CH 12

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CHAPTER 12
TACTICAL DECISION MAKING
QUESTIONS FOR WRITING AND DISCUSSION
1. A tactical decision is short-run in nature; it
involves choosing among alternatives with
an immediate or limited end in view. A strategic decision involves selecting strategies
that yield a long-term competitive advantage.
11.
Complementary effects may make it more

expensive to drop a product, as the dropped
product has a negative impact on other
products.
12.
A manager can identify alternatives by using

his or her own knowledge and experience
and by obtaining input from others who are
familiar with the problem.
13.
No. Joint costs are irrelevant. They occur

regardless of whether the product is sold at
the split-off point or processed further.
4. If one alternative is to be judged superior to

another alternative on the basis of cash-flow
comparisons, then cash flows must be expressed as an annual amount (or periodic
amount); otherwise, consideration must be
given to the time value of the nonperiodic
cash flows.
14.
Yes. The incremental revenue is $1,400,

and the incremental cost is only $1,000,
creating a net benefit of $400.
15.
Regardless of how many units are produced, fixed costs remain the same. Thus,
fixed costs do not change as product mix
changes.
5. Disagree. Qualitative factors also have an

important bearing on the decision and may,
at times, overrule the quantitative evidence
from a relevant costing analysis.
16.
No. If a scarce resource is used in producing

the two products, then the product providing
the greatest contribution per unit of scarce
resource should be selected. For more than
one scarce resource, linear programming
may be used to select the optimal mix.
17.
If a firm is operating below capacity, then a

price that is above variable costs will increase profits. A firm may sell a product below cost as a loss leader, hoping that many
customers will purchase additional items
with greater contribution margins. Grocery
stores often use this strategy.
18.
Different prices can be quoted to customers

in markets not normally served, to noncompeting customers, and in a competitive bidding setting.
19.
Linear programming is used to select the

optimal product mix whenever there are multiple constrained scarce resources.
20.
An objective function is the one to be maximized (or minimized) subject to a set of

constraints. A constraint restricts the possible values of variables appearing in the objective function. Usually, a constraint is con-
2. Depreciation is an allocation of a sunk cost.

This cost is a past cost and will never differ
across alternatives.
3. The salary of a supervisor in an accept or
reject decision is an example of an irrelevant
future cost.
6. The purchase of equipment needed to produce a special order is an example of a fixed

cost that is relevant.
7. Relevant costs are those costs that differ
across alternatives. Differential costs are the
differences between the costs of two alternatives.
8. Depreciation is a relevant cost whenever it is
a future cost that differs across alternatives.
Thus, it must involve a capital asset not yet
acquired.
9. Past costs can be used as information to
help predict future costs.
10.
Yes. Suppose, for example, that sufficient

materials are on hand for producing a part
for two years. After two years, the part will
be replaced by a newly engineered part. If
there is no alternative use of the materials,
then the cost of the materials is a sunk cost
and not relevant in a make-or-buy decision.
391
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cerned with a scarce resource. A constraint

set is the collection of all constraints for a
given problem.
21.
A feasible solution is a solution to a linear

programming problem that satisfies the
problems constraints. The feasible set of
solutions is the collection of all feasible solutions.
392
22.
To solve a linear programming problem

graphically, use the following four steps: (1)
graph each constraint, (2) identify the feasible set of solutions, (3) identify all corner
points in the feasible set, and (4) select the
corner point that yields the optimal value for
the objective function. Typically, when a linear programming problem has more than
two or three products, the simplex method
must be used.
EXERCISES
121
The correct order is: D, E, B, F, C, A.
122
Situation Flexible Resource
A
Forms & supplies
Counter staff
Food
Utilities
Substitute help
Gasoline
Committed Resource
Short Term
Purchasing agents
Telephone/internet
fees
Office equipment
Paper supplies
Advertising
Lawn mower oil
Committed Resource
Multiple Periods
Building and parking lot

