亨格瑞管理會(huì)計(jì)英文第15版練習(xí)答案06

CHAPTER6COVERAGEOFLEARNINGOBJECTIVESLEARNINGOBJECTIVEFUNDAMENTALASSIGN-MEN!MATERIALCRITICALTHINKINGEXERCISESANDEXERCISESPROBLEMSCASES,EXCEL,COLLAB.&INTERNETEXERCISESLO1:Useadifferentialanalysistoexamineincomeeffectsacrossalternatives,andshowthatanopportunitycostanalysisyieldsidenticalresults.24,27,28,29,30,31,42,4445,46,47,48,49,50,56,61LO2:Decidewhethertomakeortobuycertainpartsorproducts.A1,B125,32,33,3462,6365,66,67,68,70LO3:Choosewhethertoaddordeleteaproductlineusingrelevantinformation.B336LO4:Computetheoptimalproductmixwhenproductionisconstrainedbyascarceresource.A2,B23551,53LO5:Decidewhetherajointproductshouldbeprocessedbeyondthesplit-offpoint.A3,B437,3854,5569

LO6:Decidewhethertokeeporreplaceequipment.A4,B54057,59LO7:Identifyirrelevantandmisspecifiedcosts.26,39,4152,58,6471LO8:Discusshowperformancemeasurescanaffectdecisionmaking.B64360CHAPTER6RelevantInformationandDecisionMakingWithaFocusonOperationalDecisions6-A1(20min)Thekeytothisquestioniswhatwillhappentothefixedoverheadcostsifproductionoftheboxesisdiscontinued.Assumethatall$60,000offixedcostswillcontinue.Then,SunshineStatewilllose$20,000bypurchasingtheboxesfromWeyerhaeuser:PaymenttoWeyerhaeuser,80,000x$2.10$168,000Costssaved,variablecosts148,000Additionalcosts$20,000Somesubjectivefactorsare:MightWeyerhaeuserraisepricesifSunshineStatecloseddownitsbox-makingfacility?Willsub-contractingtheboxproductionaffectthequalityoftheboxes?Isatimelysupplyofboxesassured,evenifthenumberneededchanges?3.DoesSunshineStatesacrificeproprietaryinformationwhendisclosingtheboxspecificationstoWeyerhaeuser?3.Inthiscasethefixedcostsarerelevant.However,itisnotthedepreciationontheoldequipmentthatisrelevant.Itis

thecostofthenewequipment.Annualcostsavingsbynotproducingtheboxesnowwillbe:VariablecostsInvestmentavoided(annualized)Totalsaved$148,00080,000$228,000ThepaymenttoWeyerhaeuseris$228,000-$168,000=$60,000lessthanthesavings,soSunshineStatewouldbe$60,000betteroffsubcontractingtheproductionofthe$148,00080,000$228,0006-A2(10min.)1.Contributionmargins:Plain=$70-$55=$15Professional=$100-$75=$25Contributionmarginratios:Plain=$15士$70=21.4%Professional=$25士$100=25%2.PlainProfessionala.Unitsperhour21b.Contributionmarginperunit$15$25Contributionmarginperhour$30$25Totalcontributionfor20,000hours$600,000$500,000Theplaincircularsawsarethebestuseofthescarcemachinehours.Foragivencapacity,thecriterionformaximizingprofitsistoobtainthegreatestpossiblecontributiontoprofitforeachunitofthelimitingorscarcefactor.Moreover,fixedcostsareirrelevantunlesstheirtotalisaffectedbythechoiceofproducts.6-A3(15min.)Tableisinthousandsofdollars.1,2.(a)(b)(a)-(b)(c)(a)-(b)-(c)SeparableSalesSalesCostsIncrementalBeyondatIncrementalBeyondGainorSplit-OffSplit-OffSalesSplit-Off(Loss)A23054176190(14)B33032298300⑵C1755412110021IncreaseinoveralloperatingincomefromfurtherprocessingofA,B,andC5TheincrementalanalysisindicatesthatProductCshouldbeprocessedfurther,butProductsAandBshouldbesoldatsplit-off.Theoveralloperatingincomewouldbe$44,000,asfollows:$261,000Sales:$54,000+$32,000+$175,000

