a.

Contribution margin ratio = 70% (100%, minus variable costs of

30%)
Break-Even Sales
Volume

b.

Incremental cost to buy: $2.65 60,000 = $159,000

Break-Even Sales
=
Volume

$5,950 + $0
.70

= $8,500
c. Fixed element of room service costs
Variable element of room service costs ($15,000 30
Estimated total room service costs in a month
generating $15,000 room service revenue

$ 5,950
4,500

Compare the incremental cost to make with the incremental cost to buy.
Remember the incremental cost to make includes the opportunity cost of the
foregone rent revenue.
Incremental cost to make: $2.50 60,000 + $5,000 = $155,000

Contribution Margin
Unit Sales Price - Variable Costs
=
Sales Price
Ratio
=

Fixed Costs + Target

Contribution Margin

a.

$24 - $18
= 25%
$24

It is less costly for Bacrometer to continue to make part no. 566.

Fixed Costs
Contribution Margin Ratio
$240,000
= $960,000
.25

b. Sale volume at 75,000 units (75,000 $24) . $ 1,800,000

Less: Break-even sales volume (part a )
960,000
Margin of safety sales volume $ 840,000

$10,450

a. Gumcharas materials price variance is computed as follows:

Materials Price Variance

The company should sell the defective units as scrap at $4.18 per unit, rather
than spending $119,200 to correct the defects and realize a unit sales price of
$10 per unit, as summarized below:
Scrap value of units (20,000 $4.18)
Proceeds from sale of reworked units
($10 20,000) $
Less: Cost of corrective work
Net proceeds from sale of reworked units
Net benefit of selling the defective units as scrap

83,600

80,800
2,800

= Actual Quantity Used (Standard Price - Actual Price)

= 2,800 grams ($1.25 - $1.40*)
= -$420(or $420 Unfavorable)

Payback Period = Amount to Be Invested

Annual Net Cash Flow

200,000
119,200

b. Gumcharas materials quantity variance is computed as follows:

Materials Quantity Variance
=
=
=
*Standard Quantity Allowed
=

Standard Price (Standard Quantity $1.25 per gram (2,080 grams* Actual Quantity)
-$900(or $900 Unfavorable)
520 units 4 grams/unit = 2,080

b.

Return on average investment:

25000
Average Net Income =
Average Investment
$300,000 2 150,000
0.167
(25,000/150,000)x100%

c.

Net present value of proposal, discounted at an annual rate of 12%:

c. Gumcharas overhead volume variance will be unfavorable because its actual

output for the period (520 units) was less than normal output (550 units).
a. If contribution margin ratio is 40%, variable costs must be 60% of sales
Unit sales price = $24 variable costs .60 = $40
Unit Contribution Margin = Unit Sales Price Variable Cost per Unit
= $40 (above) - $24 = $16
Fixed Costs + Target Operating Income
Unit Contribution Margin

b. Sales Volume (in units) =

Fixed Costs + Target Operating Income

Contribution Margin Ratio

b. Monthly operating profit when distributing the normal 30,000 crates can
be found by multiplying the contribution margin by the number of crates
sold and deducting fixed expenses as follows: CM = $24 - $18.50 = $5.50.
Monthly operating profit = $5.50 30,000 = $165,000 - $122,000 =
$43,000.
If Poppycrock accepts the special order, it will add the contribution margin
for the 5,000 crates for the Boys and Girls of Canada order to its monthly
profit: ($20 - $19.00) 5,000 = $5,000. Monthly operating profit with the
special order is $43,000 + $5,000 = $48,000. The opportunity cost of not
accepting the special order is $5,000.

$660,000 + $300,000
0.40

a. Fixed overhead rate = $330,000 60,000 units = $5.50 per unit,

Total overhead application rate = $5.50 + $2.50 = $8.00 per unit.
b. Overhead applied = $8.00 65,000 units = $520,000.
c. The amount of overapplied overhead = $520,000 - $400,000 = $120,000
the spending variance = $330,000 + ($2.5 65,000) - $400,000 = $92,500 favorable
a.
the volume variance = (65,000 $5.50) - $330,000 = $27,500 favorable.
d. Chasman was able to spend less than budget for the overhead while simultaneously producing
more than the normal or expected number of units.

a. Normal crates: incremental costs are all variable costs including direct
labor, direct materials and variable overhead. = $4.50 + $10.50 + $3.50 =
Special order crates: incremental costs include all variable costs for the
normal crate plus an additional cost for the special labels and minus $.50 in
distribution costs. = $18.50 + $1.00 - $.50 = $19.00.

