CH 10

CHAPTER 10 SOLUTIONS
Solutions to Questions for Review and Discussion
1. The basic differential analysis decision rule is: From the alternative decisions that could be
made, select the choice that yields the greatest incremental profit from the relevant revenues
and costs. Incremental profit is the difference between the relevant revenues and costs of
each choice relative to a "status quo" position. Relevant revenues and costs are defined as
the current and future values that differ among the choices being considered.
2. The managerial accountant is involved in all eight steps, as follows:
Define the decision issue: The decision maker must understand the strategic, competitive,
and organizational factors to identify the real decision issues and not merely the surface
problems. The accountant often helps clarify the issue.
Specify the decision objective and decision rule: The basic decision is based on selecting
the choice with the highest incremental profit to the firm. The accountant can define the
objective and the rule, given the context of the decision.
Identify the choices: The decision maker must narrow the many possible decision
alternatives to a specific set of choices. The accountant may advise the decision maker on the
feasibility and the financial implications of alternative choices.
Collect relevant data on alternatives: Many times, the decision maker will strive to collect all
available information for a choice. However, the decision maker should be looking only for
relevant information about a decision choice. Also, a cost-benefit relationship exists with
regard to data collection. Collecting data is expensive and time consuming. At a certain point,
the cost of collecting more information is greater than the benefit derived from that information.
Managerial accountants play a major role in this step, because they are very familiar with the
types and value of information necessary to make decisions.
Format and analyze information about each alternative: Organization of the data simplifies
the decision task. Specific formats can help the decision maker better compare and analyze
the relevant information regarding each choice. The managerial accountant's role is to
organize the relevant quantitative data for analysis.
Make the decision: Given the decision rule and relevant information about the choices, select
the choice which provides the greatest benefit. While making the decision, it is important not
to forget the qualitative factors regarding the choices. Too often the decision maker focuses
only on the quantitative analysis and makes a poor decision. The decision is the responsibility
of the manager and not the accountant. The managerial accountant advises, and the manager
decides.
Implement the decision: Although this step may seem obvious, much time and thought need
to be spent implementing a decision. The accountant's role may be to evaluate costs and
benefits of implementation alternatives, to design and implement information systems and
controls, and to prepare reports.
Evaluate the decision: Valuable information that will aid in making future decisions can be
obtained from evaluating a decision. The accountant collects, analyzes, and reports the
Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 10, Page 10-1
results.
3. Irrelevant cost data:
1. Any past cost

2. Any present or future cost that is committed and cannot be avoided
3. Any present or future cost that does not differ among the alternatives considered
Relevant cost data:
1. The cost must be a present or future value and

2. The cost must change among the alternatives considered
4. Identifying choices is an important step because it determines which choices will be

considered. This, in turn, affects the outcome of the decision. At one extreme, the choices may
be so numerous that an exhaustive list would be almost impossible to evaluate. At the other
extreme, the choices selected may be so few that some profitable alternatives may be
overlooked. The key to identifying the appropriate choices is properly defining the problem,
being cautious not to define it too broadly or too narrowly.
In addition to defining the problem carefully, some simplifying assumptions may be necessary
to proceed in a practical manner. However, a manager does not want to overlook important
choices, either through the simplifying process or by not pursuing choices beyond the most
obvious ones.
5. This statement is generally true but should not be relied upon as a fact. While variable costs
are usually relevant in the short term, a variable cost that does not differ between decision
alternatives in the future would not be relevant to that decision and should not be included in
the analysis. Also, any additional, or incremental, fixed costs related to a decision choice are
relevant; and a wrong decision could be made if they are excluded from the analysis.
When volume or activity change, we expect total variable costs to change. But we must
examine the fixed costs to determine whether the decision will cause these costs to change in
some way.
6.
(a) An incremental analysis approach includes only incremental revenues and costs of each
choice. The choice with the highest additional benefit is chosen. A total analysis approach
shows the results for the entire entity, including the alternative and then excluding the
alternative. The decision is made by comparing total profit in each scenario.
(b)An opportunity cost is the sacrificed returns or benefits foregone because an choice was not
selected. Out-of-pocket costs refer to actual cash outflows resulting from the decision made.
7. While most relevant costing decisions are viewed as short-term decisions, many of them will
have long-term effects that should be considered before making a decision. Decisions made
today cannot be easily reversed in the future. For example, if we decide today to buy a part
from an outside supplier instead of making it ourselves, it is unlikely that tomorrow we will
reverse that decision and begin making the part again. Also, a profitable special order
accepted today may result in lower sales of regular units in the future. Short-term thinking for
near-term profit should be analyzed carefully because the decision may end up damaging the
overall business strategy in the future. Incremental decision making is the basic thinking
framework. But as the timeframe is extended, more factors must be included in the analysis.
8. Basically, agree. Looking at the basic facts, a rational person can add the benefits and
subtract the costs. The alternative selected is the one with the largest positive contribution
margin. But, this simple approach is also dangerous and would probably cause experienced
managers to disagree. While the relevant dollars and cents are an important part of the
decision-making process, many nonquantitative factors are important and must be considered.
For example, the numbers may show that it is cheaper for a company to buy a part instead of
making it; but the numbers do not show that the quality and delivery problems may cause
additional costs. Also, a short-term money-making choice may damage customer relations in
an important segment of our normal market. We start with the basic common sense set of
facts and move to more sophisticated analyses that consider many more variables.
9. Any analysis using accounting data reflects the quantitative aspects of the decision-making
process. If only quantitative factors are important, the result of the analysis directs us to the
decision. However, in many situations qualitative factors exist that cannot be quantified yet
which must be considered in the decision. Common "other factors" include quality of parts or
products, delivery dependability, market segmentation, customer service, response time of
vendors, and long-term financial stability of vendors or customers.
10.
(a) Make or buy: Hiring management consultants to analyze our operations vs. using inhouse
staff and managers to evaluate our current system.
(b) Special sales: Licensing a Japanese manufacturer to produce and distribute our mouthwash
products in the Pacific rim.
(c) Scarce resources: Using mainframe computer time during the normal work day.
(d) Sell or process further: Buying a new computer system – sold in the box as received from the
manufacturer or setup with additional software installed.
(e) Add or delete a segment: Deciding whether to expand or drop a cardiac care specialization in
a hospital.
11. The guidelines that should be followed are:
1. Excess capacity should exist, with no alternative use of the capacity. This allows the
opportunity cost of using the capacity to be zero or at least very low. If the capacity can be
used, then the decision must include the opportunity cost of using the capacity.
2. The special sale should not interfere with regular business. The special sale is in a market
segment different than our other business. The sale will then be incremental revenue. If
the sale does interfere with regular business, we are often merely substituting lower priced
"special sales" for normal priced regular sales.
3. The expectation is that this is a one-time deal, will not become regular business, and will
not share the general overhead burden of regular sales. If the special sale becomes
repeat business, we have probably added a product with a lower contribution margin to our
product line. Therefore, it must share the common overhead in evaluating its use of
resources.
12. The decision rule:
If the out-of-pocket costs of buying the product or service are less than the out-of-pocket costs
of making the product or service, buy it. If not, make it.
Relevant make costs are the direct costs of producing the item plus any opportunity costs.
Relevant buy costs are the part's purchase price plus shipping and handling costs, and any
costs incurred to get the purchased item into usable form.
13. An opportunity cost is defined as the return or benefit associated with the best choice not
selected. In this case, the scarce capacity should be used where the incremental profit is
greatest. Thus, the opportunity cost (sell now or process further) should be less than the
incremental profit from the other alternative (process further or sell now).
If a product is completely processed and sold, the company will have to give up the revenue
from the sale of the product in its unfinished state. The proceeds from the sale of the
unfinished product are the opportunity costs of further processing. The product should be
completely processed if the revenue from the sale of the finished product is greater than the
combination of the sacrifice of revenue from the sale of unfinished product and the additional
costs to process the unfinished product to a finished form.
14. Key assumptions:
$200 tax returns generate more contribution margin per hour of tax return preparer time than
do $80 tax returns.
Not enough $200 tax return customers exist to use the preparer's total time available.
The tax return preparers cannot handle all customers who want returns prepared.
Memo:
To: Receptionist
From: Decision maker
Subject: Scheduling of tax return customers
Since tax returns are due on April 15, time is a scarce resource. Priority should be given to
$200 tax return customers. Prepare a wait list of $80 tax return customers and, if any time is
available, schedule these customers after the $200 customers are scheduled.
15. If Company A is considering buying a part from Company B instead of making the part itself,
then Company A is facing a make-or-buy decision; and Company B is facing a potential special
sales decision. For both companies to be satisfied, the negotiated price of the part must be
less than Company A's cost to make the part and more than Company B's cost to make the
part. Company A wants to save money by buying the part from Company B, and Company B
wants to make money by selling the part to Company A.
Something to consider in this case is that a special sales decision is usually a one-time deal
and does not become part of regular business. On the other hand, make-or-buy decisions are
usually for a longer time horizon. Company A above would probably not be very interested in
purchasing the part from Company B only once and then going back to making the part itself
or finding a new seller.
16. If the subassembly is a critical part of a larger component that the company manufactures, the
company may be willing to make it at a higher cost rather than purchase it from an outside
supplier for many reasons. For example, the company must have the subassembly on time to
keep the manufacturing process running. The outside supplier may not be able to meet the
company's strict delivery requirements, and it is more economical to make the subassembly
part itself than to risk the possibility of shutting down the line for lack of subassemblies. Also,
the quality of the subassembly purchased from an outside supplier may be substandard,
forcing the company to incur substantial rework costs that are greater than the cost savings
associated with purchasing the subassembly. And, the subassembly may have technology
included that the company does not want outsiders to see or to access.
17.The restaurant should add the new main course if its profits are higher after adding the new
course and dropping the other course. This is an add or delete a segment decision. This may
also have attributes of a scarce resource problem. Limited menu space may cause the
manager to choose between the two selections – better use of limited capacity.
18. Incremental analysis looks at the differences between various choices as related to the status
quo alternative. The incremental analysis approach is "clearer" since it shows only the costs
and revenues that change across the choices considered. Total analysis includes all of the
costs and revenues associated with each of the alternatives. It has the advantage of showing
the total revenues, costs, and profits associated with each alternative rather than just the
changes between alternatives. The form of analysis selected by a manager will depend on
personal preference and on how costly the selected form of analysis is compared with the
benefits to the user. Regardless of which method is chosen, the incremental contribution
margin will always be the same.
19. Several reasons exist why a company may not want to accept the offer. First, the company
must be able to isolate its market for the special sale from the market for regular sales -- such
as a foreign market or an isolated sector of the domestic market. Secondly, the company may
have a high-quality image; and accepting the special sale would hurt that image and possibly
damage regular sales. Or, the company may have a future plan in mind for the excess
capacity and does not want to commit to a special sale that may become repeat business at a
lower contribution margin.
20. The markup must be sufficient to cover any costs not included in the cost per unit and to
provide a profit. If full costs are used, the unit cost frequently includes only the manufacturing
variable costs and an allocated share of the manufacturing fixed costs. Therefore, the markup
must cover selling and administrative costs and provide for a profit. In cases where full costs
are interpreted to mean all costs of the company (manufacturing, selling, and administrative),
the markup provides only for profit.
If variable costs are used, the assumption is that all variable costs are included in the unit cost.
For this situation, the markup must cover all other costs and provide for a profit. It may be
defined to mean, however, that only manufacturing variable costs are included. In this case,
any selling and administrative variable costs must be covered also.
21. Neither person is totally correct. Pricing is one of the most difficult and critical decisions faced
by a company. In some markets, for instance an agricultural product, the price is set by the
market; and the producers have no control over it. In other markets, for instance
rate-regulated industries, the price is almost solely determined by cost; and demand is ignored.
However, in most circumstances both cost and demand should be considered in the pricing
decision. A middle ground probably does exist, but the challenge facing most companies today
is finding it.
Depending on cost in a market-driven situation may cause the price to be out of line with
competition. If too high, no sales exist. If too low, excess sales and the loss of additional
contribution margin occur.
Depending on market-driven prices may cause losses to incur if the market price is below what
is needed to earn a satisfactory profit.
Solutions to Exercises
10-1.
(1) Total analysis approach:
Before Expansion After Expansion
(8,000 units) (9,000 units)
Sales ($30 per unit) $240,000 $270,000
Variable costs ($18 per unit) 144,000 162,000
Contribution margin $96,000 $108,000
Fixed costs 60,000 75,000
Net income $36,000 $33,000
Expanding operations causes a decrease of $3,000 in net income.
(2) Incremental analysis approach:
Incremental sales ($30 x 1,000 units) $30,000

