管理會計ima13sol_ch05.doc

CHAPTER 5COVERAGE OF LEARNING OBJECTIVESLEARNING OBJECTIVEFUNDA-MENTAL ASSIGN-MENTMATERIALCRITICAL THINKING EXERCISES AND EXERCISESPROBLEMSCASES, EXCEL, COLLAB. & INTERNET EXERCISESLO1: Discriminate between relevant and irrelevant information for making decisions.A1,B129,3153LO2: Apply the decision process to make business decisions.30,3153LO3: Decide to accept or reject a special order using the contribution margin technique.A1,B13246,47,52,53, 5462LO4: Choose whether to add or delete a product line using relevant information.B33752,56LO5: Compute a measure of product profitability when product is constrained by a scarce resource.A2,B23650,53,5863LO6: Identify the factors that influence pricing decisions in practice.26,27,39,4045,48,49,5464LO7: Compute a target sales price by various approaches, and compare the advantages and disadvantages of these approaches.A327,40,41,4247,48,53LO8: Use target costing to decide whether to add a new product.A4,B428,43,4459,60,61CHAPTER 5Relevant Information and Decision Making: Marketing Decisions5-A1(25-30 min.)1.A contribution format, which is similar to Exhibit 5-3, clarifies the analysis.WithoutWithSpecialEffect ofSpecialOrder Special OrderOrderUnits2,000,000150,0002,150,000 Total Per UnitSales$10,000,000$660,000$4.401$10,660,000Less variable expenses: Manufacturing$ 3,600,000$300,000$2.002$ 3,900,000 Selling & administrative 800,000 37,500 .253 837,500 Total variable expenses$ 4,400,000$337,500$2.25$ 4,737,500Contribution margin$ 5,600,000$322,500$2.15$ 5,922,500Less fixed expenses: Manufacturing$ 2,900,00000.00$ 2,900,000 Selling & administrative 2,000,000 00.00 2,000,000 Total fixed expenses$ 4,900,000 0 0.00$ 4,900,000Operating income$ 700,000$322,500$2.15$ 1,022,5001$660,000 150,000 = $4.402Regular unit cost = $3,600,000 2,000,000 =$1.80Logo .20Variable manufacturing costs$2.003Regular unit cost = $800,000 2,000,000 =$ .40Less sales commissions not paid (3% of $5) (.15)Regular unit cost, excluding sales commission$ .252.Operating income from selling 7.5% more units would increase by $322,500 $700,000 = 46.1%. Note also that the average selling price on regular business was $5.00. The full cost, including selling and administrative expenses, was $4.65. The $4.65, plus the 20 per logo, less savings in commissions of 15 came to $4.70. The president apparently wanted $4.70 + .08($4.70) = $4.70 + .376 = $5.076 per pen.Most students will probably criticize the president for being too stubborn. The cost to the company was the forgoing of $322,500 of income in order to protect the companys image and general market position. Whether $322,500 was a wise investment in the future is a judgment that managers are paid for rendering.5-A2(10 min.)1.Contribution margins:Plain = $66 - $50 = $16Professional = $100 - $70 = $30 Contribution margin ratios: Plain = $16 $66 = 24% Professional = $30 $100 = 30%2.PlainProfessionala.Units per hour21b.Contribution margin per unit$16$30Contribution margin per hour$32$30Total contribution for 20,000 hours$640,000$600,0003.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.5-A3(15-20 min.)The purpose of this problem is to underscore the idea that any of a number of general formulas might be used that, properly employed, would achieve the same target selling prices. Desired sales = $7,500,000 + $1,500,000 = $9,000,000.The target markup percentage would be:1.100% of direct materials and direct labor costs of $4,500,000. Computation is: = 100%2.50% of the full cost of jobs of $6,000,000. Computation is: = 50%3. = 66.67%4.= 20%5.= = 57.9%If the contractor is unable to maintain these profit percentages consistently, the desired operating income of $1,500,000 cannot be obtained.5-A4(15-20 minutes)1. Revenue ($360 x 70,000)$25,200,000Total cost over product life16,600,000Estimated contribution to profit$ 8,600,000Desired (target) contribution to profit40% x $25,200,000$10,080,000Deficiency in profit$ 1,480,000The product should not be released to production.2.Previous total estimated cost$16,600,000Cost savings from suppliers.20 x .70 x $8,000,000 1,120,000Revised total estimated cost$15,480,000Revised total contribution to profit:$25,200,000 - $15,480,000$ 9,720,000Desired (target) contribution to profit$10,080,000Deficiency in profit$ 360,000The product should not be released to production.3.Previous revised total estimated cost fromrequirement 2.$15,480,000Process improvement savings:.25 x .30 x $8,000,000$600,000Less cost of new technology220,000 380,000Revised total estimated cost15,100,000Revised total contribution to profit:$25,200,000 - $15,100,000$10,100,000Desired (target) contribution to profit$10,080,000Excess contribution to profit$ 20,000The product should be released to production.5-B1(30-40 min.)1.DANUBE COMPANYIncome StatementFor the Year Ended December 31, 20X0 Total Per UnitSales$40,000,000$20.00Less variable expenses: Manufacturing$19,000,000 Selling & administrative 9,000,000 28,000,000 14.00Contribution margin$12,000,000$ 6.00Less fixed expenses: Manufacturing$ 5,000,000 Selling & administrative 6,000,000 11,000,000 5.50Operating income$ 1,000,000$ 0.502.Additional details are either in the statement of the problem or in the solution to