PROBLEM 20.

7B
Analyzing the Effects of Changes in Costs and Volume Dorsal Ranch raises fish for sale in the restaurant
industry. The company can obtain batches of two million eggs from its supplier. Management is trying to
decide whether to raise cod or salmon. Cod eggs cost $14,000 per batch, while salmon eggs cost
$18,000 per batch. Due to differences in needs, only one species can be raised during a 52-week
period.With current facilities, approximately 15 percent of cod eggs and 10 percent of salmon eggs can
be raised to maturity. Cod take approximately 40 weeks to grow to a marketable size, while salmon take
50 weeks. Salmon also require more care than cod. Each week, salmon require two water treatments
and 35 feedings. Each feeding costs $400 and each water treat-ment costs $600. Cod require only 21
feedings and a single water treatment. Heat and lightregulation costs average $300 per week for either
species. The company can sell cod for $5 apiece and salmon for $9 apiece. Annual fixed costs, regardless
of which species is raised, total $900,000.
Instructions
a. Which species should Dorsal Ranch raise to earn the highest operating income for the year?
b. Other than fixed costs, which factors or categories of costs seem to have the greatest influence on
operating income?
c. Management is considering one of the following improvements, each of which will cost an additional
$20,000 for the year. Due to resource constraints, only one can be implemented.
1. Installing a new filtration system to improve water quality. This will increase the survival rates to 20
percent for cod and 14 percent for salmon. The need for water treatments will be reduced to one per
week for salmon. Due to higher yields, feeding costs will increase by $80 weekly.
2. Installing an environment regulation system that will reduce heating and lighting costs to $250 per
week. The equipment will increase the survival rate for cod to 16 percent and the survival rate for
salmon to 11 percent. This slight change in survival rates is not expected to increase either water
changing requirements or feeding costs.
Using your answers to part b (with no calculations), which option do you think will be most beneficial?
d. Perform the necessary calculations to check if your answer to part c was correct. Should either of
these investments be undertaken, and if so, which species should be raised?

PROBLEM 20.8B
CVP with Multiple Products HomeTeam Sports sells hats and shirts licensed by the NFL and the NBA. The
following is selected per-unit information for these two product lines.

Hats Shirts
Sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20 $28
Variable costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6. $21

Fixed costs and expenses amount to $684,000 per month.HomeTeam has total sales of $1.5 million per
month, of which 60 percent result from the sale of shirts and the other 40 percent from the sale of hats.
Instructions
a. Compute separately the contribution margin ratio for each line of products.
b. Assuming the current sales mix, compute:
1. Average contribution margin ratio of total monthly sales.
2. Monthly operating income.
3. The monthly break-even sales volume (stated in dollars).
c. Assume that because of consumer trends, the company’s sales mix shifts to a higher demand for hats.
Total sales remain $1.5 million per month, but now 60 percent of this revenue stems from sales of hats.
Using this new sales mix, compute:
1. Average contribution margin ratio of total monthly sales.
2. Monthly operating income.
3. The monthly break-even sales volume (stated in dollars).
d. Explain why the company’s financial picture changes so significantly with the new sales mix.

Exercise 21.7

Bacrometer, Inc., makes part no. 566 on one of its production lines. Each month Bacrometer makes
6,000 of part no. 566 at a variable cost of $4 per part. Bacrometer has been provided a bid for part no.
566 from another manufacturer that will make the part for $5 per part. Bacrometer knows the
production line could be rented to another manufacturer for $8,000 per month. Fixed costs associ-ated
with the production line will remain unchanged regardless of the company’s decision. Should
Bacrometer continue to make part no. 566 or should it buy the part and rent the production line Parsons
Plumbing & Heating manufactures thermostats that it uses in several of its products. Man-agement is
considering whether to continue manufacturing the thermostats or to buy them from an outside source.
The following information is available.
1. The company needs 80,000 thermostats per year. Thermostats can be purchased from an ou-side
supplier at a cost of $6 per unit.
2. The cost of manufacturing thermostats is $7.50 per unit, computed as follows.
PROBLEM 21.3A Make or Buy Decision
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $156,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,000
Manufacturing overhead:
Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,000
Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,000
Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600,000
Cost per unit ($600,000 ÷ 80,000 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.50
3. Discontinuing the manufacture of the thermostats will eliminate all of the direct materials and
direct labor costs but will eliminate only 60 percent of the variable overhead costs.
4. If the thermostats are purchased from an outside source, certain machinery used in the pro-duction
process would no longer have to be leased. Accordingly, $9,200 of fixed overhead costs could be
avoided. No other reductions will result from discontinuing production of the thermostats.
Instructions
a. Prepare a schedule to determine the incremental cost or benefit of buying thermostats from
the outside supplier. On the basis of this schedule, would you recommend that the company
manufacture thermostats or buy them from the outside source?
b. Assume that if thermostats are purchased from the outside source, the factory space previously used
to produce thermostats can be used to manufacture an additional 6,000 heat-flow regu-lators per year.
These regulators have an estimated contribution margin of $18 per unit. The manufacture of the
additional heat-flow regulators would have no effect on fixed overhead. Would this new assumption
change your recommendation as to whether to make or buy thermostats? In support of your conclusion,
prepare a schedule showing the incremental cost or benefit of buying thermostats from the outside
source and using the factory space to pro-duce additional heat-flow regulators.

PROBLEM 21.1B

Swirl Incorporated designs and manufactures fashionable women’s clothing. For the coming year, the
company has scheduled production of 50,000 silk skirts. Budgeted costs for this product are as follows.
Unit Costs

(50,000 units) Total

The management of Swirl is considering a special order from Discount Fashions for an additional 18,000
skirts. These skirts would carry the Discount Fashions label, rather than the Swirl label. In all other
respects, they would be identical to the regular Swirl skirts.
Although Swirl regularly sells its skirts to retail stores at a price of $180 each, Discount Fash-ions has
offered to pay only $55 per skirt. However, because no sales commissions would be involved with this
special order, Swirl will incur variable selling expenses of only $5 per unit on these sales, rather than the
$15 it normally incurs. Accepting the order would cause no change in the company’s fixed
manufacturing costs or fixed operating costs. Swirl has enough plant capacity to produce 70,000 skirts
per year.
Instructions
a. Using incremental revenue and incremental costs, compute the expected effect of accepting this
special order on Swirl’s operating income.
b. Briefly discuss any other factors that you believe Swirl’s management should consider in deciding
whether to accept the special order. Include nonfinancial as well as financial considerations.