PROBLEM 20.

7B
This scenario involves several calculations and analyses to determine the best option for
Dorsal Ranch. Here's a step-by-step breakdown:

Contribution Margin Ratio (Home Team)

Contribution Margin Ratio is calculated as follows:

Contribution Margin Ratio=Sales−Variable CostsSales\text{Contribution Margin Ratio} = \

frac{\text{Sales} - \text{Variable Costs}}{\text{Sales}}

Since specific data on variable costs isn't provided here, let's focus on Dorsal Ranch
calculations.

Operating Income for Dorsal Ranch

Cod

1. Revenue from Cod:

o Marketable Cod=2,000,000×0.15=300,000\text{Marketable Cod} = 2,000,000

\times 0.15 = 300,000

o Revenue from Cod=300,000×$5=$1,500,000\text{Revenue from Cod} =

300,000 \times \$5 = \$1,500,000

2. Costs for Cod:

o Cod eggs: \$14,000

o Weekly Costs:

 Feedings: 21×40×400=336,00021 \times 40 \times 400 = 336,000

 Water Treatment: 40×600=24,00040 \times 600 = 24,000

 Heating and Lighting: 40×300=12,00040 \times 300 = 12,000

o Total Variable Costs for Cod:

14,000+336,000+24,000+12,000=$386,00014,000 + 336,000 + 24,000 + 12,000 = \$386,000

3. Fixed Costs:

o Annual Fixed Costs: \$900,000

 4. Operating Income for Cod:

1,500,000−386,000−900,000=$214,0001,500,000 - 386,000 - 900,000 = \$214,000

Salmon

1. Revenue from Salmon:

o Marketable Salmon=2,000,000×0.10=200,000\text{Marketable Salmon} =

2,000,000 \times 0.10 = 200,000

o Revenue from Salmon=200,000×$9=$1,800,000\text{Revenue from Salmon}

= 200,000 \times \$9 = \$1,800,000

2. Costs for Salmon:

o Salmon eggs: \$18,000

o Weekly Costs:

 Feedings: 35×50×400=700,00035 \times 50 \times 400 = 700,000

 Water Treatment: 50×2×600=60,00050 \times 2 \times 600 = 60,000

 Heating and Lighting: 50×300=15,00050 \times 300 = 15,000

o Total Variable Costs for Salmon:

18,000+700,000+60,000+15,000=$793,00018,000 + 700,000 + 60,000 + 15,000 = \$793,000

3. Fixed Costs:

o Annual Fixed Costs: \$900,000

4. Operating Income for Salmon:

1,800,000−793,000−900,000=$107,0001,800,000 - 793,000 - 900,000 = \$107,000

Analysis and Recommendations

a. Which species should Dorsal Ranch raise to earn the highest operating income for the
year?

 Cod should be raised as it yields a higher operating income (\$214,000 vs. \

$107,000).
b. Factors Influencing Operating Income:

 Variable costs (especially feedings and water treatments)

 Survival rates of eggs to marketable size

 Market price of the fish

c. Improvement Options:

 Filtration System:

o Cod: Higher survival rate (20%)

o Salmon: Higher survival rate (14%) and reduced water treatment (1 per week)

 Environment Regulation System:

o Cod: Slightly increased survival rate (16%)

o Salmon: Slightly increased survival rate (11%)

o Reduced heating and lighting costs (\$250 per week)

d. Calculations for Improvements: Let's calculate the potential increase in income with each
improvement:

1. Filtration System:

o Cod Revenue: 2,000,000×0.20×5=$2,000,0002,000,000 \times 0.20 \times 5

= \$2,000,000

o Salmon Revenue: 2,000,000×0.14×9=$2,520,0002,000,000 \times 0.14 \times

9 = \$2,520,000

o Cod Costs: 14,000+21×40×480+40×600+40×300=$508,00014,000 + 21 \

times 40 \times 480 + 40 \times 600 + 40 \times 300 = \$508,000

o Salmon Costs: 18,000+35×50×480+50×600+50×300=$1,025,00018,000 +

35 \times 50 \times 480 + 50 \times 600 + 50 \times 300 = \$1,025,000

o Cod Operating Income: 2,000,000−508,000−900,000=$592,0002,000,000 -

508,000 - 900,000 = \$592,000
 o Salmon Operating Income:
2,520,000−1,025,000−900,000=$595,0002,520,000 - 1,025,000 - 900,000 = \
$595,000

