Required If the Bath Department is dropped, what will be the effect on the operating income of the company as a whole?

Transcription

1 In Class #12.1 Dropping or Retaining a Segment Required If the Bath Department is dropped, what will be the effect on the operating income of the company as a whole? Contribution margin lost if the Bath Department is dropped: Lost from the Bath Department... $700,000 Lost from the Kitchen Department (10% $2,400,000) ,000 Total lost contribution margin ,000 Less avoidable fixed costs ($900,000 $370,000) ,000 Decrease in overall operating income... $410,000 1

2 In Class #12.2 Make or Buy a Component Required 1: Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier s offer be accepted? Show all computations. 1. Per Unit Differential Costs 15,000 units Make Buy Make Buy Cost of purchasing... $20 $300,000 Direct materials... $ 6 $ 90,000 Direct labour ,000 Variable manufacturing overhead ,000 Fixed manufacturing overhead, traceable ,000 Fixed manufacturing overhead, common Total costs... $17 $20 $255,000 $300,000 Difference in favour of continuing to make the parts... $3 $45,000 1 Only the supervisory salaries can be avoided if the parts are purchased. The remaining book value of the special equipment is a sunk cost; hence, the $3 per unit depreciation expense is not relevant to this decision. Based on these data, the company should reject the offer and should continue to produce the parts internally. Required 2: Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $65,000 per year. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each? Show computations. 2. Make Buy Cost of purchasing (part 1)... $300,000 Cost of making (part 1)... $255,000 Opportunity cost segment margin forgone on a potential new product line... 65,000 Total cost... $320,000 $300,000 Difference in favour of purchasing from the outside supplier... $20,000 Thus, the company should accept the offer and purchase the parts from the outside supplier. 2

3 In Class #12.3 Evaluating a Special Order Required: What effect would accepting this order have on the company s operating income if a special price of $ is offered per bracelet for this order? Should the special order be accepted at this price? Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision. Per Total Unit 10 bracelets Incremental revenue... $ $3, Incremental costs: Variable costs: Direct materials , Direct labour Variable manufacturing overhead Special filigree Total variable cost... $ , Fixed costs: Purchase of special tool Total incremental cost... 2, Incremental operating income... $ Even though the price for the special order is below the company's regular price for such an item, the special order would add to the company s operating income and should be accepted. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource. 3

4 In Class #12.4 Sell or Process Further Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations. Product X Product Y Product Z Sales value after further processing... $80,000 $150,000 $75,000 Sales value at split-off point... 50,000 90,000 60,000 Incremental revenue... 30,000 60,000 15,000 Cost of further processing... 35,000 40,000 12,000 Incremental profit (loss)... $(5,000) 20,000 3,000 Products Y and Z should be processed further, but not Product X. 4

5 In Class #12.5 Utilization of a Constrained Resource Required 1: Compute the amount of contribution margin that will be obtained per hour of labour time spent on each product. 1. A B C (1) Contribution margin per unit... $18 $36 $20 (2) Direct labour cost per unit... $12 $32 $16 (3) Direct labour rate per hour (4) Direct labour-hours required per unit (2) (3) Contribution margin per direct labour-hour (1) (4)... $12 $ 9 $10 Required 2: Which orders would you recommend that the company work on next week the orders for product A, product B or product C? Show computations. 2. The company should concentrate its labour time on producing product A: A B C Contribution margin per direct labour-hour... $12 $9 $10 Direct labour-hours available... 3,000 3,000 3,000 Total contribution margin... $36,000 $27,000 $30,000 Although product A has the lowest contribution margin per unit and the second lowest contribution margin ratio, it has the highest contribution margin per direct labour-hour. Since labour time seems to be the company s constraint, this measure should guide management in its production decisions. Required 3: If your demand for each product was 1,000 units of product A, 1,000 units of product B and 200 units of product C, how much of each product would you produce? Show computations. As the CM per DLH is the highest for Product A, we would maximize production of Product A first. You have 3,000 DLHs available. Product A: each unit uses 1.5 DLHs, therefore to produce 1,000 units that would be 1,000 x 1.5 = 1,500 DLHs, so we could make the 1,000 units of Product A and have 3,000 1,500 = 1,500 DLHs left. The next highest CM per DLH is Product C, therefore we would maximize product of Product C next. Product C: each unit uses 2 DLHs, therefore to produce 200 units that would be 200 x 2 = 400 DLHs, so we could make the 200 units of Product C and have 1, = 1,100 DLHs left. Finally we are only left with Product B. Product B: each unit uses 4 DLHs, therefore if we have 1,100 DLHs left, 1,100 / 4 = 275. So we could make the 250 units of Product B and have 1,100 1,100 = 0 DLHs left. 5

6 Required 4: By paying overtime wages, more than 3,000 hours of direct labour time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? Explain. 3. The amount Banner Company should be willing to pay in overtime wages for additional direct labour time depends on how the time would be used. If there are unfilled orders for all of the products, Banner would presumably use the additional time to make more of product A. Each hour of direct labour time generates $12 of contribution margin over and above the usual direct labour cost. Therefore, Banner should be willing to pay up to $20 per hour (the $8 usual wage plus the contribution margin per hour of $12) for additional labour time, but would of course prefer to pay far less. The upper limit of $20 per direct labour hour signals to managers how valuable additional labour hours are to the company. If all the demand for product A has been satisfied, Banner Company would then use any additional direct labour-hours to manufacture product C. In that case, the company should be willing to pay up to $18 per hour (the $8 usual wage plus the $10 contribution margin per hour for product C) to manufacture more product C. Likewise, if all the demand for both products A and C has been satisfied, additional labour hours would be used to make product B. In that case, the company should be willing to pay up to $17 ($8 + $9) per hour to manufacture more product B. 6

7 In Class #12.6 Target Costing Required: Calculate the target cost of one carbon fibre road bike. Sales (1,000 bikes $2,000 per bike)... $2,000,000 Less desired profit (25% $2,000,000) ,000 Target cost for 1,000 bikes... $1,500,000 Target cost per bike = ($1,500,000 1,000 bikes) = $1,500 per bike 7