Accounting For Decision Making And Control, 9th Edition Solution Manual

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PART II: SOLUTIONS TO PROBLEMS AND CASESCHAPTER1INTRODUCTIONP 1–1:Solution to MBA Students(10 minutes)[Using accounting information for decision making and control]Together the two observations highlight the extremes in thetrade-offs of usingaccounting information for decision and control. In the first case, there is more analysisof opportunity costs that are hard to capture with typical accounting information.In thesecond case, there is less intended interest in opportunity cost and greater emphasis oncontrol.P 1–2:Solution to One Cost System Isn't Enough(15 minutes)[Economic Darwinism]The first part of the quote describes the tension (and conflict) that arises when asingle accounting system is used for multiple purposes.This part of the statement is anaccurate description of practice. However, the quote has a couple of problems, including:•While the quote describes the costs of using a single system ("a single system ...can't perform important managerial functions adequately"), the quote does not describethe benefits derived from using a single system (lower bookkeeping costs, a single audit,less confusion).•Because the quote ignores the benefits of a single system, it ignores the conceptof economic Darwinism.It does not address the question of how surviving (successful)companies can compete if a single system "can't perform important managerial functionsadequately."•Also, the quote assumes that managers are bound to their internal accountingsystems, that no other alternative information sources are available.Often managersdevelop their own ad hoc, "off-line" information systems for decision making.Thesesystems include spreadsheets, informal observation, and "walking around."P 1–3:Solution to U.S. and Japanese Tax Laws(15 minutes)[Influence of conflicting demands on cost systems]Theinternalaccountingsystemsupportsmultipleuses,includingfinancialreporting, taxes, contracting (debt and management compensation), internal decisionmaking, and internal control.Because multiple purposes are served, trade-offs must bemade among the competing demands.When more emphasis is placed on one purpose(taxes), less consideration can be given to other uses (internal decision making andcontrol).By linking taxes to external reporting, Japanese firms’ financial reports will be

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based on accounting procedures that give more weight to tax considerations. In the U.S.,companies can keep two sets of books, one for taxes and the other for financial reporting.Thus, in the U.S., there is more of a decoupling of taxes and everything else. Except forthe additional bookkeeping costs of producing the two separate sets of reports, taxconsiderations are predicted to have less influence on the choice of internal (and thusexternal) accounting procedures in the U.S. than in Japan.The question is raised as to why firms use the same accounting procedures forinternal reports as they do for external reports.Or for that matter, why do tax laws andexternalfinancialreportingconsiderationshaveanyeffectoninternalaccountingprocedures?Why don’t firms maintain multiple sets of accounts, one for each purpose(e.g., financial reporting, internal decision making, and internal control)?Clearly thereare additional bookkeeping costs for maintaining multiple sets of accounts.But also,there are confusion costs and, in many instances, firms explicitly link senior executivecompensation to externally reported financial statements.Such explicit linkage ofexecutive pay to externally reported net income presumably exists to control agency costsbetween management and shareholders.Once senior management performance andrewards are linked to external reports, the internal reporting system will become linked tothe external reports and basically less consideration will be given to choosing accountingprocedures that aid in internal decision making and internal control.In Japan, the firm’s accounting systems are less likely to be used for internal uses(decision making and control) than in the U.S. Because they cannot rely as much on theiraccounting systems for internal uses (because more weight is placed on using accountingprocedures to reduce taxes), Japanese managers are more likely to use non-accounting-based systems for internal decision making and control.P 1-4:Solution to Using Accounting for Planning(15 minutes)[Usefulness of historical costs]a.Historical costs are of limited use in making planning decisions in a rapidlychangingenvironment.With changingproducts,processesandprices,thehistorical costs are inadequate approximations of the opportunity costs of usingresources.Historical costs may, however, be useful for control purposes, as theyprovideinformationabouttheactivitiesofmanagersandcanbeusedasperformance measures to evaluate managers.b.Thepurposeofaccounting systemsistoprovideinformation for planningpurposes and control.Although historical costs are not generally appropriate forplanning purposes, additional measures are costly to make. An accounting systemshould include additional measures if the benefits of improved decision makingare greater than the costs of the additional information.

