management and cost accounting bhimani solutions 5th edition

8/17/2019 Management and Cost Accounting Bhimani Solutions 5th edition

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CVP – chp8

8.18 CVP, movie production. (10 min)

1 Fixed costs = €5,000,000 (production cost)

Unit variable cost = €0.20 per €1 revenue (marketin !ee)

Unit contribution marin = €0."0 per €1 revenue

a

Fixed costs#reak even point in revenues =

Unit contribution marin per € 1 revenue

=

€5,000,000

€0."0

= €$,250,000

b %spasso receives $2.5& o! box'o!!ice receipts. #ox'o!!ice receipts o! €10,000,000 translate to €$,250,000 in revenues to %spasso.

2 evenues, 0.$25 × €00,000,000 €1"*,500,000

+ariable costs, 0.20 × €1"*,500,000 *,500,000

ontribution marin 150,000,000

Fixed costs 5,000,000

-peratin income €15,000,000

8.19 CVP, cost structure differences, movie production. (20 min)

1

a Contract A

Fixed costs !or ontract /

roduction costs €21,000,000

Fixed salar 15,000,000

3otal !ixed costs €$,000,000

Unit variable cost = €0.25 per €1 revenue marketin !ee

Unit contribution marin = €0.*5 per €1 revenue

#ox'o!!ice receipts o! €*$,"00,000 translate to €",000,000 in revenues to %spasso.

b Contract B

Fixed costs !or ontract #

roduction costs €21,000,000

Fixed salar ,000,000

3otal !ixed costs €2,000,000

Unit variable cost = €0.25 per €1 revenue !ee to /rtes e 4edia

€0.15 per €1 revenue residual to directoractors

€0.0 per €1 revenue

Unit contribution marin = €0.$0 per €1 revenue

#reakeven points in revenues =

€2,000,000

€0.$0 = €0,000,000

#ox'o!!ice receipts o! €$,000,000 translate to €0,000,000 in revenues to %spasso.


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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting , 5th Edition, Instructor’s Manual

Difference in breaeven points

ontract / 6as a 6i6er !ixed cost and a lo7er variable cost per sales euro. 8n

contrast, ontract # 6as a lo7er !ixed cost and a 6i6er variable cost per sales euro.

8n ontract #, t6ere is risk s6arin bet7een %spasso and +ieira, 4oura and ebello

t6at lo7ers t6e breakeven point, but results in %spasso receivin less operatinincome i! Tornado 2 is a mea'success.

2 evenues, 0.$25 9 €00,000,000 €187,500,000

+ariable costs, 0.0 9 €1"*,500,000 *5,000,000

ontribution marin 112,500,000

Fixed costs 2,000,000

-peratin income € "",500,000

Tornado 2 6as a 6i6er breakeven point t6an Tornado due to 6avin a 6i6er level

o! !ixed costs and a lo7er unit contribution marin.

8.2! CVP, shoe stores. (20:0 min)

1

a 8n number o! pairs

Fixed costs $0,000;0,000 pairs

ontribution marin per pair ;


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b #reakeven point in revenues = ;0 9 2,000 = ;1,2$0,000

! Fixed costs = ;$0,000

ontribution marin per pair = ;".*0

a

;$0,000#reakeven point in units = = 1,"0 pairs

;".*0

b #reakeven point in revenues = ;0 9 1,"0 = ;1,21,00

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# #reakeven point = 0,000 pairs

>tore manaer receives commission on 10,000 pairs

ost o! commission = ;0.0 9 10,000 = ;,000

Re#enues, $" % $5, $!,5,

&aria'le costs

(ost o) shoes $*+5,

ales-eo-le commission +5,

Manager commission ", !,5",

(ontri'ution margin ..+,

/i0ed costs "1,

-erating income $3+,

/n alternative approac6 is 10,000 units 9 ;".*0 = ;"*,000

8.2# CVP, shoe stores. (20:25 min)

1 #ecause t6e unit sales level at t6e point o! indi!!erence 7ould be t6e same !or eac6

plan, t6e revenue 7ould be e?ual. 36ere!ore, t6e unit sales level sou6t 7ould be

t6at 76ic6 produces t6e same total costs !or eac6 plan.

@et Q = unit sales level

a ;1


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" @et 3A = 3aret number o! units

a ;0.003A B ;1lope coe!!icient (b) =

Di!!erence in cost

Di!!erence in labour 6ours

&

€52


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9ctual total o#erhead costs

Linear a--ro0imation

9ctual minus linear

a--ro0imation

:".,

"5+,

:6!+,7

:.,

.,

:

:."5,

..",

: 63,7

:.++,

.31,

: 6*,7

:52*,

52*,

:

:53+,

5+2,

: 5,

Pro)essional la'our;hours ", ., 5, 1, +, 3,

36e data are s6o7n in >olution %x6ibit


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" Based on Based on linear

/ctual ost !unction

(ontri'ution 'e)ore deducting incremental o#erhead :"3, :"3,

Incremental o#erhead "5, .",(ontri'ution a)ter incremental o#erhead : ", :65,7

Solution Exhibit 9.15

@inear'cost !unction plot o! pro!essional labour'6ours on total over6ead costs !or 4arre'Auise

consultants.

