Chapter 11 Assignment Solutions

Problem 11-20 (30 minutes)

1.

Total Company
Amount
%
Sales ........................................................
Variable expenses .....................................
Contribution margin ..................................
Traceable fixed expenses...........................
Territorial segment margin ........................
Common fixed expenses* ..........................
Operating income .....................................
*465,000 $290,000 = $175,000.

$900,000
408,000
492,000
290,000
202,000
175,000
$ 27,000

100.0
45.3
54.7
32.2
22.4
19.4
3.0

Sales Territory
Central
Eastern
Amount
%
Amount
%
$400,000
208,000
192,000
160,000
$ 32,000

100
52
48
40
8

$500,000 100
200,000
40
300,000
60
130,000
26
$170,000
34

Product Line

Sales ........................................................
Variable expenses .....................................
Contribution margin ..................................
Traceable fixed expenses...........................
Product line segment margin .....................
Common fixed expenses* ..........................
Sales territory segment margin ..................
*$160,000 $114,000 = $46,000.

Central Territory
Amount
%

Kiks
Amount

Dows
Amount

$400,000
208,000
192,000
114,000
78,000
46,000
$ 32,000

$100,000
25,000
75,000
60,000
$ 15,000

100
25
75
60
15

$300,000 100
183,000
61
117,000
39
54,000
18
$ 63,000
21

100.0
52.0
48.0
28.5
19.5
11.5
8.0

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Solutions Manual, Chapter 11

2. Two points should be brought to the attention of management. First, compared to the
Eastern territory, the Central territory has a low
contribution margin ratio. Second, the Central territory has high traceable fixed
expenses. Overall, compared to the Eastern territory, the Central territory is very
weak.
3. Again, two points should be brought to the attention of management. First, the
Central territory has a poor sales mix. Note that the territory sells very little of the
Kiks product, which has a high contribution margin ratio. It is this poor sales mix
that accounts for the low overall contribution margin ratio in the Central territory
mentioned in part (2) above. Second, the traceable fixed expenses of the Kiks
product
seem very high in relation to sales. These high fixed expenses may simply mean
that the Kiks product is highly leveraged; if so, then an increase in sales of this
product line would greatly enhance profits in the Central territory and in the
company as a whole.
Problem 11-26 (30 minutes)
1.
(1) Sales ...............................
(2) Operating income ............
(3) Operating assets ..............
(4) Margin (2) (1) ..............
(5) Turnover (1) (3) ...........
(6) ROI (4) (5) ..................

Present
$21,000,000
$1,680,000
$5,250,000
8.0%
4.00
32%

New Line

Total

$9,000,000
$630,000 *
$3,000,000
7.0%
3.00
21%

* Sales.........................................................................
Variable expenses (65% x $9,000,000) .......................
Contribution margin ...................................................
Fixed expenses ..........................................................
Operating income ......................................................

$30,000,000
$2,310,000
$8,250,000
7.7%
3.64
28%
$9,000,000
5,850,000
3,150,000
2,520,000
$ 630,000

2. Stefan Grenier will be inclined to reject the new product line, since accepting it
would reduce his divisions overall rate of return.
3. The new product line promises an ROI of 21%, whereas the companys overall ROI
last year was only 18%. Thus, adding the new line would increase the companys
overall ROI.

Present

4. a.
Operating assets .............................
Minimum required return .................
Minimum operating income ..............

$5,250,000
15%
$787,500

New Line
$3,000,000
15%
$450,000

Total
$8,250,000
15%
$1,237,500

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Solutions Manual, Chapter 11

Actual operating income ..................

Minimum net operating income
(above) .......................................
Residual income ..............................

$1,680,000

$ 630,000

$2,310,000

787,500
$ 892,500

450,000
$ 180,000

1,237,500
$1,072,500

b. Under the residual income approach, Stefan Grenier would be inclined to accept
the new product line, since adding the product line would increase the total
amount of his divisions residual income, as shown above.
Problem 11-37
From the below analysis it would appear that Belangers program has been successful,
because:
total quality costs as a percentage of total production have declined from 23.4%
to 13.1%.
external failure costs, those costs signalling customer dissatisfaction, have
declined from 8% of total production to 2.3%. These declines in warranty repairs
and customer returns should translate into increased sales in the future.
internal failure costs have been reduced from 4.6% to 2.3% of production costs,
which represents a 50% drop.
appraisal costs have decreased from 5.0% to 2.6% of total productiona drop of
48%. Higher quality is reducing the demand for final testing.
quality costs have shifted to the area of prevention where problems are solved
before the customer becomes involved. Maintenance, training, and design
reviews have increased from 5.8% of total production cost to 6% and from
24.9% of total quality costs to 45.7%. The $30,000 increase is more than offset
by decreases in other quality costs.
2. Guy Laflammes current reaction to the quality improvement program is more
favourable as he is seeing the benefits of having the quality problems investigated
and solved before they reach the production floor. Because of improved designs,
quality training, and additional pre-production inspections, scrap and rework costs
have declined. Consequently, work is now moving much faster through the
department
and fewer resources are now required for customer service.
3. To measure the opportunity cost of not implementing the quality program, Belanger
Ltee. could assume that:
sales and market share would continue to decline and then calculate the revenue
and income lost.
the company would have to compete on price rather than quality and
calculate
the impact of having to lower product prices.

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Solutions Manual, Chapter 11

1. A percentage analysis of the companys quality cost report is presented below:

Amount
Prevention costs:
Machine maintenance ................
Training suppliers ......................
Design reviews..........................
Total prevention cost ....................
Appraisal costs:
Incoming inspection ..................
Final testing ..............................
Total appraisal cost ......................
Internal failure costs:
Rework .....................................
Scrap .......................................
Total internal failure cost ..............
External failure costs:
Warranty repairs .......................
Customer returns ......................
Total external failure cost .............
Total quality cost .........................
Total production cost....................

$ 215
5
20
240

Year 1
Percentage*
5.2 %
0.1
0.5
5.8

22.3 %
0.5
2.1
24.9

45
160
205

1.1
3.9
5.0

4.7
16.6
21.3

120
68
188

2.9
1.7
4.6

12.4
7.1
19.5

69
262
331
$ 964
$4,120

1.7
6.4
8.0
23.4 %

7.2
27.2
34.3
100.0 %

Amount
$ 160
15
95
270

Year 2
Percentage*
3.5 %
0.3
2.1
6.0

27.1 %
2.5
16.1
45.7

22
94
116

0.5
2.1
2.6

3.7
15.9
19.6

62
40
102

1.4
0.9
2.3

10.5
6.8
17.3

23
80
103
$ 591
$4,510

0.5
1.8
2.3
13.1 %

3.9
13.5
17.4
100.0 %

*Percentage figures are subject to rounding error

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Solutions Manual, Chapter 8