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P 1–5:Solution to Budgeting(15 minutes)[Trade-off between decision making and control]In this firm, the bonus is based on meeting the budget.Two incentives exist:sales people will under-forecast future sales and they have little incentive to sell morethan the budget.This firm tries to use the budget for two functions:decision making and control.In deciding on next year’s production plans, sales peoples’ forecasts of future sales areimportant. However, these same forecasts (after revision by supervisors) are used as partof the compensation scheme to motivate the sales people to achieve their goals. By usingthe budget (forecasts) as part of the control system, the firm gives up some of thebudget’s usefulness as a decision making tool to set production plans.While seniormanagers might recognize that the sales people’s forecasts are low, they don’t knowexactly how low.This introduces more uncertainty into planning for next year’sproduction.P 1-6:Solution to Golf Specialties(20 minutes)[Average versus variable cost of an incremental order]a.Given that the variable cost per head cover is 1.10 euros, thefixed cost per weekis:AC = FC / Q + VC3.10 = FC/600 + 1.103.50 = FC/500 + 1.10FC = 1,200 eurosFC = 1,200 eurosb.The change in total cost if the 100 unit Kojo offer is accepted is:600×3.10 euros–500×3.50 euros = 110 eurosOr, each head cover has variable cost of 1.10 euro. Since Kojo is willing to pay 2euros per head cover or 200 euros for 100 covers, by accepting this order GSmakes 90 euros a week. Therefore, GS should accept Kojo’s offer if these are allthe relevant facts.c.GS should consider the following non-quantitative factors:What prevents Kojo from reselling the head covers back todealers inEurope at prices belowGS’scurrent price of 4.25 euros?IfGS sellsthe head covers to Kojo at 2 euros, what preventsGS’sEuropean customers from learning of this special deal and demand similarprice concessions.In other words, why do we expect to be able toimplement this price discrimination strategy?

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Will Kojo purchase other GS products and import them to Japan?What is Kojo’s credit worthiness and will they pay for the head coversupon taking delivery?P 1–7:Solution to Parkview Hospital(25 minutes)[Changes in the environment cause accounting system changes]a.Parkview’s accounting system wasprobably adequate 10 years ago. It faced littlecompetition and had little incentive to have detailed cost and revenue data at theclinical levels.b.With increased pressure to reduce costs, Parkview management wants detailedcost and revenue data at the clinic level to help identify units with excess revenuesor deficits. This would help guide their decisions as to how to respond to the $3.2million shortfall.The accounting system doesn’t provide as much help asmanagement would like.c.The question of changing the accounting system should be approached as a cost-benefit decision.What will such changes cost, how long will they take toimplement, and what benefits are derived?While it is tempting to say more accurate tracking of costs and benefitsallows better decision making, changing the accounting system, including all thedata processing changes that are likely necessary, usually is a very costly and timeconsuming process.Often special studies based on approximations of clinicaldepartment costs and revenues might prove to be faster and cheaper than waitingto revamp the accounting system.Notice the change in competition in the health insurance market caused byTrans Insurance’s entry prompted a series of changes in Parkview, including a re-examination of its accounting system.P 1–8:Solution to Montana Pen(25 minutes)[Incremental cost of outsourcing]a.The average cost information given in the problem does not tell us what 400 clipscost.Like in the Vortec example from the chapter, the incremental cost of the400 clips must be estimated from the following:Changein totalcostChangein volume=B1851200B212.58001, 200800= B130/clipAt the current volume of 1,200 clips, the total cost is B222,000 (B185×1,200).If 400 clips are outsourced, reducing in-house volume to 800, the total cost falls toB170,000(B212.5×800).Hence,totalcostfallsB52,000(B222,000-B170,000), or B130 per clip (B52,000 ÷ 400).Therefore, if 400 clips are