lease
Power mower
Weed eater
Pickup truck
123
1.
The two alternatives are to make the component in house or to buy it from the
outside supplier.
2.
Alternatives
Make
Buy
$ 2.95
0.40
1.80
$6.50
$ 5.15
$6.50
Direct materials
Direct labor
Variable overhead
Purchase cost
Total relevant cost
Differential
Cost to Make
$ 2.95
0.40
1.80
(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 Electronics.
393
124
1.
Alternatives
Make
Buy
$ 2.95
0.40
1.80
1.85
$6.50
$6.50
$ 7.00
Direct materials
Direct labor
Variable overhead
Avoidable fixed overhead
Purchase cost
Total relevant cost
2.
Differential
Cost to Make
$ 2.95
0.40
1.80
1.85
(6.50)
$ (0.50)
Chesbrough should purchase the component from Berham Electronics because operating income will increase by $10,000 ($0.50 20,000).
125
1.
Sales revenue
Less: Variable expenses
Contribution margin
Less: Direct fixed expenses
Segment margin
Less: Common fixed expenses
Operating income
2.
Regulars
$135,000
50,000
$85,000
3,000
$82,000
Seasonals
$15,000
8,600
$6,400
1,200
$5,200
Total
$150,000
58,600
$91,400
4,200
$ 87,200
60,000
$ 27,200
Dropping the seasonals line will reduce operating income by $5,200.
394
126
1.
If Product C is dropped, profit will decrease by $15,000 since the avoidable

direct fixed costs are only $55,000 ($80,000 $25,000). Depreciation is not relevant.
2.
A new income statement, assuming that C is dropped and demand for B decreases by 10 percent, is given below (amounts are in thousands).
A
$1,800
1,350
$450
150
$300
Sales revenue
Contribution margin
Less: Direct fixed expenses
Segment margin
Less: Common fixed expenses
Operating income
B
$1,440
900
$ 540
300
$ 240
Total
$3,240
2,250
$990
450
$ 540
340
$ 200
Operating income will decrease by $50,000 ($250,000 $200,000).
127
1.
Direct materials
Direct labor
Variable overhead
Relevant cost per unit
$ 8.00
10.00
4.00
$22.00
Yes, Thomson should accept the special order, because operating income
will increase by $68,000 [($24 $22) 34,000].
395
127
2.
Concluded
Additional revenue ($24 34,000)

$816,000
Less:
Direct materials ($8 34,000)
272,000
Direct labor ($10 34,000)
340,000
Variable overhead ($4 34,000)
136,000
Contribution margin
$68,000
Additional packing cost ($6,000 7)*
42,000
Increase in income
$26,000
* 34,000/5,000 = 6.8, which is rounded up to 7 to reflect the lumpy nature of
the packing capacity (since additional capacity is purchased in 5,000 unit increments)
Yes, the special order should be accepted because income will increase by
$26,000.
128
1.
Direct materials
Direct labor
Variable overhead
Sales commission
$ 9.00
6.50
2.00
1.75
$19.25
No, Melton should not accept the special order, because operating income
will decrease by $8,750 [($19.25 $18) 7,000].
2.
Direct materials
Direct labor
Variable overhead
$ 9.00
6.50
2.00
$17.50
Yes, Melton should accept the special order, because operating income will
increase by $3,500 [($18.00 $17.50) 7,000].
396
129
1.
Sales
Costs
Operating profit
$ 293,000
264,000
$ 29,000
2.
Revenues
Further processing cost
Operating income
Sell
$40,000
0
$40,000
Process Further
$73,700
23,900
$49,800
Difference
$33,700
23,900
$ 9,800
The company should process Delta further, because operating profit would
increase by $9,800 if it were processed further. (Note: Joint costs are irrelevant to this decision, because the company will incur them whether or not
Delta is processed further.)
1210
1.
($30 2,000) + ($60 4,000) = $300,000
2.
Juno
$30
2
$15
Contribution margin
Pounds of material
Contribution margin/pound
Hera
$60
5
$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
= $204,000
= (2,000 $30) + (2,400 $60)
397
1211
1.
Basic
$ 9.00
6.00
$ 3.00
0.10
$30.00
Price
Variable cost
Contribution margin
Machine hours
Contribution margin/MHr.
Standard
$30.00
20.00
$10.00
0.50
$20.00
Deluxe
$35.00
10.00
$25.00
0.75
$33.33
The company should sell only the deluxe unit with contribution margin per
machine hour of $33.33. Sealing can produce 20,000 (15,000/0.75) deluxe units
per year. These 20,000 units, multiplied by the $25 contribution margin per
unit, would yield total contribution margin of $500,000.
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 remaining 1,000 machine hours.
Total contribution margin = ($25 12,000) + ($3 50,000) + ($10 2,000)
= $470,000
1212
1.
COGS + Markup(COGS) = Sales

