Iygfig

Problem 11-19 Special order, ABC costing, (CMA adapted)
The Gold Plus Company manufactures medals for winners of athletic events and other contests.
Its manufacturing plant has the capacity to produce 11,000 medals each month. Current
production and sales are 10,000 medals per month. The company normally charges $150 per
medal. Cost information for the current activity level is as follows: 10,000
Variable costs that vary with the number of units produced

Direct materials $350,000 $35.00
Direct manufacturing labor 375,000 $37.50
Variable costs (for setups, materials handling, quality control,
and so on) that vary with number of batches, 200 batches
X $500 per batch 50 batch size 100,000 $500.00
Fixed manufacturing costs 300,000
Fixed marketing costs 275,000
Total $1,400,000 $140.00
Gold Plus has just received a special one-time-only order for 1,000 medals at $100 per medal.
Accepting the special order would not affect the company's regular business. Gold Plus
makes medals for its existing customers in batch sizes of 50 medals (200 batches X 50 medals
per batch = 10,000 medals). The special order requires Gold Plus to make the medals in 25
batches of 40 each.
1. Should Gold Plus accept the special one-time only order for 1,000 medals at $100 per medal?
Incremental revenue $100 1,000 $100,000

Incremental costs
Variable manufacturing costs
Direct materials ($35) 1,000 ($35,000)
Direct manufacturing labor ($37.50) 1,000 (37,500)
Batch setup costs ($500) 25 (12,500) (85,000)
Incremental increase in operating income $15,000
Gold Plus should accept the one-time-only special order provided that there are no
long-term implications. If accepting the special order would cause the regular
customers to be dissatisfied or to demand lower prices, then Gold Plus will have to
trade off the $15,000 profit increase from accepting the special order against the
operating income that might be lost from regular customers.
2. Suppose plant capacity was only 10,500 medals instead of 11,000 medals each month. The
special order must either be taken in full or be rejected completely. Should Gold Plus accept
the special order?
Batch size Batches Req.
Total production capacity 10,500 10,500
Capacity used for normal customers 10,000 50 200
Capacity usage with special order
Needed fo special order 1,000 40 25
Available for regular customers 9,500 50 190
Excess Capacity 0 500
Units SP/Costs Total

Lost revenue from regular customers (500) $150.00 ($75,000)
Variable manufacturing costs saved
Direct materials 500 $35.00 17,500
Direct manufacturing labor 500 $37.50 18,750
Batch setup costs saved 10 $500.00 5,000
Decrease in operating income from regular customers ($33,750)
Incremental revenue from special order 1,000 $100.00 $100,000
Incremental costs
Direct materials 1,000 ($35.00) ($35,000)
Direct manufacturing labor 1,000 ($37.50) (37,500)
Batch setup costs 25 ($500.00) (12,500)
Increase in operating income from special order 15,000
Net benefit of accepting special order ($18,750)
The special order should be rejected because if accepted operating income would decrease
by $18,750.
Note: Even if operating income had increased by accepting the special order, Gold Plus should
consider the effect on its regular customers of accepting the special order. For example, would
selling 500 fewer medals to its regular customers cause these customers to find new suppliers
that might adversely impact Gold Plus’s business in the long run.
3. As in requirement 1, assume that monthly capacity is 11,000 medals. Gold Plus is concerned
that if it accepts the special order, its existing customers will immediately demand a price discount
of $10 in the month in which the special order is being filled. They would argue that Gold Plus's
capacity costs are now being spread over more units and that existing customers should get the
benefit of these lower costs. Should Gold Plus accept the special order under these conditions?
Incremental revenue from special order 1,000 $100 $100,000

Incremental costs from special order
Direct materials 1,000 ($35.00) ($35,000)
Direct manufacturing labor 1,000 ($37.50) (37,500)
Batch setup costs 25 ($500.00) (12,500) 15,000
Incremental increase in operating income from special order $15,000
Less decrease in operating income generated from normal sales (100,000)
Net decrease in operating income if special order is accepted ($85,000)
The special order should, therefore, be rejected

per unit
per unit
per batch
per unit
$135.00
rice discount
Problem 11-20
The Svenson Corporation manufactures cellular modems. It manufactures its own cellular
modem circuit boards (CMCB), an important part of the cellular modem. It reports the
following cost information about the costs of making CMCBs in 2014 and the expected costs
in 2015:
Current Costs Expected Costs
in 2014 in 2015
Direct material cost per CMCB $180 $170
Direct manufacturing labor cost per CMCB $50 $45
Variable manufacturing cost per batch for setups, materials
handling, and quality control $1,600 $1,500
Fixed manufacturing cost
Fixed O/H costs that can be avoided if CMCBs are not made $320,000 $320,000
Fixed O/H costs of plant depreciation, insurance, and administra-
tion that cannot be avoided even if CMCBs are not made $800,000 $800,000
Svenson manufactured 8,000 CMCBs in 2014 in 40 batches of 200 each. In 2015, Svenson
anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80 batches of 125 each.
The Minton Corporation has approached Svenson about supplying 10,000 CMCBs to Svenson in 2015 at
$300 per CMCB on whatever delivery schedule Svenson wants.
1. Calculate the total expected manufacturing cost per unit of making CMCBs in 2015.
Production Level 10,000

Direct materials cost per unit $170
Direct manufacturing labor 45
Batch costs (setups, materials handling and quality control) $120,000 12
Fixed Costs
Avoidable Costs $320,000 32
Unavoidable Costs $800,000 80
Total expected mfg. cost per unit to manufacture 10,000 units $339
2. Suppose the capacity currently used to make CMCBs will become idle if Svenson purchases
CMCBs from Minton. On the basis of financial considerations alone, should Svenson make
CMCBs or buy them from Minton?
Incremental cost per unit if purchased from Minton $300
Incremental cost savings per unit by not producing CMCBs internally