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outsourced to the Chinese company, Montana saves B130 per clip, but must paythe Chinese firm 136 per clip. Therefore, based solely on the cost data presentedin the problem, do not outsource the gold clips.b.There are a number of additional factors that must be considered besides just thecosts:i.How does the quality of the Chinese clips compare to Montana’s quality?If it is significantly higher, then it might be worth paying six Bahtmoreper clip (approximately $0.10).What about delivery reliability?Is theChinese firm more or less reliable than producing the clips in-house?ii.What alternative use can be made of the manufacturing capacity of the 400clipsfreedupiftheyareoutsourced?IstheBangkokplant’smanufacturing capacity constrained because there are not enough skilledgoldsmiths or because of space or equipment?If so, by outsourcing the400 clips to the Chinese, what other pen parts can these goldsmithsmanufacture?iii.What long-term benefits are created by developing a business relation withthis Chinese firm?For example, might this Chinese firm become apossible business partner or useful in opening a Chinese pen factory? WillMontana’s management learn anything new about business dealings withChinese firms from outsourcing these clips?Will purchasing these clipsin China help Montana sell more pens in China?

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CHAPTER2THENATURE OFCOSTSP 2-1:Solution to Darien Industries(10 minutes)[Relevant costs and benefits]Current cafeteria incomeSales$12,000Variable costs (40%×12,000)(4,800)Fixed costs(4,700)Operating income$2,500Vending machine incomeSales (12,000×1.4)$16,800Darien's share of sales(.16×$16,800)2,688Increase in operating income$ 188P 2-2:Negative Opportunity Costs(10 minutes)[Opportunity cost]Yes, when the most valuable alternative to a decision is a net cash outflow thatwould have occurred is now eliminated. The opportunity cost of that decision is negative(an opportunity benefit).For example, suppose you own a house with an in-groundswimming pool you no longer use or want.To dig up the pool and fill in the hole costs$3,000.You sell the house instead and the new owner wants the pool.By selling thehouse, you avoid removing the pool and you save $3,000. The decision to sell the houseincludes an opportunity benefit (a negative opportunity cost) of $3,000.P 2-3:Solution to NPR(10 minutes)[Opportunity cost of radio listeners]The quoted passage ignores the opportunity cost of listeners’ having to foregonormal programming foron-air pledges.While such fundraising campaigns may have alow out-of-pocket cost to NPR, if they were to consider the listeners’ opportunity cost,such campaigns may be quite costly.

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P 2-4:Solution to Silky Smooth Lotions(15 minutes)[Break even with multiple products]Given that current production and sales are: 2,000, 4,000, and 1,000 cases of 4, 8,and 12 ounce bottles, construct of lotionbundleto consist of 2 cases of 4 ounce bottles, 4cases of 8 ounce bottles, and 1 case of 12 ounce bottles.The following table calculatesthebreak-evennumber of lotion bundles to break even and hence the number of cases ofeach of the three products required to break even.Per Case4 ounce8 ounce12 ounceBundlePrice$36.00$66.00$72.00Variable cost$13.00$24.50$27.00Contribution margin$23.00$41.50$45.00Current production200040001000Cases per bundle241Contribution margin per bundle$46.00$166.00$45.00$257.00Fixedcosts$771,000Number of bundles to break even3000Number of cases to break even6000120003000P 2-5:Solution to J.P. Max Department Stores(15 minutes)[Opportunity cost of retail space]Home AppliancesTelevisionsProfits after fixed cost allocations$64,000$82,000Allocated fixed costs7,0008,400Profits before fixed cost allocations71,00090,400Lease Payments72,00086,400Forgone Profits–$1,000$ 4,000Wewould rent out the Home Appliance department, as lease rental receipts aremore than the profits in the Home Appliance Department.On the other hand, profitsgenerated by the Television Department are more than the lease rentals if leased out, sowe continue running the TV Department.However, neither is being charged inventoryholding costs, which could easily change the decision.Also, one should examine externalities.What kind of merchandise is being soldin the leased store and will this increase or decrease overall traffic and hence sales in theother departments?P 2-6:Solution to Vintage Cellars(15 minutes)