2. Environment Regulation System:

o Cod Revenue: 2,000,000×0.16×5=$1,600,0002,000,000 \times 0.16 \times 5

= \$1,600,000

o Salmon Revenue: 2,000,000×0.11×9=$1,980,0002,000,000 \times 0.11 \times

9 = \$1,980,000

o Cod Costs: 14,000+21×40×400+40×600+40×250=$464,00014,000 + 21 \

times 40 \times 400 + 40 \times 600 + 40 \times 250 = \$464,000

o Salmon Costs: 18,000+35×50×400+50×600+50×250=$1,015,00018,000 +

35 \times 50 \times 400 + 50 \times 600 + 50 \times 250 = \$1,015,000

o Cod Operating Income: 1,600,000−464,000−900,000=$236,0001,600,000 -

464,000 - 900,000 = \$236,000

o Salmon Operating Income: 1,980,000−1,015,000−900,000=$65,0001,980,000

- 1,015,000 - 900,000 = \$65,000

Conclusion:

 The Filtration System is the most beneficial investment, with significantly higher
operating incomes for both species.

 Cod yields higher operating income overall, even with the improvements.

PROBLEM 20.8B

Let's break it down step by step!

a. Contribution Margin Ratio:

 For Hats:

Contribution Margin Ratio=Sales Price−Variable CostsSales Price=20−1420=0.3 or 30%\

text{Contribution Margin Ratio} = \frac{\text{Sales Price} - \text{Variable Costs}}{\
text{Sales Price}} = \frac{20 - 14}{20} = 0.3 \text{ or } 30\%
  For Shirts:

Contribution Margin Ratio=Sales Price−Variable CostsSales Price=28−728=0.75 or 75%\

text{Contribution Margin Ratio} = \frac{\text{Sales Price} - \text{Variable Costs}}{\
text{Sales Price}} = \frac{28 - 7}{28} = 0.75 \text{ or } 75\%

b. Assuming the current sales mix:

1. Average Contribution Margin Ratio:

Average Contribution Margin Ratio=(0.4×0.3)+(0.6×0.75)=0.57 or 57%\text{Average

Contribution Margin Ratio} = (0.4 \times 0.3) + (0.6 \times 0.75) = 0.57 \text{ or } 57\%

2. Monthly Operating Income:

Total Contribution Margin=1,500,000×0.57=855,000\text{Total Contribution Margin} =

1,500,000 \times 0.57 = 855,000

Operating Income=Total Contribution Margin−Fixed Costs=855,000−684,000=171,000\

text{Operating Income} = \text{Total Contribution Margin} - \text{Fixed Costs} = 855,000 -
684,000 = 171,000

3. Monthly Break-even Sales Volume:

Break-even Sales=Fixed CostsAverage Contribution Margin Ratio=684,0000.57≈1,200,000

USD\text{Break-even Sales} = \frac{\text{Fixed Costs}}{\text{Average Contribution
Margin Ratio}} = \frac{684,000}{0.57} \approx 1,200,000 \text{ USD}

c. New sales mix (60% hats, 40% shirts):

1. Average Contribution Margin Ratio:

Average Contribution Margin Ratio=(0.6×0.3)+(0.4×0.75)=0.45 or 45%\text{Average

Contribution Margin Ratio} = (0.6 \times 0.3) + (0.4 \times 0.75) = 0.45 \text{ or } 45\%

2. Monthly Operating Income:

Total Contribution Margin=1,500,000×0.45=675,000\text{Total Contribution Margin} =

1,500,000 \times 0.45 = 675,000

Operating Income=Total Contribution Margin−Fixed Costs=675,000−684,000=−9,000\

text{Operating Income} = \text{Total Contribution Margin} - \text{Fixed Costs} = 675,000 -
684,000 = -9,000
 3. Monthly Break-even Sales Volume:

Break-even Sales=Fixed CostsAverage Contribution Margin Ratio=684,0000.45≈1,520,000

USD\text{Break-even Sales} = \frac{\text{Fixed Costs}}{\text{Average Contribution
Margin Ratio}} = \frac{684,000}{0.45} \approx. 1,520,000 \text{ USD}

d. Financial Picture Changes: The financial picture changes significantly due to the shift in
the sales mix because the contribution margin ratio for shirts is much higher (75%) compared
to hats (30%). A higher percentage of hat sales reduces the overall contribution margin ratio,
leading to a lower total contribution margin. This results in a lower operating income and a
higher break-even sales volume.