Variable manufacturing costs saved by not producing CMCBs internally
Direct materials cost per unit $170
Unit batch costs (setups, materials handling and quality control) $120,000 12
Fixed Costs
Avoidable Costs (1) $320,000 32
Incremental mfg. costs per unit saved by not producing CMCBs $259
Disadvantage of buying CMCBs and having freed capacity remain idle $41
(1) Note: The unavoidable fixed costs of $800,000 will continue to be incurred regardless of
the decision to make or buy. These costs are therefore, irrelevant to the decision at
hand.
3. Now suppose that if Svenson purchases CMCBs from Minton, its best alternative use of the
capacity currently used for CMCBs is to make and sell special circuit boards (CB3s) to the
Essex Corporation. Svenson estimates the following incremental revenues and costs from
CB3s:
Total expected incremental future revenues $2,000,000
Total expected incremental future costs $2,150,000
On the basis of financial considerations alone, should Svenson make CMCBs or buy them from
Minton?
Incremental cost of producing CMCBs internally $259
Net cost of buying and using freed capacity to produce CB3s

Cost of buying from CMCBs Minton $300
Net benefit/loss of using freed capacity to produce CB3s.
Incremental revenue associated with CB3s $2,000,000
Incremental costs associated with CB3s 2,150,000
Net loss associated with producing CB3s ($150,000)
Extra cost per unit to be absorbed by the 10,000 CMCBs 15
Net cost of buying CMCBs and using freed capacity to produce CB3s. $315
Disadvantage of buying CMCBs from Minton and producing and selling CB3s $56
Note: As long as producing CB3s yields a net loss, Svenson should just produce CMCBs.
8,000
10,000
80
Problem 11-22 (Slightly Modified Data -- #'s)
The Snack Shack is a take-out food store at a popular beach resort. Susan Sexton, owner of the
Snack Shack, is deciding how much refrigerator space to devote to four different drinks. Pertinent
data on these four drinks are as follows:
Cola Lemonade Punch Natural OJ

Selling price per case $18.80 $20.75 $26.90 $39.30
Variable cost per case 13.80 16.26 20.10 30.10
Cases sold per foot of shelf space per day 7 12 10 6
Sexton has a maximum front shelf space of 12 feet to devote to the four drinks. She wants a minimum
of 1 foot and a maximum of 6 feet of front shelf space for each drink.
1. Calculate the contribution margin per case of each type of drink.

Variable cost per case (13.80) (16.26) (20.10) (30.10)
Contribution margin per case $5.00 $4.49 $6.80 $9.20
3 4 2 1
2. A co-worker of Sexton's recommends that she maximize the shelf space devoted to those
drinks with the highest C/M per case. Evaluate this recommendation.
The recommendation fails to take into consideration that "cases sold per foot of shelf space per day"
differs by drink.
3. What recommendation would you make?

Variable cost per case (13.80) (16.26) (20.10) (30.10)
Contribution margin per case $5.00 $4.49 $6.80 $9.20
Daily C/M per foot of shelf space (A) $35.00 $53.88 $68.00 $55.20
1 Foot 4 Feet 6 Feet 1 Foot

Minimum Remaining Maximum Minimum
Allowed Amount Allowed Allowed
(A) Contribution margin per unit of limiting resource.

ace per day"
Problem 11-25: Closing and Opening Stores
Given:
Sanchez Corporation runs two convenience stores, one in Connecticut and one in Rhode
Island. Operating income for each store in 2012 is as follows:
Connecticut Rhode Island

Store Store
Revenues $1,070,000 $860,000
Operating Costs
Cost of Goods Sold $750,000 $660,000
Lease rent (renewable each year) 90,000 75,000
Labor costs (paid on an hourly basis) 42,000 42,000
Equipment depreciation 25,000 22,000
Utilities (electricity, heating) 43,000 46,000
Allocated corporate overhead 50,000 40,000
Total operating costs $1,000,000 $885,000
Operating Income $70,000 ($25,000)
The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the
management accountant at Sanchez Corporation, makes the following comment, "Sanchez
can increase its profitability by closing down the Rhode Island store or by adding another
store like it."
1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs
by $44,000. Calculate Sanchez's operating income if it closes the Rhode Island store. Is Maria
Lopez's statement about the effect of closing the Rhode Island store correct?
Explain. Yes, see below. Relevant Cost Total Rev./Cost
Irrelevant Approach Approach
Current situation Connecticut Rhode Island Both
Store Store Stores
Revenues $1,070,000 $860,000 $1,930,000
Operating Costs
Cost of Goods Sold $750,000 $660,000 $1,410,000
Lease rent (renewable each year) 90,000 75,000 165,000
Labor costs (paid on an hourly basis) 42,000 42,000 84,000
Equipment depreciation 25,000 22,000 47,000
Utilities (electricity, heating) 43,000 46,000 89,000
Allocated corporate overhead 50,000 40,000 90,000
Total operating costs $1,000,000 $885,000 $1,885,000
Operating Income $70,000 ($25,000) $45,000
Close Rhode Island Store Connecticut Rhode Island Both

Store Store Stores
Revenues $1,070,000 $0 $1,070,000
Operating Costs
Cost of Goods Sold $750,000 $0 $750,000
Lease rent (renewable each year) 90,000 0 90,000
Labor costs (paid on an hourly basis) 42,000 0 42,000
Equipment depreciation 25,000 22,000 47,000
Utilities (electricity, heating) 43,000 0 43,000
Allocated corporate overhead 50,000 (4,000) 46,000
Total operating costs $1,000,000 $18,000 $1,018,000
Net benefit obtained by closing RI store $7,000 $7,000
2. Calculate Sanchez's operating income if it keeps the Rhode Island store open and opens
another store with revenues and costs identical to the Rhode Island store (including a
cost of $22,000 to acquire equipment with a one-year useful life and zero disposal value).
Opening this store will increase corporate overhead costs by $4,000. Is Maria Lopez's
statement about the effect of adding another store like the Rhode Island store correct?
Explain. Yes, see below.
Irrelevant Irrelevant
Current situation Connecticut Rhode Island
Store Store
Revenues $1,070,000 $860,000
Operating Costs
Cost of Goods Sold $750,000 $660,000
Lease rent (renewable each year) $90,000 $75,000
Labor costs (paid on an hourly basis) $42,000 $42,000
Equipment depreciation $25,000 $22,000
Utilities (electricity, heating) $43,000 $46,000
Allocated corporate overhead $50,000 $40,000
Total operating costs $1,000,000 $885,000
Operating Income $70,000 ($25,000)
Incremental
Irrelevant Irrelevant approach
Open an additional store Connecticut Rhode Island New
Store Store (Current) Store
Revenues $1,070,000 $860,000 $860,000
Operating Costs
Cost of Goods Sold $750,000 $660,000 $660,000
Lease rent (renewable each year) 90,000 75,000 $75,000
Labor costs (paid on an hourly basis) 42,000 42,000 $42,000
Equipment depreciation 25,000 22,000 $22,000
Utilities (electricity, heating) 43,000 46,000 $46,000
Allocated corporate overhead 50,000 40,000 $4,000
Total operating costs $1,000,000 $885,000 $849,000
Net benefit obtained by adding a Rhode Island type store. $11,000
ria Lopez, the
t, "Sanchez
ate overhead costs

