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Solution Manual Managerial Accounting Hansen Mowen 8th Editions CH 12 PDF
Solution Manual Managerial Accounting Hansen Mowen 8th Editions CH 12 PDF
Solution Manual Managerial Accounting Hansen Mowen 8th Editions CH 12 PDF
1. A tactical decision is short-run in nature; it 11. Complementary effects may make it more
involves choosing among alternatives with expensive to drop a product, as the dropped
an immediate or limited end in view. A stra- product has a negative impact on other
tegic decision involves selecting strategies products.
that yield a long-term competitive advan-
tage. 12. A manager can identify alternatives by using
his or her own knowledge and experience
2. Depreciation is an allocation of a sunk cost. and by obtaining input from others who are
This cost is a past cost and will never differ familiar with the problem.
across alternatives.
13. No. Joint costs are irrelevant. They occur
3. The salary of a supervisor in an accept or
regardless of whether the product is sold at
reject decision is an example of an irrelevant
the split-off point or processed further.
future cost.
4. If one alternative is to be judged superior to 14. Yes. The incremental revenue is $1,400,
another alternative on the basis of cash-flow and the incremental cost is only $1,000,
comparisons, then cash flows must be ex- creating a net benefit of $400.
pressed as an annual amount (or periodic 15. Regardless of how many units are pro-
amount); otherwise, consideration must be duced, fixed costs remain the same. Thus,
given to the time value of the nonperiodic fixed costs do not change as product mix
cash flows. changes.
5. Disagree. Qualitative factors also have an 16. No. If a scarce resource is used in producing
important bearing on the decision and may,
the two products, then the product providing
at times, overrule the quantitative evidence
the greatest contribution per unit of scarce
from a relevant costing analysis.
resource should be selected. For more than
6. The purchase of equipment needed to pro- one scarce resource, linear programming
duce a special order is an example of a fixed may be used to select the optimal mix.
cost that is relevant.
17. If a firm is operating below capacity, then a
7. Relevant costs are those costs that differ price that is above variable costs will in-
across alternatives. Differential costs are the crease profits. A firm may sell a product be-
differences between the costs of two alter- low cost as a loss leader, hoping that many
natives. customers will purchase additional items
8. Depreciation is a relevant cost whenever it is with greater contribution margins. Grocery
a future cost that differs across alternatives. stores often use this strategy.
Thus, it must involve a capital asset not yet
18. Different prices can be quoted to customers
acquired.
in markets not normally served, to noncom-
9. Past costs can be used as information to peting customers, and in a competitive bid-
help predict future costs. ding setting.
10. Yes. Suppose, for example, that sufficient 19. Linear programming is used to select the
materials are on hand for producing a part optimal product mix whenever there are mul-
for two years. After two years, the part will tiple constrained scarce resources.
be replaced by a newly engineered part. If
there is no alternative use of the materials, 20. An objective function is the one to be max-
then the cost of the materials is a sunk cost imized (or minimized) subject to a set of
and not relevant in a make-or-buy decision. constraints. A constraint restricts the possi-
ble values of variables appearing in the ob-
jective function. Usually, a constraint is con-
391
cerned with a scarce resource. A constraint 22. To solve a linear programming problem
set is the collection of all constraints for a graphically, use the following four steps: (1)
given problem. graph each constraint, (2) identify the feasi-
ble set of solutions, (3) identify all corner
21. A feasible solution is a solution to a linear
points in the feasible set, and (4) select the
programming problem that satisfies the
corner point that yields the optimal value for
problem’s constraints. The feasible set of
the objective function. Typically, when a li-
solutions is the collection of all feasible solu-
near programming problem has more than
tions.
two or three products, the simplex method
must be used.
392
EXERCISES
12–1
12–2
12–3
1. The two alternatives are to make the component in house or to buy it from the
outside supplier.
2. Alternatives Differential
Make Buy Cost to Make
Direct materials $ 2.95 — $ 2.95
Direct labor 0.40 — 0.40
Variable overhead 1.80 — 1.80
Purchase cost — $6.50 (6.50)
Total relevant cost $ 5.15 $6.50 $ (1.35)
Chesbrough should make the component in house because operating income
will decrease by $27,000 ($1.35 × 20,000) if it is purchased from Berham Elec-
tronics.
