Ch 11 - Solutions - Horngren’s Cost Accounting: A Managerial Emphasis 8th Canadian Edition 2019 PDF

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Horngren’s Cost Accounting: A Managerial Emphasis 8th Canadian Edition 2019...

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CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION 11-15 (20 min.) 1.

Disposal of assets.

This is an unfortunate situation, yet the $88,000 costs are irrelevant regarding the decision to remachine or scrap. The only relevant factors are the future revenues and future costs. By ignoring the accumulated costs and deciding on the basis of expected future costs, operating income will be maximized (or losses minimized). The difference in favour of not remachining is $400:

Future revenues Deduct future costs Operating income

(a) Remachine $37,000 33,000 $ 4,000

Difference in favour of not remachining

2.

(b) Scrap $4,400 — $4,400 $400

This too is an unfortunate situation. But the $110,000 original cost is irrelevant to this decision. The difference in favour of rebuilding is $7,700:

New truck Deduct current disposal price of existing truck Rebuild existing truck

(a) Replace $112,200

(b) Rebuild —

11,000 — $101,200

— $93,500 $93,500

Difference in favour of rebuilding

$7,700

Note here that the current disposal price of $11,000 is relevant, but the original cost (or book value, if the truck were not brand new) is irrelevant.

11-16 (10 min.) 1.

Inventory decision, opportunity costs.

Unit cost, orders of 20,000 Unit cost, order of 240,000 (0.96  $9.00) Copyright © 2019 Pearson Canada Inc. 11-1

$9.00 $8.64

Instructor’s Solutions Manual for Cost Accounting, Eighth Canadian Edition

Alternatives under consideration: (a) Buy 240,000 units at start of year. (b) Buy 20,000 units at start of each month. Average investment in inventory: (a) (240,000  $8.64) ÷ 2 (b) (20,000  $9.00) ÷ 2 Difference in average investment

$1, 036,800 90,000 $ 946,800

Opportunity cost of interest forgone from 240,000-unit purchase at start of year = $946,800  0.10 = $94,680 2.

No. The $94,680 is an opportunity cost rather than an incremental or outlay cost. No actual transaction records the $94,680 as an entry in the accounting system.

3.

The following table presents the two alternatives:

Alternative A: Purchase 240,000 spark plugs at beginning of year (1) Annual purchase-order costs (1  $200; 12  $200) Annual purchase (incremental) costs (240,000  $8.64; 240,000  $9) Annual interest income that could be earned if investment in inventory were invested (opportunity cost) (10%  $1,036,800; 10%  $90,000) Relevant costs

$

Alternative B: Purchase 20,000 spark plugs at beginning of each month Difference (2) (3) = (1) – (2)

200 $ 2,073,600

103,680 $2,177,480

2,400 2,160,000

$ (2,200) (86,400)

9,000 $2,171,400

94,680 $ 6,080

Column (3) indicates that purchasing 20,000 spark plugs at the beginning of each month is preferred relative to purchasing 240,000 spark plugs at the beginning of the year because the opportunity cost of holding larger inventory exceeds the lower purchasing and ordering costs. If other incremental benefits of holding lower inventory such as lower insurance, materials handling, storage, obsolescence, and breakage costs were considered, the costs under Alternative A would have been higher, and Alternative B would be preferred even more.

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Chapter 11: Decision Making and Relevant Information

11-17 (20 min.)

Relevant and irrelevant costs.

1. Relevant costs Variable costs Avoidable fixed costs Purchase price Unit relevant cost

Make

Buy

$180 20 ____ $200

$210 $210

Ewing Computers should reject HT’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, HT’s offer price is higher than the cost to continue to produce. 2. Cash operating costs (4 years) Current disposal value of old machine Cost of new machine Total relevant costs

Keep $80,000 ______ $80,000

Replace $48,000 (2,500) 8,000 $53,500

Difference $32,000 2,500 (8,000) $26,500

AP Manufacturing should replace the old machine. The cost savings are far greater than the cost to purchase the new machine.

