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Class Activities With Solns Relevant Costs
Class Activities With Solns Relevant Costs
Question 1
Tim’s Tech manufactures three different product lines: Tech A, Tech B, and Tech C. Considerable market
demand exists for all models. The following per unit data apply:
Tech A Tech B Tech C
Selling price $180 $100 $140
Direct materials 120 30 69
Direct labour ($15 per hour) 30 15 30
Variable support costs ($5 per machine hour) 5 10 15
Fixed support costs 20 20 20
Question 2
Noel’s Novelties manufactures Green Bay Packer cheese heads (small, medium, and large) that are sold to
area retailers. Production takes 0.20, 0.25, and 0.30 machine hours to manufacture one unit of the small,
medium, and large cheese heads, respectively. The company has a monthly capacity of 2,500 machine
hours. The following per unit data apply for the month of August:
Small Medium Large
Projected maximum sales 2,500 4,000 3,000
Machine hours required 0.20 0.25 0.30
a. For each size of cheese head, calculate the contribution margin per unit.
b. For each size of cheese head, calculate the contribution margin per machine hour.
c. How many units of each size should Noel’s produce this month to maximize profits?
d. Suppose a foreign firm places a special order for the purchase of an additional 1,000 medium cheese
heads at $50 each.
1. Determine the opportunity cost for this order.
2. What other issues might Noel want to consider before accepting this special order?
e. Suppose available machine hour capacity is reduced to 2000 machine hours due to a machine
breakdown. How many units of each size should Noel’s produce to maximize profits?
Question 3
Nanny McPhee, the owner and manager of Nanny’s Roasted Chicken Company, replaced the company’s
convection ovens just six months ago. Today, Green Valley Oven Manufacturing announced the
availability of a new convection oven that cooks much more quickly with lower operating expenses.
Nanny is considering the purchase of this faster, lower-operating cost, convection oven to replace the
existing one they recently purchased. Selected information about the two ovens is given below:
Required:
a. What costs are sunk?
b. What costs are relevant?
c. What are the net cash flows over the next 10 years assuming that Nanny purchases the new
convection oven?
d. What other factors should Nanny consider when making this decision?
Class activities (Week 2) , Relevant Costs Solutions
Question 1
a. The contribution margin per unit is $25 for Tech A ($180 - $120 - $30 - $5),
$45 for Tech B ($100 - $30 - $15 - $10),
and $36 for Tech C ($140 - $59 - $30 - $15).
b. The contribution margin per machine hour is
$25 for Tech A ($25 contribution margin / 1.0 machine hours per unit),
$22.50 for Tech B ($45 / 2.0), and
$12 for Tech C ($36 / 3.0).
c. When there is excess capacity, Tech B is the most profitable because it has the greatest contribution
margin per unit.
d. When there are machine hour capacity constraints, Tech A is the most profitable because it has the
greatest contribution margin per constrained resource.
e. To encourage salespersons to promote specific products, Tim may want to provide marketing
incentives such as higher sales commissions for products contributing the most to profits. Brent
may also want to educate salespeople about the effects of constrained resources.
Question 2
a. The contribution margin per unit is
$15 for Small ($30 - $8 - $3 - $4),
$18 for Medium ($36 - $10 - $3 - $5), and
$21 for Large ($42 - $12 - $4 - $5).
b. The contribution margin per machine hour is
$75 for Small ($15 contribution margin / 0.20 machine hours per unit),
$72 for Medium ($18 / 0.25) and
$70 for Large ($21 / 0.30).
c. Machine hours required: Small (2,500 x 0.20) = 500 mh
Medium (4,000 x 0.25) = 1,000 mh
Large (3,000 x 0.30) = 900 mh
Total machine hours required 2,400 mh
Since total machine hours required are less than the capacity of 2,500 machine hours, to maximize
profits Noel’s should produce enough to meet projected sales for each size. That is, Noel’s should
produce 2,500 small, 4,000 medium, and 3,000 large cheese heads.
a. Sunk costs include the original cost of the existing convection oven and the accompanying accumulated
depreciation.
c. Net cash flows over 10 years with the new Turbo oven:
Cash inflow:
Decrease in annual operating expenses ($5,000 x 10) $ 50,000
Sale of the existing oven 80,000
Cash outflow:
Acquisition of the new Turbo oven (100,000)
d. Other items the manager should consider when making this decision include:
The Turbo Oven’s reliability and efficiency is still unknown since it is a brand new
product.
If the Turbo Oven bakes faster as it claims, the company may be able to increase
sales due to the quicker baking time.