Jointcostof$261,000JointcostofgoodssoldSeparablecostofgoodssoldOperatingincome$117,000100,000217,000$44,000Comparethiswiththepresentoperatingincomeof$28,000.Thatis,$230,000+$330,000+$175,000-($190,000+$300,000+$100,000+$117,000)=$28,000.Theextra$16,000ofoperatingincomecomesfromeliminatingthe$16,000lossresultingfromprocessingProductsAandBbeyondthesplit-offpoint.6-A4(30-40min.)Problem6-60isanextensionofthisproblem.Thetwoproblemsmakeagoodcombination.1.Operatinginflowsforeachyear,oldmachine:$910,000-($810,000+$60,000)$40,000Operatinginflowsforeachyear,newmachine:$910,000-($810,000+$22,000*)$78,000*$60,000-$38,000Cashflowstatements(inthousandsofdollars):KeepReplaceThreeThreeYearYearsYearsYearYearsYears12&3Together12&3TogetherReceipts,inflowsfromoperations40401207878234Disbursements:Purchaseof"old"equipment(90)*--(90)(90)--(90)Purchaseof"new"equipment:Totalcostslessproceedsfromdisposalof"old"equipment($99,000-$15,000)------(84)--(84)Netcashinflow(outflow)(50)4030(96)7860*Assumesthattheoutlayof$90,000tookplaceonJanuary2,2010,orsometimeduring2010.Somestudentswillignorethisitem,assumingcorrectlythatitisirrelevanttothedecision.However,notethatastatementfortheentireyearwasrequested.Thedifferenceforthreeyearstakentogetheris$60,000-$30,000=$30,000.Noteparticularlythatthe$90,000bookvaluecanbeomittedfromthecomparison.Merelycrossouttheentireline;althoughthecolumntotalswillbeaffected,thenetdifferencewillstillbe$30,000.2.Incomestatements(inthousandsofdollars):2.KeepReplaceSalesYears1,2&3Together910ThreeYearsTogether2,730Year1910Years2&3910ThreeYears2,730Expenses:Otherexpenses8102,4308108102,430Operatingofmachine60180222266Depreciation3090*333399Totalexpenses9002,7008658652,595Lossondisposal:Proceeds("revenue")■-■-(15)■-(15)Bookvalue("expense")■-■-90■-90*Loss■-■-75■-75Totalcharges9002,7009408652,670Netincome1030130)45_60*Asinpart(1),the$90,000bookvaluecanbeomittedfromthecomparisonwithoutchangingthe$30,000difference.Thiswouldmeandroppingthedepreciationitemof$30,000peryear(acumulativeeffectof$90,000)underthe"keep"alternative,anddroppingthebookvalueitemof$90,000inthelossondisposalcomputationunderthe"buy"alternative.Differenceforthreeyearstogether,$60,000-$30,000=$30,000.Notethemotivationalfactorshere.AmanagermaybereluctanttoreplacesimplybecausethelargelossondisposalwillseverelyharmtheprofitperformanceinYear1.Thenetdifferenceforthethreeyearstakentogetherwouldbeunaffectedbecausetheitemisapastcost.Youcansubstituteanynumberfortheoriginal$90,000figurewithoutchangingthisanswer.Forexample,examinehowtheresultswouldchangeinpart(1)byinserting$1millionwherethe$90,000nowappears(inthousandsofdollars):Receipts,inflowsfromoperationsKeep:ThreeYearsTogetherDifference120Replace:ThreeYearsTogether234114Disbursements:Purchaseofoldequipment(1,000)(1,000)0Purchaseofnewequipment:GrosspriceDisposalproceedsof"old"15(99)--(84)(84)Netcashoutflow(880)(850)30Insum,thismaybeahorriblesituation.Themanagerreallyblundered.Butkeepingtheoldequipmentwillcompoundtheblundertothecumulativetuneof$30,000overthenextthreeyears.Diplomatically,Leeshouldtrytoconveythefollowing.Allofustendtoindulgeintheerroneousideathatwecansoothethewoundedprideofabadpurchasedecisionbyusingtheiteminsteadofreplacingit.Thefallacyisbelievingthatacurrentorfutureactioncaninfluencethelong-runimpactofapastoutlay.Allpastcostsaredownthedrain.Nothingcanchangewhathasalreadyhappened.The$90,000hasbeenspent.Subsequentaccountingfortheitemisirrelevant.Theschedulesinparts(1)and(2)clearlyshowthatwemaycompletelyignorethe$90,000originaloutlayandstillhaveacorrectanalysis.Theimportantpointisthatthe$90,000isnotanelementofdifferencebetweenalternativesand,therefore,maybesafelyignored.Theonlyrelevantitemsarethoseexpectedfutureitemsthatwilldifferbetweenalternatives.The$90,000purchaseoftheoriginalequipment,thesales,andtheotherexpensesareirrelevantbecausetheyarecommontobothalternatives.Therelevantitemsarethefollowing(inthousandsofdollars):

ThreeYearsTogetherOperatingofOperatingofmachine(3x$60;3x$22)

Incrementalcostofnewmachine:TotalcostLessproceedsofoldmachineIncrementalcostTotalrelevantcostsDifferenceinfavorofbuyingKeepReplace$180$66$9915z84$180$150$306-B1(15-20min.)1.MakeBuyTotalPerUnitTotalPerUnitPurchasecost?10,000,000?50Directmaterial?5,500,000?27.50Directlabor1,900,0009.50Factoryoverhead,variable1,100,0005.50Factoryoverhead,fixedavoided900,0004.50Totalrelevantcosts?9,400,000?47.00?10,000,000?50Differenceinfavorofmaking?600,000?3.002.RentRentrevenueObtainingofcomponentsNetrelevantcostsThenumericaldifferenceinfavorofmakingis?600,000or?3.00perunit.2.RentRentrevenueObtainingofcomponentsNetrelevantcostsBuyandLeaveMakeCapacityIdleBuyand----?1,150,000?(9,400,000)?(10,000,000)?(10,000,000)?(9,400,000)?(10,000,000)?(8,850,000)Thefinalcolumnindicatesthatbuyingthecomponentsandrentingthevacatedcapacitywillyieldthebestresultsinthiscase.Thefavorabledifferenceis?9,400,000-?8,850,000=?550,000.6-B2(15min.)Iffixedmanufacturingcostisappliedtoproductsat$1.00permachinehour,ittakes$.75士$1.00,or3/4ofanhourtoproduceoneunitofXY-7.Similarly,ittakes$.25士$1.00or1/4ofanhourtoproduceBD-4.Ifthereare100,000hoursofcapacity:XY-7:100,000hours士3/4=133,333units.BD-4:100,000hours士1/4=400,000units.

TotalcontributionmarginsshowthatBD-4shouldbeproduced,generating$200,000ofcontributionmargin,whichis$66,667morethanwouldbeearnedbyXY-7.UnitsPerUnitTotalXY-7BD-4$6.00-UnitsXY-7BD-4$6.00-($3.00+$2.00)=$1.00$4.00-($1.50+$2.00)=$.50133,333400,000$133,333$200,0006-B3(15-20min.)AllamountsareinthousandsofBritishpounds.Themajorlessonisthataproductthatshowsanoperatinglossbasedonfullyallocatedcostsmayneverthelessbeworthkeeping.Why?Becauseitmayproduceasufficientlyhighcontributiontoprofitsothatthefirmwouldbebetteroffwithitthananyotheralternative.Theemphasisshouldbeontotals:ReplaceMagicDepartmentWithExistingGeneralOperationsMerchandiseElectronicProductsSales6,000-600+250=5,650-600+200=5,600Variableexpenses4,090-390+175a=3,875-390+100b=3,800Contributionmargin1,910-210+75=1,775-210+100=1,800Fixedexpenses1,100-120+0=980-120+30=1,Operatingincome810-90+75=795_-90+70=790a(100%-30%)x250b(100%-50%)X200Thefactsasstatedindicatethatthemagicdepartmentshouldnotbeclosed.First,thetotaloperatingincomewoulddrop.Second,fewercustomerswouldcometothestore,sosalesinotherdepartmentsmaybeaffectedadversely.