$144,300 + Markup($144,300) = $206,349
Markup($144,300) = $206,349 $144,300
Markup = $62,049/$144,300
Markup = 0.43, or 43%
2.
Direct materials
Direct labor
Overhead
Total cost
Add: Markup
Initial bid
800
1,600
3,200
$ 5,600
2,408
$ 8,008
398
1213
1.
COGS + Markup(COGS) = Sales

$1,000,000 + Markup($1,000,000) = $1,250,000
Markup($1,000,000) = $1,250,000 $1,000,000
Markup = $250,000/$1,000,000
Markup = 0.25, or 25%
2.
Price = $43,000 + (0.25 $43,000) = $53,750
1214
1.
Contribution margin
Hours on lathe
Contribution margin/hours on lathe
Model A-4
$24
6
$
4
Model M-3
$ 15
3
$ 5
Model M-3 has the higher contribution margin per hour of drilling machine
use, so all 12,000 hours should be spent producing it. If that is done, 4,000
(12,000 hours/3 hours per unit) units of Model M-3 should be produced. Zero
units of Model A-4 should be produced.
2.
If only 2,500 units of Model M-3 can be sold, then 2,500 units should be produced. 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
1215
1.
Contribution margin
Hours on lathe
Contribution margin/hours on lathe
Model 14-D
$ 12
4
$ 3
Model 33-P
$ 10
2
$ 5
Model 33-P has the higher contribution margin per hour of lathe use, so all
12,000 hours should be spent producing it. If that is done, 6,000 (12,000
hours/2 hours per unit) units of Model 33-P should be produced. Zero units of
Model 14-D should be produced.
2.
If only 5,000 units of Model 33-P can be sold, then 5,000 units should be produced. 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.
1216
1.
Let X = Number of Model 14-D produced

Let Y = Number of Model 33-P produced
Maximize Z = $12X + $10Y (objective function)
4X + 2Y 12,000 (lathe constraint)
X 2,000 (demand constraint)
Y 5,000 (demand constraint)
X0
Y0
400
1216 Continued
2.
Y
6,000
5,000
4,000
3,000
2,000
1,000
A
0
1,000
E
2,000
X
3,000
4,000
5,000
Solution: The corner points are points A, B, C, D, and E. The point of intersection of the linear constraints is obtained by solving the two equations simultaneously.
Corner Point
A
B
C
D
E
X-Value
0
0
500
2,000
2,000
Y-Value
0
5,000
5,000
2,000
0
Z = $12X + $10Y
$
0
50,000
56,000
44,000
24,000
*The intersection values for X and Y can be found by solving the simultaneous equations:
401
1216 Concluded
Corner Point C:
Y
4X + 2Y
4X + 2(5,000)
4X
X
= 5,000
= 12,000
= 12,000
= 2,000
= 500
Z = $12(500) + $10(5,000) = $56,000

Corner Point D:
X
4X + 2Y
4(2,000) + 2Y
2Y
Y
= 2,000
= 12,000
= 12,000
= 4,000
= 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.
3.
At the optimal level, the contribution margin is $56,000.
1217
1.
Let X = Number of Product A produced

