亨格瑞管理会计英文第15版练习答案06.doc

CHAPTER 6
COVERAGE OF LEARNING OBJECTIVES

LEARNING OBJECTIVE
FUNDA-
MENTAL ASSIGN-MENT
MATERIAL
CRITICAL THINKING EXERCISES AND EXERCISES

PROBLEMS
CASES, EXCEL, COLLAB. & INTERNET EXERCISES
LO1: Use a differential analysis to examine income effects across alternatives, and show that an opportunity cost analysis yields identical results.

24,27,28,29, 30,31, 42,44
45,46,47,48,
49,50,56,61

LO2: Decide whether to make or to buy certain parts or products.
A1,B1
25,32,33,34
62,63
65,66,67,68, 70
LO3: Choose whether to add or delete a product line using relevant information.
B3
36

LO4: Compute the optimal product mix when production is constrained by a scarce resource.
A2,B2
35
51,53

LO5: Decide whether a joint product should be processed beyond the split-off point.
A3,B4
37,38
54,55
69
LO6: Decide whether to keep or replace equipment.
A4,B5
40
57,59

LO7: Identify irrelevant and misspecified costs.

26,39,41
52,58,64
71
LO8: Discuss how performance measures can affect decision making.
B6
43

60

CHAPTER 6
Relevant Information and Decision Making With a Focus on Operational Decisions

6-A1 (20 min)

1. The key to this question is what will happen to the fixed overhead costs if production of the boxes is discontinued. Assume that all $60,000 of fixed costs will continue. Then, Sunshine State will lose $20,000 by purchasing the boxes from Weyerhaeuser:
Payment to Weyerhaeuser, 80,000 × $2.10 $168,000
Costs saved, variable costs 148,000
Additional costs $ 20,000

2. Some subjective factors are:
· Might Weyerhaeuser raise prices if Sunshine State closed down its box-making facility?
· Will sub-contracting the box production affect the quality of the boxes?
· Is a timely supply of boxes assured, even if the number needed changes?
· Does Sunshine State sacrifice proprietary information when disclosing the box specifications to Weyerhaeuser?

3. In this case the fixed costs are relevant. However, it is not the depreciation on the old equipment that is relevant. It is the cost of the new equipment. Annual cost savings by not producing the boxes now will be:
Variable costs $148,000
Investment avoided (annualized) 80,000
Total saved $228,000
The payment to Weyerhaeuser is $228,000 - $168,000 = $60,000 less than the savings, so Sunshine State would be $60,000 better off subcontracting the production of the boxes.

6-A2 (10 min.)

1. Contribution margins:
Plain = $70 - $55 = $15
Professional = $100 - $75 = $25

Contribution margin ratios:
Plain = $15 ÷ $70 = 21.4%
Professional = $25 ÷ $100 = 25%

2. Plain Professional
a. Units per hour 2 1
b. Contribution margin per unit $15 $25
Contribution margin per hour $30 $25
Total contribution for 20,000 hours $600,000 $500,000

3. The plain circular saws are the best use of the scarce machine hours. For a given capacity, the criterion for maximizing profits is to obtain the greatest possible contribution to profit for each unit of the limiting or scarce factor. Moreover, fixed costs are irrelevant unless their total is affected by the choice of products.

6-A3 (15 min.) Table is in thousands of dollars.

1,2. (a) (b) (a)-(b) (c) (a)-(b)-(c)
Separable
Sales Sales Costs Incremental
Beyond at Incremental Beyond Gain or
Split-Off Split-Off Sales Split-Off (Loss)

A 230 54 176 190 (14)
B 330 32 298 300 (2)
C 175 54 121 100 21
Increase in overall operating income from further processing of A, B, and C 5

The incremental analysis indicates that Product C should be processed further, but Products A and B should be sold at split-off. The overall operating income would be $44,000, as follows:

Sales: $54,000 + $32,000 + $175,000 $261,000
Joint cost of goods sold $117,000
Separable cost of goods sold 100,000 217,000
Operating income $ 44,000

Compare this with the present operating income of $28,000. That is, $230,000 + $330,000 + $175,000 - ($190,000 + $300,000 + $100,000 + $117,000) = $28,000. The extra $16,000 of operating income comes from eliminating the $16,000 loss resulting from processing Products A and B beyond the split-off point.
6-A4 (30-40 min.)

Problem 6-60 is an extension of this problem. The two problems make a good combination.