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[Average versus marginal cost]a.The following tabulates total, marginal and average cost.QuantityAverageCostTotalCostMarginalCost1$12,000$12,000210,00020,000$8,00038,60025,8005,80047,70030,8005,00057,10035,5004,70067,10042,6007,10077,35051,4508,85087,85062,80011,35098,60077,40014,600109,60096,00018,600b.Marginalcostintersectsaveragecostatminimumaveragecost(MC=AC=$7,100). Or, at between 5 and 6 units AC = MC = $7,100.c.At four units, the opportunity cost of producing and selling one more unit is$4,700.At four units, total cost is $30,800.At five units, total cost rises to$35,500.The incremental cost (i.e., the opportunity cost) of producing the fifthunit is $4,700.d.Vintage Cellars maximizes profits ($) by producing and selling seven units.QuantityAverageCostTotalCostTotalRevenueProfit1$12,000$12,000$9,000-$3,000210,00020,00018,000-2,00038,60025,80027,0001,20047,70030,80036,0005,20057,10035,50045,0009,50067,10042,60054,00011,40077,35051,45063,00011,55087,85062,80072,0009,20098,60077,40081,0003,600109,60096,00090,000-6,000P2-7:Solution to ETB(15 minutes)[Minimizing average cost does not maximize profits]a.The following table calculates that the average cost of the iPad bamboo case isminimized by producing 4,500 cases per month.

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Monthly Production and SalesProduction (units)3,0003,5004,5005,000Total cost$162,100$163,000$167,500$195,000Average cost$54.03$46.57$37.22$39.00b.The following tablecalculates net income of the four production (sales) levels.Monthly Production and SalesProduction (units)3,0003,5004,5005,000Revenue$195,000$227,500$292,500$325,000Total cost162,100163,000167,500195,000Netincome$32,900$64,500$125,000$130,000Based on the above analysis, the profit maximizing production (sales) level is tomanufacture and sell 5,000 iPad cases a month. Selecting the output level that minimizesaverage cost (4,500 cases) does notmaximize profits.P 2-8:Solution to Taylor Chemicals(15 minutes)[Relation between average, marginal, and total cost]a.Marginal cost is the cost of the next unit.So, producingtwocases costs anadditional $400, whereas to go from producingtwocases to producingthreecasescosts an additional $325, and so forth. So, to compute the total cost of producingsayfivecases you sum the marginal costs of 1, 2, …, 5 cases and add the fixedcosts ($500 + $400 + $325 + $275 + $325 + $1000 = $2825). The following tablecomputes average and total cost given fixed cost and marginal cost.

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QuantityMarginalCostFixedCostTotalCostAverageCost1$500$1000$1500$1500.00240010001900950.00332510002225741.67427510002500625.00532510002825565.00640010003225537.50750010003725532.14862510004350543.75977510005125569.441095010006075607.50b.Average cost is minimized when sevencases are produced.At seven cases,average cost is $532.14.c.Marginal cost always intersects average cost at minimum average cost.Ifmarginal cost is above average cost, average cost is increasing.Likewise, whenmarginal cost is below average cost, average cost is falling.When marginal costequals average cost, average cost is neither rising nor falling.This only occurswhen average cost is at its lowest level (or at its maximum).P 2-9:Solution to Emrich Processing(15 minutes)[Negative opportunity costs]Opportunity costs are usually positive.In this case, opportunity costs are negative(opportunity benefits) because the firm can avoid disposal costs if they accept the rushjob.The original $1,000 price paid for GX-100 is a sunk cost.The opportunity cost ofGX-100 is-$400.That is, Emrich willincreaseits cash flows by $400 by accepting therush order because it will avoid having to dispose of the remaining GX-100 by payingEnviron the $400 disposal fee.How to price the special order is another question.Just because the $400 disposalfee was built into the previous job does not mean it is irrelevant in pricing this job.Clearly, one factor to consider in pricing this job is the reservation price of the customerproposing the rush order.The $400 disposal fee enters the pricing decision in thefollowing way:Emrich should be prepared topayup to $399 less any out-of-pocketcosts to get this contract.

