Download Solution Manual, Managerial Accounting Hansen Mowen 8th Editions_ch 12 PDF

TitleSolution Manual, Managerial Accounting Hansen Mowen 8th Editions_ch 12
File Size141.6 KB
Total Pages34
Document Text Contents
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1. A tactical decision is short-run in nature; it
involves choosing among alternatives with
an immediate or limited end in view. A stra-
tegic decision involves selecting strategies
that yield a long-term competitive advan-

2. Depreciation is an allocation of a sunk cost.
This cost is a past cost and will never differ
across alternatives.

3. The salary of a supervisor in an accept or
reject decision is an example of an irrelevant
future cost.

4. If one alternative is to be judged superior to
another alternative on the basis of cash-flow
comparisons, then cash flows must be ex-
pressed as an annual amount (or periodic
amount); otherwise, consideration must be
given to the time value of the nonperiodic
cash flows.

5. Disagree. Qualitative factors also have an
important bearing on the decision and may,
at times, overrule the quantitative evidence
from a relevant costing analysis.

6. The purchase of equipment needed to pro-
duce a special order is an example of a fixed
cost that is relevant.

7. Relevant costs are those costs that differ
across alternatives. Differential costs are the
differences between the costs of two alter-

8. Depreciation is a relevant cost whenever it is
a future cost that differs across alternatives.
Thus, it must involve a capital asset not yet

9. Past costs can be used as information to
help predict future costs.

10. Yes. Suppose, for example, that sufficient
materials are on hand for producing a part
for two years. After two years, the part will
be replaced by a newly engineered part. If
there is no alternative use of the materials,
then the cost of the materials is a sunk cost
and not relevant in a make-or-buy decision.

11. Complementary effects may make it more
expensive to drop a product, as the dropped
product has a negative impact on other

12. A manager can identify alternatives by using
his or her own knowledge and experience
and by obtaining input from others who are
familiar with the problem.

13. No. Joint costs are irrelevant. They occur
regardless of whether the product is sold at
the split-off point or processed further.

14. Yes. The incremental revenue is $1,400,
and the incremental cost is only $1,000,
creating a net benefit of $400.

15. Regardless of how many units are pro-
duced, fixed costs remain the same. Thus,
fixed costs do not change as product mix

16. No. If a scarce resource is used in producing
the two products, then the product providing
the greatest contribution per unit of scarce
resource should be selected. For more than
one scarce resource, linear programming
may be used to select the optimal mix.

17. If a firm is operating below capacity, then a
price that is above variable costs will in-
crease profits. A firm may sell a product be-
low cost as a loss leader, hoping that many
customers will purchase additional items
with greater contribution margins. Grocery
stores often use this strategy.

18. Different prices can be quoted to customers
in markets not normally served, to noncom-
peting customers, and in a competitive bid-
ding setting.

19. Linear programming is used to select the
optimal product mix whenever there are mul-
tiple constrained scarce resources.

20. An objective function is the one to be max-
imized (or minimized) subject to a set of
constraints. A constraint restricts the possi-
ble values of variables appearing in the ob-
jective function. Usually, a constraint is con-

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cerned with a scarce resource. A constraint
set is the collection of all constraints for a
given problem.

21. A feasible solution is a solution to a linear
programming problem that satisfies the
problem’s constraints. The feasible set of
solutions is the collection of all feasible solu-

22. To solve a linear programming problem
graphically, use the following four steps: (1)
graph each constraint, (2) identify the feasi-
ble set of solutions, (3) identify all corner
points in the feasible set, and (4) select the
corner point that yields the optimal value for
the objective function. Typically, when a li-
near programming problem has more than
two or three products, the simplex method
must be used.

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1. Cost Item Make Buy
Direct materialsa $372,000 —
Direct laborb 102,600 —
Variable overheadc 30,400 —
Fixed overheadd 58,000 —
Purchase coste — $550,000
Total $563,000 $550,000

a($80 × 3,000) + ($165 × 800)
b$27 × 3,800
c$8 × 3,800
d$26,000 + $32,000
e($130 × 3,000) + ($200 × 800)

Net savings by purchasing: $13,000. Powell should purchase the crowns ra-
ther than make them.

2. Qualitative factors that Powell should consider include quality of crowns, re-

liability and promptness of producer, and reduction of workforce.

3. It reduces the cost of making the crowns to 531,000, which is less than the

cost of buying. (563,000 – 32,000)

4. Cost Item Make Buy
Direct materials $419,000 —
Direct labor 124,200 —
Variable overhead 36,800 —
Fixed overhead 58,000 —
Purchase cost — $640,000
Total $638,000 $640,000

Powell should produce its own crowns if demand increases to this level be-
cause the fixed overhead is spread over more units.

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1. @ 600 lbs. Process Further Sell Difference
Revenuesa $30,000 $9,000 $21,000
Bagsb — (39) 39
Shippingc (408) (90) (318)
Grindingd (1,500) — (1,500)
Bottlese (3,000) — (3,000)
Total $25,092 $8,871 $16,221

a600 × 10 × $5 = $30,000; $15 × 600 = $9,000
b$1.30 × (600/20)
c[(10 × 600)/25] × $1.70 = $408; $0.15 × 600 = $90
d$2.50 × 600
e10 × 600 × $0.50

Primack should process rhinime further.

2. $16,221/600 = $27.035 additional income per pound
$27.035 × 265,000 = $7,164,275


1. System A System B Headset Total
Sales $45,000 $ 32,500 $8,000 $ 85,500
Less: Variable expenses 20,000 25,500 3,200 48,700
Contribution margin $25,000 $ 7,000 $4,800 $ 36,800
Less: Direct fixed costs* 526 11,158 1,016 12,700
Segment margin (loss) $24,474 $ (4,158) $3,784 $ 24,100
Less: Common fixed costs 18,000
Operating income $ 6,100

*$45,000/$85,500 × $18,000 = $9,474; $10,000 – $9,474 = $526
$32,500/$85,500 × $18,000 = $6,842; $18,000 – $6,842 = $11,158
$8,000/$85,500 × $18,000 = $1,684; $2,700 – $1,684 = $1,016

Page 33


12–32 Concluded

I have retained the budget for advertising and would recommend that this amount
be allocated to the individual colleges in proportion to the evening and off-
campus revenues generated by each college.

As you can see, the savings from decentralization are significant. This presumes,
of course, that the overhead of the individual units will not increase because of
the added responsibilities. I have discussed this matter with my department
heads and with the deans of the other colleges. They all seem to feel that the ad-
ditional administrative work can be easily absorbed by their existing staff. Thus, it
seems that the promised savings are real.

In choosing to decentralize, however, we do lose some intangible benefits. First,
we no longer have one individual who can be contacted by outside parties. In-
stead, we have numerous individuals involved. This may prove to be frustrating
for some of those whom we serve, and it is possible that they will perceive a drop
in service quality.

There is also a risk that some units will not exert the effort needed to provide
good service. Accountability is more diffuse, and some department heads may
feel that they have more than enough to do without continuing education. This
problem can be alleviated to some extent by localizing the CE responsibility at
the college level, rather than at the departmental level.

I am personally convinced that a decentralized CE will work as well, if not better,
than our current arrangement. Given our current budgetary crisis, I would rather
risk reducing the quality of service for CE than risk reducing the quality of service
for our main programs. Therefore, I strongly recommend that CE be decentralized
and that the savings from this action be used to maintain the quality of our on-
campus programs.



Answers will vary.


Answers will vary.

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