ANSWER KEY

5-63 Total net annual benefit from the new machine:

Increase in contribution margin
Decrease in inventory carrying costs
Less increase in lease costs
Net annual benefit from new machine
a
b

$648,000a
63,000b
(410,000)c
$301,000

[($56$32) 48,000][(56$42) 36,000] = $648,000

Inventory levels with the old machine:

Raw materials
Work-in-process
Finished goods

36,000 $12 4/12 = $144,000

36,000 $25 3/12 = $225,000
36,000 $46 2/12 = $276,000
$645,000

Inventory levels with the new machine

Raw materials
48,000 $11 1.5/12 = $ 66,000
Work-in-process 48,000 $20 1.5/12 = $120,000
Finished goods
48,000 $36 1/12 = $144,000
$330,000
Change in annual inventory carrying costs:
($330,000 645,000) 20% = $63,000 decrease
c
$900,000$490,000 = $410,000 increase

(b)

Rossman should replace its old machine with the new machine
because the penalty of $280,000 for early termination of the
lease is more than offset by the net annual benefit of $301,000
for each of four years with the new machine.

(c)

A manager evaluated on the basis of net income may decide not

to replace the existing machinery if there is considerable
uncertainty about the projections for increased sales or reduced
costs, given the relatively small benefit in the first year based
on the stated projections. This benefit is $301,000 $280,000 =
$21,000. Thus, a manager with a short-term focus may not lease
the new machinery even though it would increase Rossmans
income over the long-run.

6-49 (Unofficial CMA Answer)

In order to maximize the companys profitability, Sportway, Inc. should
purchase 9,000 tackle boxes from Maple Products, manufacture
17,500 skateboards and manufacture 1,000 tackle boxes. This
combination of purchased and manufactured goods maximizes the
contribution per direct labor hour available, as calculated below in
Tables 1 and 2.
Table 1:

Calculate unit contribution

PurchasedTackle ManufacturedTackle Skateboards
Boxes
Boxes

Selling price

$86.00

$86.00

$45.00

68.00

17.00

12.50

Direct labor

n/a

18.75

7.50

Manufacturing support*

n/a

6.25

2.50

4.00

11.00

3.00

$14.00

$33.00

$19.50

none

1.25

0.50

n/a

$26.40

$39.00

Less: Variable costs

Material

Selling & administrative cost**

Contribution
Direct labor hours per unit
Contribution per hour
* Calculation of variable support cost per unit:

Tackle boxes:
Direct labor hours

$18.75 $15.00 1.25 hours

Support costs/DLH

$12.50 1.25 $10.00

Capacity

8,000 boxes 1.25 $10,000 hours

Total support

10,000 hours $10 $100,000

Total variable support

$100,000 $50,000 $50,000

Variable support per hour

$50,000 10,000 $5.00

Variable support per box

$5.00 1.25 $6.25

Skateboards:
Direct labor hours

$7.50 $15.00 .5 hours

Variable support

$5.00 .5 $2.50

** For calculating contribution, $6.00 of fixed support cost per unit for distribution must be deducted from
selling and administrative cost.

Table 2:
Item
Total hours

Optimal use of Sportways available direct labor

Unit
DLH
Total
Balance
Total
Quantity Contribution per Unit
DLH
of DLH Contribution
10,000

Skateboards

17,500

$19.50

0.50

8,750

1,250

Make Boxes

1,000

33.00

1.25

1,250

33,000

Buy Boxes

9,000

14.00

126,000

Total
Contribution
Less: Contribution for manufacturing 8,000 boxes (8,000
$33.00)
neo

Improvement in contribution margin

$341,250

$500,250
264,000
$236,250