C h a p t e r 1 2 / Ta c t i c a l D e c i s i o n M a k i n g 545

E. Identify alternatives as possible solutions to the problem.

F. Total the relevant costs and benefits for each alternative.

Consider each of the following independent situations. 12-2

A. The Purchasing Department has five purchasing agents that work full time and Flexible versus
are paid a salary of $35,000 per year. Each purchase order takes about 90 min- Committed
utes, and requires approximately $5 of forms and supplies. Each order also Resources
requires, on average, about 45 minutes of telephone or Internet time to check LO2
with potential suppliers. The company pays a flat monthly rate for telephone and
Internet services. The depreciation on office equipment for the Purchasing
Department is $3,000 per month.
B. El Munchies, a taco stand near the college, hires counter staff at the rate of $7.50
per hour. Each staff member knows that the hours vary each week depending on
the amount of business that El Munchies expects. Food is purchased from a
restaurant supplier on an “as needed” basis; there is about 4 days of perishable
goods inventory on hand, and a month’s worth of nonperishable goods (e.g.,
napkins, paper cups) in inventory. Utilities are paid on a monthly basis for the
previous month’s usage. El Munchies has a three-year lease on the building and
parking lot. Each month, the restaurant buys newspaper and radio advertising for
the coming month.
C. Jared Benning runs a lawn mowing service during the summers to help pay for
his college expenses. Jared bought a power mower (it runs on gasoline and must
have its oil changed monthly due to the volume of lawns mowed) and a gas-
powered weed eater for trimming along the edges. Jared buys a season’s worth of
lawn mower oil at the beginning of summer because he can get a discount if he
buys in bulk. From time to time, Jared has a commitment elsewhere. When that
happens, a friend of his mows the yards that day; he and the friend have agree
on a per yard fee for this. Jared owns a used pickup truck and uses it to haul his
equipment from job to job.

Required
Classify the resources in each of the above situations as flexible or committed. If the
resource is committed, determine whether it is committed for the short term or
committed for multiple periods.

Chesbrough, Inc., makes many of the components of its main product in-house. 12-3
Recently, Berham Electronics offered to supply one component, K-25, at a price of
$6.50 each. Chesbrough uses 20,000 units of component K-25 each year. The Make-or-Buy
absorption cost per unit of this component is as follows: Decision
LO3
Direct materials $2.95
Direct labor 0.40
Variable overhead 1.80
Fixed overhead 4.00
Total $9.15
The fixed overhead is an allocated expense; none of it would be eliminated if pro-
duction of component K-25 stopped.

Required

1. What are the alternatives facing Chesbrough, Inc., with respect to production of
component K-25?
2. List the relevant costs for each alternative. Suppose that Chesbrough, Inc., pur-
chases K-25 from Berham Electronics. By how much will operating income
increase or decrease?
546 Pa r t 5 / M a n a g e r i a l D e c i s i o n M a k i n g

12-4 Refer to Exercise 12-3. Now suppose that $1.85 of the fixed overhead for component
K-25 is the cost of leasing special equipment used to make K-25. If production of K-25
Make-or-Buy stops, then the leased machinery can be returned immediately at no further cost.
Decision
LO3 Required

1. What are the relevant costs for each alternative?

2. If Chesbrough, Inc., purchases K-25 from Berham Electronics, by how much will
operating income increase or decrease?

12-5 Garringer Company makes two products, regulars and seasonals. Information on
costs associated with each product line is as follows:
Keep-or-Drop
Decision Regulars Seasonals
LO3 Sales revenue $135,000 $15,000
Less: Variable expenses 50,000 8,600
Contribution margin $ 85,000 $ 6,400
Less:
Direct fixed expenses 3,000 1,200
Common fixed expenses 54,000 6,000
Operating income $ 28,000 $ (800)
The direct fixed expenses are advertising and selling costs that are incurred by
the particular product line. The common fixed expenses are allocated to the two
product lines on the basis of sales revenue. Total common fixed expenses would not
change if a product line were dropped.

Required

1. Develop a segmented income statement, by product and in total for Garringer

Company. Be sure to show the segment margin for each product.
2. By how much would operating income increase or decrease if the seasonals were
dropped?

12-6 Yavapei Company produces three products: A, B, and C. A segmented income state-
ment, with amounts given in thousands, follows:
Keep-or-Drop
Decision A B C Total
LO3
Sales revenue $1,800 $1,600 $210 $ 3,610
Less: Variable expenses 1,350 1,000 140 2,490
Contribution margin $ 450 $ 600 $ 70 $1,120
Less: Direct fixed expenses 150 300 80 530
Segment margin $ 300 $ 600 $(10) $ 590
Less: Common fixed expenses 340
Operating income $ 250
Direct fixed expenses include depreciation on equipment dedicated to the prod-
uct lines of $20,000 for A, $120,000 for B, and $25,000 for C. None of the product
line equipment can be sold, and would have to be disposed of if the product line
were dropped.

Required
1. What impact on profit would result from dropping Product C?
2. Suppose that 10 percent of the customers for Product B choose to buy from
Yavapei because it offers a full range of products, including Product C. If C were
 C h a p t e r 1 2 / Ta c t i c a l D e c i s i o n M a k i n g 547

no longer available from Yavapei, these customers would go elsewhere to pur-

chase B. Now what is the impact on profit if Product C is dropped?

Thomson Company has been approached by a new customer with an offer to pur- 12-7
chase 34,000 units of Thomson’s product at a price of $24 each. The new customer
is geographically separated from Thomson’s other customers, and there would be no Special-Order
effect on existing sales. Thomson normally produces 400,000 units but plans to pro- Decision; Flexible
duce and sell only 360,000 in the coming year. The normal sales price is $30 per and Committed
unit. Unit cost information is as follows: Resources
LO2, LO3
Direct materials $ 8.00
Direct labor 10.00
Variable overhead 4.00
Fixed overhead 3.40
Total $25.40
If Thomson accepts the order, no fixed manufacturing activities will be affected
because there is sufficient excess capacity.

Required

1. Should Thomson accept the special order? By how much will profit increase or
decrease if the order is accepted?
2. Suppose that Thomson’s distribution center at the warehouse is operating at full
capacity and would need to add capacity costing $6,000 for every 5,000 units to
be packed and shipped. Should Thomson accept the special order? By how
much will profit increase or decrease if the order is accepted?

After several years producing and selling at capacity (50,000 units), Melton Com- 12-8
pany faced a year with projected sales and production of 38,000 units. A potential
customer offered to purchase 7,000 units at a price of $18 each. The normal sales Special-Order
price is $30 each. Unit cost information is as follows: Decision
LO2, LO3
Direct materials $ 9.00
Direct labor 6.50
Variable overhead 2.00
Fixed overhead 3.75
Total $21.25
Melton also pays a sales commission of $1.75. The commission would have to be
paid on this order.

Required
1. Should Melton accept the special order? By how much will profit increase or
decrease if the order is accepted?
2. Suppose that Melton does not have to pay the sales commission on the special
order. Should Melton accept the special order? By how much will profit increase
or decrease if the order is accepted?

Danelle, Inc., produces four products (Alpha, Beta, Gamma, and Delta) from a com- 12-9
mon input. The joint costs for a typical quarter follow:
Sell or Process
Direct materials $128,000 Further; Basic
Direct labor 56,000 Analysis
Overhead 80,000 LO1, LO2, LO3
The revenues from each product are as follows: Alpha, $130,000; Beta, $93,000;
Gamma, $30,000; and Delta, $40,000.
E XCEL