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Making
Chapter Thirteen
Learning Objective 1
2
1
Process
$45
$45 per
per month
month × 8 months $1.60 per gallon ÷ 32 MPG
$18,000
$18,000 cost
cost – $4,000 salvage value ÷÷ 55 years
years
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
13-8
As you can see, the only costs that differ between the alternatives are
the direct labor costs savings and the increase in fixed rental costs.
Situation Differential
Current With New Costs and
Situation Machine Benefits
Sales (5,000 units @ $40 per unit) $ 200,000 $ 200,000 -
Less variable expenses:
Direct materials (5,000 units @ $14 per unit) 70,000 70,000 -
Direct labor (5,000 units @ $8 and $5 per unit) 40,000 25,000 15,000
Variable overhead (5,000 units @ $2 per unit) 10,000 10,000 -
Total variable expenses 120,000 105,000 -
Contribution margin 80,000 95,000 15,000
Less fixed expense:
Learning Objective 2
Prepare an analysis
showing whether a product
line or other business
segment should be
dropped or retained.
Adding/Dropping Segments
Adding/Dropping Segments
DECISION RULE
Lovell
Lovell should
should drop
drop the
the digital
digital watch
watch segment only
ifif its
its profit
profit would
would increase.
increase. This
This would
would only
only
happen
happen ifif the
the fixed
fixed cost
cost savings exceed
exceed the
the lost
lost
contribution
contribution margin.
margin.
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
Variable manufacturing costs $ 120,000
Variable shipping costs 5,000
Commissions 75,000 200,000
Contribution margin $ 300,000
Less: fixed expenses
General factory overhead $ 60,000
Salary of line manager 90,000
Depreciation of equipment 50,000
Advertising - direct 100,000
Rent - factory space 70,000
General admin. expenses 30,000 400,000
Net operating loss $ (100,000)
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
Investigation has revealed that total fixed general
Investigation has revealed that
Variable manufacuring costs $ 120,000
total fixed general
factory overhead
overhead and
factory costs
Variable shipping and general
general
5,000
administrative
administrative
Commissions expenses
expenses would not
not be
would75,000 be affected
affected ifif
200,000
the
the digital
Contribution watch
watch line
margin
digital line is
is dropped.
dropped. The The fixed
$ 300,000
fixed
Less: fixed expenses
general
general factory
factory overhead
overhead and general
General factory overhead $ 60,000general
and
administrative
administrative expenses
expenses assigned
Salary of line manager assigned to
90,000to this
this product
product
would
would be
Depreciation reallocated
be of equipment to
reallocated to other
other product
product lines.
50,000 lines.
Advertising - direct 100,000
Rent - factory space 70,000
General admin. expenses 30,000 400,000
Net operating loss $ (100,000)
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
The
The equipment
equipment
Variable used to
to manufacture
usedcosts
manufacturing manufacture
$ 120,000
Variable shipping costs 5,000
digital watches has no resale
digital watches has no resale
Commissions 75,000 200,000
value
value
Contribution or
or alternative
marginalternative use.
use. $ 300,000
Less: fixed expenses
General factory overhead $ 60,000
Salary of line manager 90,000
Depreciation of equipment 50,000
Should
Should Lovell
Lovell retain
retain or
or drop
drop
Advertising - direct 100,000
Rent - factory space the
the digital
digital watch
70,000 segment?
watch segment?
General admin. expenses 30,000 400,000
Net operating loss $ (100,000)
Contribution Margin
Solution
Contribution margin lost if digital
watches are dropped $ (300,000)
Less fixed costs that can be avoided
Salary of the line manager $ 90,000
Advertising - direct 100,000
Rent - factory space 70,000 260,000
Net disadvantage $ (40,000)
RRe
ettaai
inn
Learning Objective 3
Smoother flow of
parts and materials
Better quality
control
Realize profits
Direct materials $ 9
Direct labor 5
Variable overhead 1
Depreciation of special equip. 3
Supervisor's salary 2
General factory overhead 10
Unit product cost $ 30
The
The special
special equipment
equipment hashas no
no resale
resale
value
value and
and is
is aa sunk
sunk cost.
cost.
