Chapter 2 Guided Practice


Back to Chapter 2 in Textbook


2GP.1 Make-or-Buy

2GP.1.E1

At a university in the United States, an accounting department has assigned the tenured Professor Golightly to teach the Introduction to Managerial Accounting class. This class is a crucial input to the department’s eventual output, accounting major graduates. Professor Golightly earns $30,000 for teaching three sections of this class during the semester. The accounting department has a differentiation strategy of attracting new students to the major with quality teaching. Professor Golightly is considered a high-quality teacher.

The university is considering re-assigning Professor Golightly to a different set of classes and hiring adjunct professors to teach the Introduction to Managerial Accounting class. Adjunct professors are paid the equivalent of $5,000 per section they teach. Professor Golightly’s new assignment would be to teach four sections of the upper division of cost accounting (no difference in how much the professor earns). These sections are currently taught by four adjunct professors (paid at $5,000 as well).

Required

(A) According to relevant cost analysis, how much money will the accounting department gain or lose by re-assigning Professor Golightly?

(B) According to strategic cost analysis, should the department re-assign Professor Golightly?

2GP.1.M1

For several years a firm has bought specialized industrial paint from a supplier that also provides many other inputs the firm uses for its final product. The firm is now looking into making this paint in-house. The paint is purchased for $5 per gallon and 50,000 gallons of paint are required per period.

Making the paint would require the firm to lease equipment for $20,000 per period and buy raw materials at a cost of $0.50 per gallon of paint produced. Two new workers would need to be hired, and each would be paid $20,000 per period. Two current workers would need to be re-assigned from working on the firm’s final product to working on producing the paint. This would decrease the number of final products that could be produced per period by 150 units per period (final products earn $1,000 in profit per unit).

Required

(A) According to relevant cost analysis, how much money will the firm gain or lose if it made the paint instead of buying it?

(B) According to strategic cost analysis, should the firm make or buy the paint?

2GP.2 Sell-or-Process-Further

2GP.2.E1

An undergraduate student is choosing between two career paths: medical doctor and chemist. The student expects that a chemistry major will prepare him for medical school and for a career as a chemist. But, if he chooses to be a chemist, he must also attend medical school after graduating with a bachelor’s degree in chemistry.

The undergraduate degree will cost $75,000. Medical school will cost an additional $300,000 (ignore the time value of money for this question). As a chemist, he expects his career earnings to be $1,250,000. As a medical doctor, he expects his career earnings to be $2,200,000.

Required

(A) According to relevant cost analysis, should this student produce a chemistry degree only or process his education further to produce a medical degree?

(B) Are there any strategic considerations that could affect this decision?

2GP.2.M1

A firm currently produces specialized industrial paint at a cost of $2.50 per gallon. and at a sales price of $5 per gallon. Sales volume is 100,000 gallons per period. The firm is considering processing this paint further into a more refined final product. The paint product is currently the subject of intense regulatory action from the national government, whereas the refined product would not be. The firm is confident that this refined final product would sell, at least, at a price of $200 per unit with 4,000 unit sales per period, although it could sell for much more.

To process the paint into the refined final product, the firm would need to lease equipment at a cost of $100,000 per period, and buy additional raw materials at a cost of $150,000 per period. It could use existing workers (i.e. idle capacity) as well as hiring two new workers at a cost of $35,000 per period.

(A) According to relevant cost analysis, how much money will the firm gain or lose by processing the paint further?

(B) According to strategic cost analysis, should the process the paint further or sell as is?

2GP.3 Keep-or-Drop

2GP.3.E1

A Boise-area ice skating rink provides three products: general skating, hockey, and figure skating. The rink pursues a differentiation strategy through its variety of ice skating products. The rink’s motto is “Something for every member of the family.” The firm is deciding whether or not to drop figure skating. The three products have the following costs and revenues.

Required

(A) According to relevant cost analysis, should the firm drop figure skating?

(B) According to strategic cost analysis, should the firm drop figure skating?

2GP.3.M1

Use the same revenue and cost data from problem 2GP.3.E1. But now consider that the firm believes dropping figure skating would reduce revenue for the other two products by 10% and that figure skating’s $20,000 of other costs are unavoidable.

Required

(A) According to relevant cost analysis, should the firm keep or drop the figure skating product?

(B) According to strategic cost analysis, should the firm keep or drop the figure skating product?