and store. Is Maria
Incremental
Approach
($860,000)
($660,000)
($75,000)
($42,000)
$0
($46,000)
($44,000)
($867,000)
$7,000
n and opens
posal value).
Total Rev./Cost
Both
Stores
$1,930,000
$1,410,000
165,000
84,000
47,000
89,000
90,000
$1,885,000
$45,000
Total Rev./Cost
All
Stores
$2,790,000
$2,070,000
240,000
126,000
69,000
135,000
94,000
$2,734,000
$56,000 $56,000
$11,000
Problem 11-26: Choosing Customers (Slightly modified)
Given:
Rodeo Printers operates a printing press with a monthly capacity of
4,000 machine-hours. Rodeo Printers has two main customers: Trent
Corporation and Julie Corporation. Data on each customer for
January follows: 4,000
Current situation Trent Julie Both

Corporation Corporation Corporations
Revenues $210,000 $140,000 $350,000
Variable Costs 84,000 85,000 169,000
Total contribution margin $126,000 $55,000 $181,000
Fixed costs (allocated) 102,000 68,000 170,000
Operating income $24,000 ($13,000) $11,000
Machine-hours required 3,000 1,000 4,000
Julie Corporation indicates that it wants Rodeo to do a total of $224,000

worth of printing business for it during February. This additional work
would be similar to the work Rodeo did for Julie in January and would
have identical cost-volume-profit characteristics as January's business
with Rodeo. In addition, Rodeo anticipates that the business from Trent
Corporation in February will be the same as that in January. Rodeo can
choose to accept as much of the Trent and Julie business for February
as its capacity allows. Assume that total machine-hours and total fixed
costs for February will be the same as in January.
Required: What action should Rodeo take to maximize its operating

income?
Analysis: Trent Julie Both

C/M per limiting resource Corporation Corporation Corporations
Revenues $210,000 $140,000 $350,000
Variable Costs 84,000 85,000 169,000
Total contribution margin $126,000 $55,000 $181,000
Machine hours necessary 3,000 1,000
CM per machine hour $42 $55
Revenue per machine hour $70 $140
Rodeo should maximize C/M per unit of limiting resource -- that is

maximize business with Julie Corporation.
Total machine hours available 4,000

Potential revenue from Julie Corporation $224,000
Divided by revenue per machine hour 140
Hours required for Julie business 1,600 1,600
Hours remaining for Trent business 2,400
Revenue per machine hour $70
Revenue potential from Trent business $168,000
Rodeo should devote 1,600 machine hours to Julie business
and 2,400 machine hours to Trent business.
New situation Trent Julie Both

Revenues $168,000 $224,000 $392,000
Variable Costs 0.40 67,200 136,000 203,200
Total contribution margin 0.60 $100,800 $88,000 $188,800 (1)
Fixed costs 170,000
Operating income $18,800
(1) Proof of C/M Trent Julie Both

Machine hours - new 2,400 1,600 4,000
C/M per machine hour $42 $55
Total C/M $100,800 $88,000 $188,800
Sample LP Problem
Information Technology, Inc., assembles and sells two products:

printers and desktop computers. Customers can purchase
either (1) a computer or (2) a computer plus a printer. The
printers are not sold without the computer. The result is that
the quantity of printers sold is equal to or less than the quantity
of desktop computers sold. The contribution margins are $200
per printer and $100 per computer.
Each printer requires 6 assembly-hours on production line 1

and 10 assembly-hours on production line 2. Each computer
requires 4 assembly-hours on production line 1 only. (Many of
the components for each computer are preassembled by
external vendors.) Production line 1 has 24 assembly-hours
available per day. Production line 2 has 20 assembly-hours
available per day.
Let P represent units of printers and C represent units of desktop

computers. The production manager must decide on the optimal
mix of printers and computers to manufacture.
1. Formulate the production manager's problem in a LP format.
Let P = the number printers (only sold with computers)

Let C = the number computers
Objective function
Maximize: $200 P + $100 C
Subject to the following constraints:
1 Sales Constraint P<=C
2 Assembly Line 1 6P + 4C < = 24 hours
3 Assembly Line 2 10P + 0C < = 20 hours
4 Non-negativity P > = 0; C > = 0
Plot: Equality relationships
1 Sales Constraint P = C
P C
0 0 Point 1 Objective Function
9 9 Point 2 9 Assembly Line 2 C
2 Assembly Line 1 6P + 4C = 24 hours
P C 8
0 6 Point 1
4 0 Point 2 C 7
3 Assembly Line 2 10P + 0C = 20 hours O
10P = 20 hours M 6 Assembly Line 1
P C P=2 P Constraint
2 0 Point 1 U 5
2 9 Point 2 T
4 Non-negativity P = 0; C = 0 E 4
R Feasible
5 Objective function 200 P + 100 C = Z S 3 Solution
Area
Set Z = 800 (an easy to plot assumed value) 2
Then plot: 200 P + 100 C = 800
1
P C P C
0 8 Point 1 0 7 Point 1 1 2 3
4 0 Point 2 3.5 0 Point 2 P R
Z = 800 Z = 700
The objective function is maxed at corner point (P = 2, C = 3)
The interesection of Assembly Line Constraint 1

and Assembly Line Constraint 2.
Assembly line constraint 2: P=2

Assembly line constraint 1: 6 P + 4 C = 24
6 (2) + 4 C = 24
12 + 4 C = 24
4 C = 12
C=3
Therefore, optimum solution is 2 printers (P) and 3 computers (C)
Objective solution: $200 P + $100 C = Z