Let Y = Number of Product B produced
Maximize Z = $30X + $60Y (objective function)
2X + 5Y 6,000 (direct material constraint)
3X + 2Y 6,000 (direct labor constraint)
X 1,000
Y 2,000
X0
Y0
402
1217 Concluded
2.
Y
3,000
2,000
1,000 D
C
A
0
B
1,000
X
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 linear constraints is obtained by solving the two equations simultaneously.
Corner Point
A
B
C
D
X-Value
0
1,000
1,000
0
Y-Value
0
0
800
1,200
Z = $30X + $60Y
$
0
30,000
78,000*
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
3.
At the optimal level, the contribution margin is $78,000.
403
1218
1.
The amounts Heath has spent on purchasing and improving the Silverado are
irrelevant because these are sunk costs.
2.
Cost Item
Transmission
Water pump
Master cylinder
Sell Silverado
Cost of new car
Total
Alternatives
Restore Silverado Buy Dodge Ram
$2,400
400
1,700
$(9,400)
12,300
$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 Silverado, how much longer would it last? What about increased license fees and insurance on the newer car? Could he remove the stereo and put it in the
Dodge Ram without decreasing the Silverados resale value by much?
1219
1.
Direct materials
Direct labor
Variable overhead
Fixed overhead
Purchase cost
Total relevant costs
Make
$360,000
120,000
100,000
88,000
$668,000
Buy
$640,000 ($16 40,000)

$640,000
Sherwood should purchase the part.

2.
Maximum price = $668,000/40,000 = $16.70 per unit
3.
Income would increase by $28,000 ($668,000 $640,000).
404
1220
1.
Direct materials
Direct labor
Variable overhead
Purchase cost
Make
$360,000
120,000
100,000
$580,000
Buy
$640,000 ($16 40,000)

$640,000
Sherwood should continue manufacturing the part.

2. Maximum price = $580,000/40,000 = $14.50 per unit
3. Income would decrease by $60,000 ($640,000 $580,000).
405
PROBLEMS
1221
Steps in Austins decision:
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 recognized engineering program.
Step 2:
Identify the alternatives. Events A and B. (Students may want to include

event Ipossible 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 5they are
included here because they may help Austin estimate future income
benefits.)
Step 4:
Total relevant costs and benefits for each feasible alternative. No specific 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 5:
Assess qualitative factors. Events D, E, F, G, and H.
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 future 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 after his decision to stay was made. )
406
1222
1.
Cost Item
Direct materialsa
Direct laborb
Variable overheadc
Fixed overheadd
Purchase coste
Total
Make
$372,000
102,600
30,400
58,000
$563,000
Buy
$550,000
$550,000
($80 3,000) + ($165 800)

$27 3,800
c
$8 3,800
d
$26,000 + $32,000
e
($130 3,000) + ($200 800)
b
Net savings by purchasing: $13,000. Powell should purchase the crowns rather than make them.
2.
Qualitative factors that Powell should consider include quality of crowns, reliability 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)
4.
Cost Item
Direct materials
Direct labor
Variable overhead
Fixed overhead
Purchase cost
Total
Make
$419,000
124,200
36,800
58,000
$638,000
Buy
$640,000
$640,000
Powell should produce its own crowns if demand increases to this level because the fixed overhead is spread over more units.
407
1223
1.
@ 600 lbs.
Revenuesa
Bagsb
Shippingc
Grindingd
Bottlese
Total
Process Further
$30,000
(408)
(1,500)
(3,000)
$25,092
Sell
$9,000
(39)
(90)
$8,871
Difference
$21,000
39
(318)
(1,500)
(3,000)
$16,221
600 10 $5 = $30,000; $15 600 = $9,000

$1.30 (600/20)
c
[(10 600)/25] $1.70 = $408; $0.15 600 = $90
d
$2.50 600
e
10 600 $0.50
b
Primack should process rhinime further.