= 60,000 units
c. Sales Volume (in dollars) =

Total present value of annual net cash flows

($325,000 - $225,000) 3.037 303700
Less: Amount to be invested 300000
Net present value of proposal
3700

a. Average per-unit manufacturing cost at 110,000 units per month:

Variable cost per unit ($45 + $25 + $5) $ 75
Fixed manufacturing cost per unit ($1,430,000 110,000 units)
13
Average per-unit manufacturing cost $ 88
b. Incremental cost per paper feed drive is the products unit
variable cost ($45 + $25 + $5)
$ 75
c. Unit sales price for a $500,000 pretax profit on 20,000 units:
Incremental cost per unit (from part b ) $ 75
Required profit per unit ($500,000 20,000 units)
25
Unit sales price $ 100

$660,000 + $300,000
$16

= $2,400,000
[or 60,000 units (part b) ($40 unit sales price (part a) = $2,400,000]

b.

c. In this case, Poppycrock is operating at full capacity. It has a production

constraint that will require it to forego some normal sales in order to
accept the special order. Without the special order, monthly profits at full
capacity would be:

a. Normal crates: incremental costs are all variable costs including direct
labor, direct materials and variable overhead. = $4.50 + $10.50 + $3.50 =
Special order crates: incremental costs include all variable costs for the
normal crate plus an additional cost for the special labels and minus $.50 in
distribution costs. = $18.50 + $1.00 - $.50 = $19.00.

a. If variable costs are 70% of sales revenue, the

contribution martgin ratio must be (1 - .7) = 30%
b.

c.

Break-Even Sales
=
Volume

Fixed Costs
CM ratio

Fixed Costs
.3

Sales Volume =

; Fixed Costs = $4,500

Fixed Costs + Target Operating Income

Contribution Margin Ratio
$4,500 + $9,000
.3

= 45,000

($24 - $18.50) 35,000 crates - $122,000 = $70,500

b. Monthly operating profit when distributing the normal 30,000 crates can
be found by multiplying the contribution margin by the number of crates
sold and deducting fixed expenses as follows: CM = $24 - $18.50 = $5.50.
Monthly operating profit = $5.50 30,000 = $165,000 - $122,000 =
$43,000.
If Poppycrock accepts the special order, it will add the contribution margin
for the 5,000 crates for the Boys and Girls of Canada order to its monthly
profit: ($20 - $19.00) 5,000 = $5,000. Monthly operating profit with the
special order is $43,000 + $5,000 = $48,000. The opportunity cost of not
accepting the special order is $5,000.

300000 = 3 years
$325,000 - $225,000

a.

*Actual Price per Gram = $3,920 2,800 grams = $1.40/gram

c.

a.

The payback period of the Seattle Sound investment is computed as follows:

Amount to Be Invested
Estimated Annual Net Cash Flow

530000 = 2.65 years

200000

The net present value of the Seattle Sound investment is computed as follows:
Present value of net cash flows of $200,000 per year for 4
years discounted at a rate of 20% is $200,000 2.589
(from Exhibit 26.4)

517800

Present value of the investments $50,000 salvage value at

the end of year 4, discounted at a rate of 20% is
$50,000 .482 (from Exhibit 26.3)
Total present value of all cash flows
Less: Original cost of investment
Net present value

24100
541900
530000
11900

There are several nonfinancial issues that Northwest Records should consider. First, musical tastes often
change very quickly. As such, an estimate that the grunge sound wil remain popular for four years is
only a speculative guess. Second, even if the grunge sound remains popular, there is no guarantee that
Seattle Sound wil be able to attract the best talent. Finally, the most valuable asset that Seattle Sound
possesses is its management team. This team is ultimately responsible for signing contracts and making
deals with big-name grunge bands. It is very important for Northwest Records to establish a legal clause
that forbids Seattle Sound employees from leaving and establishing their own competing companies.