$200(2) + $100(3) = Z
$400 + $300 = Z
$700 = Z
Assembly Line 2 Constraint
Sales Constraint
Assembly Line 1
Constraint
4 5 6 7 8 9
I N T E R S
Problem 11-34: Opportunity costs.
Data
The Wild Orchid Corporation is working at full production capacity producing 13,000 units
of a unique product, Everlast. 13,000
Manufacturing costs per unit for Everlast include:

Direct materials $10
Manufacturing overhead 14 (1)
Total manufacturing cost $26
(1) VMOH per unit $8

FMOH per unit ($78,000/13,000 capacity) 6
$78,000
Marketing costs per unit, all variable $4
Selling price per unit $52
A customer, the Apex Company, has asked Wild Orchid to produce 3,500 units of
Stronglast, a modification of Everlast. Stronglast would require the same manufacturing
processes as Everlast. Apex has offered to pay Wild Orchid $40 for a unit of Everlast
and share 1/2 of the marketing cost per unit. 3,500 $40 0.5
1. What is the opportunity cost to Wild Orchid of producing the 3,500 units of Stronglast?
(Assume that no overtime is worked.)
The opportunity cost to Wild Orchid of producing the 3,500 units of Stronglast is the C/M
lost on the 3,500 units of Everlast that would have to be forgone, as computed below:
Selling price $52

Variable cost per unit:
Direct materials ($10)
Direct mfg. Labor (2)
Variable mfg. Overhead (8)
Variable marketing (4) (24)
Contribution margin per unit $28
Units of Everlast that must be forgone 3,500
Total opportunity cost of producing Stronglast $98,000
Additional Data
The Chesapeake Corporation has offered to produce 3,500 units of Everlast for
Wild Orchid so that Wild Orchid may accept the Apex offer. That is, if Wild Orchid
accepts the Chesapeake offer, Wild Orchid would manufacture 9,500 units of Everlast
and 3,500 units of Stronglast and purchase 3,500 units of Everlast from Chesapeake.
Cheaspeake would charge Wild Orchid $36 per unit to manufacture Stronglast.
$36
2. On the basis of financial considerations alone, should Wild Orchid accept the
Chesapeake offer?
Contribution margin from sale of Stronglast produced by Wild Orchid to Apex

Sales price ($40 plus 1/2 of variable marketing) $42
Units of Stronglast produced for and sold to Apex 3,500
Total C/M from sales of Stronglast $63,000
Contribution from sale of Everlast purchased from Chesapeake

Sales price $52
Purchase cost from Chesapeake (36)
Variable marketing (4)
Units of Chesapeake-produced Everlast sold 3,500
Total C/M from Chesapeake-produced Everlast $42,000
Contribution from sale of Everlast produced by Wild Orchid: Contribution from sale of Ever
Selling price $52 Selling price
Variable cost per unit: Variable cost per unit:
Contribution margin per unit $28 Contribution margin per unit
Units of Wild Orchid-produced Everlast sold 9,500 Units of Wild Orchid-produced
Total C/M from Wild Orchid-produced Everlast $266,000 Total C/M from Wild Orchid-pro
Overall C/M earned by Wild Orchid: $371,000 Overall C/M earned by Wild Or
Net benefit of accepting Chesapeake's offer and producing Stronglast for Apex $7,000
Alternative calculation of net benefit $7,000
3. Assume current production of only 9,500 units of Everlast. What is minimum selling
price Wild Orchid would accept from Apex Co. for Stronglast? 9,500
Since there is enough excess capacity for Wild Orchid to produce Stronglast without
giving up any normal customers, then the minimal acceptable selling price would
be slightly higher than its incremental unit cost: 3,500
Minimum selling price $22

Variable cost per unit which will be incurred by Wild Orchid:
Var. marketing (Wild Orchid's portion; 1/2 to be paid by Apex) (2) (22)
** $22 selling price plus 1/2 of the marketing costs.
FMOH are irrelevant because they will not increase because of the production
and sale of Stronglast. Incremental fixed costs are zero.
Contribution from sale of Everlast all produced by Wild Orchid:
Selling price $52
Units of Wild Orchid-produced Everlast sold 13,000
Total C/M from Wild Orchid-produced Everlast $364,000
Overall C/M earned by Wild Orchid: $364,000
**
Exercise 11-24 Theory of Constraints
Given:
The Pierce Corporation manufactures filing cabinets in two operations: machining
and finishing.
Machining Finishing
Annual capacity (units) 110,000 90,000
Annual production (units) 90,000 90,000
Fixed operating costs (excluding DM) $540,000 $270,000
Fixed operating costs per unit produced $6 $3
Each cabinet sells for $70

Variable costs (all direct materials; added at the beg. of machining) $30
Demand is unlimited (Can sell all it can produce.)
Required:
1. Pierce is considering using some modern jigs and tools in the finishing
operation that would increase annual finishing output by 1,150 units. The
annual cost of these jigs and tools is $35,000. Should Pierce acquire
these tools?
Finishing is a bottleneck.
Modern jigs and tools would relax the bottleneck by 1,150 units.
Benefit of modern jigs and tools:
Additional contribution margin generated $46,000
Incremental fixed costs associated with tools (35,000)
Net advantage of buying modern jigs and tools $11,000
Recommendation: Buy modern jigs and tools
2. The production manager of the Machining Department has submitted a

proposal to do faster setups that would increase the annual capacity of
the Machining Department by 9,000 units and cost $4,000 per year.
Should Pierce implement the change?
Machining already has excess capacity and is therefore not a bottleneck

operation. Increasing its capacity further will not increase throughput contribution.
Therefore, there is no benefit from spending $4,000 to increase the Machining

Department's capacity by 9,000 units.
Recommendation: Do not implement the change to do faster setups.
3. An outside contractor offers to do the finishing operation for 9,500 units

at $9 per unit, triple the $3 per unit that it costs Pierce to do the finishing
in-house. Should Pierce accept the subcontractor's offer?
Finishing is a bottleneck operation.