2.
$16,221/600 = $27.035 additional income per pound

$27.035 265,000 = $7,164,275
1224
1.
Sales
Contribution margin
Less: Direct fixed costs*
Segment margin (loss)
Less: Common fixed costs
Operating income
System A
$45,000
20,000
$25,000
526
$24,474
System B
$ 32,500
25,500
$ 7,000
11,158
$ (4,158)
Headset
$8,000
3,200
$4,800
1,016
$3,784
*$45,000/$85,500 $18,000 = $9,474; $10,000 $9,474 = $526

$32,500/$85,500 $18,000 = $6,842; $18,000 $6,842 = $11,158
$8,000/$85,500 $18,000 = $1,684; $2,700 $1,684 = $1,016
408
Total
$ 85,500
48,700
$ 36,800
12,700
$ 24,100
18,000
$ 6,100
1224 Concluded
2.
Sales
Contribution margin
Less: Direct fixed costs
Segment margin
Operating income
System A
$58,500
26,000
$32,500
526
$31,974
Headset
$6,000
2,400
$3,600
1,016
$2,584
System A
$45,000
20,000
$25,000
526
$24,474
System C
$ 26,000
13,000
$ 13,000
11,158
$ 1,842
Total
$64,500
28,400
$36,100
1,542
$34,558
18,000
$16,558
System B should be dropped.

3.
Sales
Contribution margin
Less: Direct fixed costs
Segment margin
Operating income
Headset
$7,200
2,880
$4,320
1,016
$3,304
Total
$78,200
35,880
$42,320
12,700
$29,620
18,000
$11,620
Replacing B with C is better than keeping B, but not as good as dropping B

without replacement with C.
409
1225
1.
Steve should consider selling the part for $1.85 because his divisions 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
Pats divisional profits would increase by $18,400:
Revenues ($32 8,000)
Variable expenses:
Direct materials ($17 8,000)
Direct labor ($7 8,000)
Variable overhead ($2 8,000)
Component (2 $1.85 8,000)
Total relevant benefits
2.
Accept
$ 256,000
Reject
$0
(136,000)
(56,000)
(16,000)
(29,600)
$ 18,400
0
0
0
0
$0
Pat should accept the $2 price. This price will increase the cost of the component from $29,600 to $32,000 (2 $2 8,000) and yield an incremental benefit of $16,000 ($18,400 $2,400).
Steves division will see an increase in profit of $15,200 (8,000 units 2 components 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 answer to Requirement 1.)
410
1226
1.
Salesa
Less: Variable expensesb
Contribution margin
Less: Direct fixed expensesc
Divisional margin
Less: Common fixed expensesc
Operating (loss)
$ 3,751,500
2,004,900
$ 1,746,600
1,518,250
$ 228,350
299,250
$ (70,900)
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
$83/1.25 = $66.40
20.00
$46.40
5.00
$51.40
Manufacturing cost
Fixed overhead
Per internal unit variable cost
Selling
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
$ 3,751,500
(2,004,900)
(1,518,250)
$ 228,350
Sales
Variable costs
Direct fixed expenses
Annuity
Total
Drop
$
(2,050,000)*
100,000
$(1,950,000)
*$100 20,500 (The units transferred internally must be purchased externally.)

The company should keep the division.
411
1227
1.
Napkins: CM/machine hour = ($2.50 $1.50)/1 = $1.00

Tissues: CM/machine hour = ($3.00 $2.25)/0.5 = $1.50
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.
2.
Let X = Boxes of napkins; Y = Boxes of tissues

a. Z = $1.00X + $0.75Y (objective function)
X + 0.5Y 200,000 (machine constraint)
X 150,000 (demand constraint)
X 0
Y 0
412
1227 Concluded
b. and c.
(in thousands)
Y
400
300
D
E
200
100
C
A
0
Corner Point
A
B
C*
D*
E
B
100
X
200
300
X-Value
0
150,000
150,000
50,000
0
400
Y-Value
0
0
100,000
300,000
300,000
*Point C:
Z = $1.00X + $0.75Y
0
150,000
225,000
275,000*
225,000
Point D:
X = 150,000
X + 0.5Y = 200,000
150,000 + 0.5Y = 200,000
Y = 100,000
Y = 300,000
X + 0.5Y = 200,000
X + 0.5(300,000) = 200,000
X = 50,000
The optimal mix is D: 50,000 packages of napkins and 300,000 boxes of