6-B4(15min.)1.Sales($400+$600+$100)Costs:$1,100Rawmaterials$700ProcessingTotal100800Profit$3002.Sales($840+$850+$170)Costs:$1,860Jointcosts$800Frozendinnercosts440Salisburysteakcosts200Tanningcosts80Totalcosts1,520Profit$340Althoughitismoreprofitabletoprocessallthreeproductsfurtherthanitistosellthemallatthesplit-offpoint,itisimportanttolookattheeconomicbenefitfromfurtherprocessingofeachindividualproduct.Steakstofrozendinners:Additionalrevenuefromprocessingfurther($840-$400)$44044020080AdditionalcostforprocessingfurtherIncrease(decrease)inprofitfromprocessingfurther$0HamburgertoSalisburysteaks:44020080Additionalrevenuefromprocessingfurther($850-$600)$250AdditionalcostforprocessingfurtherIncrease(decrease)inprofitfromprocessingfurther$50Untannedhidetotannedhide:Additionalrevenuefromprocessingfurther($170-$100)$70AdditionalcostforprocessingfurtherIncrease(decrease)inprofitfromprocessingfurther$(10)Onlythehamburgerdictatesthatitshouldbeprocessedfurther,becauseitistheonlyproductwhoseadditionalrevenueforprocessingfurtherexceedstheadditionalcost.Youare

indifferentaboutprocessingfurthersteaktofrozendinners,astheincrementalprofitis0.4.Theresultingprofitwouldbe$350:4.6-B5Sales($400+$850+6-B5Sales($400+$850+$100)Costs:JointcostsFurtherprocessingofhamburgerTotalcostProfit(15-20min.)$1,350$8002001,000$3501.ThreeYearsTogetherCashoperatingcostsOldequipment,bookvalue:Periodicwrite-offas1.CashoperatingcostsOldequipment,bookvalue:Periodicwrite-offasdepreciationKeep

$42,000Replace$27,000Difference$15,00015,000orlump-sumwrite-offDisposalvalueNewequipment,acquisitioncostTotalcosts15,000*-6,000*15,000**$57,000$51,0006,000-15,000$6,0002.CashoperatingcostsDisposalvalueofoldequipmentNewequipment,acquisitioncostTotalrelevantcostsThreeYearsTogetherKeepReplaceDifference$42,000$27,000$15,000-6,0006,00015,000-15,000$42,000$36,000$6,0003.Thistabulationisclearerbecauseitfocusesononlythoseitemsthataffectthedecision.timeBenefitsofthereplacementalternative*Deductinitialnetcashoutlayrequired*Differenceinfavorofreplacement*3X($14,000-$9,000)**$15,000-$6,000Also,thenewequipmentislikelytobefaster,thussavingoperator.Thelatterisimportant,butitisnotquantifiedinthisproblem.$15,0009,000$6,000Thereplacementalternativewouldbechosenbecausethecountywouldhave$6,000morecashaccumulatedinthreeyears.Thekeepalternativewouldbechosenbecausethehigheroverallcostsofphotocopyingforthefirstyearwouldbeshownforthereplacementalternative(underaccrualaccounting):FirstYearKeepReplaceCashoperatingcosts$14,000$9,000Depreciationexpense5,0005,000Lossondisposal9,000Totalcosts$19,000$23,000Thus,theperformanceevaluationmodelmightmotivatethemanagertomakeadecisionthatwouldbeundesirableinthelongrun.6-1Anopportunitycostdoesnotentailadisbursementofcashatanyfuturetime,whereasanoutlaycostdoesentailanadditionaldisbursementsoonerorlater.6-2The$800representsanopportunitycost.Itistheamountforgonebyrejectinganopportunity.Itsignifiesthatthevaluetotheownerofkeepingthosestrangersoutofthesummerhouseforthattwo-weekperiodisatleast$800.6-3Accountantsdonotordinarilyrecordopportunitycostsinaccountingrecordsbecausethoserecordsaretraditionallyconcernedwithrealtransactionsratherthanpossibletransactions.Itisimpossibletorecorddataonalllostopportunities.6-4Adifferentialcostisanydifferenceintotalcostorrevenuebetweentwoalternatives.Adifferentialcostisanincrementalcostwhenoneofthealternativescontainsallthecostsoftheotherplussomeadditionalcosts.Theadditionalcostsaretheincrementalcosts-whicharealsodifferential.6-5No.Incrementalcosthasabroadermeaning.Itistheadditiontototalcostsbytheadoptionofsomecourseofaction.Anotherterm,marginalcost,isusedbyeconomiststoindicatetheadditiontocostsfromthemanufactureofoneadditionalunit.Ofcourse,marginalcostisindeedtheincrementalcostofoneunit.6-6Thedeclineincostswouldbecalleddifferentialorincrementalsavings.6-7Notnecessarily.Qualitativefactorscanfavoreithermakingorbuying.Oftenfactorssuchasproductqualityandassuranceofdeliveryschedulesfavormaking.However,sometimesestablishinglong-termrelationshipswithsuppliersisanimportantqualitativefactorfavoringthepurchaseofcomponents.6-8Thechoiceinmanycasesisnotreallywhethertomakeorbuy.Instead,thechoiceishowbesttouseavailablecapacity.6-9Yes.Thecoststhatmakeadifferencewhenaproductordepartmentisbeingdeletedaretheavoidablecosts.6-10Fourexamplesofscarcefactorsare:(a)laborhours,(b)money(investmentcapital),(c)supervisoryhours,and(d)computerhours.6-11Jointproductsaretwoormoremanufacturedproductsthat(1)haverelativelysignificantsalesvaluesand(2)arenotseparatelyidentifiableasindividualproductsuntiltheirsplit-offpoint.Examplesofjointproductsincludechemicals,lumber,flour,andmeat.6-12Thesplit-offpointiswheretheindividualproductsproducedinajointprocessbecomeseparatelyidentifiable.Costsbeforethesplit-offpointareirrelevantfordecisionsabouttheindividualproducts.Theyaffectthedecisionaboutwhethertoundertaketheentireproductionprocess,buttheydonotinfluencedecisionsaboutwhattodowiththeindividualproducts.6-13Yes.Techniquesforassigningjoint-productcoststoindividualproductsareusefulonlyforproductcosting,notfordecidingonfurtherprocessingafterthesplit-offpoint.Theproductmustbeconsideredseparatelyatthatpointapartfromitsjointcost.Theproperbasisofthedecisiononfurtherprocessingisacomparisonofincrementalrevenueversusincrementalexpensebetweenthealternativesofsellingatthesplit-offpointandprocessingfurther.6-14No.Onceinventoryhasbeenpurchased,thepricepaidisasunkcost.Itistruethatsellingatapricelessthan$5,000wouldproduceareportedloss.However,asaleatanypriceabove$0iseconomicallybeneficialprovidedthattheonlyalternativeistoscraptheinventory.6-15No.Sunkcostsareirrelevanttothereplacementdecision.6-16No.Pastcostsarenotrelevantbecausetheycannotbeaffectedbyadecision.Althoughpastcostsareoftenindispensableforformulatingpredictions,pastcoststhemselvesarenotthepredictionsthataretheinputstodecisionmodels.Clearthinkingisenhancedbythesedistinctions.6-17Onlybandcarerelevant.Bookvalueofoldequipmentisirrelevanttoareplacementdecisionbecauseitdoesnotchangeunderanyalternativeandcannotberealized.Disposalvalueofoldequipmentisrelevanttoareplacementdecisionbecauseitcaneitherberealized(byreplacement)orforgone(bycontinueduse).Costofnewequipmentisrelevanttoareplacementdecisionbecauseitcanbeincurred(byreplacement)oravoided(bycontinueduse).6-18Yes.Someexpectedfuturecostsmaybeirrelevantbecausetheywillbethesameunderallfeasiblealternatives.6-19Yes.Thestatementiscorrectintermsoftotalvariablecosts.6-20Tworeasonswhyunitcostsshouldbeanalyzedwithcareindecisionmakingare:Mostunitcostsarestableonlyoveracertainrangeofoutput,andcaremustbetakentoseethatallowancesaremadewhenalternativesareconsideredoutsidethatrange.Someunitcostsareanallocationoffixedcosts;thuswhenahighervolumeofoutputisbeingconsidered,unitcostwilldecreaseproportionately,andviceversa.Twootherreasonsarementionedinthetext:Someunitcostsarebasedonbothrelevantandirrelevantfactorsandshouldbebrokendownfurtherbeforebeingconsidered.Unitcostsmustbereducedtothesamebase(denominator)beforecomparingorcombiningthem.6-21Salespersonnelsometimesneglecttopointoutthattheunitcostsarebasedonoutputsfarinexcessofthevolumeoftheirprospectivecustomer.6-22Aninconsistencybetweenadecisionmodelandaperformanceevaluationmodeloccurswhenadecisionaboutwhethertoreplaceapieceofequipmentisbasedonthecashfloweffectsoverthelifeoftheequipmentbutamanager'sperformanceevaluationisbasedonthefirstyear'sreportedincome.Thelossondisposaloftheequipmentisirrelevantfordecisionpurposes,butitaffectsthefirstyearincome,hencetheperformanceevaluation.6-23Thewideuseofincomestatementstoevaluateperformancemayoverlyinfluencemanagerstomaximizeshort-runperformancethatmayhurtlong-runperformance.Theymaypassupprofitableopportunitiestoreplaceequipmentbecauseofthelargelossondisposalshownonthefirstyear'sincomestatement.6-24Yes,thisstatementisgenerallycorrect.Accountantsrecordtransactions.Butopportunitycostisthecostoftransactionsthatdonotoccur(orhavenotoccurredyet).Itisthecostofopportunitiesforgone.Managersusuallyhavemuchbetterinformationaboutforgoneopportunitiesthandoaccountants.6-25Decidingwhethertooutsourcepayrollfunctionsrequiresestimatesofthecostofdesigning,maintaining,andusingapayrollsysteminternallycomparedtothecostofacontractwithanoutsidesupplier.Tooperateaninternalpayrollsystemrequireshiringpersonnelwiththeneededexpertiseinbothlegal/governmentalissuesaffectingpayrollandinformationprocessingtoimplementasystem.Smallcompaniesoftenfinditlesscostlytooutsourcepayrolltoacompanythathasbroadexpertiseintheseareas.6-26Whenevertotalcostsareunitizedbydividingbytotalunitsandtheresultingunitcostsarethenusedtopredictnewtotalcostsbasedonadifferentlevelofproduction,errorsarebeingmadeifanyofthecostsarefixed.Ifthenewproductionlevelishigher,predictedtotalcostsareoverestimated.Ifthenewproductionlevelislower,predictedtotalcostsareunderestimated.Neverunitizefixedcostsiftheresultingunitcostwillbeusedforplanningpurposes!Considerthefollowingsimpleexample:TotalUnitsUnitCostFixedCost$100士10$10VariableCost$100士10$10Total$200士10$20TotalUnitsUnitCostFixedCost$100士10$10VariableCost$100士10$10Total$200士10$20ThecorrectcostfunctionandcostpredictionisTotalCost=$100+$10xNumberofunits=$100+$10X20=$300Thecorrectcostfunctionisbasedonthetwoamountsthatareconstantwithintherelevantrange-thetotalfixedcostandtheunitvariablecost.TheincorrectunitizedcostfunctionandincorrectandoverestimatedpredictionisTotalCost=$20xNumberofunits=$20X20=$400Itiseasytoseethattheerrorcomesfromtreatingfixedcostsasiftheywerevariable.6-27Theamountpaidforinventoryisasunkcost.Onceacompanyhastheinventory,itcannotchangewhatitpaidforit.Thustheonlyrelevantissueiswhatcanbedonewiththeinventory.Ifthereisachoiceofsellingtheinventoryforlessthanwhatthecompanypaidforitornotsellingitatall,itiscertainlybettertogetsomethingEmployeeDifferenceratherthannothingforit.6-28(10-15min.)1.IndependentPracticeOperatingrevenues$350,000$110,000$240,000Operatingexpenses220,000--220,000Incomeeffectsperyear$130,000$110,000$20,000ChooseIndependentPracticeRevenues$350,000Expenses:Outlaycosts$220,000Opportunitycostofemployeecompensation110,000330,000Incomeeffectsperyear$20,000Eachtabulationproducesthekeydifferenceof$20,000.Asageneralrule,wefavorusingthefirsttabulationwhenfeasible.Itoffersastraightforwardpresentationofinflowsandoutflowsundersharplystatedalternatives.2.ChoiceasEmployeeRevenue$110,000Expenses:Outlaycosts$0Opportunitycostofaccountingpractice130,000130,000Incomeeffectsperyear$(20,000)Iftheemployeealternativeisselected,thekeydifferenceinfavorofbecomingasolepractitionerisagain$20,000.Bridgemanissacrificing$20,000toavoidtherisksofanindependentpractice.