Accepting the outside contractor's offer will increase output by 9,500 units.
Advantage of accepting
Additional Throughput CM from increased sales $380,000
Cost of outside finishing (85,500)
Net advantage of accepting the offer $294,500
Recommendation: Accept the offer.
4. The Hammond Corporation offers to machine 5,000 units at $3 per unit, half
the $6 per unit that it costs Pierce to do the machining in-house. Should
Pierce accept the subcontractor's offer?
If Pierce provides the materials to be converted, there is no variable cost savings

by accepting Hammond Corporation's offer. All other costs incurred by Pierce are
fixed. Therefore, there is no cost savings by accepting the Hammond offer. In
addition, since the machining department is not a bottleneck, no additional
throughput contribution will be generated by accepting the offer from Hammond
Corporation. Sales is limited by the capacity of the finishing department. If the
offer is accepted, costs will increase by 5,000 X $3 = $15,000.
Recommendation: Reject the Hammond offer.
5. Pierce produces 1,700 defective units during the machining operation. What is
the cost to Pierce of the defective items produced?
Machining is not a bottleneck operation.

Producing 1,700 defective units does not reduce throughput contribution; machining
can still produce and transfer 90,000 good units to finishing.
Therefore, the cost of the defective units is $30 X 1,700 = $51,000.
6. Pierce produces 1,700 defective units at the finishing operation. What is

the cost to Pierce of the defective items produced?
Finishing is a bottleneck operation.

Producing 1,700 defective units in the bottleneck operation will reduce throughput
contribution.
Therefore, the cost of the defective units is
Lost materials added in the machining department 1,700 X $30 = $51,000
Lost throughput contribution in finishing department 1,700 X ($70-$30)= 68,000
Total cost of the 1,700 defective units $119,000
Another approach: No Defects 1,700 Defects

Revenue from units sold $6,300,000 $6,181,000
Cost of units sold (includes spoiled units, if any) ** $2,700,000 $2,700,000
Gross profit $3,600,000 $3,481,000
Total cost of the 1,700 defective units $119,000
** Note that the direct material cost is irrelevant; whether the units are defective or good
the direct material costs will be incurred.
Alternative calculation: 1,700 X $70 = $119,000

$119,000
Problem 11-40 Theory of Constraints, CM, Sensitivity Analysis
Given:
Talking Toys (TT) produces dolls in two processes: molding and assembly. TT is
currently producing two models: Chatty Chelsey and Talking Tanya. Production in
the molding department is limited by the amount of materials available. Production
in the assembly department is limited by the amount of trained labor available. The
only variable costs are materials in the molding department and labor in the assembly
department. The requirements and limitations by doll model and department are:
Chatty Talking Total

Chelsey Tanya Available
Selling Price per Doll $39 $50
Manufacturing Requirements
Molding Department Requirements
Pounds of Molding Materials 36,000
DM needed per doll (pounds) 2 3
DM cost per pound $8
Assembly Department Requirements
Hours of Assembly Labor 8,500
DL needed per doll (minutes) 15 20
DL cost per labor hour $12
The following requirements refer only to the preceeding data. There is no connection
between the requirements.
1. If there were enough demand for either doll, which doll would TT produce?
How many of these dolls would it make and sell?
Chatty Talking
Chelsey Tanya
Maximum production possible (dolls) 18,000 12,000
Maximum production possible (dolls) 34,000 25,500
Combined Department Requirements
Overall maximum production possible (dolls) 18,000 12,000
Selling Price per Doll $39 $50

Variable costs per Doll
Molding department (materials only) (16) (24)
Assembly department (labor only) (3) (4)
Contribution Margin per Doll $20 $22
Maximum contribution given departmental constraints $360,000 $264,000
Dolls Model
Therefore, TT should makle and sell as follows: 18,000 Chatty Chelsey
0 Talking Tanya
2. If TT sells three Chatty Chelseys for each Talking Tanya, how many dolls of
each type would it produce and sell? What would be the TCM?
Constraint Checking: Chatty Talking Total Excess
Chelsey Tanya Available Resources
From "1." above:
Molding materials used 36,000 0 36,000 0
Labor hours used 4,500 0 8,500 4,000
* Molding Department is a bottleneck

* Molding Department material is the
limiting resource.
Sales Mix Requirement in Dolls 3 1

Let X = units of Talking Tanya produced X
Let 3X = units of Chatty Chelsey produced 3X
DM needed given 3:1 sales mix 6X 3X
Material constraint 6X + 3X = 36,000 36,000
3:1 Sales mix production 12,000 4,000
TCM $240,000 $88,000 $328,000
3. If TT sells three Chatty Chelseys for each Talking Tanya, how much would production
and contribution margin increase if the molding department could buy 900 more pounds
of materials for $8 per pound?
Chatty Talking Total
Chelsey Tanya Available
TCM $246,000 $90,200 $336,200
Increase in contribution margin $8,200
ADDED
and contribution margin increase if the molding department could buy 900 more pounds
of materials for $10 per pound? 900 $10

TCM $246,000 $90,200 $336,200
Old operating income (328,000)
Less extra material cost (1,800)
Chatty Talking
Proof: Chelsey Tanya Total
Sales $479,700 $205,000 $684,700
Molding material costs (8.0488) (198,000) (99,000) (297,000) (297,000)
Assembly department labor (36,900) (16,400) (53,300)
Operating income with extra material $244,800 $89,600 $334,400 $334,400
Old operating income (328,000)
and contribution margin increase if the assembly department could get 65 more labor
hours at $12 per hour?
Constraint Checking: Chatty Talking Total Excess

Chelsey Tanya Available Resources
From "3." above:
Production & Sales 12,000 4,000
DM needed per doll (pounds) 2 3 36,000
DL needed per doll (minutes) 15 20 8,500
Molding materials used 24,000 12000 36,000 0
Labor hours used 3,000 1333.33333 8,500 4,167
* Molding Department is a bottleneck

* Molding Department material is the
limiting resource.
With 65 more labor hours, production would not change.

