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Ch11 - CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION...

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CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION 11-17 (20 min.) Relevant and irrelevant costs . 1. Make Buy Relevant costs Variable costs $180 Avoidable fixed costs 20 Purchase price ____ $210 Unit relevant cost $200 $210 Dalton Computers should reject Peach’s offer. The $30 of fixed costs are irrelevant because they will be incurred regardless of this decision. When comparing relevant costs between the choices, Peach’s offer price is higher than the cost to continue to produce. 2. Keep Replace Difference Cash operating costs (4 years) $80,000 $48,000 $32,000 Current disposal value of old machine (2,500) 2,500 Cost of new machine ______ 8,000 (8,000) Total relevant costs $80,000 $53,500 $26,500 AP Manufacturing should replace the old machine. The cost savings are far greater than the cost to purchase the new machine. 11-22 (20–25 min.) Relevant costs, contribution margin, product emphasis. 1. Cola Lemonade Punch Natural Orange Juice Selling price $18.80 $20.00 $27.10 $39.20 Deduct variable cost per case 14.20 16.10 20.70 30.20 Contribution margin per case $ 4.60 $ 3.90 $ 6.40 $ 9.00 2. The argument fails to recognize that shelf space is the constraining factor. There are only 12 feet of front shelf space to be devoted to drinks. Sexton should aim to get the highest daily contribution margin per foot of front shelf space: Cola Lemonade Punch Natural Orange Juice Contribution margin per case $ 4.60 $ 3.90 $ 6.40 $ 9.00 Sales (number of cases) per foot of shelf space per day × 25 × 24 × 4 × 5 Daily contribution per foot of front shelf space $115.00 $93.60 $25.60 $45.00
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3. The allocation that maximizes the daily contribution from soft drink sales is: Daily Contribution Feet of per Foot of Total Contribution Shelf Space Front Shelf Space Margin per Day Cola 6 $115.00 $ 690.00 Lemonade 4 93.60 374.40 Natural Orange Juice 1 45.00 45.00 Punch 1 25.60 25.60 $1,135.00 The maximum of six feet of front shelf space will be devoted to Cola because it has the highest contribution margin per unit of the constraining factor. Four feet of front shelf space will be devoted to Lemonade, which has the second highest contribution margin per unit of the constraining factor. No more shelf space can be devoted to Lemonade since each of the remaining two products, Natural Orange Juice and Punch (that have the second lowest and lowest contribution margins per unit of the constraining factor) must each be given at least one foot of front shelf space. 11-23 (10 min.) Selection of most profitable product. Only Model 14 should be produced. The key to this problem is the relationship of manufacturing overhead to each product. Note that it takes twice as long to produce Model 9; machine-hours for Model 9 are twice that for Model 14. Management should choose the product mix that maximizes operating income for a given production capacity (the scarce resource in this situation). In this case, Model 14 will yield a $9.50 contribution to fixed costs per machine hour, and Model 9 will yield $9.00: Model 9 Model 14 Selling price Variable costs per unit (total cost – FMOH) Contribution margin per unit Relative use of machine-hours per unit of product Contribution margin per machine hour $100.00 82.00 $ 18.00 ÷ 2 $ 9.00 $70.00 60.50 $ 9.50 ÷ 1 $ 9.50 11-30 (30 min.) Contribution approach, relevant costs .
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