requirement 1: TotalPer UnitFull manufacturing cost$24,000,000$12.00Variable cost: Manufacturing$19,000,000$ 9.50 Selling and administrative 9,000,000 4.50Total variable cost$28,000,000$14.00Full cost = fully allocated cost* Full manufacturing cost$24,000,000$12.00 Selling and administrative expenses 15,000,000 7.50 Full cost$39,000,000$19.50Gross margin ($40,000,000 - $24,000,000)$16,000,000$ 8.00Contrib. margin ($40,000,000 - $28,000,000)$12,000,000$ 6.00*Students should be alerted to the loose use of these words. Their meaning may not be exactly the same from company to company. Thus, fully allocated cost in some companies may be used to refer to manufacturing costs only.3.Ricardos analysis is incorrect. He was on the right track, but he did not distinguish sufficiently between variable and fixed costs. For example, when multiplying the additional quantity ordered by the $12 full manufacturing cost, he failed to recognize that $2.50 of the $12 full manufacturing cost was a unitized fixed cost allocation. The first fallacy is in regarding the total fixed cost as though it fluctuated like a variable cost. A unit fixed cost can be misleading if it is used as a basis for predicting how total costs will behave.A second false assumption is that no selling and administrative expenses will be affected except commissions. Shipping expenses and advertising allowances will be affected also - unless arrangements with Costco on these items differ from the regular arrangements.The following summary, which is similar to Exhibit 5-3, is a correct analysis. The middle columns are all that are really necessary.WithoutWithSpecial Effect ofSpecialOrder Special OrderOrderUnits2,000,000100,0002,100,000 Total Per UnitSales$40,000,000$1,700,000$17.00$41,700,000Less variable expenses:Manufacturing$19,000,000$ 950,000$ 9.50$19,950,000Selling and administrative 9,000,000 330,000 3.30* 9,330,000Total variable expenses$28,000,000$1,280,000$12.80$29,280,000Contribution margin$12,000,000$ 420,000$ 4.20$12,420,000Less fixed expenses:Manufacturing$ 5,000,000 0 0.00$ 5,000,000Selling and administrative 6,000,000 20,000 0.20 6,020,000Total fixed expenses$11,000,000 20,000 0.20$11,020,000Operating income$ 1,000,000$ 400,000$ 4.00$ 1,400,000*Regular variable selling and administrative expenses, $9,000,000 2,000,000 =$ 4.50Less: Average sales commission at 6% of $20 =(1.20)Regular variable sell. and admin. expenses, less commission$ 3.30Fixed selling and administrative expenses, special commission, $20,000 100,000 .20Some students may wish to enter the $20,000 as an extra variable cost, making the unit variable selling and administrative cost $3.50 and thus adding no fixed cost. The final result would be the same; in any event, the cost is relevant because it would not exist without the special order.Some instructors may wish to point out that a 5% increase in volume would cause a 40% increase in operating income, which seems like a high investment by Danube to maintain a rigid pricing policy.4.Ricardo is incorrect. Operating income would have declined from $1,000,000 to $850,000, a decline of $150,000. Ricardos faulty analysis follows:Old fixed manufacturing cost per unit, $5,000,000 2,000,000 =$2.50New fixed manufacturing cost per unit, $5,000,000 2,500,000 = 2.00Savings$ .50Loss on variable manufacturing costs per unit, $9.20 - $9.50 (.30)Net savings per unit in manufacturing costs$ .20The analytical pitfalls of unit-cost analysis can be avoided by using the contribution approach and concentrating on the totals:WithoutEffect ofWithSpecialSpecialSpecialOrder OrderOrderSales$40,000,000$4,600,000a$44,600,000Variable manufacturing costs$19,000,000$4,750,000b$23,750,000Other variable costs 9,000,000 0 9,000,000Total variable costs$28,000,000$4,750,000$32,750,000Contribution margin$12,000,000$ (150,000)c$11,850,000a 500,000 x $9.20 selling price of special orderb 500,000 x $9.50 variable manufacturing cost per unit of special orderc 500,000 x $.30 negative contribution margin per unit of special orderNo matter how fixed manufacturing costs are unitized, or spread over the units produced, their total of $5,000,000 remains unchanged by the special order.5-B2(15 min.)1.If fixed manufacturing cost is applied to product at $1.00 per machine hour, it takes $.80 $1.00, or 4/5 of an hour to produce one unit of XY-7. Similarly, it takes $.20 $1.00 or 1/5 of an hour to produce BD-4.2.If there are 100,000 hours of capacity:XY-7:100,000 hours 4/5 = 125,000 units.BD-4:100,000 hours 1/5 = 500,000 units.Total contribution margins show that BD-4 should be produced, generating an increase of $250,000 in the contribution margin. Per Unit Units TotalXY-7$6.00 - ($3.00 + $2.00) = $1.00125,000$125,000BD-4$4.00 - ($1.50 + $2.00) = $ .50500,000$250,0005-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 WithExistingGeneralOperationsMerchandise Electronic ProductsSales6,000-600 + 300= 5,700-600 + 200= 5,600Variable expenses4,090-390 + 210a= 3,910-390 + 100 b= 3,800Contribution margin1,910-210 + 90= 1,790-210 + 100= 1,800Fixed expenses1,110-100 + 0= 1,010-100 + 25= 1,035Operating income 800-110 + 90= 780-110 + 75= 765a(100% - 30%) x 300b(100% - 50%) x 200The 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.5-B4(10-15 