Incremental variable cost ($18 x 1,000 units) 18,000
Incremental variable contribution margin $12,000
Incremental fixed cost 15,000
Incremental net income ($3,000)
The results are the same. Part (1) includes all firm revenues (including the first 8,000 units).
Part (2) includes only the revenue and costs of the additional 1,000 units.
10-2. The minimum price on the special sale of 20,000 units must be sufficient to cover all of the
relevant costs as well as the $50,000 desired profit:
Direct materials $10.00

Direct labor 5.00
Variable overhead ($12 x 1/3) 4.00
Shipping costs 3.00
Desired incremental profit ($50,000  20,000 units) 2.50
Selling price $24.50
10-3.
(1) Make Costs Buy Costs
Direct Materials (20,000 x $4) $ 80,000 | Purchase cost (20,000 x $36) $720,000
Direct Labor (20,000 x $16) 320,000 | Additional money saved
Variable Overhead (20,000 x $8) 160,000 | from renting facilities -10,000
Fixed O/d (20,000 x $10) x 0.4 80,000 |
Total make costs $640,000 | Total buy costs $710,000
Net make advantage $70,000 |
(2) Assumptions about cost behaviors may be troublesome by either buying or making because a
cost’s behavior may change relative to what decision is ultimately made.
Variable make costs are subject to external market forces. Fixed overhead make costs must
be controlled. Often unforeseen costs may be incurred to support the new (or continuing)
manufacturing activity. Stace may or may not be highly skilled in making this part – quality
might be a serious problem if this is a new production area.
Buying costs are also uncertain. Vaz may be bidding low to get the business. Then, over time
Vaz may try to raise the price. Also, is Vaz a stable supplier? Or, will additional costs be
incurred to ensure dependable and timely deliveries?
10-4.
(1) The firm is concerned with selling now or processing further. If the net incremental revenue
from processing further is greater than the sales value of HiEnergy, the product should be
processed further.
Sales Value Additional Costs Net Incremental Revenue Priority

HiEnergy $ 80 $80 3rd
GoGetEm 100 $15 85 ($100 – $15) 2nd
ReallyGo 110 35 75 ($110 – $35) Don't process
SuperGo 130 40 90 ($130 – $40) 1st
The firm should process further and sell SuperGo and then GoGetEm. All remaining capacity
should be used to produce HiEnergy. Since the net incremental revenue for HiEnergy is
greater than that for ReallyGo, ReallyGo should not be made.
(2) If the HiEnergy market is limited and once the demand for SuperGo, GoGetEm, and HiEnergy
has been covered, ReallyGo should be sold. The incremental revenue is $75, versus a cost of
$50 to produce it.
10-5. Zelenski products:

Product X Product Y Product Z
Market value after $3.20 $3.75 $5.00
Minus market value now 1.00 2.00 3.00
Increase in value $2.20 $ 1.75 $2.00
Gallons 10,000 10,000 10,000
Additional revenue $22,000 $17,500 $20,000

Minus additional costs 10,000 20,000 15,000
Net benefit(loss) $12,000 ($2,500)
Assuming that all three products are produced from the common process, Zelenski should
process Products X and Z further. Product Y loses $2,500 in processing further.
If the initial process can produce either Product X or Y or Z, the picture is very different.
Product X Product Y Product Z

Market value after $3.20 $3.75 $5.00
Gallons 10,000 10,000 10,000
Total revenue $32,000 $37,500 $50,000

Minus additional costs (10,000) (20,000) (15,000)
Net benefit(loss) $22,000 $17,500 $35,000
Only Product Z covers the initial production costs of $30,000 and its process further costs.
The key assumptions:

All three products are produced in the initial process (a total of 30,000 gallons).
Process further all products that earn additional profits beyond the split-off point.
10-6. Artists' priorities:
Large Medium Small
Sale price $80 $50 $25
Materials and artists' time costs 38 25 16
Contribution margin per piece $42 $25 $9
Time per piece 1 hour 0.5 hour 0.2 hour

Pieces per hour 1 2 5
Contribution margin per hour* $42 $50 $45
* CM piece x Pieces per hour = Contribution margin per hour
Order of priority: Medium, small, large.
10-7.
Make Costs Buy Costs
Ingredients Purchase cost
(5,000 x Y2) Y10,000 (5,000 x Y3) Y15,000
Labor & overhead Additional contribution
(5,000 x Y1) 5,000 margin from the
Fixed making costs 4,000 extra space (3,000)
Total make costs Y19,000 Total buy costs Y12,000
Net buy advantage Y7,000
Mr. Li would be better off quantitatively if he purchased the dumplings. He should be

concerned with maintaining the same quality and taste in the purchased ones. Notice that the
fixed making costs could be placed on either side – as an additional make cost or as a cost
savings on the buy side. In this case the variable make and the buy costs are equal. The
avoidable fixed and the contribution margin for the extra space create the buy advantage.
10-8.
(1) Without special order:
Sales (10,000 gallons x $1.30) $13,000
Minus costs (10,000 gallons x $1.10) 11,000
Profit $2,000
With special order:

Regular sales (9,000 gallons x $1.30) $11,700
Special sales (3,000 gallons x $1.00) 3,000
Total sales $14,700
Minus costs:
Ingredients and labor (12,000 gallons x $0.60) $ 7,200
Variable overhead (12,000 gallons x $0.20) 2,400
Fixed overhead (10,000 gallons x $0.30) 3,000
Total costs $12,600
Profit $2,100
Clouse should accept the special sale since it increases profits by $100.
(2) Regular customers could find out about the special price and either demand the lower price or
arrange to buy the supermarket brand. Furthermore, Clouse may not want to run the plant at
full capacity. At full capacity, Clouse cannot grow, take on seasonal flavors, or consider other
special deals. The incremental profit is very small and hardly worth the extra effort.
10-9. Common costs are incurred regardless of the decision made. If a segment is dropped, the
common costs are simply redistributed to the remaining segments. Therefore, the direct
contribution margin should be used to evaluate each segment.
Dept 2 Dept 3 Total

Gross margin $500 $350 $850
Less direct expenses (400) (400) (800)
Direct contribution margin $100 ($50) $ 50
(a) The company should not delete Department 2 since it would lose $100 in profits. The common
costs would simply be reallocated to the remaining departments.
(b) The company could delete Department 3 since it is incurring a $50 loss before common costs
are even considered.
(c) By deleting both segments, the company is losing a net $50 profit. Delete Department 3 but
keep Department 2.
(d) It would be more beneficial to keep the two departments since they are producing a profit of
$50 versus the $25 profit in a new department. Delete Department 3 and add Department 5, if
possible.
(e) Reallocating the common expenses would not help since common expenses are not
considered in the decision-making process.
10-10.
(1) If the special sale is a one-time sale, the price must cover only the variable and direct costs:
Materials and variable supplies $ 4.25

Variable selling expenses 1.80
Direct fixed manufacturing costs 1.50
Total incremental costs $ 7.55
To make $120,000 (or $1.20 per unit on 100,000 units) on the sale, the markup on incremental
costs is 16 percent ($1.20  $7.55).
(2) If the sales are going to become regular business, the price must cover all costs:
Total manufacturing costs $ 9.50

Total selling expenses 3.25
Total costs $12.75
The markup on total costs is now 9.4 percent ($1.20  $12.75).