1. Operating inflows for each year, old machine:
$910,000 - ($810,000 + $60,000) $40,000
Operating inflows for each year, new machine:
$910,000 - ($810,000 + $22,000*) $78,000
* $60,000 - $38,000

Cash flow statements (in thousands of dollars):

Keep Replace
Three Three
Year Years Years Year Years Years
1 2 & 3 Together 1 2 & 3 Together
Receipts, inflows from operations 40 40 120 78 78 234
Disbursements:
Purchase of "old" equipment (90)* -- (90) (90) -- (90)
Purchase of "new" equipment:
Total costs less proceeds
from disposal of "old"
equipment ($99,000-$15,000) -- -- -- (84) -- (84)
Net cash inflow (outflow) (50) 40 30 (96) 78 60

* Assumes that the outlay of $90,000 took place on January 2, 2010, or sometime during 2010. Some students will ignore this item, assuming correctly that it is irrelevant to the decision. However, note that a statement for the entire year was requested.

The difference for three years taken together is $60,000 - $30,000 = $30,000. Note particularly that the $90,000 book value can be omitted from the comparison. Merely cross out the entire line; although the column totals will be affected, the net difference will still be $30,000.

2. Income statements (in thousands of dollars):

Keep Replace
Three Three
Years Years Year Years Years
1, 2 & 3 Together 1 2 & 3 Together
Sales 910 2,730 910 910 2,730
Expenses:
Other expenses 810 2,430 810 810 2,430
Operating of machine 60 180 22 22 66
Depreciation 30 90* 33 33 99
Total expenses 900 2,700 865 865 2,595
Loss on disposal:
Proceeds ("revenue") -- -- (15) -- (15)
Book value ("expense") -- -- 90 -- 90*
Loss -- -- 75 -- 75
Total charges 900 2,700 940 865 2,670
Net income 10 30 (30) 45 60

* As in part (1), the $90,000 book value can be omitted from the comparison without changing the $30,000 difference. This would mean dropping the depreciation item of $30,000 per year (a cumulative effect of $90,000) under the "keep" alternative, and dropping the book value item of $90,000 in the loss on disposal computation under the "buy" alternative.

Difference for three years together, $60,000 - $30,000 = $30,000.

Note the motivational factors here. A manager may be reluctant to replace simply because the large loss on disposal will severely harm the profit performance in Year 1.

3. The net difference for the three years taken together would be unaffected because the item is a past cost. You can substitute any number for the original $90,000 figure without changing this answer.

For example, examine how the results would change in part (1) by inserting $1 million where the $90,000 now appears (in thousands of dollars):

Keep: Replace:
Three Years Three Years
Together Together Difference
Receipts, inflows from operations 120 234 114
Disbursements:
Purchase of old equipment (1,000) (1,000) 0
Purchase of new equipment:
Gross price (99)
Disposal proceeds of "old" 15 -- ( 84) (84)
Net cash outflow ( 880) ( 850) 30

In sum, this may be a horrible situation. The manager really blundered. But keeping the old equipment will compound the blunder to the cumulative tune of $30,000 over the next three years.

4. Diplomatically, Lee should try to convey the following All of us tend to indulge in the erroneous idea that we can soothe the wounded pride of a bad purchase decision by using the item instead of replacing it. The fallacy is believing that a current or future action can influence the long-run impact of a past outlay. All past costs are down the drain. Nothing can change what has already happened. The $90,000 has been spent. Subsequent accounting for the item is irrelevant. The schedules in parts (1) and (2) clearly show that we may completely ignore the $90,000 original outlay and still have a correct analysis. The important point is that the $90,000 is not an element of difference between alternatives and, therefore, may be safely ignored. The only relevant items are those expected future items that will differ between alternatives.

5. The $90,000 purchase of the original equipment, the sales, and the other expenses are irrelevant because they are common to both alternatives. The relevant items are the following (in thousands of dollars):

Three Years
Together
Keep Replace
Operating of machine
(3 × $60; 3 × $22) $180 $ 66
Incremental cost of new machine:
Total cost $99
Less proceeds of old machine 15
Incremental cost -- 84
Total relevant costs $180 $150

Difference in favor of buying $ 306-B1 (15-20 min.)

1. Make Buy
Total Per Unit Total Per Unit
Purchase cost €10,000,000 €50
Direct material €5,500,000 €27.50
Direct labor 1,900,000 9.50
Factory overhead, variable 1,100,000 5.50
Factory overhead, fixed
avoided 900,000 4.50
Total relevant costs €9,400,000 €47.00 €10,000,000 €50
Difference in favor of making € 600,000 € 3.00

The numerical difference in favor of making is €600,000 or €3.00 per unit. The relevant fixed costs are €900,000, not €3,000,000.

2. Buy and Leave
Make Capacity Idle Buy and Rent
Rent revenue -- -- € 1,150,000
Obtaining of components €(9,400,000) €(10,000,000) €(10,000,000)
Net relevant costs €(9,400,000) €(10,000,000) € (8850,000)

The final column indicates that buying the components and renting the vacated capacity will yield the best results in this case. The favorable difference is €9,400,000 - €8,850,000 = €550,000.

