+)<,<<<
3pending Iariance,
R/0,<<< F
EEciency Iariance,
R/+,<<< K
otal Iariance,
R,,<<< F
Z,<,<<< units V +.0 hours per unit Y @0,<<< hours
Alternative 3olution:
Iaria$le overhead spending variance Y A; V A8 X A; V 38
R+<@,<<< X C<,<<< hours V R+.B< per hour Y R/0,<<< F
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R+.B< per hour (C<,<<< hours X @0,<<< hours* Y R/+,<<< K
&t is dou$tful that a correlation still e.ists $etween direct la$or
and varia$le manufacturing overhead cost. >irect la$or time is
now largely a '.ed cost. Iaria$le manufacturing overhead,
however, will tend to rise and fall with actual changes in
production. &f varia$le manufacturing overhead cost was indeed
correlated with direct la$or, then the actual varia$le
manufacturing overhead cost for 5une should have $een a$out
R+0+,<<< (C<,<<< hours V R+.B< per hour*. ?ut actual varia$le
manufacturing overhead cost was far $elow this 'gure, as
shown $y the large favora$le spending variance for the month.
&ndeed, the actual varia$le manufacturing overhead cost of
R+<@,<<< is very near the R+)<,<<< standard cost allowed for
the monthGs output. hus, it appears that as production has
$een cut $ack, varia$le manufacturing overhead cost has also
decreased, even though direct la$or time has remained 4uite
sta$le.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<+
&ro'lem 1$-2! (continued*
/. a. and $.
Month
April Ma% 9une
hroughput time9hours:
!rocessing time (.*............................................... +.2 +.0 +./
&nspection time..................................................... )., <.C <.)
Move time............................................................. ).C )./ <.2
6ueue time........................................................... B.+ 0.+ ).C
otal throughput time (y*...................................... )/.< )<.< 0.<
Manufacturing cycle eEciency (M"E*:
!rocessing time (.* [ hroughput
time (y*.............................................................. )B.2P +0. <P /B.<P
Aote that the manufacturing cycle eEciency has improved
dramatically over the last three months. his means that non7
value7added time is $eing eliminated.
0. Knder 5& the goal of the company is to produce to meet
demand rather than to just 'll la$or time. hus, the traditional
la$or variances are often unfavora$le. hroughput time and
M"E focus on all elements of manufacturing9not just la$or
time. hese other elements, which are independent of la$or
time, are showing greater eEciency each month as the
company eliminates non7value7added activities.
hroughput time and M"E are more appropriate in this situation
since they focus on those elements that are of greatest
importance in a 5& environment. he la$or eEciency variance
has little or no signi'cance in such an environment.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<,
=earning
and
1rowth
&nternal
?usiness
!rocesses
Financial
"ustomer
&ro'lem 1$-2" (/0 minutes*
). 3tudentsG answers may di#er in some details from this solution.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +</
Oeekly pro't
Oeekly
sales
Aum$er of
menu items
>ining area
cleanliness
!ercentag
e of
kitchen
sta#
completin
g cooking
course
\
\
\
\
"ustomer
satisfaction with
service
"ustomer
satisfaction with
menu choices
\ \
Average time
to prepare an
order
Average time
to take an
order
!ercentag
e of dining
room sta#
completing
hospitality
course
\
\
X
X
&ro'lem 1$-2" (continued*
+. he hypotheses underlying the $alanced scorecard are
indicated $y the arrows in the diagram. 8eading from the
$ottom of the $alanced scorecard, the hypotheses are:
o &f the percentage of dining room sta# who complete the
$asic hospitality course increases, then the average time to
take an order will decrease.
o &f the percentage of dining room sta# who complete the
$asic hospitality course increases, then dining room
cleanliness will improve.
o &f the percentage of kitchen sta# who complete the $asic
cooking course increases, then the average time to prepare
an order will decrease.
o &f the percentage of kitchen sta# who complete the $asic
cooking course increases, then the num$er of menu items
will increase.
o &f the dining room cleanliness improves, then customer
satisfaction with service will increase.
o &f the average time to take an order decreases, then
customer satisfaction with service will increase.
o &f the average time to prepare an order decreases, then
customer satisfaction with service will increase.
o &f the num$er of menu items increases, then customer
satisfaction with menu choices will increase.
o &f customer satisfaction with service increases, weekly sales
will increase.
o &f customer satisfaction with menu choices increases, weekly
sales will increase.
o &f sales increase, weekly pro'ts for the =odge will increase.