10-11.
Revenue (9,000 caps x $10) $90,000
Costs:
Prime costs (9,000 caps x $5) $45,000
Overhead cost breakdown:
10,000 caps x $3 $30,000
Minus fixed costs 20,000
Variable costs $10,000
Divided by units  10,000
Variable cost per cap $1
Variable overhead (9,000 caps x $1) 9,000
Fixed overhead 20,000
Total costs $74,000
Profit $16,000
Special Sale
Revenue (1,000 caps x $7) $ 7,000
Costs:
Prime costs (1,000 caps x $5) $ 5,000
Variable overhead (1,000 caps x $1) 1,000
Insignia cost 200
Total special sale costs $ 6,200
Additional profit $ 800
A.J. should accept the special sale since he will make an additional $800 profit. He should be
aware of the qualitative concerns of special sales – alternative use of excess capacity, low
profit level on this sale, and interference with regular sales.
10-12. Ballou Corporation:

Product A Product B Product C
Incremental revenues:
Product A: ($60,000 – $45,000) $15,000
Product B: ($98,000 – $75,000) $23,000
Product C: ($62,000 – $30,000) $32,000
Minus incremental costs:
Product A: (20,000)
Product B: (20,000)
Product C: (18,000)
Incremental benefit (loss) ($5,000) $3,000 $14,000
Ballou Corporation should process Product B and C further since incremental revenue for each
of these products will exceed the incremental costs of processing further. Product A should be
sold at the split-off point since incremental costs exceed the incremental revenue.
10-13. Hinds Copies course packet cost estimate:
Variable cost per packet = Change in cost = $2,400 – $2,000 = $400 = $2 per unit
Change in units 600 – 400 200
Total cost (600 units x $4) $2,400
Minus variable costs (600 units x $2) 1,200
Total fixed costs $1,200
Number of packets needed:

600 students x 80% purchase rate 480
Complimentary 30
Total needed 510
Incremental costs: Variable costs (510 packets x $2) $1,020
Jo Ann must charge enough to have revenue of at least $1,020 to cover her costs in making the
packets. Notice that fixed costs are ignored since they are common fixed. Any incremental fixed
costs of this order would have to be included. Since she will sell 480, she must charge at least
$2.125 per packet ($1,020  480). Notice that this price will only cover incremental costs and
contribute nothing to paying common costs and to increasing profits. $2.125 is the answer to
question, but it is probably an unacceptable price for her business unless this price gives her a
competitive short-run advantage that will have a long-run impact on other sales that provide a
more favorable profit.
10-14. Ryan's courses:
Current Grade Hours/0.5 Grade Priority Study Hours Final Grade

Course 1 2.0 5 2 20 4.0
Course 2 3.0 4 1 8 4.0
Course 3 1.0 6 3 12 2.0
Course 4 1.0 8 4 0 1.0
Ryan should prioritize based on the lowest hour effort per 0.5 grade increase. Ryan should
study Course 2, then Course 1, and then Course 3. The 40 hours are now committed and
Ryan is stuck with a 1.0 in Course 4. But, his grade average would be 2.75.
10-15. Murphy Farms sprinkle system:

Costs to Run Costs to Run
Old System New System
Rent $25,000 $10,000
Variable operating costs:
200 acres x $100 20,000
200 acres x $ 40 8,000
Fixed operating costs 20,000 30,000
Total costs $65,000 $48,000
Since the costs are less under the new system, Murphy should change to the new system.
Notice that contribution margin is not used since it is the same under both choices.
10-16.
(1) Service plan:
Able Baker Charlie
Services required 500 500 500
Time per service x 0.8 x 0.5 x 0.2
Time used 400 250 100
After the service requirements are met, the remaining 1,250 hours (2,000 – 400 – 250 – 100)
should be used for the services that have the highest contribution margin per hour:
Able Baker Charlie
Revenue per service $50 $40 $30
Variable cost per service (30) (25) (20)
Contribution margin per service $20 $15 $10
Time per service 0.8 hour 0.5 hour 0.2 hour
Contribution margin per service

hour (contribution margin per
service divided by hours
per unit) $25 $30 $50
Priority: Highest profitability 3rd 2nd 1st
Contribution margin generated $10,000 + $7,500 + $67,500 = $85,000

($25 x 400)($30 x 250)($50 x 1,350)
Charlie service should be performed to the limit of demand. The remaining 1,250 hours can be
used to perform 6,250 Charlie services (1,250  0.2). A total of 6,750 Charlie services in 1,350
hours plus 500 Able services in 400 hours and 500 Baker services in 250 hours are performed.
(2) Assuming that Soma can only sell 3,000 of each services gives the following results:
Number Remaining Contribution

of Hours Available Margin Contribution
Priority Service Hours Per Services Required Hours Per Hour Margin
2,000
1st Charlie 0.2 3,000 600 1,400 $50 $ 30,000
2nd Baker 0.5 2,800 1,400 0 $30 42,000
Total hours used 2,000 $ 72,000
The priorities are the same as in Part (1): 1 st, Charlie; 2nd, Baker; and 3rd, Able.
10-17. The numbers show that, by using ASF, Inc. services, the subsidy will drop 60 percent. This
is due to a 10 percent reduction in food and preparation costs. Gramlich should be concerned
over the quality if the food services are performed by the outside company. Also, the
employees may choose to go elsewhere and eat since the cafeteria is not company operated.
The $300,000 overhead costs would be replaced with a management fee of $200,000. This
seems beneficial but might result in the elimination of employees. The company may want to
survey its employees and see how they feel about having an outside team prepare their food.
A major benefit to the company is that day-to-day management is transferred to a professional

food service company. Gramlich can focus on its primary business, not cafeteria management.
Key issues of concern:

Can the cost savings be achieved in food and preparation areas?
Will lower prices allow revenues to hold at $750,000?
Will current employees be displaced?
Will the quality of food and service remain high?
Will the cafeteria continue to be viewed as an employee benefit?
What are the views of employees toward an outside service?
Data needed:
Careful review of ASF's cost and revenue estimates.
Views of employees from a survey.
Review of Gramlich cost data.
10-18. The solution to this exercise is found by comparing the incremental revenue with the
additional processing cost. The joint costs are irrelevant because they do not differ between the
alternatives to sell now or to process further.
(1) Analysis of 1,000 barrels of naphtha:
Revenue after processing ($85 per barrel) $85,000

Minus revenue at split-off ($60 per barrel) (60,000)
Incremental revenue $25,000
Minus additional processing cost (20,000)
Advantage of further processing $5,000
The 1,000 barrels of naphtha should be processed further since it is worth an additional
$5,000 of profit for the company.
Analysis of other distillates:
Revenue after processing $110,000

Minus revenue at split-off (80,000)
Incremental revenue $30,000
Minus additional processing cost (40,000)
Advantage of further processing ($10,000)
The other distillates should be sold at the split-off point for $80,000 since further processing
decreases profits by $10,000.
Analysis of kerosene: Kerosene must be sold at the split-off point.
(2) Solving for the price of crude oil:
Revenues:
Naphtha (sold after further processing) $85,000
Kerosene (sold at split-off) 60,000
Other distillates (sold at split-off) 80,000
Total revenue $225,000
Minus costs:
Additional processing of naphtha ($20,000)
Joint costs of process (120,000)
Total costs ($140,000)
Net income $85,000
The maximum amount Silver Bullet could pay for crude oil is $85,000. At that price, the
company breaks even and would not lose money on refining.
10-19. To analyze the statements about Department E, first prepare a segment contribution
margin income statement for the department. Rent and services and half of the advertising
expenses should be ignored since they are common costs and they will not change regardless
of the decision made.
Department E
Sales $500,000
Minus cost of sales 300,000
Variable contribution margin $200,000
Minus direct expenses:
Direct salaries ($50,000)
Advertising (25,000)
Total direct expenses ($75,000)
Direct segment contribution margin $125,000
(a) Not true; Department E is earning $200,000 in variable contribution margin.