The limiting constraint is pounds of material, not labor hours.
TT already has more labor hours available than it needs.
*
*
Problem 11-41 Closing Down Divisions
Given:
Ainsley Corporation has four operating divisions. The budgeted revenues and expenses for each division
for 2014 follows:
Divisions
A B C D
Sales $504,000 $948,000 $960,000 $1,240,000
Cost of Goods Sold 440,000 930,000 765,000 925,000
Selling, general, and administrative expenses 96,000 202,500 144,000 210,000
Operating incomes (Loss) ($32,000) ($184,500) $51,000 $105,000
Further analysis of cfosts reveals the following percentages of variable costs in each division:
Cost of Goods Sold 90% 80% 90% 85%
Selling, general, and administrative expenses 50% 50% 60% 60%
Top management is very concerned about the unprofitable divisions (A and B) and is considering
closing them for the year. Closing down any division would result in a savings of 40% of the fixed
costs of that division. 40%
1&2. Calculate the change in operating income if Division A or B are closed.
A B
Lost sales ($504,000) ($948,000)
Saved variable costs
COGS (90%) 396,000 744,000
Selling G & A Expenses (50%) 48,000 101,250
Saved fixed costs (40%) 36,800 114,900
Change in operating income ($23,200) $12,150
Keep open Close
3. What other factors should the top management consider before making such a decision?
Before deciding to close Division B, management should consider the role that the Division's
product line plays relative to other product lines. For instance, if the product manufactured by
Division B attracts customers to the company, then dropping Division B may have a detrimental
effect on the revenues of the remaining divisions.
Management may also want to consider the impact on the morale of the remaining employees
if Division B is closed. Talented employees may become fearful of losing their jobs and seek
employment elsewhere.
Problem 11-30: Short-run pricing, capacity constraints
Given:
Ohio Acres Diary, maker of specialty cheeses, produces a soft cheese from the milk
of Holstein cows raised on a special corn-based diet. One kilogram of soft cheese,
which has a contribution margin of $8, requires 4 liters of milk. A well-known
gourmet restaurant has asked Ohio Acres Dairy to produce 2,000 kilograms of a
hard cheese from the same milk of Holstein cows. Knowing that the diary has
sufficient unused capacity, Elise Princiotti, owner of Ohio Acres Diary calculates the
costs of making one kilogram of the desired hard cheese:
Milk (10 liters X $1.50 per liter) $15

Variable direct manufacturing labor 4
Variable manufacturing overhead 2
Fixed manufacturing cost allocated 5
Total manufacturing cost (Hard Cheese) $26 one kilogram
Required:
1. Suppose Ohio Acres Diary can acquire all the Holstein milk that it needs.
What is the minimum price per kilogram it should charge for the hard cheese?
The minimum price is the sum of all of the variable costs. $21
The fixed costs are not relevant because they are not dependent
on production volume.
2. Now suppose that the Holstein milk is in short supply. Every kilogram of hard
cheese produced by Colorado Mountains Dairy will reduce the quantity of soft
cheese that it can make and sell. What is the minimum price per kilogram it
should charge to produce the hard cheese?
One kilogram of hard cheese requires 10 liters of milk.

One kilogram of soft cheese requires 4 liters of milk.
Every kilogram of hard cheese produced requires that 2.5 (10/4) kilograms of
soft cheese to be foregone.
Each kilogram of soft cheese generates $8 of contribution margin.

Therefore, every kilogram of hard cheese produced must generate at least
$8 X 2.5 = $20 of contribution margin. $20
The minimum price per kilogram for hard cheese is equal to:
(1) the VC necessary to produce 1 kilogram of hard cheese, plus $21
(2) the foregone CM sale of 2 kilograms of soft cheese 20
Minimum price per kilogram for hard cheese $41
Alternative solution approach based on CM per unit of limiting resource:

Soft Cheese:
CM generated per kilogram $8
Liters of milk required per kilogram 4
CM generated per liter of milk $2.00 CM per limiting resource
Hard Cheese (substitute for soft cheese)
CM necessary per liter of milk $2.00 CM per limiting resource
Liters of milk required per kilogram 10
CM generated per kilogram $20
Variable cost of production 21
Minimum price per kilogram $41
Problem 11-27: Relevance of equipment costs
Given:
The Auto Wash Company has just today paid for and installed a special machine for polishing cars at
one of its several outlets. It is the first day of the company's fiscal year. The machine costs $20,000
Its annual cash operating costs total $15,000. The machine will have a 4-year useful life and a zero
terminal disposal value.
After the machine has been used for only one day, a salesperson offers a different machine that
promises to do the same job at annual cash operating costs of $9,000. The new machine will cost
$24,000 cash, installed. The "old" machine is unique and can be sold outright for only $10,000, minus
$2,000 removal cost. The new machine, like the old one, will have a 4-year useful life and zero terminal
disposal value.
Revenues, all in cash, will be $150,000 annually, and other cash costs will be $110,000 annually,
regardless of this decision.
Required: For simplicity, ignore income taxes and the time value of money.
1a. Prepare a statement of cash receipts and disbursements for each of the 4 years under each
alternative. What is the cumulative difference in cash flow for the 4 years taken together?
Keep the "Old" Machine -- Cash Flow Analysis

