Chapter 11-33 Week 3

Solution to Chapter 11 Problems
11-33 Special Order (15 min)
1. Current Special Order
Revenue per unit $ 45 $ 35
Variable costs per unit: Direct materials $ 9 $ 9 Direct labor $ 8 $ 8 Variable factory overhead $ 4 $ 4 Variable nonmanufacturing costs $ 8 29 $ 4 25 Contribution margin per unit $ 16 $ 10

Contribution margin for 5,000 units $ 80,000 $ 50,000

The difference in favor of continuing with current production and turning down the special order is $30,000 ($80,000 - $50,000).

Note that because Alton, Inc. is at full capacity, the decision whether or not to produce the special order is based
Overhead 16 Total $ 62

($62 x 2,000) = $124,000.
The total cost to purchase the units is $120,000. Saving to purchase $124,000 - $120,000 = $4,000

Since the purchase price is less than the production cost, Terry Inc. should purchase the units. Since there is some urgency to the order Mr. Walters may opt for the alternative which will allow him to deliver the product as quickly as possible. Quality, reliability, and capacity utilization are other considerations.

d. Profit from Processing Further
The main point of this exercise is that joint costs should be ignored (see also coverage of this point in chapter 7). A B C
Addt’l costs of further process $28,000 20,000 12,000
Increase in sales value * 40,000 20,000 10,000
Differential benefit (loss) $12,000 $0 ($2,000)

* $40,000= $280,000-$240,000; $20,000=$120,000-$100,000;
Selection of most Profitable Product Flash Clash
Selling price per unit $250.00 $140.00
Variable cost per unit* 200.00 100.00
Contribution margin per unit $ 50.00 $ 40.00
Relative use of labor hours  2  1 (Clash requires ½ as many as Flash)
Contribution margin per labor hr. $ 25.00 $ 40.00
*$200 = $50+$100+$50; $100 =$25+$50+$25

Since Clash requires ½ the labor time, and since labor capacity is a constraint, and since Clash’s relative contribution per labor hour is greater, as much production as possible should be devoted to Clash. Note that the products have the same per unit profit, but Flash has the higher contribution, and Clash has the higher contribution per labor hour. Thus, Flash would be the most profitable product without a labor constraint, while Clash is the most profitable product with the labor constraint. The measure, operating profit, is not used because it includes the sunk fixed costs.

11-50 Profitability Analysis, Scarce Resources (25 min)

1. When there is no limit on production capacity, the super model should be manufactured since it has the highest contribution margin per