min.)1.Cost-plus pricing is adding a specified markup to cost to cover those components of the value chain not included in the cost plus a desired profit. In this case the markup is 35% of production cost. Price charged for piston pin = 1.35 x $50.00 = $67.50. If the estimated selling price is only $46 and this price cannot be influenced by Caterpillar, a manager would be unlikely to favor releasing this product for production.2.Target costing assumes the market price cannot be influenced by companies except by changing the value of the product to consumers. The price charged would then be the $46 estimated by market research. The highest acceptable manufactured cost or target cost, TC, is DollarsTarget Price $ 46.00Target Cost TC Target Gross Margin$.35TC46 TC = .35TC1.35TC = 46TC = 46 1.35 = $34.073.The required cost reduction over the products life isExisting manufacturing cost$50.00Target manufacturing cost 34.07Required cost reduction$15.93Steps that Caterpillar managers can take to meet the required cost reduction include value engineering during the design phase, Kaizen costing during the production phase, and activity-based management throughout the products life.5-1Precision is a measure of the accuracy of certain data. It is a quantifiable term. Relevance is an indication of the pertinence of certain facts for the problem at hand. Ideally, data should be both precise and relevant.5-2Decisions may have both quantitative and qualitative aspects corresponding to the nature of the facts being considered before deciding. Quantitative implications of alternative choices can be expressed in monetary or numerical terms, such as variable costs, initial investment, etc. Other relevant features may not be quantifiable, such as the quality of life in a choice between locating in Chicago or New York. The advantage of quantitative information is that it is more objective and often easier to compare alternatives than with qualitative judgments.5-3The accountants role in decision-making is primarily that of a technical expert on relevant information analysis, especially relevant costs. The accountant is usually an information provider, not the decision maker.5-4No. Only future costs that are different under different alternatives are relevant to a decision.5-5Past data are unchangeable regardless of present or future action and thus would not differ under different alternatives.5-6Past costs may be bases for formulating predictions. However, past costs are not inputs to the decision model itself because past costs cannot be changed by the decision.5-7The commonalty of approach is the focus on the differences between expected outcomes of different available alternatives.5-8The lesson here is important. No matter how fixed costs are spread for unit product costing purposes, the total fixed costs will be unchanged (even though fixed costs per unit may change).5-9Yes. The costs that make a difference when a product or department is being deleted are the avoidable costs.5-10No. Avoidable costs are all costs (both variable and fixed) that will not continue if an ongoing operation is changed or deleted.5-11Four examples of scarce factors are: (a) labor hours, (b) money (investment capital), (c) supervisory hours, and (d) computer hours.5-12 Customers are one of the factors influencing pricing decisions because they can buy or do without the product, they can make the product themselves, or they can usually purchase a similar product from another supplier.5-13 Target cost per unit is the average total unit cost over the products life cycle that will yield the desired profit margin.5-14 Value engineering is a cost-reduction technique, used primarily during the design function in the value chain, that uses information about all value chain functions to satisfy customer needs while reducing costs.5-15 Kaizen costing is the Japanese term for continuous improvement during manufacturing. 5-16In target costing, managers start with a market price. Then they try to design a product with costs low enough to be profitable at that price. Thus, prices essentially determine costs.5-17 Customer demands and requirements are important in the product development process. Many companies seek customer input on the design of product features. Companies purchase many of the materials used in products. They have to work with suppliers to get the lowest cost for these materials.5-18Not necessarily. There are other important factors that management must consider before discontinuing a product. The product may be necessary to round out a product line. The product may be the companys attempt to break into a new market area or new product class.5-19The variable costs of a job can be misused as a guide to pricing. However, the adjusted markup percentages based on variable costs can have the same price result as those based on total costs, plus they have the advantage of indicating the minimum price at which any sale may be considered profitable even in the short run.5-20Three examples of pricing decisions are (1) pricing new products, (2) pricing products sold under private labels, and (3) responding to new prices of a competitors products.5-21Three popular mark