Each of these hypotheses is 4uestiona$le to some degree. For
e.ample, the items added to the menu may not appeal to
customers. 3o even if the num$er of menu items increases,
customer satisfaction with the menu choices may not increase.
he fact that each of the hypotheses can $e 4uestioned does
not, however, invalidate the $alanced scorecard. &f the
scorecard is used correctly, management will $e a$le to identify
which, if any, of the hypotheses are incorrect. ]3ee $elow.^
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<0
&ro'lem 1$-2" (continued*
,. Management will $e a$le to tell if a hypothesis is false if an
improvement in a performance measure at the $ottom of an
arrow does not, in fact, lead to improvement in the
performance measure at the tip of the arrow. For e.ample, if
the num$er of menu items is increased, $ut customer
satisfaction with the menu choices does not increase,
management will immediately know that something was wrong
with that particular hypothesis.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<2
&ro'lem 1$-2# (/0 minutes*
he answers $elow are not the only possi$le answers. &ngenious
people can 'gure out many di#erent ways of making performance
look $etter even though it really isnGt. his is one of the reasons
for a balanced scorecard. ?y having a num$er of di#erent
measures that ultimately are linked to overall 'nancial goals,
MgamingN the system is more diEcult.
). 3peed7to7market can $e improved $y taking on less am$itious
projects. &nstead of working on major product innovations that
re4uire a great deal of time and e#ort, 8J> may choose to
work on small, incremental improvements in e.isting products.
here is also a danger that in the rush to push products out the
door, the products will $e inade4uately tested and developed.
+. !erformance measures that are ratios or percentages present
special dangers. A ratio can $e increased either $y increasing
the numerator or $y decreasing the denominator. Ksually, the
intention is to increase the numerator in the ratio, $ut a
manager may react $y decreasing the denominator instead. &n
this case (which actually happened*, the managers pulled
telephones out of the high7crime areas. his eliminated the
pro$lem for the managers, $ut was not what the "ED or the
city oEcials had intended. hey wanted the phones '.ed, not
eliminated.
,. &n real life, the production manager simply added several
weeks to the delivery cycle time. &n other words, instead of
promising to deliver an order in four weeks, the manager
promised to deliver in si. weeks. his increase in delivery cycle
time did not, of course, please customers and drove some
$usiness away, $ut it dramatically improved the percentage of
orders delivered on time.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<@
&ro'lem 1$-2# (continued*
/. As stated a$ove, ratios can $e improved $y changing either the
numerator or the denominator. Managers who are under
pressure to increase the revenue per employee may 'nd it
easier to eliminate employees than to increase revenues. Df
course, eliminating employees may reduce total revenues and
total pro'ts, $ut the revenue per employee will increase as long
as the percentage decline in revenues is less than the
percentage cut in num$er of employees. 3uppose, for e.ample,
that a manager is responsi$le for $usiness units with a total of
),<<< employees, R)+< million in revenues, and pro'ts of R+
million. Further suppose that a manager can eliminate one of
these $usiness units that has +<< employees, revenues of R)<
million, and pro'ts of R).+ million.
Before
eliminating the
business unit
After
eliminating the
business unit
otal revenue R)+<,<<<,<<< R))<,<<<,<<<
otal employees ),<<< B<<
8evenue per
employee R)+<,<<< R),@,0<<
otal pro'ts R+,<<<,<<< RB<<,<<<
As these e.amples illustrate, performance measures should $e
selected with a great deal of care and managers should avoid
placing too much emphasis on any one performance measure.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<B
&ro'lem 1$-3$ (,< minutes*
). a., $., and c.
Month
4 5 6 7
hroughput time in days:
!rocess time +.) +.< ).C ).B
&nspection time <.B <.@ <.@ <.@
Move time <., <./ <./ <.0
6ueue time during production
+.B /./ 2.< @.<
otal throughput time 2.< @.0 C.< )<.<
Manufacturing cycle eEciency
(M"E*:
!rocess time [ hroughput
time ,0.<P +2.@P +).)P )B.<P
>elivery cycle time in days:
Oait time to start of production
C.< )).0 )+.< )/.<
hroughput time 2.< @.0 C.< )<.<
otal delivery cycle time )0.< )C.< +).< +/.<
+. a. Areas where the company is improving:
8ualit% control* he num$er of defects has decreased $y
over 0<P in the last four months. Moreover, $oth warranty
claims and customer complaints are down sharply. &n short,
overall 4uality appears to have signi'cantly improved.