Year 1 Year 2 Year 3 Year 4
Revenues $150,000 $150,000 $150,000 $150,000
Disbursements
Purchase of machinery $20,000
Cash machine operating costs 15,000 $15,000 $15,000 $15,000
Other cash operating costs 110,000 110,000 110,000 110,000
Net cash disbursements $145,000 $125,000 $125,000 $125,000
Net cash inflow $5,000 $25,000 $25,000 $25,000
Buy the newer Machine -- Cash Flow Analysis

Revenues $150,000 $150,000 $150,000 $150,000
Disbursements
Purchase of machinery ("old") $20,000
Buy newer machine 24,000
Salvage from sale of "old" (8,000)
Net cash disbursements $155,000 $119,000 $119,000 $119,000
Net cash inflow ($5,000) $31,000 $31,000 $31,000
Net benefit of buying newer machine ($10,000) $6,000 $6,000 $6,000
1b. Prepare a statement of income for each of the 4 years under each alternative. Assume straight-line
depreciation. What is the cumulative difference in operating income for the 4 years taken together?
Keep the "Old" Machine -- Income Analysis

Revenues $150,000 $150,000 $150,000 $150,000
Expenses
Depreciation of "old" machine $5,000 $5,000 $5,000 $5,000
Cash machine operating costs 15,000 15,000 15,000 15,000
Total Expenses $130,000 $130,000 $130,000 $130,000
Operating Income $20,000 $20,000 $20,000 $20,000
Buy the newer Machine -- Income Analysis

Revenues $150,000 $150,000 $150,000 $150,000
Expenses (and Losses)
Loss on disposal of "old" $12,000
Depreciation of newer machine 6,000 6,000 6,000 6,000
Total expenses/losses $137,000 $125,000 $125,000 $125,000
Operating Income $13,000 $25,000 $25,000 $25,000
1c. What items included in 1a and 1b above are irrelevant? Why?
Cost of "old" equipment

Other cash operating costs
Revenues generated
These items do not differ between alternatives.
2. Suppose that the cost of the original machine was $1,000,000, would the net difference
in 1a and 1b change.
No. See schedules below.
1a revisited. Keep the "Old" Machine -- Cash Flow Analysis

Revenues $150,000 $150,000 $150,000 $150,000
Disbursements
Purchase of machinery $1,000,000
Net disbursements $1,125,000 $125,000 $125,000 $125,000
Net cash inflow ($975,000) $25,000 $25,000 $25,000
Buy the newer Machine -- Cash Flow Analysis

Revenues $150,000 $150,000 $150,000 $150,000
Disbursements
Purchase of machinery $1,000,000
Buy newer machine 24,000
Salvage from sale of "old" (8,000)
Net disbursements 1,135,000 119,000 119,000 119,000
Net cash inflow ($985,000) $31,000 $31,000 $31,000
1b revisited. Keep the "Old" Machine -- Income Analysis

Revenues $150,000 $150,000 $150,000 $150,000
Expenses
Depreciation of "old" machine $250,000 $250,000 $250,000 $250,000
Total expenses $375,000 $375,000 $375,000 $375,000
Operating income ($225,000) ($225,000) ($225,000) ($225,000)
Buy the newer Machine -- Income Analysis

Revenues $150,000 $150,000 $150,000 $150,000
Expenses (and Losses)
Loss on disposal of "old" $992,000
Depreciation of newer machine 6,000 6,000 6,000 6,000
Total expenses $1,117,000 $125,000 $125,000 $125,000
Operating Income ($967,000) $25,000 $25,000 $25,000
3. Is there any conflict between the decision model and the incentives of the manager who has
just purchased the "old" machine and is considering replacing it a day later?
Decision model is based upon relevant items -- those expected future items that will differ among
alternatives.
Difference in total cash machine operating costs $24,000

Cost of new machine ($24,000)
Salvage of old machine 8,000 (16,000)
Advantage of buying newer machine $8,000
Incentives -- income measures are often the principal means of performance evaluation.
Replacement requires recognition of large loss in the replacement year, which can be avoided
by not replacing. Management compensation plans often are disfunctional causing equipment
decisions to be deferred or avoided despite being good for the company as a whole.
polishing cars at
e costs $20,000.
life and a zero
achine that
chine will cost
ly $10,000, minus
e and zero terminal
00 annually,
under each
sh Flow Analysis
Total
$600,000
$20,000
60,000
440,000
$520,000
$80,000
h Flow Analysis
Total
$600,000
$20,000
36,000
440,000
24,000
(8,000)
$512,000
$88,000
$8,000
ssume straight-line
ars taken together?
come Analysis
Total
$600,000
$20,000
60,000
440,000
$520,000
$80,000
come Analysis
Total
$600,000
$12,000
36,000
440,000
24,000
$512,000
$88,000
$8,000
sh Flow Analysis
Total
$600,000
$1,000,000
60,000
440,000
$1,500,000
($900,000)
h Flow Analysis
Total
$600,000
$1,000,000
36,000
440,000
24,000
(8,000)
1,492,000
($892,000)
$8,000
come Analysis
Total
$600,000
$1,000,000
60,000
440,000
$1,500,000
($900,000)
come Analysis
Total
$600,000
$992,000
36,000
440,000
24,000
$1,492,000
($892,000)
$8,000
er who has
YES
will differ among
an be avoided
sing equipment
! ! !
" " "
# # #
$ $ $
% % %
& & &
' ' '
( ( (
) ) )
* * *
+ + +
, , ,
- - -
. . .
/ / /
0 0 0
1 1 1
2 2 2
3 3 3
4 4 4
5 5 5
6 6 6
7 7 7
8 8 8
9 9 9
: : :
; ; ;
< < <
= = =
> > >
? ? ?
@ @ @
A A A
B B B
C C C
D D D
E E E
F F F
G G G
H H H
I I I
J J J
K K K
L L L
M M M
N N N
O O O
P P P
Q Q Q
R R R
S S S
T T T
U U U
V V V
W W W
X X X
Y Y Y
Z Z Z
[ [ [
\ \ \
] ] ]
^ ^ ^
_ _ _
` ` `
a a a
b b b
c c c
d d d
e e e
f f f
g g g
h h h
i i i
j j j
k k k
l l l
m m m
n n n
o o o
p p p
q q q
r r r
s s s
t t t
u u u
v v v
w w w
x x x
y y y
z z z
{ { {
| | |
} } }
~ ~ ~