(b) Not true; Department E is earning $125,000 in direct contribution margin.
(c) Not true; if Department E were eliminated, the overall profitability would fall by $125,000.
(Department E's direct contribution margin) to $375,000.
10-20. To find the indifference point between making the lens and lens holder assembly or buying
it, set the cost to make equal to the cost to buy:
Make costs Buy costs

Prime costs per unit $21 Purchase price per unit $40
Other variable costs per unit 3
Total variable costs $ 24
Fixed costs $360,000 Fixed costs $200,000
Make costs = Buy costs

24 x (units) + 360,000 = 40 x (units) + 200,000
Units = 10,000
If volume is below 10,000, buy the lens assembly. If volume is above 10,000, make the lens
assembly.
10-21.
(1) Product priorities: Product Line
A B C D
Selling price per unit $300 $250 $130 $ 70
Variable cost per unit 250 80 50 40
Contribution margin per unit $ 50 $170 $ 80 $ 30
Hours required for each unit 5 10 4 2

Contribution margin per hour of production
time (contribution margin per unit
divided by hours per unit) $10 $17 $20 $15
Priority: Highest unit profitability 4th 2nd 1st 3rd

Remaining Contribut’n
Hours Hours Available Margin Contribution
Priority Piece Per Unit Units Required Hours Per Hour Margin
96,000
1st Piece C 4 8,000 32,000 64,000 $ 20 $ 640,000
2nd Piece B 10 6,000 60,000 4,000 17 1,020,000
3rd Piece D 2 2,000 4,000 0 15 60,000
Totals 96,000
$1,720,000
Given the above calculations, the best product combination is to produce in the following
order:
1st: 8,000 units of Piece C

2nd: 6,000 units of Piece B
3rd: 2,000 units of Piece D
(2) If the company has to deliver 2,000 units of each product to a major contributor, the product
combination becomes:
Remaining Contribution
96,000
Required Piece A 5 2,000 10,000 86,000 $10 $100,000
Required Piece B 10 2,000 20,000 66,000 17 340,000
Required Piece C 4 2,000 8,000 58,000 20 160,000
Required Piece D 2 2,000 4,000 54,000 15 60,000
Totals 42,000 $660,000
Now that the distributor's needs are met, the company can produce pieces C, B, D, and A in
that order with the remaining hours:
Remaining Contribut’n
54,000
1st Piece C 4 6,000 24,000 30,000 $20 $480,000
2nd Piece B 10 3,000 30,000 0 17 510,000
Total hours used for regular sales 54,000 $990,000
Totals 96,000 $1,650,000
The best product combination is now:
Piece A 2,000 units

Piece B 5,000 units
Piece C 8,000 units
Piece D 2,000 units
Notice that the company's total contribution margin has fallen from $1,720,000 to $1,650,000
due to the commitment to the distributor.
10-22. Incremental analysis approach:
Incremental revenue from additional processing

[($3.30 – $2.30) x 40,000 units] $40,000
Minus: Incremental costs from additional processing
($0.40 x 40,000 units) (16,000)
Avoidable fixed costs (5,000)
Incremental contribution from additional processing $19,000
Total analysis approach:

Product Sold Product Sold
Unprocessed Processed
Sales revenue:
40,000 units x $2.30 $92,000
40,000 units x $3.30 $132,000
Minus costs:
Variable cost of unprocessed meat
(40,000 units x $1.20) ($48,000) ($48,000)
Additional variable processing costs
(40,000 units x $0.40) (16,000)
Fixed costs, unprocessed product (30,000) (30,000)
Fixed costs, committed processing (8,000) (8,000)
Fixed costs, avoidable processing (5,000)
Total costs ($86,000) ($107,000)
Total profit (loss) $6,000 $25,000
The total profit is $19,000 greater if the product is processed further (using either approach).
10-23. Probability Hours Expected Value

50%
7.5 hours
20
4.0
20 40 8.0
10 100 10.0
100%
29.5 hours
The expected value of the number of hours each month is 29.5.
Option 1: $3,000 x 12 months = $36,000 plus direct expenses

(Note that expected hours are below 400 hours per year.)
Option 2: $130 x 29.5 x 12 months = $46,020 plus direct expenses
Option 3: $90,000 inclusive of direct support costs
The best alternative is Option 1, pay the retainer. However, this method ignores the increased
cost levels when hour usage exceeds the 400 hour per year limit. A preferred look follows.
Another view:
If each level of activity is costed, Option 1's expected cost changes as follows:
Hours per month Option 1 Cost Option 2 Cost Option 3 Cost
15 $36,000 + expenses $23,400 + expenses $90,000
20 36,000 + expenses
31,200 + expenses 90,000
40 44,000 + expenses 62,400 + expenses 90,000
100 116,000 + expenses
156,000 + expenses 90,000
Expected value: $ 45,600 + expenses $ 46,020 + expenses $90,000
The recommended action is now Option 2 until 40 hours is reached; then Option 1 is preferred.
Only if 100 hours are required will Option 3 be attractive.
10-24. Incremental analysis approach:

Costs Costs
Today Years 1 Through 4
Purchase Spray ($60,000)
Trade-in of Sprinkle 10,000
Operating costs: Spray $35,000
Sprinkle 20,000
Annual savings $15,000
Times useful life in years x 4
Total costs ($50,000) $60,000
Changing to the new Sprinkle system is worth an additional $10,000 to the company.
Note: Some students may ask about the impacts of the time value of money. Agree that this
analysis is incomplete and that in Chapters 11 and 12 we will incorporate time into the
analysis.
10-25.
(1) Harrell Company: Department A Department B
Incremental revenues:
Department A: ($72,000 + $13,000) $85,000
Department B: ($100,000 + $95,000) $195,000
Department A (20,000)
Department B (150,000)
Incremental benefit $65,000 $45,000
GASS has a value of $50,000 before processing further. It should be processed further into
Products A and AA since profits will increase by $15,000 ($65,000 – $50,000).
(2) Yes, assuming that a small profit of $5,000 would be considered enough to make GASS and
its subsequent products. If we already had made GASS, the $60,000 is a past cost and
therefore irrelevant. If we are making a new batch and it costs $60,000, we would earn a profit
only if we made GASS and then processed it through Department A. GASS by itself would
lose money ($60,000 of cost versus $50,000 of revenue). Processing through Department B
would lose even more money. Only Department A products would earn a profit.
10-26.
A. Darichuk: Make Buy
Prime costs $200,000 | Purchase cost $500,000
Variable o/h 200,000 |
Avoidable Fixed o/h 100,000 | Rent on space (30,000)
Total make cost $500,000 | Total buy cost $470,000
Buy and save $30,000.
B. Pleiness: Make Buy

Materials costs $60,000 | Purchase cost $200,000
Var labor & o/h 40,000 |
Avoid direct fixed o/h 50,000 |
Total make cost $150,000 | Total buy cost $200,000
Make and save $50,000.
C. Ferguson: Make (He cleans) (Fischer’s Maidens) Buy

Employee $40,000 | Cleaners labor cost $50,000
Supplies & equipment 12,000 | Supplies 5,000
Do-it-yourself $52,000 | Hire cleaner $55,000
Clean yourself and save $3,000. Ignore irrelevant allocated common costs of $10,000.
10-27. A segment contribution margin should be created. Ignoring common costs is important
since they are incurred regardless of the decision made.
Paint Peanut Butter

Sales $10,000 $20,000
Minus cost of sales (6,000) (15,000)
Gross margin $4,000 $ 5,000
Minus direct expenses (1,000) (3,000)
Segment contribution margin $3,000 $ 2,000
The paint department is actually more profitable than the peanut butter boutique. The only
reason that the peanut butter boutique looks better is that it has less allocated common costs
attached to it. However, these costs do not disappear. Therefore, by switching to peanut
butter, the overall profits will decrease by $1,000 ($3,000 – $2,000).
10-28.
(1) A special sale should be accepted if it provides a positive contribution margin, if excess
capacity exists, if the market can be segmented, and if no other use of the excess capacity
exists.
Regular Sales Special Sales

Sales HK$10 HK$7
Variable costs (6) (6)
Contribution margin HK$ 4 HK$1
The special sale has a positive contribution margin, and the problem statement satisfies the
other criteria. Even though the contribution margin of the special sale is not as large as the
regular sales, the sale should be accepted since it will increase overall company profits by
HK$10,000 (10,000 pairs x HK$1 per pair).
(2) Market is not segmented, and regular sales drop by 5,000 units:
Lost regular contribution margin

(5,000 pairs x HK$4 per pair) (HK$20,000)
Additional contribution margin on special order
(10,000 pairs x HK$1 per pair) 10,000
Net disadvantage of accepting special order (HK$10,000)
As a result of the market not being segmented, the company loses $10,000 of profits and
should not accept the order. The contribution margin on the lost sales is twice as large as the
incremental sales contribution margin.
(3) Price drops on regular pairs to keep sales level, and special order price increases:
Additional contribution margin on special order

(10,000 pairs x HK$3 per pair) HK$ 30,000
Minus lost contribution margin on regular sales
(80,000 pairs x HK$0.50 per pair) (HK$40,000 )
Net disadvantage of accepting special order (HK$10,000)
Again, the company should not accept the special order since overall profits will fall by
$10,000. The HK$0.50 per pair drop in price affects the entire regular sales.
10-29.
(1) Slowik, Inc. make or buy:

Prime costs $ 80,000 Purchase cost
Variable overhead 60,000 (100,000 units x $2.20) $220,000
Leased equipment costs 30,000 Inspection costs 5,000
Released space saving -46,000
Total make costs $170,000 Total buy costs $179,000
Net make advantage $9,000
Notice that the $30,000 of leased equipment could be considered a negative buy cost and that
the $46,000 of released space could be considered a make opportunity cost. The numbers
shift sides, but the net difference is the same.
The make advantage is $9,000. The out-of-pocket costs for materials, labor, overhead, and
direct equipment costs are less than the buy costs. The savings from the alternative use of the
released space makes the decision close.
(2) The buy alternative must be evaluated for quality, delivery, and warranty issues. The financial
strength of the supplier is also important. The assumed use of the released space is important
since Slowik has employees who may need to be retrained or even replaced. The fixed
manufacturing overhead expense should be examined to determine whether other costs could
be eliminated.
10-30. To analyze each of the proposed actions, first calculate each store's direct contribution
margin (statement figures in thousands):
Main Street King Street Queen Street
Sales $200 $175 $190
Minus product cost of sausages (120) (100) (110)
Variable contribution margin $80 $75 $80
Minus direct store expenses (60) (85) (35)
Direct contribution margin $20 ($10) $45
(a) If Main Street is eliminated, the company would lose $20,000 of contribution margin; and the
total loss would increase to $25,000 ($5,000 + $20,000).
(b) If King Street is eliminated, the company would save the $10,000 lost contribution margin; and
total profits would increase to $5,000 ($5,000 loss + $10,000).
(c) If Main and King Street stores are eliminated, the company would lose $20,000 contribution
margin from Main but save the $10,000 lost from King for a total change of a $10,000 loss.
The total loss would increase to $15,000 ($5,000 + 10,000).
(d) If all stores are closed, the implied new profit would be 0. But, it is likely that not all
administrative expenses can be avoided even with no stores. We would probably have a loss
for some time.
(e) If the new store will have zero net income, total profits will increase by the direct contribution
margin of the new fourth store. Since the new store has zero net income, it would have a
positive direct contribution margin of $15,000 to cover its portion of the allocated expenses.
Assuming that the $60,000 of allocated administrative expenses were divided equally among
the 4 stores, this would be $15,000 each. Total profits would be $10,000 ($5,000 loss +
$15,000).
10-31. Bidding on public contracts has numerous troublesome aspects. Bidding is often very
competitive. Multiyear contracts with renegotiation in subsequent years may allow the
successful bidder to raise prices to recoup costs. Also, in these types of service areas, the
successful bidder may expect to get other business as contract add-ons to make the overall
contract profitable. This could be happening in the VR/Dermit contract. The open end in the
contract is the emergency service. If the current $32 per hour rate is profitable to VR, needed
maintenance may be ignored as part of the routine quarterly checks saving VR personnel and
parts costs. Thus, the equipment may be deteriorating, causing more emergencies.
The hourly rate may also be a problem. The basis of determining the rate has been changed.
It is not known whether this is specified in the contract. VR could have changed the allocation
method to load more fringe overhead onto the maintenance personnel, particularly to the
emergency repair persons' time. Thus, the supposedly emergency time may actually become
the main source of revenue to VR.
The downtime may be a result of inadequate routine maintenance. Whether the routine
maintenance needed is more than provided in the basic contract cannot be determined. An
analysis of the emergency calls should be done.
The suggestion by VR that the equipment may be aging and need replacement implies that VR
would like to sell, design, implement, and maintain a new and probably more expensive
system. An inherent conflict of interest may exist.
The City of Dermit is in a difficult spot. More careful contract negotiations may be needed.
Monitoring VR more carefully may be needed.
10-32.
(1) a. If the offer is a one-time basis, the price must cover only the relevant "out-of-pocket" costs:
Direct materials $200

Direct labor 100
Total costs $300
Since the supermarket is willing to pay $420 for the order, it is profitable on a one-time basis.
This assumes that overhead expenses are common costs and will not increase from this job.
(1) b. If the job is to become part of regular business, then the price must cover all costs,
including overhead. Use the office manager's cost plus pricing policy to price the job:
Direct materials $200

Labor and overhead 200 ($100 direct labor x 2)
Total costs $400
Mark-up (20%) 80
Price $480
Using the office manager's pricing policy, the order does not appear to be profitable since the
price would have to be $480 instead of $420. The order does not meet the manager's 20
percent mark-up policy. However, the total costs under the manager's policy are only $400 so
the order is contributing $20 a week to profits. Since the order is a weekly, it would be a stable
source of cash flow and revenue for the company and should probably be accepted unless the
business is operating at capacity with more profitable business.
(2) Some qualitative factors the company should consider are:
a. Does a more profitable use of capacity exist? If not now, are other options likely in the
future?
b. How will this order affect regular print jobs? Since this is a weekly job, what will be the
effect on other print jobs? Will they have to be delayed?
c. Supermarket advertising usually has a lot of color. Are the materials and labor estimates
accurate? Or, will the business cost more than anticipated?
d. Might this work attract other customers or other business from the supermarket?
Solutions to Problems
10-33.
(1) Passengers needed to make $30,000 profit:
Revenue – Flight costs – Fixed costs – Variable costs – Profit = 0
$55X = ($2,000 x 200) – $60,000 – $5X – $30,000
$50X = $490,000
X = 9,800 passengers or 49 per flight or 32.67% of capacity
(2) $56X = ($2,000 x 200) – $60,000 – $5X – $30,000
$51X = $490,000
X = 9,608 passengers or 48 per flight or 32.03% of capacity
The impact is almost exactly 1 person per flight.
(3) Flight costs: This is implied to be fixed per flight. But more likely this is a mixed cost since
flights and conditions vary. Probably not all flight crews are paid the same wage or salary.
Maintenance costs may be included here or in fixed costs.
Fixed costs: We don't know what expenses are included here, but mixed expenses are likely
included.
Variable costs: These change as one more passenger is added. These costs seem low
unless the flights are very short with little or no food service included.
10-34.
(1) While costs of goods sold is usually variable and direct, in this problem it is a common cost for
the three products. Even if Bob eliminates rattles from production, he must still purchase
whole snakes for processing meats and hides. Since every snake has a rattle, Bob is still
purchasing it even though he doesn't process it.
Incremental analysis approach:

Lost revenue ($2,000)
Saved processing costs 600
Lost profit ($1,400)
Total analysis approach:

With Rattles Without Rattles
Sales $40,000 $38,000
Minus cost of snakes (24,000) (24,000)
Gross profit $16,000 $14,000
Minus:
Processing costs ($7,500) ($6,900)
Common costs (5,000) (5,000)
Operating expenses $12,500 $11,900
Income(loss) $3,500 $ 2,100
Lost profit ($1,400)
Leverenz should continue to process rattles since they are contributing $1,400 to profits.
(2) Sell rattles to old miner:
Leverenz is buying 2,400 snakes ($24,000  $10 per snake).
Sell rattles to miner (2,400 rattles x $0.50) $1,200

Minus lost contribution of rattles to profits (1,400)
Net disadvantage of selling to miner ($ 200)
10-35. Total analysis approach:
Total With Total Without
Department 2 Department 2
Sales $400,000 $320,000
Minus costs:
Cost of goods sold $210,000 $166,000
Sales salaries 60,000 52,000
Fixed administrative cost 90,000 90,000
Total costs $360,000 $308,000
Net income before taxes $ 40,000 $ 12,000
Plus space rental income 12,000
Total profit $ 40,000 $ 24,000
Total profits are larger by $16,000 if Department 2 is kept, so the department should not be
discontinued.

Lost sales of Department 2 ($80,000)
Space rental income 12,000
Saved costs:
Cost of goods sold 44,000
Sales salaries 8,000
Total profit(loss) ($16,000)
The profits of the company will decline by $16,000 if Department 2 is eliminated. Same
answer under either approach.
10-36.
Prime costs $14 | Purchase cost
Plus variable overhead 4 | (100,000 units x $23) $2,300,000
Variable make cost per unit $18 |
x units needed x 100,000 |
Total variable costs $1,800,000 |
Space rental 175,000 |
Additional equipment 200,000 |
Total make costs $2,175,000 | Total buy costs $2,300,000
Net make advantage $125,000
They should make the motors.
Assumptions:
The costs behave as indicated.
The estimated volume is accurate.
It is feasible to produce the same quality motor in the facility.
10-37.
#1 Baker: Value Now Costs to Process Value Then Net Value Then Rank
Option A: $2,500 1st
Option B: $200 $2,600 $2,400 2nd
Option C: 3,900 5,800 1,900 3rd
Option D: 1,000 0 (1,000) Avoid
Choice: Sell cow, make more money, have less fun, and avoid legal problems!
#2 Vehlewald: Value Now Costs to Process Value Then Net Value Then Rank
Juice only $15,000 3rd
Option A: $4,000 $21,000 1 $17,000 2nd
Option B: 15,000 28,000 13,000 4th
Option C: 20,000 38,000 2 18,000 1st
1 (
$6 x 2,000 + $4 x 1,000 + $10 x 500)
2
($15 x 2,000 + 16 x $500)
10-38.
(1) Finance manager's analysis:
Regular Production With Special Order
(500,000 units) (600,000 units)
Sales ¥1,700 ¥1,700
Variable costs (900) (900)
Contribution margin ¥800 ¥800
Fixed costs (600) (500) ($300,000,000/600,000 units)
Net profit ¥200 ¥300
Full cost ¥1,500 ¥1,400
The finance manager is correct in stating that the full cost of producing an average unit does
decline if the special sale is accepted and included in total units sold. However, that is only
because the fixed costs are now spread over an additional 100,000 units. The finance
manager's analysis will result in the correct net additional profit. But it is an indirect route to
analyzing the special sale benefits.
Special sale:
Full cost per unit ¥1,400
Minus selling price per unit (1,350)
Lost gross margin per unit ¥50
x number of units x 100,000
Lost gross margin (¥5,000,000
Plus: Additional overtime (7,500,000)
Additional supervision (2,000,000)
Net loss on special units (14,500,000)
Additional profit (500,000 units x ¥100) 50,000,000
Net additional profit ¥35,500,000
To analyze the special sale directly, determine if it contributes enough to cover its own relevant
costs:
Selling price (¥1,350 x 100,000) ¥135,000,000