6-B2 (15 min.)

1. If fixed manufacturing cost is applied to products at $1.00 per machine hour, it takes $.75 ÷ $1.00, or 3/4 of an hour to produce one unit of XY-7. Similarly, it takes $.25 ÷ $1.00 or 1/4 of an hour to produce BD-4.

2. If there are 100,000 hours of capacity:

XY-7: 100,000 hours ÷ 3/4 = 133,333 units.
BD-4: 100,000 hours ÷ 1/4 = 400,000 units.

Total contribution margins show that BD-4 should be produced, generating $200,000 of contribution margin, which is $66,667 more than would be earned by XY-7.

Per Unit Units Total
XY-7 $6.00 - ($3.00 + $2.00) = $1.00 133,333 $133,333
BD-4 $4.00 - ($1.50 + $2.00) = $ .50 400,000 $200,000

6-B3 (15-20 min.)

All amounts are in thousands of British pounds.

The major lesson is that a product that shows an operating loss based on fully allocated costs may nevertheless be worth keeping. Why? Because it may produce a sufficiently high contribution to profit so that the firm would be better off with it than any other alternative.

The emphasis should be on totals:

Replace Magic Department With
Existing General
Operations Merchandise Electronic Products
Sales 6,000 -600 + 250 = 5,650 -600 + 200 = 5,600
Variable expenses 4090 -390 + 175a = 3,875 -390 + 100 b = 3,800
Contribution margin 1,910 -210 + 75 = 1,775 -210 + 100 = 1,800
Fixed expenses 1,100 -120 + 0 = 980 -120 + 30 = 1,010
Operating income 810 - 90 + 75 = 795 - 90 + 70 = 790
a(100% - 30%) × 250
b(100% - 50%) × 200

The facts as stated indicate that the magic department should not be closed. First, the total operating income would drop. Second, fewer customers would come to the store, so sales in other departments may be affected adversely.

6-B4 (15 min.)

1. Sales ($400 + $600 + $100) $1,100
Costs:
Raw materials $700
Processing 100
Total 800
Profit $ 300

2. Sales ($840 + $850 + $170) $1,860
Costs:
Joint costs $800
Frozen dinner costs 440
Salisbury steak costs 200
Tanning costs 80
Total costs 1,520
Profit $ 340

Although it is more profitable to process all three products further than it is to sell them all at the split-off point, it is important to look at the economic benefit from further processing of each individual product.

3. Steaks to frozen dinners:
Additional revenue from processing further ($840 - $400) $440
Additional cost for processing further 440
Increase (decrease) in profit from processing further $ 0

Hamburger to Salisbury steaks:
Additional revenue from processing further ($850 - $600) $250
Additional cost for processing further 200
Increase (decrease) in profit from processing further $ 50

Untanned hide to tanned hide:
Additional revenue from processing further ($170 - $100) $ 70
Additional cost for processing further 80
Increase (decrease) in profit from processing further $ (10)

Only the hamburger dictates that it should be processed further, because it is the only product whose additional revenue for processing further exceeds the additional cost. You are indifferent about processing further steak to frozen dinners, as the incremental profit is 0.

4. The resulting profit would be $350:

Sales ($400 + $850 + $100) $1,350
Costs:
Joint costs $800
Further processing of hamburger 200
Total cost 1,000
Profit $ 350

6-B5 (15-20 min.)

1. Three Years Together
Keep Replace Difference
Cash operating costs $42,000 $27,000 $15,000
Old equipment, book value:
Periodic write-off as
depreciation 15,000 -
or lump-sum write-off - 15,000 *
Disposal value -6,000 * 6,000
New equipment, acquisition cost 15,000 ** - 15,000
Total costs $57,000 $51,000 $ 6,000
*In a formal income statement, these two items would be combined as "loss on disposal" of $15,000 - $6,000 = $9,000.
**In a formal income statement, written off as straight-line depreciation of $15,000 ÷ 3 = $5,000 for each of three years.

2. Three Years Together
Keep Replace Difference
Cash operating costs $42,000 $27,000 $15,000
Disposal value of old equipment - -6,000 6,000
New equipment, acquisition cost - 15,000 - 15,000
Total relevant costs $42,000 $36,000 $ 6,000

This tabulation is clearer because it focuses on only those items that affect the decision.

3. Benefits of the replacement alternative* $15,000
Deduct initial net cash outlay required* 9,000
Difference in favor of replacement $ 6,000
* 3 × ($14,000 - $9,000)
** $15,000 - $6,000

Also, the new equipment is likely to be faster, thus saving operator time. The latter is important, but it is not quantified in this problem.
6-B6 (10 min.)

1. The replacement alternative would be chosen because the county would have $6,000 more