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P 2-10:Solution to Verdi Opera or Madonna?(15 minutes)[Opportunity cost of attending a Madonna concert]If you attend the Verdi opera, you forego the $200 in benefits (i.e., your willingnessto pay) you would have received from going to see Madonna. You also save the $160(the costs) you would have paid to see Madonna.Since an avoided benefit is a cost andan avoided cost is a benefit, the opportunity cost of attending the opera (the value youforego by not attending the Madonna concert) is $40–i.e., the net benefit foregone. Yourwillingness to pay$30 for the Verdi opera is unrelated to the costs and benefits offoregoing the Madonna concert.P 2-11:Solution to Dod Electronics(15 minutes)[Estimating marginal cost from average cost]a.Dod should accept Xtron’s offer. The marginal cost to produce the 10,000 chips isunknown. But since management is convinced that average cost is falling, this meansthat marginal cost is less than average cost. The only way that average cost of $35can fall is if marginal cost is less than $35. Since Xtron is willing to pay $38 perchip, Dod should make at least $30,000 on this special order (10,000 x $3). Thisassumes (i) that average cost continues to fall for the next 10,000 units (i.e., itassumes that at,say 61,000 units,average cost does not start to increase), and (ii)there are no other costs of taking this special order.b.Dod can’t make a decision based on the information. Since average cost isincreasing, we know that marginal cost is greater than $35 per unit. But we don’tknow how much larger. If marginal cost at the 60,001th unit is $35.01, average costis increasing and if marginal cost of the 70,000th unit is less than $38, then DODshould accept the special order. But if marginal cost at the 60,001th unit is $38.01,the special order should be rejected.P 2-12:Solution toNapoli Pizzeria(15 minutes)[Break-evenanalysis]a.Thebreak-evennumber of servings per month is:($300–$75) ÷ ($3–$1)= ($225) ÷ ($2)= 112.5servingsb. To generate $1,000 after taxes Gino needs to sell 881.73 servings ofespresso/cappuccino.Profits after tax = [Revenues–Expenses] x (1–0.35)$1,000 = [$3N + $75–$1N–$300] x (1–0.35)$1,000 = [$2N–$225] x .65$1,000 ÷ .65 = $2N–$225

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$1,538.46 = $2N–$225$2N = $1,763.46N = 881.73P 2-13:Solution to JLT Systems(20 minutes)[Cost-volume-profit analysis]a.Since we know that average cost is $2,700 at 200 unit sales, then Total Cost (TC)divided by 200 is $2,700.Also, since JLT has a linear cost curve, we can write,TC=FC+VxQ where FC is fixed cost, V is variable cost per unit, and Q is quantitysold and installed. Given FC = $400,000, then:TC/Q = (FC+VxQ)/Q = AC($400,000 + 200 V) / 200 = $2,700$400,000 + 200 V = $540,000200 V = $140,000V = $700b.Given the total cost curve from part a, a tax rate of 40%, and a $2,000 sellingprice, and an after-tax profit target of $18,000, we can write:($2000 Q-$400,000-$700 Q) x (1-40%) = $18,0001300 Q-400,000 = 18,000 / .60 = 30,0001300 Q = 430,000Q = 330.8In other words, to make an after-tax profit of $18,000, JLT must have 330.8 salesand installs per month.c.The simplest (and fastest way) to solve for the profit maximizing quantity giventhe demand curve is to write the profit equation, take the first derivative, set it tozero, and solve for Q.Total Profit = (2600-2Q) Q-400,000-700 QFirst derivative: 2600-4Q-700 = 04Q = 1900Q = 475The same solution is obtained if you set marginal revenue (where MR is 2600-4Q) equal to marginal cost (700), and again solve for Q, or2600-4Q = 700Q = 475The more laborious solution technique is to use a spreadsheet and identify theprofit maximizing price quantitycombination.