393
12–4
1. Alternatives Differential
Make Buy Cost to Make
Direct materials $ 2.95 — $ 2.95
Direct labor 0.40 — 0.40
Variable overhead 1.80 — 1.80
Avoidable fixed overhead 1.85 — 1.85
Purchase cost — $6.50 (6.50)
Total relevant cost $ 7.00 $6.50 $ (0.50)
12–5
394
12–6
2. A new income statement, assuming that C is dropped and demand for B de-
creases by 10 percent, is given below (amounts are in thousands).
A B Total
Sales revenue $1,800 $1,440 $3,240
Less: Variable expenses 1,350 900 2,250
Contribution margin $450 $ 540 $990
Less: Direct fixed expenses 150 300 450
Segment margin $300 $ 240 $ 540
Less: Common fixed expenses 340
Operating income $ 200
Operating income will decrease by $50,000 ($250,000 – $200,000).
12–7
Yes, Thomson should accept the special order, because operating income
will increase by $68,000 [($24 − $22) × 34,000].
395
12–7 Concluded
Yes, the special order should be accepted because income will increase by
$26,000.
12–8
No, Melton should not accept the special order, because operating income
will decrease by $8,750 [($19.25 − $18) × 7,000].
Yes, Melton should accept the special order, because operating income will
increase by $3,500 [($18.00 − $17.50) × 7,000].
396
12–9
1. Sales $ 293,000
Costs 264,000
Operating profit $ 29,000
12–10
2. Juno Hera
Contribution margin $30 $60
÷ Pounds of material ÷ 2 ÷ 5
Contribution margin/pound $15 $12
Norton should make the 2,000 units of Juno, then make Hera.
2,000 units of Juno × 2 = 4,000 pounds
16,000 pounds – 4,000 pounds = 12,000 pounds for Hera
Hera production = 12,000/5 = 2,400 units
Product mix is 2,000 Juno and 2,400 Hera.
Total contribution margin = (2,000 × $30) + (2,400 × $60)
= $204,000
397
12–11
2. Produce and sell 12,000 deluxe units, which would use 9,000 machine hours.
Then, produce and sell 50,000 basic units, which would use 5,000 machine
hours. Then produce and sell 2,000 standard units, which would use the re-
maining 1,000 machine hours.
Total contribution margin = ($25 × 12,000) + ($3 × 50,000) + ($10 × 2,000)
= $470,000
12–12
398
12–13
12–14
2. If only 2,500 units of Model M-3 can be sold, then 2,500 units should be pro-
duced. This will take 7,500 hours of drilling machine time. The remaining
4,500 hours should be spent producing 750 (4,500/6) units of Model A-4.
399
12–15
2. If only 5,000 units of Model 33-P can be sold, then 5,000 units should be pro-
duced. This will take 10,000 hours of lathe time. The remaining 2,000 hours
should be spent producing 500 (2,000/4) units of Model 14-D.
12–16
400
12–16 Continued
2.
Y
6,000
5,000 C
B
4,000
3,000
2,000 D
1,000
A E X
0 1,000 2,000 3,000 4,000 5,000
Solution: The corner points are points A, B, C, D, and E. The point of intersec-
tion of the linear constraints is obtained by solving the two equations simul-
taneously.
401
12–16 Concluded
Corner Point C:
Y = 5,000
4X + 2Y = 12,000
4X + 2(5,000) = 12,000
4X = 2,000
X = 500
Z = $12(500) + $10(5,000) = $56,000
Corner Point D:
X = 2,000
4X + 2Y = 12,000
4(2,000) + 2Y = 12,000
2Y = 4,000
Y = 2,000
Z = $12(2,000) + $10(2,000) = $44,000
Optimal solution is Point C, where X = 500 units and Y = 5,000 units.
12–17
402
12–17 Concluded
2.
Y
3,000
2,000
1,000 D
C
A B X
0 1,000 2,000 3,000
Solution: The corner points are the origin, the points where X = 0, Y = 0, and
where two linear constraints intersect. The point of intersection of the two li-
near constraints is obtained by solving the two equations simultaneously.
Corner Point X-Value Y-Value Z = $30X + $60Y
A 0 0 $ 0
B 1,000 0 30,000
C 1,000 800 78,000*
D 0 1,200 72,000
*The values for X and Y are found by solving the simultaneous equations:
X = 1,000
2X + 5Y = 6,000
2(1,000) + 5Y = 6,000
Y = 800
Z = $30(1,000) + $60(800) = $78,000
Optimal solution: X = 1,000 units and Y = 800 units
403
12–18
1. The amounts Heath has spent on purchasing and improving the Silverado are
irrelevant because these are sunk costs.