Minus variable costs (¥900 x 100,000) (90,000,000)
Contribution margin ¥45,000,000
Minus: Additional overtime (7,500,000)
Additional supervision (2,000,000)
Net profit ¥35,500,000
By using the finance manager's logic, the company would be giving up the opportunity to make
an additional ¥35,500,000 from the special order.
(2) The finance manager feels the special order may be "too risky" because it might violate some
of the basic rules of special sales decisions. For example, he may think that the order might
become part of regular business and violate the one-time deal rule. He might also be worried
that the special units will interfere with regular business. Perhaps the special pricing attracts
off-price merchandisers putting our product in discount stores and in competition with our
regular lamps. Our premium product image may be hurt in the long run as a result.
(3) The firm may have strict policy that disallows any price discrimination among customers. Or it
may state that all products must be priced to cover their fair share of total overhead costs. Or
as a premium product producer, accepting business outside this premium price level is
inconsistent with marketing strategies.
10-39.
(1) Close Store 54:
Lost sales $400,000

Minus saved cost of baked goods (150,000)
Lost gross margin $250,000
Gross margin picked up by other store (50,000)
Saved salaries (80,000)
Saved occupancy costs (90,000)
Incremental disadvantage of closing Store 54 $30,000
Store 54 should not be closed since doing so would result in overall profits declining by
$30,000. Committed manager's salary of $30,000 should be viewed as a committed cost and
a cost of the new store. The $30,000 of committed occupancy costs are a sunk cost, at least
for three years. No information is given about the possibility of subletting the store to another
retailer.
(2) The manager should focus attention on those areas over which the manager has control,
particularly the areas where performance is below the company average:
Cost of baked goods: These are variable and under the manager's control.
This cost is 37.5 percent of sales and higher than the company average of 35 percent.
Maybe the store is wasting ingredients or merely selling a different product mix.
Store wages: The wages are variable and controllable by the manager. The
cost is 27.5 percent of sales and above the company average of 20 percent.
Store occupancy costs: While some of these costs are committed and noncontrollable by
the manager (the 3-year lease, for instance), the manager probably does have some
control over certain occupancy costs. Utilities are probably included in this category.
Notice that home office expenses are above the average of 10 percent. This is an issue that
the manager should debate with the corporate controller. It is not controllable and should not
be part of Store 54 expenses or its manager's performance report.
10-40.
(1) To calculate Huang Automotive's variable cost per unit, simply divide the change in dollars from
one activity level to another by the change in units between activity levels.
Direct materials = NT$22,500,000 – NT$18,000,000

250,000 – 200,000 units
= NT$90 per unit
Direct labor = NT$7,500,000 – NT$6,000,000
250,000 – 200,000 units
= NT$30 per unit
Factory overhead = NT$27,000,000 – NT$24,000,000

250,000 – 200,000 units
= NT$60 per unit plus NT$12,000,000 of fixed costs
Huang Automotive's variable cost per unit and fixed costs are:
Variable Fixed
Direct materials NT$ 90 per unit
Direct labor 30 per unit
Factory overhead 60 per unit NT$12,000,000
Total NT$180 per unit NT$12,000,000
(2) T. J. Chan is using the cost per unit of NT$240 from last year which includes the fixed costs of
NT$12,000,000 on a per unit basis at a volume of 200,000 units. The special sale only has to
cover the variable costs, as no additional fixed costs exist, to be profitable. The selling price of
NT$225 per unit on the special sale means the sale is contributing NT$45 to overall profits
(NT$225 – NT$180).
Lili Zhang has determined that the added units will generate a positive contribution margin and,
therefore, more profit (NT$225 – NT$180).
As stated earlier, the special sale only has to cover the variable costs. It is actually contributing
NT$45 to profits. This problem illustrates how misleading calculating fixed costs on a per unit
basis can be.
(3) Peter Wu mentioned that the special sale will get the company's "foot in the door" of the
international market. This business can be used to establish Huang as a quality and
dependable producer. If this is the case, this special sale will probably become reoccurring
business and would then have to cover its share of the fixed costs. Another qualitative issue
would be alternate uses of the excess capacity that exists. Is this special sale the best use of
that capacity?
10-41. Best product combination: Products

A B C D
Selling price per unit $13 $20 $5 $25
Minus variable cost per unit (6) (5) (2) (16)
Contribution margin per unit $7 $15 $3 $9
Times units produced per hour x4 x2 x8 x3
Contribution margin per hour
(contribution margin per unit
times units per hour) $28 $30 $24 $27
Priority 2nd 1st 4th 3rd
Minimum production requirements:

6,000
Required Piece A 1/4
250 5,750 $28
Required Piece C 1/8
250 5,500 24
Required Piece D 1/3
400 5,100 27
Hours needed for minimum production 900 $23,800
Maximum sales limits with remaining hours:

5,100
1st Piece B 1/2 5,000 2,500 2,600 $30 $75,000
2nd Piece A 1/4 4,000 1,000 1,600 28 28,000
3rd Piece D 1/3 4,800 1,600 0 27 43,200
Hours used for maximum sales 5,100
$146,200
Totals for all production 6,000 $170,000
Number produced:
Piece A 5,000 units
Piece B 5,000 units
Piece C 2,000 units
Piece D 6,000 units
10-42.
(1) Select an alternative:
(a) Produce 600 additional units for European producers:
Additional contribution margin

($1,800 + $800) x 600 units $1,560,000
Minus:
Additional freight cost per unit
($550 x 600 units) $330,000
Increased fixed costs 150,000
International selling costs 200,000 (680,000)
Increase in profits $880,000
(b) Produce laser lathe:
Selling price $15,500

Minus variable costs:
Prime costs $4,500
Variable overhead 2,000
Variable selling 500 (7,000)
Contribution margin per unit $8,500
Times number of units x 200
Total contribution margin $1,700,000
Minus fixed costs:
Fixed overhead $700,000
Fixed selling expenses 250,000 (950,000)
Increase in profits $750,000
(c) Lease facilities:
Fixed lease payment ($30,000 per month x 12) $360,000

Variable lease payment ($15,000,000 x 2%) 300,000
Lease revenue $660,000
Management should select Alternative (a) since it provides the greatest additional profit for the
company. All three alternatives have significant risks. Lack of knowledge of the European
customer base and competition increases the uncertainty involved. However, Harris will be
marketing a known product. In the case of the smaller laser lathe, the production costs are
uncertain; and the acceptance in the market is also unknown. The third alternative depends
on the ability of the Olson firm to generate sales and commissions equal to nearly half the
proposed total lease income.
(2) The opportunity cost of selecting the European option is not producing the small laser. This
option would generate $750,000. This is the opportunity cost of the European decision.
10-43.
(1) The company has three alternative to analyze: (a) produce Pre only, (b) produce Pre and
Post, and (c) produce Post only and purchase Pre. Each of these is examined in order:
(a) Produce Pre only:
Selling price $3.00

Minus direct materials and labor (1.95)
Contribution margin per pound $1.05
Times number pounds produced

(300,000 hours x 10 pounds per hour) x 3,000,000 pounds
(b) Produce Pre and Post:
Selling price $6.80

Minus:
Costs to produce Pre (from above) (1.95)
Direct materials and labor (1.90)
Total costs ($3.85)
Times number of pounds produced

(300,000 hours x 10 pounds per 3 hours) x 1,000,000 pounds
(c) Produce Post only and purchase Pre:
Selling price $6.80

Minus:
Purchase price of Pre (3.25)
Direct materials and labor (1.90)
Total costs ($5.15)
Times number of pounds produced
(300,000 hours x 10 pounds per 2 hours) x 1,500,000 pounds
Ms. Bailey is incorrect. She included fixed costs in her analysis. Fixed costs should not be
included in the analysis, as shown above, because they do not vary among the three
alternatives. She is looking in the right direction, however. A decision rule based on internal
costs and market prices is needed to optimize profits.
(2) Given the above analysis, it is in the best interests of the company to produce Pre only since it
gives the highest contribution margin.
(3) Assuming that Bucien can sell all of either product produced and that the internal cost
functions remain constant, the decision on whether to produce and what to produce will
depend on the market prices.
To produce or not to produce for the long run:
Contribution margin from production must in the long run cover $1,800,000, the fixed
costs of the operation (3,000,000 x $0.60 fixed cost per pound). Select the product or
combination with the highest contribution margin per ton hour. Multiply the contribution
margin per pound times the production capacity for that product or combination. If the
current market prices generate a contribution margin greater than $1,800,000, the firm
earns a profit.
To produce or not to produce in the short run:
Current market prices must generate a positive contribution margin, covering direct
materials and labor costs. Any market price below this level will mean variable costs are
not being recovered from revenue.
To select which products to produce:
Using current market prices, the product that generates the highest contribution margin
per ton hour should be produced.
10-44. To begin this problem, first prepare a contribution margin income statement (in thousands):
Product J Product K Product L

Dollars % Dollars % Dollars %
Sales SFr300 100% SFr500 100% SFr800 100%
Variable costs (90) 30 (200) 40 (400) 50
Contribution margin SFr210 70% SFr300 60% SFr400 50%
Fixed costs, separable (90) 30 (100) 20 (120) 15
Direct contribution margin SFr120 40% SFr200 40% SFr280 35%
Joint costs (60) 20 (100) 20 (160) 20
Net profit SFr 60 20% SFr100 20% SFr120 15%
(1) The new product, M, would have to cover not only its own costs but also the direct contribution
margin of Product J (SFr120,000) which it is replacing:
SFr104,000 + SFr120,000 = 32,000 units