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As before, we again observe that 475 sales and installs maximize profits.P 2-14:Solution to Volume and Profits(15 minutes)[Cost-volume-profit]a.False.b.Write the equation for firm profits:Profits = P×Q-(FC-VC×Q) = Q(P-VC)-FC= Q(P-VC)-(FC ÷ Q)QNotice that average fixed costs per unit (FC÷Q) falls as Q increases, but withmore volume, you have more fixed cost per unit such that (FC÷Q)×Q = FC.That is, the decline in average fixed cost per unit is exactly offset by having moreunits.Profits will increase with volume even if the firm has no fixed costs, aslong as price is greater than variable costs.Suppose price is $3 and variable costis $1.If there are no fixed costs, profits increase $2 for every unit produced.Now suppose fixed cost is $50.Volume increases from 100 units to 101 units.Profits increase from $150 ($2×100-$50) to $152 ($2×101-$50). The changein profits ($2) is the contribution margin. It is true that average unit cost declinesfrom $1.50 ([100×$1 + $50]÷100) to $1.495 ([101×$1 + $50]÷101). However,this has nothing to do with the increase in profits.The increase in profits is duesolely to the fact that the contribution margin is positive.Alternatively, suppose price is $3, variable cost is $3, and fixed cost is$50.Contribution margin in this case is zero.Doubling output from 100 to 200QuantityPriceRevenueTotal CostProfit250$2,100$525,000$575,000($50,000)2752,050563,750592,500(28,750)3002,000600,000610,000(10,000)3251,950633,750627,5006,2503501,900665,000645,00020,0003751,850693,750662,50031,2504001,800720,000680,00040,0004251,750743,750697,50046,2504501,700765,000715,00050,0004751,650783,750732,50051,2505001,600800,000750,00050,0005251,550813,750767,50046,2505501,500825,000785,00040,000

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causes average cost to fall from $3.50 ([100×$3 + $50]÷100) to $3.25 ([200×$3+ $50]÷200), but profits are still zero.P 2-15:Solution to American Cinema(20 minutes)[Break-evenanalysis for an operating decision]a.Both movies are expected to have the same ticket sales in weeks one and two, andlower sales in weeks three and four.Let Q1be the number of tickets sold in the first two weeks, and Q2be the numberof tickets sold in weeks three and four.Then, profits in the first two weeks,1,and in weeks three and four,2, are:1= .1(6.5Q1)–$2,0002= .2(6.5Q2)–$2,000“I Do” should replace “Paris” if1>2, or.65Q1–2,000 > 1.3Q2–2,000, orQ1> 2Q2.In other words, they should keep “Paris” for four weeks unless they expect ticketsales in weeks one and two of “I Do” to be twice the expected ticket sales inweeks three and four of “Paris.”b.Taxes of 30 percent do not affect the answer in part (a).c.With average concession profits of $2 per ticket sold,1= .65Q1+ 2Q1–2,0002= 1.30Q2+ 2Q2–2,0001>2if2.65Q1> 3.3Q2Q1> 1.245Q2Now, ticket sales in the firsttwo weeks need only be about 25 percent higher thanin weeks three and four to replace “Paris” with “I Do.”

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P2-16:Solution to Home Auto Parts(20 minutes)[Opportunity cost of retail display space]a.The question involves computing the opportunity cost of the special promotionsbeing considered. If the car wax is substituted, what is the forgone profit from thedropped promotion?And which special promotion is dropped?Answering thisquestion involves calculating the contribution of each planned promotion.Theopportunity cost of dropping a planned promotion is its forgone contribution:(retail price less unit cost)×volume.The table below calculates the expectedcontribution of each of the three planned promotions.PlannedPromotion DisplaysFor Next WeekEnd-of-AisleFrontDoorCashRegisterItemTexcan OilWiper bladesFloor matsProjected volume (week)5,00020070Sales price69¢/can$9.99$22.99Unit cost62¢$7.99$17.49Contribution margin7¢$2.00$5.50Contribution(margin×volume)$350$400$385Texcan oil is the promotion yielding the lowest contribution and therefore is theone Armadillo must beat out. The contribution of Armadillo car wax is:Selling price$2.90less: Unit cost$2.50Contribution margin$0.40×expected volume800Contribution$ 320Clearly, since the Armadillo car wax yields a lower contribution margin than allthree of the existing planned promotions, management should not change theirplannedpromotions and should reject the Armadillo offer.

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