VARIABLE COSTS

Direct Materials 10 Direct Materials

Direct Labor 8 Direct Labor
Variable Overhead 5 Factory Overhead (80% Fixed)
Variable Selling Expense 2
25
FIXED COSTS
Fixed Overhead 60,000
Fixed Selling Expense 40,000
100,000

MANUFACTURING COSTS
Direct Materials 24 per unit
Direct Labor 16 per unit
Variable Manufacturing Overh 3 per unit
Fixed Manufacturing Overhead 10,000 per month

SELLING & ADMINISTRATIVE COSTS

Variable 2.50 per unit
Fixed 24,000 per month

Sales (5,000 @ P3) 15,000

Variable Costs (5,000 @ P2) 10,000
Fixed Costs 5,000 15,000
TOTAL -
 Jade Branch Jackie Branch
1,300 Sales 1,200,000 800,000
700 Variable Expenses 840,000 360,000
1,000 Contribution Margin 360,000 440,000
3,000 Traceable Fixed Expenses 210,000 180,000
Segment Margin 150,000 260,000
Common Fixed Expenses 180,000 120,000
Profit (Loss) - 30,000 140,000
Total Products Sales
2,000,000 M 15,000 M 40,000
1,200,000 I 10,000 I 30,000
800,000 L 2,000 L 20,000
390,000 O 0 O 2,500
410,000
300,000
110,000
Add'l Processing Costs Products Market Limit Unit CM Hours on Machine
28,000 A 100 unit P 20 10 per unit
16,000 B 80 unit P 18 5 per unit
14,000 C 150 unit P 25 10 per unit
3,000
 NATURE OF ALTERNATIVE DESCRIPTION

Should a part or product be

MAKE OR BUY a part/product manufactured (in-sourced) or bought
(outsourced) from outside supplier?

Should a special order that requires a

ACCEPT OR REJECT a special order price lower than the regular selling
price be accepted?

Should a business segment, which may

CONTINUE OR SHUTDOWN a
be a product line, a department or a
business segment
branch, be continued or discontinued?

Should a product, after undergoing the

SELL OR PROCESS FURTHER a joint process, be sold at the split-off
product point or be processed further beyond
the split-off point?

Should a product, after undergoing the

SELL OR PROCESS FURTHER a joint process, be sold at the split-off
product point or be processed further beyond
the split-off point?

Which product(s) should be produced

BEST PRODUCT COMBINATION and sold when there is a given limited
resources or bottleneck operation?
 DECISION GUIDELINES

Choose the option that has the lower cost. In most

cases, fixed costs are irrelevant. Consider
opportunity costs, if any.

Accept the order when the additional revenue from

the special order exceeds additional cost, provided
the regular market will not be affected. In most
cases, fixed costs are irrelevant.

Continue if segment's avoidable revenue is greater

than its avoidable costs; otherwise, consider
shutting down the segment. Since allocated fixed
costs is usually unavoidable, it is considered
irrelevant.

Process further if additional revenue from

processing further is greater than further processing
costs. Joint costs, since already incurred prior to the
split-off point, are considered sunk costs and
irrelevant.

Process further if additional revenue from

processing further is greater than further processing
costs. Joint costs, since already incurred prior to the
split-off point, are considered sunk costs and
irrelevant.

Identify and measure the constraint on the limited

resource(s). Rank the product(s) according to the
highest contribution margin per unit of limited
resources.
S 400,000 (10,000 x 40)
VC 250,000 (10,000 x 25)
CM 150,000
FC 100,000 (60k + 40k)
P 50,000

TOTAL ANALYSIS
Present
S 400,000 x 120% 480,000
VC 250,000 x 120% 300,000
CM 150,000 180,000
FC 100,000 +20,000 120,000
P 50,000 60,000

DIFFERENTIAL ANALYSIS
Present
S 400,000 x 20% 80,000
VC 250,000 x 20% 50,000
CM 150,000 30,000
FC 100,000 +20,000 20,000
P 50,000 10,000
50,000
60,000
 Production Cost
DM 1,300 1,300 * VC is relevant
DL 700 700 * FC is irrelevant
FOH 1,000 x 20% 200
3,000 2,200

BUY MAKE
SP 2,500 P. Cost 2,200
Units 20 Units 20
50,000 44,000
OC 12,000 (should be rent income)
56,000

Decision: Buy, Saving of 6,000.

