Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed


Theory of constraints, throughput contribution, quality, relevant costs



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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.

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