Marlos labor rate variance is computed as follows:

Labor Rate Variance

= Actual Labor Hours (Standard Rate Actual Rate)

= 3,600 hrs. ($16 $18*)
= $7,200 (or $7,200 Unfavorable)

c. In this case, Poppycrock is operating at full capacity. It has a production

constraint that will require it to forego some normal sales in order to
accept the special order. Without the special order, monthly profits at full
capacity would be:

*Actual Rate per Hour = $64,800 3,600 hours = $18/hour

($24 - $18.50) 35,000 crates - $122,000 = $70,500

a. Effect of accepting the special order:
Incremental revenue ($80 10,000 units)
Less: Incremental costs:
Variable manufacturing costs ($50 10,000 units)
Variable selling expenses ($5 10,000 units)
Expected increase in operating income

Unit sale price

Less: Variable cost per unit ($50,000 $40,000
Contribution margin per unit
b. Margin of safety at sales of 45,000 units:
Sales revenue ($1.75 $45,000 units)
Less: Sales revenue at break-even point
($1.75 $40,000 units)
Margin of safety
c. Estimated operating loss at sales level of 38,000
it
Sales
revenue ($1.75 38,000 units)
Fixed costs (given)
Operating Income (loss)

1.75
1.25

0.50

78,750

70,000
8,750

66,500

(1,000)

1.25
0.50
1.75

47,500
20,000

67,500

d. (1) Unit cost at production level of 40,000 units:

Variable cost per unit
Fixed cost per unit ($20,000 40,000 units)
Total unit cost
(2) Unit cost at production level of 50,000 units:
Variable cost per unit
Fixed cost per unit ($20,000 50,000 units)
Total unit cost

b. Marlos labor efficiency variance is computed as follows:

Labor Efficiency Variance = Standard Rate (Standard Hours Actual Hours)

550,000
$ 250,000

= $16 per hour (4,500 hours* 3,600 hours)

b. Relevant considerations other than expected effect on operating income may include:

a. Contribution margin per unit:

Less: Variable costs ($1.25 38,000 units)

$ 800,000
$ 500,000
50,000

$
$

1.25
0.40
1.65

(1)

(2)

The company should continue to manufacture the part rather than buying it
from the outside supplier. The supporting schedule follows:
Make the
Part
Manufacturing costs:
Variable . $
Fixed manufacturing overhead
Purchase price of part
(20,000 $8)
Totals . $

155,000
100,000

255,000

Buy the
Part

100,000

160,000
260,000

5,000

(3)

= $14,400 Favorable

Discount Apparel may sell the jackets to customers who otherwise would buy
regular D. Lawrance jackets. Thus, the special-order jackets may create
difficulties for D. Lawrance in meeting its original sales forecasts.
A low-priced jacket that is identical to D. Lawrance jackets but that is sold
through discount stores may lessen D. Lawrances reputation for quality
goods.
The sales price to Discount Apparel ($80) is so low that Discount Apparel
could retail the jackets at less than the wholesale cost of the regular jackets
($150). This may create ill feelings between D. Lawrance and its regular retail
outlets.

(4)

Accepting the special order will place D. Lawrances scheduled production

(50,000) very close to capacity (55,000). Therefore, if the regular jackets sell
better than anticipated, D. Lawrance may not have the ability to meet the
additional demand.

(5)

This may be the beginning of a long-term relationship with Discount Apparel,

in which D. Lawrance can use its excess capacity to produce a variety of
private label merchandise.

(6)

The special-order jackets have a relatively low contribution margin

percentage [($80 - $55) $80 = 31.25%] as compared with the regular
jackets [($150 - $70) $150 = 53.33%]. This may suggest that D. Lawrance
might be able to use its excess capacity to produce a product with a higher
contribution margin percentage .

(7)

Accepting the special order may allow D. Lawrance to maintain a consistent

size labor force by avoiding layoffs.

*Standard Hours Allowed = 9,000 units 0.5 hours/unit = 4,500 hours

c.

Extended hours worked during the period may have resulted in an increased
average wage rate due to overtime wage premiums. This may explain Marlos
unfavorable labor rate variance. The standard time allowed to produce a single unit
is 0.5 hours. The average time it actually took to produce a single unit during the
period was 0.4 hours (3,600 hours/9,000 units). Thus, although many employees
worked extra hours during the period, their time spent in production was efficiently
used as evidenced by Marlos favorable labor efficiency variance.

a.
b.
c.
d.
e.

300000
3 years
16 2/3%
911100
11100

($975,000 receipts - $675,000 cash expenses)

[$900,000 investment $300,000 cash flow (part a)]
[$75,000 income ($900,000 2)]
[$300,000 cash flow (part a) 3.037] (from Exhibit 26.4)
[$911,100 (part d) - $900,000 investment]