BFA261 Week 12 Tutorial Solutions.pdf - Horngren Problem...

Horngren Problem 16-35
1. Direct materials costs to produce 390 000 tablets, A$156 000
Direct materials costs per tablet =
A$156 000
390 000
= A$0.40 per tablet
Selling price per tablet = A$1.00
Unit throughput contribution = Selling price – Unit direct materials costs
= A$1.00 – A$0.40 = A$0.60 per tablet
Tablet-making is a bottleneck operation. Therefore, producing 19 500 more tablets will
generate additional operating profit.
Additional operating income
per contractor-made tablet
=
Unit throughput
contribution
–
Additional operating
costs per tablet
= A$0.60 – A$0.12
= A$0.48
Increase in operating profit, A$0.48  19 500 = A$9360. Therefore, Wylies Ltd should
accept the outside contractor's offer.
2. Operating costs for the mixing department are fixed cost. Contracting out the
mixing activity will not reduce mixing department’s costs but will cost an additional A$0.07
per gram of mixture. Mixing more direct materials will have no effect on throughput
contribution, since tablet making is the bottleneck operati on. Therefore, Wylie’s Ltd should
reject the company's offer.
3. The benefit of improved quality is A$10 000. Wylie’s Ltd is using the same quantity
of direct materials as before, so it incurs no extra direct materials costs. The 10 000 extra
tablets produced generate additional revenue of A$10 000 (A$1  10 000 tablets) a month.
The modification costs A$7 000 per month, which results in a net gain of A$3000. Wylie’s
Ltd should implement the new method.
4. Cost per gram of mixture =
A$156 000
200 000
= A$0.78 per gram
Cost of 10000 grams of mixture = A$0.78  10 000 = A$7 800
Benefit from better mixing quality A$7800 per month
Cost of improving the mixing operation A$9000 per month
Since the costs exceed the benefits by A$1200 per month, Wylies Ltd should not adopt
the proposed quality improvement plan.
5. Compare the answers to requirements 3 and 4. The benefit of improving quality at
the mixing operation is the savings in materials cost. The benefit of improving quality of
the tablet- making department (the bottleneck operation) is savings in materials costs
plus the additional throughput contribution from higher sales equal to the total revenues
that result from relieving the bottleneck constraint.

Horngren Problem 16-42
1. Total Revenue A$3 400 000
Costs of Quality Cost
Percentage of
Total Revenue
3 400 000
Prevention Costs
Testing of purchased materials A$32 000
Quality control training for production staff A$5000
Quality design engineering A$48 000
A$85 000 2.50%
Appraisal Costs
Product inspection A$102 000
A$102 000 3.00%
Internal Failure Costs
Materials scrap A$12 000
Rework of failed parts A$18 000
Engineering redesign of failed parts A$21 000
A$51 000 1.50%
External Failure Costs
Customer support A$37 000
Warranty repairs A$82 000
A$119 000 3.50%
Total costs of quality A$357 000 10.50%