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Chapter 11
DIFFERENTIAL COSTS AND REVENUES
Auto Differential
Life- Service costs and
guard Center revenues
Monthly expenses:
Commuting 30 90 60
Meals 150 150 0
Apartment rent 450 450 0
Uniform rental 0 50 50
Union dues 10 0 (10)
Total monthly expenses 640 740 100
Net monthly income $ 560 $ 760 $200
Identifying Relevant Costs
Automobile Costs (based on 10,000 miles driven per year)
Annual Cost Cost per
of Fixed Items Mile
1 Annual straight-line depreciation on car $ 2,800 $ 0.280
2 Cost of gasoline 0.050
3 Annual cost of auto insurance and license 1,380 0.138
4 Maintenance and repairs 0.065
5 Parking fees at school 360 0.036
6 Total average cost $ 0.569
W
Make or Buy
Han Products manufactures 30,000 units of part S-6 each year
for use on its production line. At this level of activity, the cost
per unit for part S-6 is as follows:
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Accept/Reject Special Orders
Polaski Company manufactures and sells a single product called a Ret.
Operating at capacity, the company can produce and sell 30,000 Rets
per year. Costs associated with this level of production and sales are
given below:
Unit Total
Direct materials $15 $450,000
Direct labor 8 240,000
Variable manufacturing overhead 3 90,000
Fixed manufacturing overhead 9 270,000
Variable selling expense 4 120,000
Fixed selling expense 6 180,000
Total cost $45 $1,350,000
The Rets normally sell for $50 each. Fixed manufacturing overhead is
constant at $270,000 per year within the range of 25,000 through
30,000 Rets per year.
Accept/Reject Special Orders (continued)
Assume that due to a recession, Polaski Company expects to sell
only 25,000 Rets through regular channels next year. A large
retail chain has offered to purchase 5,000 Rets if Polaski is
willing to accept a 16% discount off the regular price. There
would be no sales commissions on this order; thus, variable
selling expenses would be slashed by 75%.
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Scarce Resource Constraint
Plain Fancy
Phone Phone
Selling price $ 80 $ 120
Variable costs 64 84
Contribution margin $ 16 $ 36
Contribution-margin ratio 20% 30%
Scarce Resource Constraint
It depends.
Plain Fancy
Phone Phone
1. Units per hour 3 1
2. Contribution margin per unit $ 16 $ 36
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Equipment Replacement Decision
A manager at White Co. wants to replace an old machine with a new, more
efficient machine:
NNeeww m maacchhiinnee::
LLiisstt pprriiccee $$ 9900,,000000
AAnnnnuuaall vvaarria
iabble
le eexxppeennsseess 8800,,000000
EExxppeecctteedd life
life inin yyeeaarrss 55
OOld
ld m
maacchhin inee::
OOrrig
igin
inaall ccoosstt $$ 7722,,000000
RReemmaaininin
ingg bbooookk vvaaluluee 6600,,000000
DDis
isppoossaall vvaalu
luee nnooww 1155,,000000
AAnnnnuuaall vvaarria
iabblele eexxppeennsseess 110000,,000000
RReemmaainininingg lilife
fe in
in yyeeaarrss 55
Equipment Replacement Decision
White’s sales are $200,000 per year
Fixed expenses, other than depreciation, are $70,000 per year