11-19

Keep or drop a business segment

Choice “c” is correct. Whether to keep or drop a segment will depend on whether the contribution margin of the segment in question exceeds avoidable fixed costs (relevant costs that wouldn’t exist if the segment did not exist). Unavoidable fixed costs will be incurred regardless of whether or not the segment is kept, so they are not factored into the decision. Choice “a” is incorrect. Fixed costs need to be broken out between avoidable and unavoidable in order to make the determination as to whether to keep or drop a segment. Lees Corp. would only drop the segment if the contribution margin of the segment is less than the avoidable fixed (relevant) cost. Choice “b” is incorrect. The contribution margin needs to be compared to avoidable fixed costs in order to determine whether to keep or drop a segment. Choice “d” is incorrect. Unavoidable fixed costs will be incurred regardless, so contribution margin of the segment needs to be compared to the avoidable fixed costs as the key elements to determine whether to keep or drop a segment.

11-21 (30 min.)

Dropping a product line, selling more tours Copyright © 2019 Pearson Canada Inc. 11-3

Instructor’s Solutions Manual for Cost Accounting, Eighth Canadian Edition

1.

Baldwin should not drop the advanced tours, as follows: Lost revenues from advanced tours Avoidable operating costs from dropping advanced tours: Administrative salaries Guide wages Supplies Vehicle fuel Total avoidable costs Lost operating income from dropping advanced tours

$(1,320,000)

100,000 760,000 200,000 48,000 1,108,000 $ (212,000)

Note: Equipment depreciation, allocated corporate costs, and unavoidable administrative salaries are irrelevant to the decision. 2.

Baldwin should drop the advanced tours, as follows:

Change in revenues Change in operating costs: Administrative salaries Guide wages Supplies Vehicle fuel Total change in operating costs Change in operating income

Beginner $450,000

Advanced $(1,320,000)

Total $(870,000)

0 130,000 50,000 30,000 210,000 $240,000

(100,000) (760,000) (200,000) (48,000) (1,108,000) $ (212,000)

(100,000) (630,000) (150,000) (18,000) (898,000) $ 28,000

3. Baldwin should consider if it is possible to increase the number of advanced tours sold, or if it is possible to reduce the costs of those tours before dropping them. He could also investigate the possibility of increasing the price of the advanced tours if customers would tolerate it.

11-22

(25 min.) Theory of constraints, throughput contribution, relevant costs.

1. Finishing is a bottleneck operation. Therefore, producing 1,150 more units will generate additional contribution (throughput) margin and operating income. Increase in contribution (throughput) margin ($75 – $35)  1,150 Incremental costs of the jigs and tools Increase in operating income investing in jigs and tools

$46,000 35,000 $11,000

Denver should invest in the modern jigs and tools because the benefit of higher contribution (throughput) margin of $46,000 exceeds the cost of $35,000. 2. The Machining Department has excess capacity and is not a bottleneck operation. Increasing its capacity further will not increase contribution (throughput) margin. There is,

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Chapter 11: Decision Making and Relevant Information

therefore, no benefit from spending $20,000 to increase the Machining Department’s capacity by 9,000 units. Denver should not implement the change to do setups faster. 3. Finishing is a bottleneck operation. Therefore, getting an outside contractor to produce 10,000 units will increase contribution (throughput) margin. Increase in contribution (throughput) margin ($75 – $35)  9,000 Incremental contracting costs $9  10,000 Increase in operating income by contracting 10,000 units of finishing

$360,000 90,000 $270,000

Denver should contract with an outside contractor to do 10,000units of finishing at $9 per unit because the benefit of higher throughput margin of $360,000 exceeds the cost of $90,000. The fact that the cost of $9 per unit is three times Denver’s finishing cost of $3 per unit is irrelevant. 4. Operating costs in the Machining Department of $600,000, or $6 per unit, are fixed costs. Denver will not save any of these costs by subcontracting machining of 5,000 units to Hammond Corporation. Total costs will be greater by $15,000 ($3 per unit  5,000 units) under the subcontracting alternative. Machining more filing cabinets will not increase contribution (throughput) margin, which is constrained by the finishing capacity. Denver should not accept Hammond’s offer. The fact that Hammond’s costs of machining per unit are half of what it costs Denver in-house is irrelevant. 5. The cost of 2,000 defective units in the Machining Operation is $35 per unit  2,000 units = $70,000. Because the Machining Operation has a capacity of 120,000 units, it can still produce and transfer 100,000 good units to the Finishing Operation. There is, therefore, no opportunity cost of producing defective units in the Machining Operation. 6. The cost of 2,000 defective units in the Finishing Operation is: Cost of direct materials used in the defective units $35 per unit  2,000 units Opportunity cost, lost contribution (throughput) margin $40 per unit  2,000 units Total cost of defective units in the Finishing Operation

$ 70,000 80,000 $150,000

Alternatively, the cost of 2,000 defective units in the Finishing Operation equals the revenues lost by selling 2,000 fewer units = $75 per unit  2,000 units = $150,000. The cost of the defective unit at a bottleneck operation is much higher than at a non-bottleneck operation because of the opportunity cost of lost contribution margin at the bottleneck operation.

11-24 (30 min.) Special order, activity-based costing.

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Instructor’s Solutions Manual for Cost Accounting, Eighth Canadian Edition

1.

Direct materials cost per unit ($600,000  10,000 units) = $60 per unit Direct manufacturing labour cost per unit ($700,000  10,000 units) = $70 per unit Variable cost per batch = $1,500 per batch

Reward One’s operating income under the alternatives of accepting/rejecting the special order are: Without OneWith OneTime Only Time Only Special Order Special Order 10,000 Units 12,000 Units Revenues Variable costs: Direct materials Direct manufacturing labour Batch manufacturing costs Fixed costs: Fixed manufacturing costs Fixed marketing costs Total costs Operating income 1

$2,500,000 600,000 700,000 150,000

Difference 2,000 Units

$2,950,000 720,0001 840,0002 187,5003

250,000 250,000 400,000 400,000 2,100,000 2,397,500 $ 400,000 $ 552,500

$600,000 + ($60  2,000 units) 25 batches)

2

$700,000 + ($70  2,000 units)

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3

$450,000 120,000 140,000 37,500 –– –– 297,500 $152,500

$150,000 + ($1,500 

Chapter 11: Decision Making and Relevant Information

Alternatively, we could calculate the incremental revenue and the incremental costs of the additional 2,000 units as follows: Incremental revenue $225  2,000 Incremental direct manufacturing costs Incremental direct manufacturing costs Incremental batch manufacturing costs Total incremental costs Total incremental operating income from accepting the special order

$ 60  2,000 units $ 70  2,000 units $1,500  25 batches

$450,000 120,000 140,000 37,500 297,500 $152,500

Reward One should accept the one-time-only special order if it has no long-term implications because accepting the order increases Reward One’s operating income by $152,500. If, however, accepting the special order would cause the regular customers to be dissatisfied or to demand lower prices, then Reward One will have to trade off the $152,500 gain from accepting the special order against the operating income it might lose from regular customers. 2. Reward One has a capacity of 11,000 windows. Therefore, if it accepts the special onetime order of 2,000 windows, it can sell only 9,000 windows instead of the 10,000 windows that it currently sells to existing customers. That is, by accepting the special order, Reward One must forgo sales of 1,000 windows to its regular customers. Alternatively, Reward One can reject the special order and continue to sell 10,000 windows to its regular customers. Reward One’ operating income from selling 9,000 windows to regular customers and 2,000 windows under one-time special order follow: Revenues (9,000  $250) + (2,000  $225) $2,700,000 Direct materials (9,000  $60) + (2,000  $60) 660,000 Direct manufacturing labour (9,000  $70) + (2,000  $70) 770,000 Batch manufacturing costs (901  $1,500) + (25  $1,500) 172,500 Fixed manufacturing costs 250,000 Fixed marketing costs 400,000 Total costs 2,252,500 Operating income $ 447,500 1

Reward One makes regular windows in batch sizes of 100. To produce 9,000 windows requires 90 (9,000 ÷ 100) batches. Accepting the special order will result in an increase in operating income of $47,500 ($447,500 – $400,000). The special order should, therefore, be accepted. A more direct approach would be to focus on the incremental effects––the benefits of accepting the special order of 2,000 units versus the costs of selling 1,000 fewer units to regular customers. Increase in operating income from the 2,000-unit special order equals $152,500 (requirement 1). The loss in operating income from selling 1,000 fewer units to regular customers equals: Lost revenue, $250  1,000 $(250,000) Savings in direct materials costs, $60  1,000 60,000 Savings in direct manufacturing labour costs, $70  1,000 70,000 Savings in batch manufacturing costs, $1,500  10 15,000 Operating income lost $(105,000) Copyright © 2019 Pearson Canada Inc. 11-7

Instructor’s Solutions Manual for Cost Accounting, Eighth Canadian Edition

Accepting the special order will result in an increase in operating income of $47,500 ($152,500 – $105,000). The special order should, therefore, be accepted. Reward One should consider the effect on its regular customers of accepting the special order. For example, would selling 1,000 fewer windows to its regular customers cause these customers to find new suppliers that might adversely impact Reward One’s business in the long run. 3.

Reward One should not accept the special order. Increase in operating income by selling 2,000 units under the special order (requirement 1) Operating income lost from existing customers ($20  10,000) Net effect on operating income of accepting special order

$ 152,500 (200,000) $ (47,500)

The special order should, therefore, be rejected.

11-26 (25 min.) Product mix, constrained resource. 1. Selling price Variable costs: Direct materials (DM) Labour and other costs Total variable costs Contribution margin Pounds of DM per unit Contribution margin per lb.

A130 $252

B324 $ 168

C587 $210

72 84 156 $ 96 ÷8 lbs. $ 12 per lb.

45 81 126 $ 42 ÷5 lbs. $8.40 per lb.

27 120 147 $ 63 ÷ 3 lbs. $ 21 per lb.

First, satisfy minimum requirements. Minimum units Times pounds per unit Pounds needed to produce minimum units

A130 200 ×8 lb. per unit 1,600 lb.

B324 200 ×5 lb. per unit 1,000 lb.

C587 200 ×3 lb. per unit 600 lb.

Total

3,200 lb.

The remaining 1,800 pounds (5,000 – 3,200) should be devoted to C587 because it has the highest contribution margin per pound of direct material. Because each unit of C587 requires 3 pounds of Brac, the remaining 1,800 pounds can be used to produce another 600 units of C587. The following combination yields the highest contribution margin given the 5,000 pounds constraint on availability of Brac. A130: 200 units B324: 200 units C587: 800 units (200 minimum + 600 extra)

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Chapter 11: Decision Making and Relevant Information

2. The demand for Wechsler’s products exceeds the materials available. Assuming that fixed costs are covered by the original product mix, Wechsler would be willing to pay up to an additional $21 per pound (the contribution margin per pound of C587) for another 1,200 pounds of Brac. That is, Wechsler would be willing to pay $9 + $21 = $30 per pound of Brac for the pounds of Brac that will be used to produce C587. 1 If sufficient demand does not exist for 400 units (1,200 pounds ÷ 3 pounds per unit) of C587, then the maximum price Wechsler would be willing to pay is an additional $12 per pound (the contribution margin per pound of A130) for the pounds of Wechsler that will be used to produce A130. In this case Wechsler would be willing to pay $9 + $12 = $21 pound. If all the 1,200 pounds of Brac are not used to satisfy the demand for C587 and A130, then the maximum price Wechsler would be willing to pay is an additional $8.40 per pound (the contribution margin per pound of B324) for the pounds of Brac that will be used to produce B324. Wechsler would be willing to pay $8.40 + $9 = $17.40 per pound of Brac. 1

An alternative calculation focuses on column 3 for C587 of the table in requirement 1. Selling price Variable labour and other costs (excluding direct materials) Contribution margin Divided by pounds of direct material per unit Direct material cost per pound that Wechsler can pay without contribution margin becoming negative 11-28

(10 min.)

$210 120 $ 90 ÷3 lbs. $ 30

Selection of most profitable product.

Only Model 9 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, despite the fact that model 9 requires twice the number of machine hours to produce each unit, its contribution margin per unit is so great that it still has a higher contribution margin per machine-hour. Model 14 will yield a $29 contribution to fixed costs per machine hour, and Model 9 will yield $40:

Selling price Variable cost per unit* ($23 + $16 + $18 + $13; $13 + $19 + $9 + $15) Contribution margin per unit Relative use of machine-hours per unit of product Contribution margin per machine hour

Model 9

Model 14

$150.00

$85.00

70.00 $ 80.00 ÷ 2 $ 40.00

56.00 $29.00 ÷ 1 $29.00

*Variable cost per unit = Direct material cost per unit + Direct manufacturing labour cost per unit + Variable manufacturing cost per unit + Variable marketing cost per unit.

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Instructor’s Solutions Manual for Cost Accounting, Eighth Canadian Edition

PROBLEMS 11-31 (20–25 min.)

Relevant costs, contribution margin, product emphasis.

1. Selling...