Material control* he purchase order lead time is only half of
what it was four months ago, which indicates that purchases
are arriving in less time. his trend may $e a result of the
companyGs move toward 5& purchasing.
!eliver% performance* he process time has decreased from
+.) days to ).B days over the last four months.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +<C
&ro'lem 1$-3$ (continued*
$. Areas of deterioration:
Material control* 3crap as a percentage of total cost has
tripled over the last four months.
Machine performance* Machine downtime has dou$led over
the last four months. his may $e a result of the greater
setup time, or it may just re-ect e#orts to get the new
e4uipment operating properly. Also note that use of the
machines as a percentage of availa$ility is declining rapidly.
he use of the machines may $e declining as a conse4uence
of the shift to 5&. Machines may $e utilized less $ecause they
are not $eing used to $uild e.cess inventories.
!eliver% performance* All delivery performance measures
are moving in the wrong direction. hroughput time and
delivery cycle time are $oth increasing, and the
manufacturing cycle eEciency is decreasing.
,. a. and $.
Month
; E
hroughput time in days:
!rocess time......................................................... ).B ).B
&nspection time..................................................... <.@ <.<
Move time............................................................. <.0 <.0
6ueue time during production.............................. <.< <.<
otal throughput time........................................... ,.< +.,
Manufacturing cycle eEciency (M"E*:
!rocess time [ hroughput time........................... 2<.<P @B.,P
As non7value7added activities are eliminated, the
manufacturing cycle eEciency improves. he goal, of course, is
to have an eEciency of )<<P. his is achieved when all non7
value7added activities have $een eliminated and process time
e4uals throughput time.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +)<
&ro'lem 1$-31 (/0 minutes*
his pro$lem is more diEcult than it looks. Allow ample time for
discussion.
).
Actual 6uantity of
&nput, at Actual
!rice
Actual 6uantity
of &nput, at
3tandard !rice
3tandard 6uantity
Allowed for
Dutput, at
3tandard !rice
(A6 V A!* (A6 V 3!* (36 V 3!*
)+,<<< yards V
R/.<< per yardZ
)),+<< yardsZZ V
R/.<< per yardZ
R/0,2<< Y R/B,<<< Y R//,B<<
!rice Iariance,
R+,/<< F
6uantity Iariance,
R,,+<< K
otal Iariance,
RB<< K
Z R++./< [ 0.2 yards Y R/.<< per yard
ZZ +,<<< sets V 0.2 yards per set Y )),+<< yards
Alternative 3olution:
Materials price variance Y A6 (A! X 3!*
)+,<<< yards (R,.B< per yardZ X R/.<< per yard* Y R+,/<< F
ZR/0,2<< [ )+,<<< yards Y R,.B< per yard
Materials 4uantity variance Y 3! (A6 X 36*
R/.<< per yard ()+,<<< yards X )),+<< yards* Y R,,+<< K
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +))
&ro'lem 1$-31 (continued*
+. Many students will miss parts + and , $ecause they will try to
use product costs as if they were hourl% costs. !ay particular
attention to the computation of the standard direct la$or time
per unit and the standard direct la$or rate per hour.
Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
+,B<< hours V
R2.<< per hourZ
,,<<< hoursZZ V
R2.<< per hourZ
R)B,+<< Y R)2,B<< Y R)B,<<<
8ate Iariance,
R),/<< K
EEciency Iariance,
R),+<< F
otal Iariance,
R+<< K
Z +,B0< standard hours [ ),C<< sets Y ).0 standard hours
per set, RC.<< standard cost per set [ ).0 standard
hours per set Y R2.<< standard rate per hour.
ZZ +,<<< sets V ).0 standard hours per set Y ,,<<< standard
hours.