2. Alternatives
Cost Item Restore Silverado Buy Dodge Ram
Transmission $2,400
Water pump 400
Master cylinder 1,700
Sell Silverado — $(9,400)
Cost of new car — 12,300
Total $4,500 $ 2,900
Heath should sell the Silverado and buy the Dodge Ram because it provides a
net savings of $1,600.
Note: Heath should consider the qualitative factors. If he restored the Silvera-
do, how much longer would it last? What about increased license fees and in-
surance on the newer car? Could he remove the stereo and put it in the
Dodge Ram without decreasing the Silverado’s resale value by much?
12–19
1. Make Buy
Direct materials $360,000 —
Direct labor 120,000 —
Variable overhead 100,000 —
Fixed overhead 88,000 —
Purchase cost — $640,000 ($16 × 40,000)
Total relevant costs $668,000 $640,000
Sherwood should purchase the part.
404
12–20
1. Make Buy
Direct materials $360,000 —
Direct labor 120,000 —
Variable overhead 100,000 —
Purchase cost — $640,000 ($16 × 40,000)
Total relevant costs $580,000 $640,000
Sherwood should continue manufacturing the part.
405
PROBLEMS
12–21
Step 1: Define the problem. The problem is whether to continue studying at his
present university, or to study at a university with a nationally recog-
nized engineering program.
Step 2: Identify the alternatives. Events A and B. (Students may want to include
event I—possible study for a graduate degree. However, future events
indicate that Austin still defined his problem as in Step 1 above.)
Step 3: Identify costs and benefits associated with each feasible alternative.
Events C, E, F, and I. (Students may also list E and F in Step 5—they are
included here because they may help Austin estimate future income
benefits.)
Step 4: Total relevant costs and benefits for each feasible alternative. No specif-
ic event is listed for this step, although we can intuit that it was done,
and that three schools were selected as feasible since event J mentions
that two of three applications met with success.
Step 6: Make the decision. Event J is certainly relevant to this. (What did Austin
ultimately decide? He decided that a qualitative factor, his possible fu-
ture with his long-time girl friend was most important and stayed at his
current school. After graduation, he was hired by a major aeronautical
engineering firm. By the way, he and his girl friend broke up shortly af-
ter his decision to stay was made. )
406
12–22
2. Qualitative factors that Powell should consider include quality of crowns, re-
liability and promptness of producer, and reduction of workforce.
3. It reduces the cost of making the crowns to 531,000, which is less than the
cost of buying. (563,000 – 32,000)
407
12–23
12–24
408
12–24 Concluded
409
12–25
1. Steve should consider selling the part for $1.85 because his division’s profits
would increase by $12,800:
Accept Reject
Revenues (2 × $1.85 × 8,000) $29,600 $0
Variable expenses 16,800 0
Total $12,800 $0
Pat’s divisional profits would increase by $18,400:
Accept Reject
Revenues ($32 × 8,000) $ 256,000 $0
Variable expenses:
Direct materials ($17 × 8,000) (136,000) 0
Direct labor ($7 × 8,000) (56,000) 0
Variable overhead ($2 × 8,000) (16,000) 0
Component (2 × $1.85 × 8,000) (29,600) 0
Total relevant benefits $ 18,400 $0
2. Pat should accept the $2 price. This price will increase the cost of the com-
ponent from $29,600 to $32,000 (2 × $2 × 8,000) and yield an incremental bene-
fit of $16,000 ($18,400 – $2,400).
Steve’s division will see an increase in profit of $15,200 (8,000 units × 2 com-
ponents per unit × $0.95 contribution margin per component).
3. Yes. At full price, the total cost of the component is $36,800 (2 × $2.30 ×
8,000), an increase of $7,200 (= 2 × 8,000 × 0.45) over the original offer. This
still leaves an increase in profits of $11,200 ($18,400 – $7,200). (See the an-
swer to Requirement 1.)