Problem 21.7

Let's analyze the situation:

Current Costs:

 Variable Cost of Making Part No. 566: $4 per part

 Number of Parts Made per Month: 6,000

 Total Variable Cost: 6,000×4=24,0006,000 \times 4 = 24,000

Alternative Costs:

 Cost of Buying Part No. 566: $5 per part

 Total Cost of Buying: 6,000×5=30,0006,000 \times 5 = 30,000

 Income from Renting Production Line: $8,000

Total Costs with Alternative:

 Cost of Buying Parts: $30,000

 Subtract Rental Income: 30,000−8,000=22,00030,000 - 8,000 = 22,000

Comparison:

 Cost of Making Parts: $24,000

 Cost of Buying Parts and Renting Line: $22,000

Since the total cost of buying the parts and renting out the production line ($22,000) is lower
than the cost of making the parts ($24,000), Bacrometer should buy part no. 566 and rent the
production line.

Problem 21.3A

Part A: Incremental Cost or Benefit of Buying Thermostats

1. Cost to Buy:

o Cost of purchasing thermostats: 80,000×$6=$480,00080,000 \times \$6 = \

$480,000

2. Cost to Manufacture:

o Direct materials: $156,000

o Direct labor: $132,000

o Variable overhead: $168,000 (eliminate only 60%, so 40% remains)

$168,000×0.4=$67,200\$168,000 \times 0.4 = \$67,200

 Fixed overhead: $144,000 (can avoid $9,200, so remaining is)

$144,000−$9,200=$134,800\$144,000 - \$9,200 = \$134,800

 Total cost to manufacture:

$156,000+$132,000+$67,200+$134,800=$490,000\$156,000 + \$132,000 + \$67,200 + \

$134,800 = \$490,000

3. Incremental Cost/Benefit:

o Cost to buy: $480,000

o Cost to manufacture: $490,000

o Incremental benefit:

$490,000−$480,000=$10,000\$490,000 - \$480,000 = \$10,000

Based on this calculation, buying the thermostats from an outside supplier saves the company
$10,000. Hence, I would recommend buying the thermostats.

Part B: Additional Heat-Flow Regulators

If the factory space can be used to produce an additional 6,000 heat-flow regulators with a
contribution margin of $18 per unit:

1. Additional Contribution Margin:

6,000×$18=$108,0006,000 \times \$18 = \$108,000

2. Revised Incremental Benefit:

o Original benefit from buying thermostats: $10,000

o Additional contribution margin: $108,000

o Total incremental benefit:

$10,000+$108,000=$118,000\$10,000 + \$108,000 = \$118,000

Given this new scenario, using the factory space to produce additional heat-flow regulators
significantly increases the benefit, reinforcing the recommendation to buy the thermostats
from the outside supplier.

PROBLEM 21.1B

a. Incremental Revenue and Incremental Costs:

Incremental Revenue:

 Revenue from Special Order: 18,000×55=990,00018,000 \times 55 = 990,000

Incremental Costs:

 Variable Manufacturing Costs for Special Order: 18,000×40=720,00018,000 \times 40

= 720,000

 Variable Selling Expenses for Special Order: 18,000×5=90,00018,000 \times 5 =

90,000

 Total Incremental Costs: 720,000+90,000=810,000720,000 + 90,000 = 810,000

Effect on Operating Income:

 Incremental Revenue: $990,000

 Total Incremental Costs: $810,000

  Incremental Operating Income: 990,000−810,000=180,000990,000 - 810,000 =
180,000

So, by accepting the special order, Swirl's operating income is expected to increase by
$180,000.

b. Other Factors to Consider:

Financial Considerations:

 Capacity Utilization: Swirl has enough capacity to produce an additional 18,000 skirts
without incurring extra fixed costs, making the special order a potentially profitable
use of otherwise idle capacity.

 Contribution Margin: The special order offers a contribution margin of $55−$40−

$5=$10\$55 - \$40 - \$5 = \$10 per skirt, which is positive and contributes to covering
fixed costs.

Nonfinancial Considerations:

 Brand Impact: Selling skirts under the Discount Fashions label may affect Swirl's
brand image and positioning. The impact on brand perception and long-term customer
relationships should be assessed.

 Opportunity Cost: Accepting this special order might limit Swirl's ability to accept
higher-paying orders or engage in other profitable activities in the future.

 Market Penetration: The special order could potentially open new markets and
customer segments, leading to future business opportunities.