SFr12 – SFr5
(2) Alter K: Increased revenue (SFr500 x 120%) SFr600
Minus variable cost (SFr600 x 55%) (330)
Contribution margin SFr270
Minus fixed costs (SFr100 + SFr40) (140)
Direct contribution margin SFr130
The company should not make these changes since the direct contribution margin decreases
by SFr70 (SFr200 – SFr130).
(3) Rankings:
Product J Product K Product L
Total sales 3rd 2nd 1st
Variable contribution
margin percentage 1st 2nd 3rd
Direct contribution
margin percentage 1st (tied) 1st (tied) 2nd
Net profit percentage 1st (tied) 1st (tied) 2nd
Total sales is used for market penetration and market share analysis. Variable contribution
margin percentage is used for break-even analysis and other cost, volume, and profit
analyses. Direct contribution margin percentage is used to evaluate the profitability of the
product. Net profit (after joint and allocated costs) is useful as a total for the firm but tells little
about each product.
10-45.
(A-1) Drop Product 111:
Selling price $12

Minus variable cost (7)
Contribution margin $5 per unit
Product 111 should be dropped when its contribution margin becomes negative. Also, if an
alternative use of the capacity exists that generates a higher contribution margin per hour of
capacity used, drop Product 111. However, since no alternative use exists for the use of
Product 111's capacity, the product should not be dropped since it is contributing $75,000 to
profits (15,000 units x $5 per unit).
(A-2) Drop Product 111 and calculate effects on Product 110:
After Before
Selling price $22 $22
Minus variable cost (14) (14)
Contribution margin $8 $8
Minus fixed costs (10) ($350,000  35,000 units) (7) ($350,000  50,000 units)
Net profit ($2) $1
The net profit per unit of Product 110 drops from $1 per unit to a loss of $2 per unit due to the
allocation of more fixed expenses. If Product 111 is dropped, Products 110 and 112 must
absorb more overhead, lowering their respective net profits per unit but leaving their
contribution margins per unit unchanged.
(A-3) Drop Product 111 and increase sale of Product 112:
If Product 111 is dropped, Product 112 must cover the lost contribution margin of $75,000 from
Product 111:
$75,000 = 6,819 additional units

$27 – $16
(B-1) Replace Product 111 with Product 113:
The sales manager is both right and wrong. The total fixed cost will not change; only the fixed
cost per unit will change. Fixed costs should always be analyzed as a total and not converted
to a per unit basis. Since Product 113 takes only half as long to produce as Product 111, twice
as many units could be produced (2 x 15,000 units); and, if added, the total contribution of this
product will be $60,000 ($2 per unit x 30,000 units), compared with the total contribution of
$75,000 ($5 per unit x 15,000 units) from Product 111. This assumes we can sell 30,000 units
of Product 113. Examine total profits:
Profit with Profit with

Product 111 Product 113
Contribution margin:
Product 110 ($8 x 10,000) $ 80,000 $ 80,000
Product 111 ($5 x 15,000) 75,000
Product 112 ($11 x 25,000) 275,000 275,000
Product 113 ($2 x 30,000) 60,000
Total $430,000 $415,000
Minus fixed cost (350,000) (350,000)
Net profit $80,000 $65,000
The company will lose $15,000 in profits if Product 113 replaces 111.
(B-2) For Product 113 to be as profitable as 111, the price must increase:
Selling price = (Total variable costs + Lost contribution margin)  Units

Selling price = [($6 x 30,000 units) + $75,000]  30,000 units
Selling price = $8.50 per unit
10-46.
(1) Adding departments:
Garden Supplies Beer and Wine
Revenue $40,000 $60,000
Minus variable costs (16,000) (36,000)
Variable contribution margin $24,000 $24,000
Minus incremental fixed costs (12,000) (18,000)
Segment contribution margin $12,000 $ 6,000
Plus added grocery contribution margin 12,000 19,200
($240,000 x 5%; x 8%)
Incremental net income $24,000 $25,200
(2) Based on this analysis, the beer and wine department yields the highest incremental net
income. Several qualitative factors must be evaluated by White:
What is his attitude toward alcohol and selling alcohol?

What is the small town's attitude toward his selling alcohol?
Have all insurance costs and other operating expenses been considered?
What are the competitive niches in the small town, particularly given the invasion of the
discount store?
10-47. Memo:
To: Production planning and purchasing

From: Analyst
The attached analysis examines the selection of parts for production in Department 8. The
capacity in Department 8 is not sufficient to make all the parts needed in our production of
building products. We must out-source some amount of the work. We have obtained "best
quotes" from qualified suppliers for four of the parts we are considering for out-sourcing.
Given that quality and delivery questions are answered in a satisfactory manner, the decision
should be based on the most productive use of Department 8 capacity. This means using the
purchase price and calculating a contribution margin per hour of production time. Complicating
factors are setup costs and batch sizes for each part.
This is a make or buy decision with a scarce resource constraint and batch setup costs. The
following analysis will find the variable contribution margin per hour for producing internally.
Then, batch setup costs are added to extend the analysis to direct contribution margin per
hour. Batch setup costs are variable by setup but are fixed relative to the number of units
produced in each batch. The analysis then finds the optimal combination of internal
production. The purchase requirements for the remaining parts are also presented.
Iron Steel Steel Assembly

Variable contribution margin: Frames Frames Housing Unit
# 10 # 11 # 12 # 13
Outside prices per unit $10.00 $11.00 $32.00 $18.00
Minue: Materials cost per unit -5.00 -6.00 -18.00 -8.00
Variable labor cost per unit -1.50 -1.00 -5.00 -3.00
Contribution margin per unit $3.50 $4.00 $9.00 $7.00
Hours required per unit 1 hour 4 hours 5 hours 2 hours

Variable contribution margin per hour $3.50 $1.00 $1.80 $3.50
It is at this point that Iron Frames and the Assembly Unit are tied for the highest priority ranking
for production. However, first we must consider the setup costs per batch before ranking the
products:
Iron Steel Steel Assembly
Direct contribution margin per hour: Frames Frames Housing Unit
# 10 # 11 # 12 # 13
Units required 80,000 40,000 15,000 100,000
Batch size (in units)  10,000  10,000  3,000  5,000
Number of batches required 8
4 5 20
Estimated setup cost per batch x $4,000 x $3,000 x $3,000 x $2,000
Total setup costs $32,000 $12,000 $15,000 $40,000
Pro-forma income statement: Iron Steel Steel Assembly

Frames Frames Housing Unit
# 10 # 11 # 12 # 13
Units required 80,000 40,000 15,000 100,000
Hours required per unit x 1 hour x 4 hours x 5 hours x 2 hours
Total hours required 80,000 160,000 75,000 200,000
Contribution margin per hour x $3.50 x $1.00 x $1.80 x $3.50
Total contribution margin $280,000 $160,000 $135,000 $700,000
Less total setup costs -32,000 -12,000 -15,000 -40,000
Direct contribution margin $248,000 $148,000 $120,000 $660,000
Divided by number of hours  80,000  160,000  75,000  200,000
Direct contribution margin per hour $3.10 $0.93 $1.60 $3.30
Priority rankings 2nd 4th 3rd 1st

Internal production priorities:
Hours Production Hours Available Margin Contribution
300,000
1st # 13 2 100,000 200,000 100,000 $3.30 $660,000
2nd # 10 1 80,000 80,000 20,000 $3.10 248,000
rd
3 # 12 5 4,000 20,000 0 $1.60 32,000
Total hours used 300,000 $940,000
The company should produce: # 13 100,000 units

# 10 80,000 units
# 12 4,000 units
The company would have to purchase the remaining units needed:
# 12 11,000 units (15,000 – 4,000)

# 11 40,000 units
The contribution from this combination would be:
Savings from producing internally:

# 10 Iron frames (80,000 units x $3.50) $ 280,000
# 12 Steel housing (4,000 units x $9) 36,000
# 13 Assembly unit (100,000 units x $7) 700,000
Total savings from producing internally $1,016,000
Less batch costs:

# 10 Iron frames (8 batches x $4,000) ($32,000)
# 12 Steel housing (2 batches x $3,000) (6,000)
# 13 Assembly unit (20 batches x $2,000) (40,000)
Total batch costs ($78,000)
Net savings from producing internally $938,000
10-48.
(a) Most companies have specific policies about gifts from customers and vendors to company
personnel. Often, these types of activities appear innocent, but the intent is clearly to
influence the purchasing agent decisions. This may or may not actually influence the choice
made. These types of activities are viewed as traditional marketing in some firms and as
clearly inappropriate in many other firms and industries.
(b) This is a corporate social responsibility issue. Separating personal and business-related
problems is difficult. Employees have been successful in obtaining financial settlements and
workmen's compensation payments in similar cases. Corporate personnel policies should
encourage identification of problems like this. Alcohol and drug abuse, induced by job stress
or other factors, should be confronted and handled in a professional way. Sales policies
should not encourage excesses that Don's friend apparently experienced.
(c) This is solid customer service. Perhaps Don's firm would not meet the competition. But this
type of service will likely be rewarded with sales, assuming all other factors are equal.
(d) This is a "small potatoes" issue, probably. But it creates an aura of expected benefits that is
unprofessional. It implies that to get our business, we expect donuts. Or, our decisions are for
sale for the price of donuts. Traditions like this grow innocently in organizations as an esprit de
corps issue and gradually may include outsiders who willingly or unwillingly can pay the bill.
(e) See the Contemporary Practice item in the chapter. This "match it or your out" approach may
result in Don losing this business, but much more needs to be known before Don responds or
gives in. The existence of a comparable offer must be known. Is it comparable? Are other
factors involved? Is Don being blackmailed?
Solutions to Cases
CASE 10A – Kahn Products
(1) Make or buy:

Direct materials €1,050,000 Purchase cost (50,000 units x €23) €1,150,000
Direct labor 225,000 Rework and scrap 150,000
Variable overhead 180,000 Warranty claims (€660,000 x 25%) 165,000
Replacement parts (€127,788 x 50%) 1 63,894
Total make costs €1,455,000 Total buy costs €1,528,894
Net make advantage €73,894
The quantitative analysis shows that the company should make the part since making costs
€73,894 less than buying the part.
1
We initially purchase 50,000 units of which 10 percent will fail, forcing us to purchase an
additional 5,000 units (50,000 x 10%). Unfortunately, 10 percent of these additional units
will fail, causing us to purchase 500 more units, of which 10 percent will fail, and so on.
The 10 percent failure rate will force us to purchase an additional 5,556 units [(50,000 units
 0.90) – 50,000]. Since we split the cost on the extra units with the supplier, the
replacement parts' cost is €63,894 [5,556 units x (€23  2)].
(2) Bernie Steer makes a completely invalid point. Since the problem states that the company will
be using excess capacity to make the necessary part, the excess capacity is a free good. The
overhead to which Steer refers will be incurred regardless of whether the part is made
internally or is purchased outside. It is an irrelevant cost to this decision.
(3) This is a case of arguing over pennies while the big dollars are squandered. The issue here is
qualitative and quantitative. Get the problem fixed, and spend whatever it takes to get the
failure rate to zero.
Effects of this decision on:
The factory: If the part is to be made, production overhead for planning and control will be
increased somewhat. Purchasing, materials handling, quality control, and other areas will
see some increase in workloads. Perhaps with better quality parts, overall productivity will
increase. Rework and scrap savings might pay for most of any higher materials costs.
Sales: JUST FIX IT! Sales will not care if the problem is fixed by making the part on the
inside or purchasing it outside. They want to get a quality product to the customer.
Customers: Product failure will not be tolerated. Dependability must be achieved at whatever
cost.
Profits:
Short term: Either have suppliers upgrade the materials or bring the part inside. The 10
percent failure rate in production is probably more expensive than the €150,000 scrap and
rework costs show. Higher quality (either from inside or outside) will probably increase
efficiency and cover the higher materials cost.
Long term: Low quality results in no customers, no profits, and no firm.
CASE 10B – Little Bears’ House
(1) Since the center is operational, all of these decisions are based on incremental data. That is,
we look for incremental revenues and costs:
(a) Class sizes meeting the new child/instructor ratios would result in additional classes: two for
the 2-3 age group, one for the 3-4 age group, one for the 4-5 age group, and one for the 5-6
age group.
The incremental costs will be instructors' salaries ($1,600 per instructor, one instructor per
class) and payroll expenses (10 percent of instructors' salaries plus $200 per person) for each
new section:
Percentage
New Increase
Instructor Average over
to Student Total Number of Incremental Tuition Current
Age Ratio Children New Classes Costs Increase Tuition
2-3 5:1 20 2 $3,920 1 $196.00 61%
3-4 8:1 15 1 1,960 2 130.67 47
4-5 8:1 15 1 1,960 2 130.67 47
5-6 10:1 30 1 1,960 2 65.33 25
1
Salaries (2 instructors x $1,600) $3,200
Staff benefits [($3,200 x 10%) + (2 x $200)] 720
Incremental costs $3,920
2
Salaries (1 instructor x $1,600) $1,600
Staff benefits [($1,600 x 10%) + (1 x $200)] 360
Incremental costs $1,960
The question is whether or not the parents would accept these increases. This is a good
opportunity for discussion.
(b) Since Rivera does not want to create a new class unless the number of students on the waiting
list is greater than the number of students required for the class, only one new class would be
created. It would be in the 5-6 age group where the number of students on the waiting list is
11 and the required students for the class is 10.
Incremental revenue ($260 x 10 students) $2,600

Instructor's salary $1,600
Staff benefits [(10% x $1,600) + $200] 360
Food ($1.25 x 10 students x 22 days) 275
Variable supplies ($1 x 10 students) 10 2,245
Incremental profit $355
Creating a new class is profitable, since total profits would increase by $355.
(c) If class sizes are reduced as in Part (1) a., five new classes would have to be created, but the
classes in the 3-4 and 4-5 age groups would each have one spot open in them allowing two
new students from the waiting list to join these classes. And if new classes are created from
the waiting list, two more new classes would be necessary: one for the 2-3 age group and one
for the 5-6 age group. The additional classes created from the waiting list would bring in 15
new students (5 in the 2-3 age group and 10 in the 5-6 age group):
Incremental revenue:
Increased fees, old students:
2-3 age group ($196 x 20) $3,920
3-4 age group ($130.67 x 15) 1,960
4-5 age group ($130.67 x 15) 1,960
5-6 age group ($ 65.33 x 30) 1,960
New students:
2-3 age group ($516 x 5 students) 2,580
3-4 age group ($410.67 x 1 student) 411
4-5 age group ($410.67 x 1 student) 411
5-6 age group ($325.33 x 10 students) 3,253
Total incremental revenue $16,455

Instructors (7 new classes x $1,600) $11,200
Staff benefits [(10% x $11,200) + $1,400] 2,520
Food ($1.25 x 17 students x 22 days) 468
Variable supplies ($1 x 17 students) 17
Total incremental costs (14,205)
Incremental profit $2,250
This alternative increases profits by $2,250.
(d) New infant care:
Incremental revenue ($516 x 5 students) $ 2,580

Incremental costs:
Instructor $1,600
Staff benefits [(10% x $1,600) + $200] 360
Variable supplies ($1 x 5 students) 5 1,965
Incremental profit $615
The infant care class is profitable since it contributes $615 to net income.
(2) Memo:
To: Ms. Rivera and Ms. Dong

From: Analyst
The detailed analyses performed for the numerous alternatives we discussed are attached. As
the quantitative analyses were being developed, several qualitative issues came to the fore
and are identified here.
Given the four alternatives attached, Alternative C is the best since it contributes the most to
net income, $2,250. However, this assumes that the parents would be willing to pay the
proposed tuition increases.
Problem areas:
Tuition: What will tuition increases do to demand? Most of the percentage increases are
above acceptable levels based on the survey. Will current parents leave after the new
higher fees are imposed?
Waiting list: Is the waiting list dependable? Is demand in the surrounding area able to support
the growth that the waiting list implies?
Infant care: This introduces a new type of care. Are all costs of infant care included?
Teacher availability: Are trained teachers available at $1,600 per month?
Other cost behaviors: With the number of classes doubling, will other overheads increase, i.e.,
the need for more supervisory staff?
The analyses depend heavily on your assumptions about class sizes and cost patterns. As
these change, the analyses must be updated on an ongoing basis.

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CHAPTER 10 SOLUTIONS

Solutions to Questions for Review and Discussion

2. The managerial accountant is involved in all eight steps, as follows:

3. Irrelevant cost data:

1. Any past cost

Relevant cost data:

1. The cost must be a present or future value and

4. Identifying choices is an important step because it determines which choices will be

11. The guidelines that should be followed are:

12. The decision rule:

14. Key assumptions:

Subject: Scheduling of tax return customers

Expanding operations causes a decrease of $3,000 in net income.

(2) Incremental analysis approach:

Incremental sales ($30 x 1,000 units) $30,000

Direct materials $10.00

Sales Value Additional Costs Net Incremental Revenue Priority

10-5. Zelenski products:

Gallons 10,000 10,000 10,000

Additional revenue $22,000 $17,500 $20,000

Product X Product Y Product Z

Total revenue $32,000 $37,500 $50,000

The key assumptions:

10-6. Artists' priorities:

Time per piece 1 hour 0.5 hour 0.2 hour

* CM piece x Pieces per hour = Contribution margin per hour

Order of priority: Medium, small, large.

Mr. Li would be better off quantitatively if he purchased the dumplings. He should be

With special order:

Dept 2 Dept 3 Total

Materials and variable supplies $ 4.25

Total manufacturing costs $ 9.50

The markup on total costs is now 9.4 percent ($1.20  $12.75).

10-12. Ballou Corporation:

10-13. Hinds Copies course packet cost estimate:

Number of packets needed:

Incremental costs: Variable costs (510 packets x $2) $1,020

10-14. Ryan's courses:

Current Grade Hours/0.5 Grade Priority Study Hours Final Grade

10-15. Murphy Farms sprinkle system:

Time per service 0.8 hour 0.5 hour 0.2 hour

Contribution margin per service

Priority: Highest profitability 3rd 2nd 1st

Contribution margin generated $10,000 + $7,500 + $67,500 = $85,000

Number Remaining Contribution

A major benefit to the company is that day-to-day management is transferred to a professional

Key issues of concern:

(1) Analysis of 1,000 barrels of naphtha:

Revenue after processing ($85 per barrel) $85,000

Analysis of other distillates:

Revenue after processing $110,000

Analysis of kerosene: Kerosene must be sold at the split-off point.

(2) Solving for the price of crude oil:

(a) Not true; Department E is earning $200,000 in variable contribution margin.

Make costs Buy costs

Make costs = Buy costs

Hours required for each unit 5 10 4 2

Priority: Highest unit profitability 4th 2nd 1st 3rd

1st: 8,000 units of Piece C

The best product combination is now:

Piece A 2,000 units

Incremental revenue from additional processing

Total analysis approach: