Ch%2011%20Selected%20Problem%20Solutions - CHAPTER 11...

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CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION (Selected Problem Solutions) 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. 11-18 (15 min.) Multiple choice. 1. (b) Special order price per unit $6.00 Variable manufacturing cost per unit 4.50 Contribution margin per unit $1.50 Effect on operating income = $1.50 × 20,000 units = $30,000 increase 2. (b) Costs of purchases, 20,000 units × $60 $1,200,000 Total relevant costs of making: Variable manufacturing costs, $64 – $16 $48 Fixed costs eliminated 9 Costs saved by not making $57 Multiply by 20,000 units, so total costs saved are $57 × 20,000 1,140,000 Extra costs of purchasing outside 60,000 Minimum overall savings for Reno 25,000 Necessary relevant costs that would have 11-1
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to be saved in manufacturing Part No. 575 $ 85,000 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 11-25 (25 - 30 min.) Closing and opening stores. 1. Solution Exhibit 11-25, Column 1, presents the relevant loss in revenues and the relevant savings in costs from closing the Rhode Island store. Lopez is correct that Sanchez Corporation’s operating income would increase by $7,000 if it closes down the Rhode Island store. Closing down the Rhode Island store results in a loss of revenues of $860,000 but cost savings of $867,000 (from cost of goods sold, rent, labor, utilities, and corporate costs). Note that by closing down the Rhode Island store, Sanchez Corporation will save none of the equipment- related costs because this is a past cost. Also note that the relevant corporate overhead costs are
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This note was uploaded on 10/27/2011 for the course ECON 101 taught by Professor Womer during the Spring '08 term at NYU.

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Ch%2011%20Selected%20Problem%20Solutions - CHAPTER 11...

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