B2101 Addtnl Probs Chp5

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Atkinson, Solutions Manual t/a Management Accounting, 5E

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5-26 Rework costs in clued direct rework labor, any additional direct materials used,and if relevant, unit- and batch-related support. From a managerial perspective,opportunity cost may also be included if relevant.

5-27 When evaluating the profit impact of an increase in the sales of a product, it isimportant to evaluate the contribution margins on the increase in sales for that

product, and on the decrease in sales of other cannibalized products (otherproducts that lose customers to the product being evaluated). In addition, if inventory and accounts receivable increase with sales, then the cost of carryingthese additional current assets are also relevant.

5-28 It appears to be good advice because it will avoid distracting attention and willsimplify decisions made by managers by elim inating irrelevant details.However, it must be recognized that managers make a variety of nonroutinedecisions, and the relevant costs for these decisions depend on the context andthe alternatives available. Therefore, a single system reporting costs relevant foronly one set of routine decisions may prove inadequate for supporting the fullrange of managerial decisions.

EXERCISES

5-29 (a) Relevant costs:

• Acquisition cost of Ford Escort

• Repairs on the Impala

• Annual operating costs on the Ford Escort• Annual operating costs on the Impala

Irrelevant costs:

• Acquisition cost of Impala



Chapter 5: Management Accounting Information for Activity and Process Decisions

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(b) Don will buy the Ford Escort if he bases the decision only on the available costinformation.

Year 1: (If Don buys the Ford Escort)

Cash savings:Repairs on the Impala $5,400Operating cost—Impala 2,900

8,300Cash expenditures:Acquisition cost—Ford Escort 5,400Operating cost—Ford Escort 1,800

7,200

First Year Savings $1,100

(c) Additional quantitative considerations:

1. Number of years before car is replaced (decision horizon).

2. Expected resale values of both cars when they will be replaced.

3. Cost of capital (interest rate) to consider the time value of money.(See Chapter 11.)

Qualitative consideration:

1. Subjective preference for driving an Impala rather than a Ford

Escort.

5-30 Per Unit As Is Rework

Sales price $4 $10.00

Rework cost — $5.50*

Net after rework $4 $4.50

*55,000 ÷ 10,000

Gilmark should rework the lamps.




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5-34 Premier should make the gear model G37 because it costs $87,000 less to makethan to buy.

Make Buy

Cost of purchase: $120 20,000 = $2,400,000

Direct material cost: $55 20,000 = $1,100,000Direct labor cost: $30 20,000 = 600,000 —

Variable support: $25 20,000 = 500,000 —

Fixed support $15 20,000 = 300,000 300,000

Savings in facility-sustaining costs — (113,000)

Relevant costs $2,500,000 $2,587,000

5-35 Year 1 Year 2 Year 3 Year 4 Year 5

Cash inflow:

Sale of old machine $40,000 (5,000)

Saving because oldmachine notrepaired 20,000

Salvage value of new machine $10,000

Decrease in annual

operating costs 20,000 $20,000 $20,000

$20,000 $20,000

Cash outflow:Purchase of newmachines (120,000) 0 0

0 0

Net cash inflow(outflow) ($40,000) $20,000 $20,000

$20,000 $25,000

Cumulative cashinflow (outflow) ($40,000) ($20,000) $0

$20,000 $45,000

Joyce Printers should not replace the machines if they do not expect to use thenew machines for more than four years. (See Chapter 11 for formal coverage of net present value analysis.)




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are incurred when a customer in the field detects a problem with a product orthe product fails. Examples of external failure costs include warranty costs,service calls, and product liability recalls.

5-39 Of the four quality costing categories, an external failure cost is the mostdamaging to the organization. Customer satisfaction and future sales may be

jeopardized. Moreover, product liability lawsuits can be extremely costly to theorganization not only in dollars, but also in terms of corporate reputation. Onekey example of this is the Ford Pinto.

5-40 A grocery store is organized using a process layout—similar foods are groupedtogether to make it easier for customers to find what they want. A grocery storemight be reorganized into a modified cell layout. For example, someonewanting to prepare a certain meal, like lasagna, might find all the requiredingredients in one place. However, this approach is likely to be costly and

impractical and make stock rotation difficult.

PROBLEMS

5-41 (a) In determining the minimum prices, it is important to know which costswill change with each catering job. Assumptions will need to be madeabout how well the event-related and customer-related costs representresource usage. (For example, one might assume practical capacity wasused to determine the costs.) Event-related costs should correspond toeach catering event, while customer-related costs should correspond to

maintaining a relationship with the customer, not the number of eventswith the same customer. One might also assume the facility-sustainingcosts are committed in the short run and will not change with the additionof one more catering job.

(b) Other factors in setting the price may include the price competitionCarmen faces, the likely demand from this customer for future cateringevents, and the current demand for Carmen’s Catering.



Chapter 5: Management Accounting Information for Activity and Process Decisions

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(c)Menu 1 Menu 2

Direct materials and direct labor, 100 meals $1,300 $1,600Event-related support 100 100Customer-related support 22 22Total $1,422 $1,722Cost per meal $14.22 17.22

Assuming facility-sustaining costs are not avoidable in the short run,Carmen’s minimum price should cover at least the $14.22 for menu 1 and$17.22 for menu 2 from a short-run perspective. From a long-runperspective, Carmen’s Catering should charge a price that covers thecosts above, as well as a portion of the facility-sustaining costs and acontribution toward profit.

5-42 Incremental costs:Machine moving and reinstallation ($100,000)

Incremental benefits:Increase in contribution margin$200,000 0.31 = 62,000

Savings in inventory carrying costs$200,000 0.25 0.15 = 7,500

Net benefit (loss) from a change in plant layout in year 1 $(30,500)

The proposed change in plant layout should not be implemented because itscosts are greater than its benefits, if only one year’s benefits are considered. Themethods in Chapter 11 should be used to evaluate the benefits over the entireuseful life of the machine.

B2101 Addtnl Probs Chp5

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