tissues. The maximum profit is $275,000.
413
1228
1.
Product 401 (500 units):
Labor hoursa
Machine hoursb
Product 402 (400 units):
Labor hoursc
Machine hoursd
Product 403 (1,000 units):
Labor hourse
Machine hoursf
Total labor hours
Total machine hours
Dept. 1
Dept. 2
Dept. 3
Total
1,000
500
1,500
500
1,500
1,000
4,000
2,000
400
400
800
400
1,200
800
2,000
2,000
3,400
2,900
2,000
2,000
4,300
2,900
2,000
1,000
3,500
2,000
6,000
5,000
11,200
7,800
2 500; 3 500; 3 500

b
1 500; 1 500; 2 500
c
1 400; 2 400
1 400; 1 400
2 1,000; 2 1,000; 2 1,000
f
2 1,000; 2 1,000; 1 1,000
e
The demand can be met in all departments except for Department 3. Production requires 3,500 labor hours in Department 3, but only 2,750 hours are
available.
414
1228 Continued
2.
Product 401:
CM/unit = $196 $103 = $93

CM/DLH = $93/3 = $31
Direct labor hours needed (Dept. 3): 3 500 = 1,500

Product 402:
CM/unit = $123 $73 = $50

Requires no hours in Department 3.
Product 403:
CM/unit = $167 $97 = $70

CM/DLH = $70/2 = $35
Direct labor hours needed (Dept. 3): 2 1,000 = 2,000

Production should be equal to demand for Product 403 because it has the
highest contribution margin per unit of scarce resource. After meeting demand, any additional labor hours in Department 3 should be used to produce
Product 401 (2,750 2,000 = 750; 750/3 = 250 units of 401).
Contribution to profits:
Product 401:
250 $93 =
Product 402:
400 $50 =
Product 403:
1,000 $70 =
Total contribution margin
3.
$ 23,250
20,000
70,000
$113,250
Let X = Number of Product 401 produced

Let W = Number of Product 402 produced = 400 units
Let Y = Number of Product 403 produced
Max. Z = $93X + $70Y + $50(400) (objective function)
2X + Y 1,500 (machine constraint)
3X + 2Y 2,750 (labor constraint)
X 500 (demand constraint)
X0
Y0
415
1228 Concluded
Corner Point
A
B
C
D
E
X
0
500
500
250
0
Y
0
0
500
1,000
1,000
W
400
400
400
400
400
Z = $93X + $70Y + $50W

$ 20,000
66,500
101,500
113,250*
90,000
*The optimum output is:

Product 401: 250 units
Product 402: 400 units
Product 403: 1,000 units
At this output, the contribution to profits is $113,250.
Y
1,500
1,000
D
E
500
500
X
1,000
416
1229
1.
Cost Item
Purchase cost
Variable manufacturing costs
Lease
Supervisor salary
Lease and Make
$14,000*
27,000
10,000
$51,000
Buy
$50,000
$50,000
*$7 2,000
Drop B and Make
$14,000
34,000
$48,000
Purchase cost
Lost contribution margin
Note: The $38,000 of direct fixed expenses is the same across all alternatives.
The most favorable alternative is to drop B and make the subassembly.
2.
Analysis with complementary effect:

a
Lost sales for A

Cost of making componentb
Reduction of other variable costsc
Lost contribution margin for B
Cost to purchased
Make
$ 9,000
13,160
(1,800)
34,000
$54,360
Buy
$50,000
$50,000
0.06 $150,000
0.94 2,000 $7.00
c
0.06($80,000 $50,000); since sales decrease by 6 percent if the component
is manufactured, the other variable costs (those other than the cost of the
component) will decrease proportionately.
d
If the buy alternative is chosen, there is no reduction in sales and the same
number of components will be needed.
b
The correct decision now is to keep B and buy the component.
417
1229 Concluded
3.
Lease
Supervisor salary
Purchase cost
a
Lease and Make

$19,600a
27,000
10,000
$56,600
Buy
$70,000b
$70,000
$7 2,800
$25 2,800
Drop B and Make

Lost sales from A
$ 9,000
18,424
Variable cost of manufacturinga
Reduction of other variable costsb
(600)
Loss in contribution margin for B
34,000
Purchase cost

$60,824
a
0.94 2,800 $7.00

0.06 ($80,000 $70,000)
The correct decision now is to lease and make the component.
418
1230
1.
To maximize the companys profitability, Sportway should purchase 9,000

tackle boxes from Maple Products, manufacture 17,500 skateboards, and
manufacture 1,000 tackle boxes. This combination of purchased and manufactured goods maximizes the contribution per direct labor hour, as calculated below.
Unit contribution:
Selling price
Less:
Direct material
Direct labor
Variable overheada
Mktg. and admin.b
Contribution margin
DLH/unit
Contribution margin/hour
a
Purchased
Tackle Boxes
$86.00
(68.00)
(4.00)
$14.00
none
none
Manufactured
Tackle Boxes Skateboards
$ 86.00
$ 45.00
(17.00)
(18.75)
(6.25)
(11.00)
$ 33.00
(12.50)
(7.50)
(2.50)
(3.00)
$ 19.50
1.25
$ 26.40
0.50
$ 39.00
Variable overhead per unit
Tackle boxes:
Direct labor hours = $18.75/$15.00 = 1.25 hours
Overhead/DLH = $12.50/1.25 = $10.00
Capacity = 8,000 boxes 1.25 = 10,000 hours
Total overhead = 10,000 hours $10 = $100,000
Total variable overhead = $100,000 $50,000 = $50,000
Variable overhead per hour = $50,000/10,000 = $5.00
Variable overhead per box = $5.00 1.25 = $6.25
Skateboards:
Direct labor hours = $7.50/$15.00 = 0.5 hour
Variable overhead per skateboard = $5.00 0.5 = $2.50
b
$6 of selling and administrative costs are fixed.
419
1230 Concluded
Optimal Use of Sportways Available Direct Labor
Unit
DLH
Quantity Contrib.
per Unit
Item
Total hours
10,000
Skateboards
17,500
$19.50
0.50
Make boxes
1,000
33.00
1.25
Buy boxes
9,000
14.00
Total CM
Less:
Contribution margin from manufacturing
8,000 boxes (8,000 $33)
Improvement in CM
2.
Total
DLH
Balance
of DLH
Total
Contrib.
8,750
1,250
1,250
$341,250
33,000
126,000
$500,250
264,000
$236,250
Some qualitative factors to be considered include quality and reliability of

vendor, quality of market data for skateboards, and problems in switching
from tackle boxes to skateboards in the Plastics Department.
420
MANAGERIAL DECISION CASES

1231
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 information, 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 interest 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 users understanding
should be disclosed. Moreover, she has the obligation to communicate information fairly and objectively (IV-1). These ethical requirements, however, do
not in any way prevent Pamela from discussing the qualitative effects of eliminating 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
1232
MEMO
TO:
Central University President
DATE:
November 15, 2008
SUBJECT: Decentralization of Continuing Education
In recommending whether to centralize or decentralize continuing education (CE),
I have first focused on the economic implications. The income statements, showing a favorable trend for CE, are misleading, at least in terms of their implications
for centralization. Tuition revenues will be present whether we centralize or decentralize and, therefore, are not relevant to the decision. Department heads are
already heavily involved in scheduling and staffing off-campus and evening
courses, and individual faculty are largely responsible for generating our noncredit offerings. Thus, it would be difficult to argue that decentralizing CE would
have any adverse impact on the level of tuition revenues.
In a similar vein, one can argue that the operating costs for evening and noncredit courses and the direct costs for off-campus offerings are also irrelevant.
These costs, which consist of instructional wages, rental of facilities, and supplies, will be incurred regardless of whether CE is centralized or decentralized.
This leaves two categories of costs, indirect costs and administration, which affect 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 directors salary and advertising, can be avoided. Furthermore, 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
Indirectb
Total
$ 82,000
410,000
$492,000
[$112,000 ($50,000 $20,000)] = $82,000