6-29(10-15min.)RevenueLess:OutlaycostIncomeeffectsperyear*5%X$200,000(1)6-29(10-15min.)RevenueLess:OutlaycostIncomeeffectsperyear*5%X$200,000(1)(2)⑴-⑵Sell,Rent,andHoldInvestinBondsPresentHomeDifference$10,000*$-$10,00012,0006,0006,000$(2,000)$(6,000)$4,000AlternativesUnderConsiderationObviously,ifrentishigher,theadvantagedecreases.Theaboveanalysisdoesnotcontainexplicitopportunitycosts.Ifopportunitycostswereapartoftheanalysis,thefollowingpresentationapplies(wherebytheinterestoninvestmentinbondsisnotlistedasaseparatealternativebutisregardedasaforgonealternative):OpportunitycostOutlaycostIncomeeffectsperyearAlternativeChosen:OpportunitycostOutlaycostIncomeeffectsperyearAsbefore,theadvantageofsellingthehomeandrentingis$4,000.Theopportunitycostofhomeownershipis5%x200,000=$10,000.6-30(15-20min.)Opportunitycostisthemaximumavailablecontributiontoprofitforgonebyusinglimitedresourcesforaparticularpurpose.Inthiscase,theopportunitycostofthemachinewhenanalyzingthealternativetoproduce12-oz.bottlesofJuiceCocktailsis$90,000,thelargerofthe$90,000contributionmarginfromadditionalsalesofthe100%Juicesorthe$75,000proceedsfromthesaleofthemachine.The$160,000historicalcostofthemachineisapastcostandthusirrelevant.6-31(15-20min.)Thefirsttabulationisprobablyeasiertounderstand,butthechoiceofatabulationisamatteroftaste:RevenuesExpensesRevenuesExpensesIncomeeffectsperyear(a)(b)(c)ExpandExpandRenttoLaboratoryEyeGiftTestingClinicShop$330,000$500,000$11,000290,000480,0000$40,000$20,000$11,000Treatingthegiftshopastheforgone(rejected)alternative,thetabulationis:(a)(b)ExpandExpandLaboratoryTestingEyeClinicRevenue$330,000$500,000Expenses:Outlaycosts$290,000$480,000Opportunitycost,rentforgone11,000301,00011,000491,000Incomeeffectsperyear$29,000$9,000Thenumbersfavorlaboratorytesting,whichwillgenerateacontributiontohospitalincomethatis$20,000greaterthantheeyeclinic's.Thenumbershavebeenanalyzedcorrectlyunderbothtabulations.Bothanswerthekeyquery:Whatdifferencedoesitmake?Asageneralrule,wepreferusingthefirsttabulation.Itisastraightforwardpresentation.6-32(15min.)1.Itiseasiesttoanalyzetotalcosts,notunitcosts.MakePurchaseDirectmaterials$400,000Avoidableoverheadcosts:Indirectlabor30,000Supplies20,000Allocatedoccupancycost0Purchasecost$420,000Totalrelevantcosts$450,000$420,000Thedifferenceinfavorofpurchasingis$450,000-$420,000=$30,000.2.Becausethequantitativedifferenceissmall,qualitativefactorsmaydominatethedecision.Companiesusingajust-in-timesystemneedassuranceofbothqualityandtimelinessofsuppliesofmaterials,parts,andcomponents.Asmall,localcompanymaynotbereliableenoughforBose.Inessence,Bosemaybewillingto"invest"$30,000,thequantitativeadvantageofpurchasing,inordertohavemorecontroloverthesupplyofthecomponents.Thedivisionmanagermayhavemadetherightdecisionforthewrongreason.Heincorrectlyignoredavoidablefixedcosts,leadingtoamistakenbeliefthatmakingthecomponentswaslesscostlyby$.20perunitor$20,000intotal.The$50,000ofavoidablefixedcostsmakesthepurchaseoptionlesscostlyby$30,000.Ifthemanager'sdecisionistomakethecomponent,itshouldbebecauseforgoingprofitsof$30,000hasalong-runqualitativebenefitofmorethan$30,000,notbecausethebidisgreaterthanthevariablecost6-33(20-25min.)NantucketNectarsshouldmakethebottles.MakeBuyPerPerTotalBottleTotalBottlePurchasecost$250,000$.250Directmaterials$80,000$.080Directlabor30,000.030Variableoverhead60,000.060Avoidablefixedoverhead60,000.060Totalrelevantcosts$230,000$.230$250,000$.250

