Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
Theory of constraints, throughput contribution, quality, relevant costs
Download 1.72 Mb. View original pdf
|
| 20.20 Theory of constraints, throughput contribution, quality, relevant costs. (30–40 min) 1 Direct materials costs to produce 390,000 tablets = €156,000 Direct materials costs per tablet = €156,000 = €0.40 per tablet Selling price per tablet = €1.00 Unit throughput contribution = Selling price − Unit direct materials costs = €1.00 − €0.40 = €0.60 per tablet Tablet making is a bottleneck operation. Hence, producing 19,500 more tablets will generate additional operating income. Additional operating income per contractor-made tablet = Unit throughput contribution − Additional operating costs per tablet = €0.60 − €0.12 = €0.48 Increase in operating income, €0.48 × 19,500 = €9,360. Hence, Lappalainen should accept the outside contractor’s offer. Increase in operating income, €0.48 × 19,500 = €9,360. Hence, Lappalainen should accept the outside contractor’s offer. [AQ17] 2 Operating costs for the Mixing Department area fixed cost. Contracting out the mixing activity will not reduce Mixing Department costs but will cost an additional €0.07 per gram of mixture. Mixing more direct materials will have no effect on throughput contribution since tablet making is the bottleneck operation. Therefore, Lappalainen should reject the company’s offer. 3 The benefit of improved quality is €10,000. Lappalainen is using the same quantity of direct materials as before, so it incurs no extra direct materials costs. The 10,000 extra tablets produced generate additional revenue of €10,000 (€1 × 10,000 tablets) a month. The modification costs €7,000 per month, which results in a net gain of €3,000. 4 €156,000 Cost per gram of mixture = = €0.78 per gram 200,000 Cost of 10,000 grams of mixture = €0.78 × 10,000 = €7,800 Benefit from better mixing quality €7,800 per month Cost of improving the mixing operation €9,000 per month €390,000 Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 Since the costs exceed the benefits by €1,200 per month, Lappalainen should not adopt the proposed quality-improvement plan. 5 Compare the answers to requirements 3 and 4. The benefit of improving quality at the mixing operation is the savings in materials costs. The benefit of improving quality of the Tablet-Making Department (the bottleneck operation) is the savings in materials costs plus the additional throughput contribution from higher sales that result from relieving the bottleneck constraint. Download 1.72 Mb. Share with your friends:
|