Not
Not avoidable;
avoidable; irrelevant.
irrelevant. IfIf the
the product
product is
is
dropped,
dropped, itit will
will be
be reallocated
reallocated toto other
other products.
products.
Opportunity Cost
Learning Objective 4
Prepare an analysis
showing whether a special
order should be accepted.
Special Orders
Special Orders
$8 variable cost
Special Orders
Quick Check
Quick Check
Quick Check
Learning Objective 5
Example
Quick Check
Product 1 Product 2
a. 1 unit 0.5 unit
b. 1 unit 2.0 units
c. 2 units 1.0 unit
d. 2 units 0.5 unit
Quick Check
Product 1 Product 2
a. 1 unit 0.5 unit
b. 1 unit 2.0 units
c. 2 units 1.0 unit
d. 2 units 0.5 unit
I was just checking to make sure
you are with us.
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Quick Check
Quick Check
IfIf there
there are
are no
no other
other considerations,
considerations, the
the best
best
plan
plan would
would be
be to
to produce
produce to
to meet
meet current
current
demand
demand for for Product
Product 22 and
and then
then use
use remaining
remaining
capacity
capacity to
to make
make Product
Product 1.
1.
Weekly
Weeklydemand
demand for
for Product
Product22 2,200
2,200 units
units
Time
Time required
required per
perunit
unit ×× 0.50
0.50 min.
min.
Total
Total time
time required
required to
to make
make
Product
Product22 1,100
1,100 min.
min.
Weekly
Weeklydemand
demand for
for Product
Product22 2,200
2,200 units
units
Time
Time required
required per
perunit
unit ×× 0.50
0.50 min.
min.
Total
Total time
time required
required to
to make
make
Product
Product22 1,100
1,100 min.
min.
Total
Total time
time available
available 2,400
2,400 min.
min.
Time
Time used
used to
to make
make Product
Product22 1,100
1,100 min.
min.
Time
Time available
available for
for Product
Product11 1,300
1,300 min.
min.
Weekly
Weeklydemand
demand for
for Product
Product22 2,200
2,200 units
units
Time
Time required
required per
perunit
unit ×× 0.50
0.50 min.
min.
Total
Total time
time required
required to
to make
make
Product
Product22 1,100
1,100 min.
min.
Total
Total time
time available
available 2,400
2,400 min.
min.
Time
Time used
used to
to make
make Product
Product22 1,100
1,100 min.
min.
Time
Time available
available for
for Product
Product11 1,300
1,300 min.
min.
Time
Time required
required per
perunit
unit ÷÷ 1.00
1.00 min.
min.
Production
Production of ofProduct
Product11 1,300
1,300 units
units
Product 1 Product 2
Production and sales (units) 1,300 2,200
Contribution margin per unit $ 24 $ 15
Total contribution margin $ 31,200 $ 33,000
Quick Check
Quick Check
Quick Check
Chairs Tables
Selling price per unit $80 $400
Variable cost per unit $30 $200
Board feet per unit 2 10
Monthly demand 600 100
Quick Check
Chairs Tables
Selling price $ 80 $ 400
Chairs Tables
Variable
Selling price per unit cost$80 $400 30 200
Variable cost Contribution
per unit $30
margin $200
$ 50 $ 200
Board feet perBoard
unit feet 2 10 2 10
Monthly demand 600 100
CM per board foot $ 25 $ 20
The company’s supplier of hardwood will only
be able to supply Production
2,000 board of chairs
feet this 600
month.
What plan would Board feet required
maximize profits? 1,200
Board feet remaining 800
a. 500 chairs and 100 tables
Board feet per table 10
b. 600 chairs andProduction
80 tablesof tables 80
c. 500 chairs and 80 tables
d. 600 chairs and 100 tables
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Quick Check
Quick Check
Managing Constraints
Learning Objective 6
Prepare an analysis
showing whether joint
products should be sold at
the split-off point or
processed further.
Joint Costs
Joint Products
Oil
Common
Joint
Production Gasoline
Input
Process
Chemicals
Split-Off
Point
Joint Products
Joint
Costs Oil
Separate Final
Processing Sale
Common
Joint Final
Production Gasoline
Input Sale
Process
Separate Final
Chemicals
Processing
Sale
Split-Off Separate
Point Product
Costs
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Costs
End of Chapter 13