$20,000$.020Differenceinfavorofmaking6-34$20,000$.020BuyandUseBuyandFacilitiesBuyandLeaveforRent$75$55$(230)$(250)(250)(250)$(230)$(250)$(175)$(195)MakeIdleActivitiesFacilitiesFacilitiesOtherOutContributionfromotheractivitiesRentrevenueRelevantcostofbottlesNetrelevantcostsNantucketNectarsshouldbuythebottlesandusethefacilitiesforotherMakeIdleActivitiesFacilities6-35(20min.)Thesewarehousestoresattempttomaximizeprofitsbycuttingpricesandincreasinginventoryturnover.Sinceprofitistheproductofcontributionmarginandunitsales,itcanbeaffectedbychangingeither.Totalprofitcanbeincreasediftheaddedinventoryturnoverbroughtaboutbyaloweringofpricebringsinmorecontributionmarginthanwaslostbythepricecut.Theyalsotrytominimizefixedcostsbylimitingtheirinvestmentinbuildingsandequipment.Characteristics:(a)chooseproductlinesandsizesthatmovequicklyandavoidstockingslow-movingitemsandsizes;(b)relyheavilyonself;(c)attempttocutcostsbyprovidingfewers,and(d)buildlow-costbuildingsinaplacewherepropertycostsarenottoohigh.xTotalsalesinunitsSuchacriterionbyitselfgivesnoindicationwhattotalcontributionmargin(TCM)canbeexpected.Inventoryturnoverorsalesvolumemustbeusedalso.ThetotalcontributionmarginisdeterminedbyTCM=UnitcontributionmarginIfinventoryturnovercanbeassumedtobefairlyconstantamongitems,thensuchafigureasa20%averagetargetgrossprofitmightxTotalsalesinunits6-36(10-156-36(10-15min.)1.Thekeyistofocusonlostrevenuesandavoidablecosts:1.Revenues,600hoursCHF12Revenues,600hoursCHF12perhourAvoidablecosts*:TeachersalariesSuppliesDecreaseinoperatingincomeCHF6,000800CHF7,2006,800CHF400*Inadditiontotheavoidablecostsshown,theremightbesomesavingsinsanitaryengineering(lesscleaningnecessary)anddepreciation(lesswearandtearonequipment).UnlessthesesavingsaremorethantheCHF400decreaseinoperatingincome,theschoolwillbeworseofffinanciallywithouttheafterschoolcareprogram.2.Amongthequalitativefactorstoconsiderarethattheafterschoolcareprogrammightattractstudentstotheregularprogram,itprovidesadditionalcompensationtoteachers,andthereisasocialneedforsuchprograms.6-37(10min.)ProductMshouldnothavebeenprocessedfurther.Theonlyvalidapproachistoconcentrateontheseparablecostsandrevenuesbeyondsplit-off:SellatProcessSplit-offFurtherasasMSuperMDifferenceRevenues,2,500,000gallons30C&36C$750,000$900,000$150,000Separablecostsbeyondsplit-off-165,000165,000IncomeeffectsforApril$750,000$735,000$(15,000)Thejointcostsdonotdifferbetweenalternativesandareirrelevanttothequestionofwhethertosellorprocessfurther.Thenexttable(notrequired)confirmstheresults(inthousands):Alternative1Alternative2LMTotalLSuperMTotalDifferentialEffectsRevenues$1,000$750$1,750$1,000$900$1,900$150Jointcosts$1,600$1,600—Separablecosts—165165165Totalcosts$1,600$1,765$165Incomeeffects$150$135$(15)6-38(10min.)Answer(a):$10,000-2,000=$5.00Answer(a):ProductAistheonlyproductthatproducesanincrementalprofit($42,000-$25,000)-$9,000=$8,000.6-39(5-10min.)Theonlyrelevantitemisthe$100tobereceivedforthecalendars.Noadditionalcostswillbeincurred.Therefore,profitwillbe$100higheriftheofferisacceptedthanifitisrejected.Theamountpaidforthecalendarsisirrelevant.Evenif$1millionhadbeenpaidforthecalendars,theaddedprofitfromsellingthemfor$100is$100.The$900paidisapastcost,asunkcost,onethatshouldnotaffectthedecision.6-40(15-20min.)Thedifferenceintotalcostsoverthefiveyearsis$3,000infavorofkeeping,computedasfollows:CashoperatingcostsFiveYearsTogetherKeep$22,500Replace$15,000Difference$7,500Oldmachine(bookvalue):Depreciation5,000--or--Lump-sumwrite-off--5,000Disposalvalue---2,0002,000Newmachine:Acquisitioncost--12,500-12,500Totalcosts$27,500$30,500($3,000)Thelossondisposaloftheoldmachinecombinesthelump-sumwrite-off(anirrelevantitem)withthedisposalvalue(arelevantitem),$5,000-$2,000=$3,000lossondisposal.Becauseoftheinclusionofanirrelevantitem,thisamountdoesnotaffect