ﾀﾀﾀ
ﾁﾁﾁ
ﾂﾂﾂ
ﾃﾃﾃ
ﾄﾄﾄ
ﾅﾅﾅ
ﾆﾆﾆ
ﾇﾇﾇ
ﾈﾈﾈ
ﾉﾉﾉ
ﾊﾊﾊ
ﾋﾋﾋ
ﾌﾌﾌ
ﾍﾍﾍ
ﾎﾎﾎ
ﾏﾏﾏ
ﾐﾐﾐ
ﾑﾑﾑ
ﾒﾒﾒ
ﾓﾓﾓ
ﾔﾔﾔ
ﾕﾕﾕ
ﾖﾖﾖ
ﾗﾗﾗ
ﾘﾘﾘ
ﾙﾙﾙ
ﾚﾚﾚ
ﾛﾛﾛ
ﾜﾜﾜ
ﾝﾝﾝ
ﾞﾞﾞ
ﾟﾟﾟ
ﾠﾠﾠ
ﾡﾡﾡ
ﾢﾢﾢ
ﾣﾣﾣ
ﾤﾤﾤ
ﾥﾥﾥ
ﾦﾦﾦ
ﾧﾧﾧ
ﾨﾨﾨ
ﾩﾩﾩ
ﾪﾪﾪ
ﾫﾫﾫ
ﾬﾬﾬ
ﾭﾭﾭ
ﾮﾮﾮ
ﾯﾯﾯ
ﾰﾰﾰ
ﾱﾱﾱ
ﾲﾲﾲ
ﾳﾳﾳ
ﾴﾴﾴ
ﾵﾵﾵ
ﾶﾶﾶ
ﾷﾷﾷ
ﾸﾸﾸ
ﾹﾹﾹ
ﾺﾺﾺ
ﾻﾻﾻ
ﾼﾼﾼ
ﾽﾽﾽ
ﾾﾾﾾ
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
ￂￂￂ
ￃￃￃ
ￄￄￄ
ￅￅￅ
ￆￆￆ
ￇￇￇ
﾿﾿﾿
﾿﾿﾿
ￊￊￊ
ￋￋￋ
ￌￌￌ
ￍￍￍ
ￎￎￎ
ￏￏￏ
﾿﾿﾿
﾿﾿﾿
ￒￒￒ
ￓￓￓ
ￔￔￔ
ￕￕￕ
ￖￖￖ
ￗￗￗ
﾿﾿﾿
﾿﾿﾿
ￚￚￚ
ￛￛￛ
ￜￜￜ
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
￠￠￠
￡￡￡
￢￢￢
￣￣￣
￤￤￤
￥￥￥
￦￦￦
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
﾿﾿﾿
￹ ￹ ￹
￹ ￺ ￺
￹ ￻ ￻

￹ � �
Err:502 Err:502 Err:502

Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502

Iygfig

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Iygfig

Diunggah oleh

Hak Cipta:

Format Tersedia

Problem 11-19 Special order, ABC costing, (CMA adapted)

Variable costs that vary with the number of units produced

Incremental revenue $100 1,000 $100,000

Units SP/Costs Total

Incremental revenue from special order 1,000 $100 $100,000

The special order should, therefore, be rejected

Production Level 10,000

Variable manufacturing costs

Incremental cost per unit if purchased from Minton $300

Incremental cost savings per unit by not producing CMCBs internally

Incremental cost of producing CMCBs internally $259

Net cost of buying and using freed capacity to produce CB3s

Cola Lemonade Punch Natural OJ

1. Calculate the contribution margin per case of each type of drink.

Cola Lemonade Punch Natural OJ

3. What recommendation would you make?

Cola Lemonade Punch Natural OJ

1 Foot 4 Feet 6 Feet 1 Foot

(A) Contribution margin per unit of limiting resource.

Connecticut Rhode Island

Close Rhode Island Store Connecticut Rhode Island Both

ate overhead costs

Current situation Trent Julie Both

Julie Corporation indicates that it wants Rodeo to do a total of $224,000

Required: What action should Rodeo take to maximize its operating

Analysis: Trent Julie Both

Revenue per machine hour $70 $140

Rodeo should maximize C/M per unit of limiting resource -- that is

Total machine hours available 4,000

New situation Trent Julie Both

(1) Proof of C/M Trent Julie Both

Information Technology, Inc., assembles and sells two products:

Each printer requires 6 assembly-hours on production line 1

Let P represent units of printers and C represent units of desktop

1. Formulate the production manager's problem in a LP format.

Let P = the number printers (only sold with computers)

The objective function is maxed at corner point (P = 2, C = 3)

The interesection of Assembly Line Constraint 1

Assembly line constraint 2: P=2

Therefore, optimum solution is 2 printers (P) and 3 computers (C)

Objective solution: $200 P + $100 C = Z

Manufacturing costs per unit for Everlast include:

(1) VMOH per unit $8

Selling price $52

Contribution margin from sale of Stronglast produced by Wild Orchid to Apex

Contribution from sale of Everlast purchased from Chesapeake

Minimum selling price $22

Overall C/M earned by Wild Orchid: $364,000

Each cabinet sells for $70

Recommendation: Buy modern jigs and tools

2. The production manager of the Machining Department has submitted a

Machining already has excess capacity and is therefore not a bottleneck

Therefore, there is no benefit from spending $4,000 to increase the Machining

Recommendation: Do not implement the change to do faster setups.

3. An outside contractor offers to do the finishing operation for 9,500 units

Finishing is a bottleneck operation.

Recommendation: Accept the offer.

If Pierce provides the materials to be converted, there is no variable cost savings

Recommendation: Reject the Hammond offer.

Machining is not a bottleneck operation.

6. Pierce produces 1,700 defective units at the finishing operation. What is

Finishing is a bottleneck operation.