Alternative 3olution:
=a$or rate variance Y A; (A8 X 38*
+,B<< hours (R2.0< per hourZ X R2.<< per hour* Y R),/<< K
ZR)B,+<< [ +,B<< hours Y R2.0< per hour
=a$or eEciency variance Y 38 (A; X 3;*
R2.<< per hour (+,B<< hours X ,,<<< hours* Y R),+<< F
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +)+
&ro'lem 1$-31 (continued*
,. Actual ;ours of
&nput, at the
Actual 8ate
Actual ;ours of
&nput, at the
3tandard 8ate
3tandard ;ours
Allowed for
Dutput, at the
3tandard 8ate
(A; V A8* (A; V 38* (3; V 38*
+,B<< hours V
R+./< per hourZ
,,<<< hours V
R+./< per hourZ
R@,<<< Y R2,@+< Y R@,+<<
3pending Iariance,
R+B< K
EEciency Iariance,
R/B< F
otal Iariance,
R+<< F
ZR,.2< standard cost per set [ ).0 standard hours per set
Y R+./< standard rate per hour
Alternative 3olution:
Iaria$le overhead spending variance Y A; (A8 X 38*
+,B<< hours (R+.0< per hourZ X R+./< per hour* Y R+B< K
ZR@,<<< [ +,B<< hours Y R+.0< per hour
Iaria$le overhead eEciency variance Y 38 (A; X 3;*
R+./< per hour (+,B<< hours X ,,<<< hours* Y R/B< F
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +),
&ro'lem 1$-32 (/0 minutes*
). 3tandard cost for a ten7gallon $atch of rasp$erry sher$et.
>irect material:
8asp$erries (@.0 4uarts
)
V R<.B< per 4uart*......... R2.<<
Dther ingredients ()< gallons V R<./0 per
gallon*................................................................ /.0< R)<.0<
>irect la$or:
3orting ()B minutes
+
[ 2< minutes per hour*
V RC.<< per hour................................................ +.@<
?lending ()+ minutes [ 2< minutes per hour*
V RC.<< per hour................................................ ).B< /.0<
!acking (/< 4uarts
,
V R<.,B per 4uart*................. )0.+<
3tandard cost per ten7gallon $atch......................... R,<.+<
)
2 4uarts V (0 [ /* Y @.0 4uarts re4uired to o$tain 2 accepta$le
4uarts.
+
, minutes per 4uart V 2 4uarts.
,
/ 4uarts per gallon V )< gallons Y /< 4uarts.
+. a. &n general, the purchasing manager is held responsi$le for
unfavora$le material price variances. "auses of these
variances include the following:
L &ncorrect standards.
L Failure to correctly forecast price increases.
L !urchasing in nonstandard or uneconomical lots.
L Failure to take availa$le purchase discounts.
L Failure to control transportation costs.
L !urchasing from suppliers other than those o#ering the
most favora$le terms.
;owever, failure to meet price standards may $e caused $y a
rush of orders or changes in production schedules. &n this
case, the responsi$ility for unfavora$le material price
variances should rest with the sales manager or the manager
of production planning. Iariances may also $e caused $y
e.ternal events that are uncontrolla$le, e.g., a strike at a
supplierGs plant.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +)/
&ro'lem 1$-32 (continued*
$. &n general, the production manager or foreman is held
responsi$le for unfavora$le la$or eEciency variances.
"auses of these variances include the following:
L &ncorrect standards.
L !oorly trained la$or.
L 3u$standard or ineEcient e4uipment.
L &nade4uate supervision.
L Machine $reakdowns from poor maintenance.
L !oorly motivated employees.
L Fi.ed la$or force with demand less than capacity.
Failure to meet la$or eEciency standards may also $e
caused $y the use of inferior materials or poor production
planning. &n these cases, responsi$ility should rest with the
purchasing manager or the manager of production planning.
Iariances may also $e caused $y e.ternal events that are
uncontrolla$le, e.g., low unemployment leading to the
ina$ility to hire and retain skilled workers.
(KnoEcial "MA 3olution, adapted*
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +)0
=earning
and
1rowth
&nternal
?usiness
!rocesses
"ustomer
Financial
Case 1$-33 (2< minutes*
). 3tudent answers may di#er concerning which category9
learning and growth, internal $usiness processes, customers, or
'nancial9a particular performance measure $elongs to.
: he Mc1raw7;ill "ompanies, &nc., +<<2. All rights reserved.
3olutions Manual, "hapter )) +)2
otal pro't
Average age of
accounts
receiva$le
Oritten7o#
accounts
receiva$le as a
percentage of
sales
"ustomer
satisfaction with
accuracy of
charge account
$ills
!ercentage of
charge account
$ills containing
errors
Knsold inventory
at end of season
as a percentage
of total cost of
sales
!ercentage of
suppliers making
just7in7time
deliveries
!ercentage of sales
clerks trained to
correctly enter
data on charge
account slips
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