9.1' (e)ression ana*+sis, service compan+. (25 min)

1a >olution %x6ibit


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2 36e reression analsis indicates t6at, 7it6in t6e relevant rane o! 2,500:*,500

labour'6ours, t6e variable cost per person !or a cocktail part e?uals

/ood and 'e#erages :!5

La'our 65 hours ×

:! -er hour7 5&aria'le o#erhead 65 hours × :"*" -er la'our;hour7 !*+


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9.19 va*uatin) a*ternative simp*e re)ression mode*s, not for profit. (0:0 min)

1a >olution %x6ibit


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lot o! number o! enrolled students versus over6ead costs (in t6ousands).

!© Pearson Education Limited 2!2


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Solution Exhibit 9.19Comparison o! alternative cost !unctions !or over6ead costs estimated 7it6 simple reression !or

%cole >upLrieure des 4ines.

Criterion

Cost function 1number of

aca!emic pro"rammes asin!epen!ent #ariable

Cost function 2number of

enrolle! stu!ents asin!epen!ent #ariable

1 Economic -lausi'ilit= 9 -ositi#e relationshi- 'et>eeno#erhead costs and num'er o)academic -rogrammes iseconomicall= -lausi'le at Ecoleu-?rieure des Mines

9 -ositi#e relationshi-'et>een o#erhead costs andnum'er o) enrolled students iseconomicall= -lausi'le atEcole u-?rieure des Mines

2 @oodness o) )it r 2 A +2

E0cellent goodness o) )it

r 2 A 55

@ood goodness o) )it, 'ut not

as good as )or num'er o)academic -rogrammes

3 igni)icance o)inde-endent #aria'le6s7

t-#alue o) 53 is signi)icant t-#alue o) "5" is signi)icant

4 -eci)ication anal=siso) estimationassum-tions

Plot o) the data indicates thatassum-tions o) linearit=,constant #ariance,inde-endence o) residuals andnormalit= o) residuals hold, 'utin)erences dra>n )rom onl= !2o'ser#ations are not relia'leDur'in8Catson statistic A !3!indicates that inde-endence o)residuals holds

Plot o) the data indicates thatassum-tions o) linearit=,constant #ariance andnormalit= o) residuals hold, 'utin)erences dra>n )rom onl= !2o'ser#ations are not relia'lethe Dur'in8Catson statistic A++ indicates thatinde-endence o) residualsdoes not hold

!*2 olution gi#en in 'oo

Rele#ant costs and LP1-.11 (e*evant costs, contribution mar)in and product emphasis. (20:25 min)

1

Cola $emona!e %unch

&atural

oran"e

'uice

elling -rice -er case :!3 :!!52 :!53. :2".

Deduct #aria'le costs -er case 3! *!2 !21 !3!2

(ontri'ution margin -er case :2+ :2. :"+3 :.*2

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2 36e arument !ails to reconise t6at s6el! space is t6e constrainin !actor. 36ere are

onl 12 metres o! !ront s6el! space to be devoted to drinks. onsuelo s6ould aim to

et t6e 6i6est dail contribution marin per metre o! !ront s6el! space

Cola $emona!e %unch

&aturaloran"e

'uice

(ontri'ution margin -er case :2+ :2. :"+3 :.*2

ales 6num'er o) cases7 -er metre

o) shel) s-ace -er da= 25 2. . 5

Dail= contri'ution -er metre

o) )ront shel) s-ace :1+5 :5+1 :!5!2 :2.1

" 36e allocation t6at maximises t6e dail contribution !rom so!t drink sales is

(aily contribution

Metres of per metre of )otal contribution

shelf space front shelf space mar"in per !ay

(ola :1+5 :.,5

Lemonade 5+1 2,".

atural orange juice !5!2 !5!2

Punch 2.1 2.1

€$,*51 .20

36e maximum o! $ metres o! !ront s6el! space 7ill be devoted to ola because it

6as t6e 6i6est contribution marin per unit o! t6e constrainin !actor. Four metres

o! !ront s6el! space 7ill be devoted to @emonade, 76ic6 6as t6e second 6i6est

contribution marin per unit o! t6e constrainin !actor. Eo more s6el! space can be

devoted to @emonade, since eac6 o! t6e remainin t7o products, Eatural orane

Iuice and unc6 (t6at 6ave t6e second lo7est and lo7est contribution marins per

unit o! t6e constrainin !actor), must be iven at least one metre o! !ront s6el! space.

1-.12 Customer profitabi*it+, choosin) customers. (20:25 min)

1 Nours'Daim s6ould not drop t6e Fourbe'iM business as t6e !ollo7in analsis

s6o7s

Loss in re#enues )rom dro--ing /our'e;RiF :63,7

a#ings in costsG

&aria'le costs .3,

/i0ed costs 2 % :!, 2,


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2 8! Nours'Daim accepts t6e additional business !rom Fourbe'iM, it 7ould take an

additional 500 6ours o! mac6ine time. 8! Nours'Daim accepts all o! Fourbe'iMGs and

arpes'O'PondsG business !or Februar, it 7ould re?uire 2,500 6ours o! mac6ine

time (1,500 6ours !or arpes'O'Ponds and 1,000 6ours !or Fourbe'iM). Nours'Daim

6as onl 2,000 6ours o! mac6ine capacit. 8t must, t6ere!ore, c6oose 6o7 muc6 o!

t6e arpes'O'Ponds or Fourbe'iM business to accept. 8! Nours'Daim accepts an

additional business !rom Fourbe'iM, it must !oro some o! arpes'O'PondsGs

business.

3o maximise operatin income, Nours'Daim s6ould maximise contribution marin

per unit o! t6e constrained resource. (Fixed costs 7ill remain unc6aned at

€100,000 76atever business Nours'Daim c6ooses to accept in Februar, and aret6ere!ore irrelevant.) 36e contribution marin per unit o! t6e constrained resource

!or eac6 customer in Nanuar is

*arpes+,+-on!s ourbe+/i0

Re#enues&aria'le costs

(ontri'ution margin

:!2, .2,

:+3,

:3, .3,

:"2,

(ontri'ution margin -er machine;hour :+3,

A :52 !,5

:"2,A :1.

5

>ince t6e €"0,000 o! additional Fourbe'iM business in Februar is identical to Iobsdone in Nanuar, it 7ill also 6ave a contribution marin o! €$ per mac6ine'6our,76ic6 is reater t6an t6e contribution marin o! €52 per mac6ine'6our !romarpes'O'Ponds. 3o maximise operatin income, Nours'Daim s6ould !irst allocate

all t6e capacit needed to take t6e Fourbe'iM business (1,000 mac6ine'6ours) and

t6en allocate t6e remainin 1,000 (2,000 B 1,000) mac6ine'6ours to arpes'O'

Ponds. Nours'DaimGs operatin income in Februar 7ould t6en be €1$,000 ass6o7n belo7, reater t6an t6e €10,000 operatin income in Nanuar.

*arpes+,+-on!s ourbe+/i0 )otal

(ontri'ution margin -er machine;hour

Machine;hours to 'e >ored

(ontri'ution margin

/i0ed costs

-erating income

:52

!,

€52,000

:1.

!,

:1., :!!1,

!,

:!1,

/lternativel, 7e could present Nours'DaimGs operatin income b takin t7o't6irds(1,000 C 1,500 mac6ine'6ours) o! arpes'O'PondsGs Nanuar revenues and variable

costs and doublin (1,000 C 500 mac6ine'6ours) Fourbe'iMGs Nanuar revenues and

variable costs.

!"© Pearson Education Limited 2!2


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*arpes+,+-on!s ourbe+/i0 )otal

Re#enues

&aria'le costs

(ontri'ution margin

/i0ed costs

-erating income

:3,

23,

52,

:!1,

*1,

1.,

:2.,

!2.,

!!1,

!,

:!1,

36e problem indicated t6at Nours'Daim could c6oose to accept as muc6 o! t6e

arpes'O'Ponds and Fourbe'iM business !or Februar as it 7ants. o7ever, some

students ma raise t6e ?uestion t6at Nours'Daim s6ould t6ink more strateicall

be!ore decidin 76at to do. For example, 6o7 7ould arpes'O'Ponds react to

Nours'DaimGs inabilit to satis! its needsQ Kill Fourbe'iM continue to ive Nours'

Daim €1$0,000 o! business eac6 mont6 or is t6e additional €"0,000 o! business inFebruar a special orderQ For example, i! Fourbe'iMGs additional 7ork in Februar

is onl a special order and Nours'Daim 7ants to maintain a lon'term relations6ip

7it6 arpes'O'Ponds, it ma in !act pre!er to turn do7n t6e additional Fourbe'iM business. 8t ma !eel t6at t6e additional €$,000 in operatin income in Februar isnot 7ort6 Ieopardisin its lon'term relations6ip 7it6 arpes'O'Ponds. -t6er

students ma raise t6e possibilit o! Nours'Daim acceptin all t6e arpes'O'Ponds

and Fourbe'iM business !or Februar i! it can subcontract some o! it to anot6er

reliable, 6i6'?ualit printer.

1-.1" (e*evance of euipment costs. (0:0 min)

1a >tatements o! cas6 receipts and disbursements

eep uy ne machine

ear 1

ears

24

our

years

to"ether ear 1

ears

24

our yearsto"ether

Recei-ts )rom o-erationsG

ales

Deduct dis'ursementsG

ther o-erating costs

-eration o) machine

Purchase o) old’machine

Purchase o) ne>’eJui-ment

Cash inflofrom sale of ol!euipment

et cash in)lo>

:!5,

6!!,7

6!5,7

62,7K

:5,

:!5,

6!!,7

6!5,7

:25,

:1,

6..,7

iiiii i61,7

iiiii62,7

:3,

:!5,

iiiii6!!,7

iiiii 6*,7

iiiii 62,7

iiiii 62.,7

3,

:65,7

:!5,

iiiii6!!,7

iiiiiiii 6*,7

:"!,

:1,

6..,7

6"1,7

62,7

62.,7

3,

:33,

R>ome students inore t6is item because it is t6e same !or eac6 alternative. o7ever, note t6at a statement !or

t6e entire year 6as been re?uested. -bviousl, t6e €20,000 7ould a!!ect Sear 1 onl under bot6 t6e TkeepG andTbuG alternatives.

!.© Pearson Education Limited 2!2


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36e di!!erence is €",000 !or !our ears taken toet6er. 8n particular, note t6at t6e€20,000 book value can be omitted !rom t6e comparison. 4erel cross out t6e entirelineH alt6ou6 t6e column totals are a!!ected, t6e net di!!erence is still €",000.

Eote t6e motivational !actors 6ere. / manaer ma be reluctant to replace simpl

because t6e lare loss on disposal severel 6arms pro!itabilit in Sear 1. Eevert6eless,t6e cumulative cas6 !lo7 e!!ects are bene!icial to t6e compan as a 76ole (assumin a

7orld o! no income taxes and no interest).

1b /ain, t6e di!!erence is €",000

8ncome statements

eep uy ne machine

ears

14

our

years

to"ether ear 1

ears

24

our yearsto"ether

ales

(osts 6e0cluding dis-osal7G

ther o-erating costs

De-reciation

-erating costs o) machine


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Prap6ic solution to !ind optimal mix, Fiordi'@iio >rl.

1-.1' /ptima* sa*es mi% for a retai*er, sensitivit+ ana*+sis. (0:0 min)

1 @et G = !loor space o! rocer products carried.

D = !loor space o! dair products carried.

36e @ !ormula o! t6e decision is

4aximise €10G € D

>ubIect to €10G € D ,000

€10G W 1,000

€ D W 1"00

2 +ier'und'X7anMi ma 7is6 to maintain its reputation as a !ull'service !ood store

carrin bot6 rocer and dair products. ustomers ma not be attracted i! +ier'

und'X7anMi carries onl t6e product line 7it6 t6e 6i6est unit contribution

marins. (4arketin and economics courses examine t6is issue under t6e label o!

interdependencies in t6e demand !or products.)

" >olution %x6ibit 10.1$ presents t6e rap6ic solution. 36e optimal solution is ,200

s?uare metres o! rocer products and "00 s?uare metres o! dair products.

!+© Pearson Education Limited 2!2


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36e trial'and'error solution approac6 is

)rial Corner 7G 8 D )CM : ;1


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9B( ch-t !!

11.1" Activit+0based costin), product cost cross0subsidisation. (0:0 min)

36e idea !or %xercise 11.1 came !rom T/# 4inicase @et t6em %at akeG, in Cost anagement !pdate

(8ssue Eo. 1).

1 #udeted 4- = €210,"00

rate in 2011 200,000 units

= €1.05 per 1 Y unit o! cake

/aisin ca?e $ayere! carrot ca?e

nit direct manu)acturing cost

Direct materials :1 :*

Direct manu)acturing la'our !. :+. 2 :!!

nit indirect manu)acturing costManu)acturing o#erhead

6:!5. % !, !7 :!5. !5. :!5. !5.

nit total manu)acturing cost :!+*. :2!5.

2 /aisin ca?e $ayere! carrot ca?e

nit direct manu)acturing cost

Direct materials :1 :*

Direct manu)acturing la'our !. :+. 2 :!!

nit indirect manu)acturing cost

Mi0ing 6:. % 5, 37 :2 :"2

(ooing 6:!. % 2, "7 23 .2

(ooling 6:2 % ", 57 1 !

(reamingNicing 6:25 % , "7 +5

Pacaging 6:3 % ", +7 2. +3 51 2!5

nit total manu)acturing cost :!52 :"25

!*© Pearson Education Limited 2!2


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" 36e unit product costs in re?uirements 1 and 2 di!!er onl in t6e assinment o! indirect costs to

individual products. 36e assumed usae o! indirect'cost areas under eac6 costin sstem is

E0isting s=stem 9B( s=stem$ayere! $ayere!

Raisin cae carrot cae Raisin cae carrot cae

Mi0ing 5 5 "35 1!5

(ooing 5 5 . 1

(ooling 5 5 "+5 125

(reamingNicing 5 5 !

Pacaging 5 5 " +

36e /# sstem reconises t6e substantial di!!erence in usae o! individual activit areas bet7een

raisin cake and laered carrot cake. 36e existin costin sstem erroneousl assumes e?ual usae o!

activit areas b 1 k o! raisin cake and 1 k o! laered carrot cake.

! Uses o! activit'based cost numbers include

a "ricing decisions. >tarkuc6en can use t6e /# data to decide preliminar prices !or

neotiatin 7it6 its customers. aisin cake is currentl overcosted 76ile laered carrot cake is

undercosted. /ctual production o! laered carrot cake is 100& more t6an budeted. -ne

explanation could be t6e underpricin o! laered carrot cake.

b "roduct emphasis. >tarkuc6en 6as more accurate product marins 7it6 /#. >tarkuc6en can

use t6is in!ormation !or decidin 76ic6 products to pus6 (especiall i! t6ere are production

constraints).

c "roduct design. /# provides a road map on 6o7 a c6ane in product desin can reduce

costs. 36e percentae breakdo7n o! total indirect costs !or eac6 product is

/aisin ca?e $ayere! carrot ca?e

Mi0ing 251 6:2N:+37 !.* 6:"2N:2!57

(ooing "5* !*5

(ooling ++ .+

(reamingNicing ".*

Pacaging " 3 21

! !

>tarkuc6en can reduce t6e cost o! eit6er cake b reducin its usae o! eac6 activit area. For

example, >tarkuc6en can reduce raisin cakeGs cost b siMabl reducin its cookin time or

packain time. >imilarl, a siMeable reduction in creaminicin 7ill 6ave a marked

reduction on laered carrot cake costs.

d "rocess impro#ements. 8mprovements in 6o7 activit areas are con!iured 7ill cause a

reduction in t6e costs o! products t6at use t6ose activit areas.

2© Pearson Education Limited 2!2


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e Cost planning and fle$ible budgeting . /# provides a more re!ined model to !orecast

costs o! >tarkuc6en and to explain 76 actual costs di!!er !rom budeted costs.

11.1' Activit+0based ob0costin) s+stem. (0 min)

1 >olution %x6ibit 11.1$ presents costin overvie7s o! t6e previous Iob'costin sstem and t6e

re!ined activit'based Iob'costin sstem.

2 Direct manu)acturing costsG

Direct materials DOr ",

Indirect manu)acturing costsG

Materials handling, DOr 3 % 5 DOr .

Machining, DOr 13 % !2 3!1

9ssem'l=, DOr +5 % !5 !,!25

Ins-ection, DOr !. % . .!1 2,+5+


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Solution Exhibit 11.16Nob ostin >stems !or enriksen

11.1 Activit+0based ob costin). (15 min)

1 /n overvie7 o! t6e product'costin sstem is



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Direct manu)acturing costsG

Direct materials :1, :25,

Direct manu)acturing la'our,

:2 % +,5 5 !5, !,

Direct manu)acturing costs +5, "5,

Indirect manu)acturing costsG

Materials handling,

:25 % !, ",5 25, 3+5

(utting,

:25 % !, ",5 25, 3,+5

9ssem'l=,

:25 % +,5 5 !3+,5 !2,5

Indirect manu)acturing costs .12,5 22,!25

nstream costs !! 2"1


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• 76ere t6ere are sini!icant over6eads to apportion and

• 76ere t6e availabilit o! sop6isticated in!ormation retrieval sstems allo7s manaement to

track product costs as t6e pass t6rou6 a production sstem.

2.© Pearson Education Limited 2!2


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Multipro!uct businesses

36e main issue is t6at t6ere 6as to be at least t7o products in t6e business, ot6er7ise t6ere are no

costs to apportion bet7een products. For a sinle product compan, all costs o! t6e business are

identi!iable 7it6 t6e product and product probabilit is directl related to t6e pro!itabilit o! t6e

business as a 76ole.

-t6er advantaes o! /# in multiproduct business relate to t6e accurate valuation o! stock and

!acilitatin t6e e!!ective manaement o! stock levels 7it6 multiple products. /llied to t6is is t6at

t6ere is reduced cross'subsidisation o! products 7it6 costs accuratel identi!ied 7it6 products, it becomes easier !or manaement to discern 76ic6 products are pro!itable aainst t6ose t6at are not.

)he si"nificance of o#erhea!s an! the @C metho! of char"in" costs

>ince /# is a cost apportionment sstem, it is principall bene!icial 76en t6ere is a 6i6

proportion o! over6ead costs : i! a business incurs onl direct costs, t6ere is no issue !or /# to

resolve.

/# is based on t6e premise t6at it is activities t6at lead to costs bein incurred and t6at costs

s6ould, t6ere!ore, be apportioned on t6e basis o! t6ose activities. ost drivers are t6en c6osen t6at

re!lect t6e events t6at create costs 76en t6e activities are undertaken. 36ese costs are t6en

collected into cost pools 76ere t6ere are common cost drivers. Finall, products are allocated costs

on t6e basis o! t6e activities t6e use.

Anformation systems

/ basic re?uirement !or an cost allocation sstem is in!ormation availabilit. 36is is particularl

so !or /# sstems t6at rel 6eavil on activit in!ormation.

8n addition, /# re?uires t6e monitorin o! activities t6at 6ave not involved monitorin

previousl. 36is raises issues o! in!ormation capture and it is in ne7 tec6nolo t6at ans7ers to

t6is are most likel to be !ound.

b /# can enable t6e exclusion o! non'controllable costs, !ocusin onl on t6ose costs t6at are

traceable to manaer decisions, t6ereb providin a more !air outcome t6an absorption costin.

/# is o!ten claimed to rest on a more accurate in!ormation base t6an absorption costin and

6ence, t6e impact o! manaement decisions is potentiall more easil seen under /# t6an it is

under traditional volume'related absorption met6ods.

/lso, /# absorbs costs into products in a 7ider variet o! 7as t6an traditional absorption

met6ods t6at rel mostl on labour andor mac6ine'6ours. 8n extendin t6e rane o! absorption

bases, /# is able to more closel track costs to t6e causes o! t6e costs, 76ic6 t6en links to

manaement decisions.

B !!!* )or in)o that could assist >ith an= >ritten -arts

!!!3 solution gi#en in the 'oo

(I9 ch-t !"

1".12 Comparison of approaches to capita* bud)etin). (22:25 min)

1 aback period = €220,000 C €50,000 = . ears

2 36e table !or t6e present value o! annuities (/ppendix #, 3able ) s6o7s

10 periods at 1$& = ."

Eet present value = €50,000 (.") B €220,000

= €21,$50 B €220,000 = €21,$50



26/41


" 8nternal rate o! return (8)

€220,000 = resent value o! annuit o! €50,000 at X & !or 10 ears or 76at !actor ( & ) int6e table o! present values o! an annuit (/ppendix #, 3able ) 7ill satis! t6e

!ollo7in e?uation.

€220,000 = €50,000 &

& =

220,000

50,000

:

: = .00

-n t6e 10'ear line in t6e table !or t6e present value o! annuities (/ppendix #, 3able ), !ind t6e

column closest to .00H .00 is bet7een a rate o! return o! 1"& and 20&.



27/41


8nterpolation is necessar

Present;#alue )actors

!3 ..*. ..*.

IRR rate 8 ..

2 .!*2 8

Di))erence "2 *.

8nternal rate o! return = 1"& = 1"& (0.11) (2&) = 1".$2&

! /ccountin rate o! return based on net initial investment

Eet initial investment = €220,000

%stimated use!ul li!e = 10 ears

/nnual strai6t'line depreciation = €220,000 C 10 = €22,000

'(( =

=

50,000 22,000

220,000

−

=

2",000

220,000 = 12.*&

Eote 6o7 t6e accrual accountin rate o! return, 76ic6ever 7a calculated, can produce results t6at

di!!er markedl !rom t6e internal rate o! return.

1".1" 6pecia* order, re*evant costs, capita* bud)etin). (0 min)

1 elevant cas6 in!lo7 !rom acceptin t6e special order

/ele#ant cash flos

%er car 71

)otal

72 : 71 × 1


28/41


d +ariable marketin costs are not deducted because t6e 7ill not be incurred on t6e special order.

e Fixed marketin costs are irrelevant because t6e 7ill not c6ane 76et6er or not t6e special order

is accepted.

8! it must o!!er t6e same €50 price to its ot6er customers, %uro'Nouets 7ill lose cas6 !lo7 o! €< ×

10,000 = €1,1*0,000 per ear !or ears !rom its existin customers.

Eote t6at 76atever incremental costs %uro'Nouets incurs on sales to its existin customers is

irrelevant. 36ese costs 7ould continue to be incurred 76et6er %uro'Nouets prices t6e cars at €50 or €5


29/41


8nterpolation is necessar

%resent+#alue factors

2. "2 "2

IRR rate 8 "

21 2335 8

Di))erence !"5 2

8nternal rate o! return = 2& = 2& (0.1") (2&) = 2.0&

2 @et t6e minimum annual cas6 savins be € X .

36en 7e 7ant € X (.""


30/41


econd, tr= an !3 discount rateG

:25, × .+3 :!!,*5

6:", :3,7 × 211 !,!3

@ross -resent #alue !!2,53

Deduct net initial in#estment 6!!3,7

et -resent #alue :65,*.27

# interpolation

8nternal rate o! return =

2,1


31/41


1".1 6portin) contract, net present va*ue, pa+bac. (0 min)

1a >ummar o! cas6 in!lo7s and out!lo7s (in millions) is as !ollo7s

Cash outflos Cash inflos &et cash inflos

Qear ! 6start7 Or " Or Or 6"7

Qear ! 6end7 55 51 !

Qear 2 6end7 12 3" 2!

Qear " 6end7 +" *! !3

Qear . 6end7 +* *+ !3

ear

%

!iscount

factor

Cash

outflos% of cashoutflos

Cashinflos

% of cashinflos

G Qear ! 6start7

!G Qear ! 6end7

2G Qear 2 6end7"G Qear " 6end7

.G Qear . 6end7

!

3*"

+*++!2

1"1

Or "

55

12+"

+*

Or "

.*!!5

.*.!.5!*+1

52..

Or2"+.*

Or

51

3"*!

*+

Or

53

11!5!1.+*2

1!1*2

Or2.21."

36e net present value o! t6e 4onteiro contract is NKr1.1"


32/41


1b aback period

ear

&et cash

inflos

Cumulati#e net

cash inflos

Cash in#estment yet

to be reco#ere!

at en! of year

G Qear ! 6start7 8 8 Or"

!G Qear ! 6end7 Or! Or! 2*

2G Qear 2 6end7 2! 22 3

"G Qear " 6end7 !3 . 8

.G Qear . 6end7 !3 53 8

aback period = 2 ears

EYr0."00

EYr1."00

= 2. ears

2 -t6er !actors /spelund mi6t consider include

a Uncertaint over t6e predicted cas6 in!lo7s !or 2012 to 2015. / ke !actor 6ere is t6e possible

risk o! inIur to 4onteiro or a diminis6in o! 6is soccer abilit.

b 8ncrease in number o! c6ampions6ips /alesund Fotballklubb 7ins.

c 8ncrease in communit pride t6at accompanies a c6ampions6ip team.

d /spelundZs o7n personal prestie o! bein president o! a c6ampions6ip club.

e 36e e!!ect t6e sinin 7ould 6ave on /alesund FotballklubbGs abilit to sin ot6er plaers.

1".2- uipment rep*acement, re*evant costs, sensitivit+ ana*+sis. (0:0 min)

1 36e !irst step is to analse all relevant operatin cas6 !lo7s and alin t6em 7it6 t6e appropriatealternative. 36is analsis is as !ollo7s

Moul!in"

machine

71

@utomatic

machine

72

Ancrement

73

ales 6irrele#ant7

(ostsG

Direct materials

Direct manu)acturing la'ourK

&aria'le o#erheadK

/i0ed o#erhead 6irrele#ant7

Mareting and administrati#ecosts

6irrele#ant7

s

8

$!,

2,

!5,

8

8

$.5,

8

$*,

!,

+,5

8

8

$21,5

8

$!,

!,

+,5

8

8

$!3,5

KBecause the automatic machine -roduces t>ice as man= units -er hour, the directmanu)acturing la'our cost >ith the automatic machine >ould 'e $!, #aria'le o#erhead,'eing +5 o) direct manu)acturing la'our cost, >ould 'e $+,5

>olution %x6ibit 1.20 indicates t6at t6e automatic mac6ine 6as a ;


33/41


Eote 36e book value o! t6e old mac6ine is irrelevant and t6us is completel inored. 8n t6e li6t o!

subse?uent events, nobod 7ill den t6at t6e oriinal ;50,000 investment could 6ave been avoided,

7it6 a little luck or !oresi6t. #ut not6in can be done to alter t6e past. 36e ?uestion is 76et6er t6e

compan 7ill nevert6eless be better o!! buin t6e ne7 mac6ine. 4anaement 7ould 6ave been muc6

6appier i! t6e ;50,000 6ad never been spent in t6e !irst place, but t6e oriinal mistake s6ould not be

compounded b keepin t6e old mac6ine.

""© Pearson Education Limited 2!2


34/41



Eet present'value analsis o! purc6asin ne7 automatic mac6ine.

)otal

present

#alue

%resent+#alue

!iscount

factor

at 1>D

S?etch of rele#ant cash flos

End o) =ear ! 2 ".

9 9utomatic machine

et initial in#estment $6..,7 ←−! ←−;(,000)

(urrent dis-osal -rice

o) old eJui-ment 5,←−−! ←−− $5,

Recurring o-erating

cash costs 6+!,2357←−−21* ←−−−−−−−− $621,57 $621,57 $621,57 $621,5)

Present #alue o) net

cash out)lo>s $6!!,2357

B Moulding machine

DS?etch of rele#ant cash flos

End o) =ear ! 2 " .

1 Initial machine in#estment $6..,7

2 (urrent dis-osal -rice o) old machine $5,

et ini tial in#estment $6"*,7 ←− !←−−− $6"*,7

3 Recurring o-erating

cash sa#ings .*,+15 ←− 21*←−−−−−−−−−−−−− $!3,5 $!3,5 $!3,5 $!3,5

4 Di))erence in terminal

dis-osal -rices o) machines 6!,".27 ←− 5!1 ←−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−− 62,17

et -resent #alue $*,.2"

".© Pearson Education Limited 2!2


35/41


Eote t6e cas6 out!lo7 o! ;2,$00 !rom t6e di!!erence in terminal disposal prices o! mac6ines. 36e

relevant cas6 !lo7 e?uals t6e di!!erence in terminal disposal prices o! t6e t7o mac6ines. 8! t6e to

manu!acturer continues to use t6e old mac6ine, it 7ill receive ;2,$00 on disposal o! its mac6ine at t6e

end o! ear . 8! it s7itc6es to t6e ne7 mac6ine, it 7ill receive ;0 on disposal at t6e end o! ear .

ence, b investin in t6e ne7 mac6ine instead o! continuin 7it6 t6e old one, t6e to manu!acturer

!oroes ;2,$00 in terminal disposal price. ence, ;2,$00 appears as a cas6 out!lo7 in ear in t6e

sketc6 o! relevant cas6 !lo7s.

2 36e uni!orm paback !ormula can be used because t6e operatin savins are uni!orm

aback period =

Eet initial investment

Uni!orm increase in annual cas6 in!lo7

;,000 ;5,000= = 2.1 ears

;1",500 "

8

36e ;5,000 current disposal price o! t6e mouldin mac6ine is deducted !rom t6e ;,000 cost o!

t6e automatic mac6ine to determine t6e net initial investment in t6e automatic mac6ine.

" 36is is an example o! sensitivit analsis

Eote t6at t6e net initial investment and t6e di!!erence in terminal disposal prices o! mac6ines are

una!!ected and 6ence, are included in t6e e?uation at t6e present values t6at 7e calculated earlier.

36e present value o! an annuit o! ;1 received at t6e end o! eac6 ear !or ears is 2.$


36/41


1".21 Capita* bud)etin), computer0inte)rated manufacturin) C:5;, sensitivit+.

(25 min.)

1 36e net present'value analsis o! t6e 84 proposal is as !ollo7s. Ke consider t6e di!!erences in

cas6 !lo7s i! t6e mac6ine is replaced. /ll values in millions.

/ele#ant

cash

flos

%resent+#alue

!iscount

factors at

14D

)otal

present

value

1 Initial in#estment in (IM toda=

2a (urrent dis-osal -rice o) old -roduction line

2b (urrent reco#er= o) >oring ca-ital 6:1 B :27

3 Recurring o-erating cash sa#ings

:.K each =ear )or ! =ears

4a Higher terminal dis-osal -rice o) machines

6:!. B :7 in =ear !

4b Reduced reco#er= o) >oring ca-ital

6:2 B :17 in =ear !

et -resent #alue o) (IM in#estment

:6.57

5

.

.

!.

6.7

!

!

!

52!1

2+

2+

:6.57

5

.

231.

"+3

6! 37

:6!2 ."17

K Recurring o-erating cash )lo>s are as )ollo>sG

(ost o) maintaining so)t>are -rograms and (IM eJui-ment €6!57

Reduction in lease -a=ments due to reduced )loor;s-ace reJuirements !

/e>er -roduct de)ects and reduced re>oring .5

9nnual recurring o-erating cash )lo>s €.

-n t6e basis o! t6is !ormal !inancial analsis, Dinamica s6ould not invest in 84 : it 6as a

neative net present value o! €(12.$) million.

2 e?uirement 1 onl looked at cost savins to Iusti! t6e investment in 84. 4anuel estimatesadditional cas6 revenues net o! cas6 operatin costs o! € million a ear as a result o! 6i6er

?ualit and !aster production resultin !rom 84.

From /ppendix #, 3able , t6e net present value o! t6e € million annuit stream !or 10 ears

discounted at 1& is € × 5.21$ = €15.$". 3akin t6ese revenue bene!its into account, t6e net

present value o! t6e 84 investment is €.212 (€15.$" B €12.$) million. -n t6e basis o! t6is

!inancial analsis, Dinamica s6ould invest in 84.

" @et t6e annual cas6 !lo7 !rom additional revenues be € X . 36en 7e 7ant t6e present value o! t6is

cas6 !lo7 stream to overcome t6e neative E+ o! €(12.$) calculated in re?uirement 1. ence,

X (5.21$) = 12.$

X = €2." million

/n annuit stream o! €2." million !or 10 ears discounted at 1& ives an E+ o! €2." ×

5.21$ = 12.$ (rounded).

"1© Pearson Education Limited 2!2


37/41


!

/ele#ant

cash

flos

%resent+#alue

!iscount

factors at 14D

)otal

present

#alue

1 Initial in#estment in (IM toda=

2a (urrent dis-osal -rice o) old -roduction line

2b (urrent reco#er= o) >oring ca-ital 6:1 B :27

3a Recurring o-erating cash sa#ings :.

each =ear )or 5 =ears

3b Recurring cash )lo>s )rom additional re#enues o) :" each =ear )or 5 =ears

4a Higher terminal dis-osal -rice o) machines6:2 B :.7 in =ear 5

4b Reduced reco#er= o) >oring ca-ital 6:2 B :17 in=ear 5

et -resent #alue o) (IM in#estment

:6.57

5

.

.

"

!1

6.7

!

!

!

".""

".""

5!*

5!*

:6.57

5

.

!"+"2

!2**

3".

62 +17

:65 +.!7

36e use o! too s6ort a time 6oriMon suc6 as 5 ears biases aainst t6e adoption o! 84 proIects.

#e!ore !inall decidin aainst 84 in t6is case, 4anuel s6ould consider ot6er !actors, includin

a >ensitivit to di!!erent estimates o! recurrin cas6 savins or revenue ains.

b /ccurac o! t6e costs o! implementin and maintainin 84.

c #ene!its o! reater !lexibilit t6at results !rom 84 and t6e opportunit to train 7orkers !or

t6e manu!acturin environment o! t6e !uture.

d otential obsolescence o! t6e 84 e?uipment. Dinamica s6ould consider 6o7 di!!icult t6e

84 e?uipment 7ould be to modi! i! t6ere is a maIor c6ane in 84 tec6nolo.

e /lternative approac6es to ac6ieve t6e maIor bene!its o! 84 suc6 as c6anes in process or

implementation o! Iust'in'time sstems.

f >trateic !actors. 84 ma be t6e best approac6 to remain competitive aainst ot6er lo7'cost

producers in t6e !uture.


38/41


urc6ase costs !rom outsider, 1,000 units × €15 €15,000

Deduct >avins in variable costs,

1,000 units × €120 €120,000

>avins due to /Gs e?uipment

and !acilities bein assined

to ot6er operations

1",000 1",000

Eet cost (bene!it) to compan as a 76ole b buin !rom outside €(,000)

" 36e compan 7ill bene!it i! purc6ases !rom t6e outside supplier

urc6ase costs !rom outsider, 1,000 units × €115 €115,000

Deduct >avins in variable costs b reducin

Division / output, 1,000 units × €120 120,000

Eet cost (bene!it) to compan as a 76ole b

buin !rom outside €(5,000)

"3© Pearson Education Limited 2!2


39/41


36e t6ree re?uirements are summarised belo7 (in t6ousands)

71 72 73


40/41


DeductG


41/41


36e 4inin Division manaer 7ill pre!er 4et6od / (trans!er at market prices) because t6is

met6od ives €120,000 o! bonus rat6er t6an €2,000 under 4et6od # (trans!ers at 110& o! !ull

costs). 36e 4etals Division manaer 7ill pre!er 4et6od # because t6is met6od ives €12,000 o!

bonus rat6er t6an €$,000 under 4et6od /.

" /rturo 3uM[n, t6e manaer o! t6e 4inin Division 7ill appeal to t6e existence o! a competitive

market to price trans!ers at market prices. Usin market prices !or trans!ers in t6ese conditions

leads to oal conruence. Division manaers actin in t6eir o7n best interests make decisions t6at

are also in t6e best interests o! t6e compan as a 76ole.

3uM[n 7ill !urt6er arue t6at settin trans!er prices based on cost 7ill cause 6im to pa no

attention to controllin costs since all costs incurred 7ill be recovered !rom t6e 4etals Division at

110& o! !ull costs.

management and cost accounting bhimani solutions 5th edition

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