Indirect costs Advertising = $440,000 $30,000
422
1232 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 offcampus 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 additional administrative work can be easily absorbed by their existing staff. Thus, it
seems that the promised savings are real.
In choosing to decentralize, however, we do lose some intangible benefits. First,
we no longer have one individual who can be contacted by outside parties. Instead, we have numerous individuals involved. This may prove to be frustrating
for some of those whom we serve, and it is possible that they will perceive a drop
in service quality.
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.
I am personally convinced that a decentralized CE will work as well, if not better,
than our current arrangement. Given our current budgetary crisis, I would rather
risk reducing the quality of service for CE than risk reducing the quality of service
for our main programs. Therefore, I strongly recommend that CE be decentralized
and that the savings from this action be used to maintain the quality of our oncampus programs.
RESEARCH ASSIGNMENTS
1233
Answers will vary.
1234
Answers will vary.
423
424

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To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.

Complementary effects may make it more

A manager can identify alternatives by using

No. Joint costs are irrelevant. They occur

4. If one alternative is to be judged superior to

Yes. The incremental revenue is $1,400,

5. Disagree. Qualitative factors also have an

No. If a scarce resource is used in producing

If a firm is operating below capacity, then a

Different prices can be quoted to customers

Linear programming is used to select the

An objective function is the one to be maximized (or minimized) subject to a set of

2. Depreciation is an allocation of a sunk cost.

6. The purchase of equipment needed to produce a special order is an example of a fixed

Yes. Suppose, for example, that sufficient

cerned with a scarce resource. A constraint

A feasible solution is a solution to a linear

To solve a linear programming problem

Forms & supplies

Building and parking lot

Chesbrough should make the component in house because operating income

Dropping the seasonals line will reduce operating income by $5,200.

If Product C is dropped, profit will decrease by $15,000 since the avoidable

Operating income will decrease by $50,000 ($250,000 $200,000).

Additional revenue ($24 34,000)

($30 2,000) + ($60 4,000) = $300,000

= (2,000 $30) + (2,400 $60)

COGS + Markup(COGS) = Sales

COGS + Markup(COGS) = Sales

Price = $43,000 + (0.25 $43,000) = $53,750

Let X = Number of Model 14-D produced

Z = $12(500) + $10(5,000) = $56,000

Z = $12(2,000) + $10(2,000) = $44,000

At the optimal level, the contribution margin is $56,000.

Let X = Number of Product A produced

At the optimal level, the contribution margin is $78,000.

$640,000 ($16 40,000)

Sherwood should purchase the part.

Maximum price = $668,000/40,000 = $16.70 per unit

Income would increase by $28,000 ($668,000 $640,000).

$640,000 ($16 40,000)

Sherwood should continue manufacturing the part.

Define the problem. The problem is whether to continue studying at his

Identify the alternatives. Events A and B. (Students may want to include

Identify costs and benefits associated with each feasible alternative.

Assess qualitative factors. Events D, E, F, G, and H.

($80 3,000) + ($165 800)

600 10 $5 = $30,000; $15 600 = $9,000

Primack should process rhinime further.

$16,221/600 = $27.035 additional income per pound

*$45,000/$85,500 $18,000 = $9,474; $10,000 $9,474 = $526

System B should be dropped.

Replacing B with C is better than keeping B, but not as good as dropping B

Based on sales of 41,000 units

Variable costs = ($46.40 20,500) + ($51.40 20,500)

Fixed selling and admin: $1,100,000 $5(20,500) = $997,500

*$100 20,500 (The units transferred internally must be purchased externally.)

Napkins: CM/machine hour = ($2.50 $1.50)/1 = $1.00

Let X = Boxes of napkins; Y = Boxes of tissues

The optimal mix is D: 50,000 packages of napkins and 300,000 boxes of

2 500; 3 500; 3 500

CM/unit = $196 $103 = $93

Direct labor hours needed (Dept. 3): 3 500 = 1,500