410
12–26
1. Salesa $ 3,751,500
Less: Variable expensesb 2,004,900
Contribution margin $ 1,746,600
Less: Direct fixed expensesc 1,518,250
Divisional margin $ 228,350
Less: Common fixed expensesc 299,250
Operating (loss) $ (70,900)
a
Based on sales of 41,000 units
Let X = Units sold
$83X/2 + $100X/2 = $3,751,500
$183X = $7,503,000
X = 41,000 units
b
$83/1.25 = $66.40 Manufacturing cost
20.00 Fixed overhead
$46.40 Per internal unit variable cost
5.00 Selling
$51.40 Per external unit variable cost
Variable costs = ($46.40 × 20,500) + ($51.40 × 20,500)
= $2,004,900
c
Fixed selling and admin: $1,100,000 – $5(20,500) = $997,500
Direct fixed selling and admin: 0.7 × $997,500 = $698,250
Direct fixed overhead: $20 × 41,000 = $820,000
Total direct fixed expenses = $698,250 + $820,000 = $1,518,250
Common fixed expenses = 0.3 × $997,500 = $299,250
2. Keep Drop
Sales $ 3,751,500 $ —
Variable costs (2,004,900) (2,050,000)*
Direct fixed expenses (1,518,250) —
Annuity — 100,000
Total $ 228,350 $(1,950,000)
*$100 × 20,500 (The units transferred internally must be purchased externally.)
411
12–27
Tissues provide the greatest contribution per machine hour, so the company
should produce 400,000 packages of tissues (200,000 machine hours times 2
packages per hour) and zero napkins.
412
12–27 Concluded
b. and c.
(in thousands)
Y
400
D
300
E
200
100 C
A B X
0 100 200 300 400
413
12–28
414
12–28 Continued
415
12–28 Concluded
1,500
D
1,000
E
C
500
A B X
0 500 1,000
416
12–29
417
12–29 Concluded
418
12–30
419
12–30 Concluded
420
MANAGERIAL DECISION CASES
12–31
1. Pamela should not have told Roger about the deliberations concerning the
Power Department. She is obligated by Standard II-1 to “keep information
confidential except when disclosure is authorized or legally required.” She
had been explicitly told to keep the details quiet but deliberately informed the
head of the unit affected by the potential decision. By revealing the informa-
tion, Pamela also initiated an activity that would prejudice her ability to carry
out her duties ethically (III-2).
2. The romantic relationship between Pamela and Roger sets up a conflict of in-
terest for this particular decision, and Pamela should have withdrawn from
any active role in it. However, she should definitely provide the information
she currently has about the cost of eliminating the Power Department. This is
required by standard IV-2, which states that “all relevant information that
could reasonably be expected to influence an intended user’s understanding”
should be disclosed. Moreover, she has the obligation to communicate infor-
mation fairly and objectively (IV-1). These ethical requirements, however, do
not in any way prevent Pamela from discussing the qualitative effects of eli-
minating the Power Department. The effects on workers, community relations,
reliability of external service, and any ethical commitments the company may
have to its workers should all enter into the decision. If I were Pamela, I would
communicate the short-term quantitative effects and express my concerns
about the qualitative factors. I might also project what the costs of operating
internally would be for the next five years and compare that with estimates of
the costs of external acquisition.
421
12–32
MEMO
In a similar vein, one can argue that the operating costs for evening and noncre-
dit courses and the direct costs for off-campus offerings are also irrelevant.
These costs, which consist of instructional wages, rental of facilities, and sup-
plies, will be incurred regardless of whether CE is centralized or decentralized.
This leaves two categories of costs, indirect costs and administration, which af-
fect the decision. These categories include advertising, secretaries, assistants,
and other support personnel. If we choose to decentralize, all of these costs, with
the exception of the director’s salary and advertising, can be avoided. Further-
more, because the director will be teaching in her department, some of her salary
is avoidable as well ($20,000). The total avoidable costs are outlined as follows.
Administrationa $ 82,000
Indirectb 410,000
Total $492,000
a
[$112,000 – ($50,000 – $20,000)] = $82,000
b
Indirect costs – Advertising = $440,000 – $30,000
422
12–32 Concluded
I have retained the budget for advertising and would recommend that this amount
be allocated to the individual colleges in proportion to the evening and off-
campus revenues generated by each college.
As you can see, the savings from decentralization are significant. This presumes,
of course, that the overhead of the individual units will not increase because of
the added responsibilities. I have discussed this matter with my department
heads and with the deans of the other colleges. They all seem to feel that the ad-
ditional administrative work can be easily absorbed by their existing staff. Thus, it
seems that the promised savings are real.
There is also a risk that some units will not exert the effort needed to provide
good service. Accountability is more diffuse, and some department heads may
feel that they have more than enough to do without continuing education. This
problem can be alleviated to some extent by localizing the CE responsibility at
the college level, rather than at the departmental level.
RESEARCH ASSIGNMENTS
12–33
12–34
423
424