Compute for the increase in CM since FC is irrelevant.
Differential Analysis
SP (SO) 150,000 (3,000 x 50) DM 24
VC 135,000 (3,000 x 45) DL 16
CM 15,000 VOH 3
VAS 2.5
-0.5
45 Relevant VC
Decision: Accept SO, 15,000 Additional Profit
18
AT FULL CAPACITY:
Sales 28,000
Add'l Cost 2,000
30,000

WITH EXCESS CAPACITY:

VC 18,000
Add'l Cost 2,000
20,000
210 42 Unavoidable
168 Avoidable
a. Jade Branch is Eliminated
Jade Branch Jackie Branch Total Result
Sales 1,200,000 800,000 2,000,000 800,000
Variable Expenses 840,000 360,000 1,200,000 360,000
Contribution Margin 360,000 440,000 800,000 440,000
Traceable Fixed Expenses 210,000 180,000 390,000 180,000
Segment Margin 150,000 260,000 410,000 260,000
Common Fixed Expenses 180,000 120,000 300,000 300,000
Profit (Loss) - 30,000 140,000 110,000 - 40,000

b. Jade Brance is Eliminated

20% of traceable fixed expenses remained unchanged
Sales would decrease by 20%
Jade Branch Jackie Branch Total Result
Sales 1,200,000 800,000 2,000,000 x 80% 640,000
Variable Expenses 840,000 360,000 1,200,000 x 80% 288,000
Contribution Margin 360,000 440,000 800,000 352,000
Traceable Fixed Expenses 210,000 180,000 390,000 222,000
Segment Margin 150,000 260,000 410,000 130,000
Common Fixed Expenses 180,000 120,000 300,000 300,000
Profit (Loss) - 30,000 140,000 110,000 - 170,000

Profit 110,000 110,000

Loss -170,000 170,000
Change 280,000 280,000
--> Unavoidable 42 (210 x 20%)
180
222
1) Shutdown Point in Units
SDC = FxC - SDC
CMu 5,000 Total FxC
= 5,000 - 2,000 2,000 Shutdown Cost --> Avoidable FxC
(3 - 2) 3,000 Unavoidable FxC
= 3,000
1
= 3,000

2) Shutdown or Continue
4,000 units Continue, since > SDP
2,000 units Shutdown, since < SDP

4,000 units 2,000 units 3,000 units

CM 4,000 2,000 3,000
FxC 3,000 3,000 3,000
1,000 -1,000 0
Continue Shutdown Shutdown

Continue or Shutdown
CM
FxC 5,000 2000
3,000
3,000
Joint Cost is irrelevant
Products At Split-Off Beyond Split-Off
M 15,000 12,000 15,000
I 10,000 14,000 14,000
L 2,000 6,000 6,000
O 0 -500 35,000

Products Sales Add'l Processing Costs

M 40,000 28,000 12,000
I 30,000 16,000 14,000
L 20,000 14,000 6,000
O 2,500 3,000 -500

Profit 35,000.00
JC 10,000.00
Benefit 25,000.00
Given
Products Market Limit Unit CM Hours on Machine
A 100 unit P 20 10 per unit
B 80 unit P 18 5 per unit
C 150 unit P 25 10 per unit

Ranking
Products Unit CM Constraining Factor CM/Hr
A 20 10 2.00 Rank 3 BCA
B 18 5 3.60 Rank 1
C 25 10 2.50 Rank 2

Priority
Products Market Limit Constraining Factor Hours Running Balance
B 80 5 400 400 80
C 150 10 1,500 1,900 150
A 100 10 500 2,400 50

Units CM
B 80 18 1,440
C 150 25 3,750
A 50 20 1,000
CM 6,190
FxC 5,000
P 1,190