Practice Calculations Chapter 4, Problem

Practice Calculations

Chapter 4, Problem 4-45. 1. The machining department is responsible for 70% of the direct materials cost: 70% * 200,000 = $140,000. The machining department is also responsible for 33.3% of direct labor costs: 33.3% * 75,000 = $25,000. Thus, the machining department is responsible for a total of $140,000 + $25,000 + $38,000 = $203,000. The remainder - $152,000 -- is allocated to the finishing department as $60,000 for direct materials and $50,000 for direct labor.

The total costs for each product would follow these same allocations. Thus, for Sigma, the total cost would be:

(.4)(140,000) + (.3)(25,000) + (.333)(60,000) + (.4)(50,000) = $56,000 + 7500 + 20,000 + 20,000 = $103,500

For Chi, it would be (.3)(140,000) + (.3)(25,000) + (.333)(60,000) + (.4)(50,000) = 42,000 + 7500 + 20,000 + 20,000 = $89,500

For Delta it would be (.3)(140,000) + (.4)(25,000) + (.333)(60,000) + (.2)(50,000) = 42,000 + 10,000 + 20,000 + 10,000 = $82,000

The above considers only direct costs. The breakdown by product for indirect costs is not specifically given, but they were allocated to each department. If a 1/3 split is assumed, these costs would be $14,000 per product of indirect materials and $12,667 per product of indirect labor. Thus, the total costs per product would be:

Product

Direct Costs

Indirect Finishing

Indirect Machining

Total

Sigma

$103,500

$14,000

$12,667

$130,167

$89,500

$14,000

$12,667

$116,167

Delta

$82,000

$14,000

$12,667

$108,667

5-49. 1. 30/40 = 75% of the costs on the income statement are variable costs. This means that the other 25% are fixed costs. The term "fully allocated" implies that fixed costs are allocated to the $45,000 figure. If 25% of costs are fixed, then the variable costs built into the $45,000 figure are (.75)(45,000) = $33,750, with the remainder being fixed costs.

Thus, the contribution margin for this order is Price - $33,750. Thus, any price over $33,750 contributes margin towards fixed costs.

2. The company should accept the $39,000 offer in this case.

5-54. 1.

Volume

200,000

250,000

300,000

Sales @ $3

600000

750000

900000

VM

160000

200000

240000

VS

120000

150000

180000

Contribution

320000

53.33%

400000

53.33%

480000

53.33%

FM

125,000

125,000

125,000

FSA

25,000

25,000

25,000

Net Income

170,000

28.33%

250,000

33.33%

330,000

36.67%

2. The manager's tabulation is incorrect because the manager has set $2 as the fixed cost per unit. This is only true at the 200,000 unit level. At the other levels, the fixed cost per unit will be lower, as fixed costs do not increase with production volume.

6-47. 1. In order to make this assessment, Dana needs to calculate which method is cheaper. The accounting for producing the parts itself has been noted as $1,100,000, which equates to $22 per unit. The cost of the units from the other company is $20, but fixed costs will still be incurred. The fixed costs are $300,000 less the $150,000 that will be saved, so $150,000. For 50,000 units, this is $3 per unit. Thus, the total cost per unit will be $20 + $3 = $23. This is higher than it would cost Dana to produce the units itself -- in other words the savings from purchasing are not good enough to justify making the switch. Dana should produce the units itself.

2. a) if there is an additional input of $75,000, this equates to $1.50 per unit. The new calculation would be $20 + $3 -$1.50 = $21.50. Dana should now accept the offer to buy the units at $20.

b) the $100,000 contribution would be $2 per unit, so the new calculations are $20 + $3 - $2 = $21.00. Again, Dana should now accept the offer to buy the units at $20.

6-59. 1. Ignoring taxes means ignoring the impact of depreciation, which otherwise is not a cash flow. The comparison therefore is as follows:

Cost Comparison

Old

New

Purchase

0

-12,000

Salvage

Annual Operating

-33000

-18000

-33000

-27000

Thus, the new machine will cost less to operate over the course of the next three years than the old machine will, even after the purchase cost has been factored in. The salvage value for selling the old machine is counted in the new machine's chart because if the new one is bought the old one would be sold.