INSTRUCTOR’S SOLUTIONS MANUAL
MANAGEMENT ACCOUNTING FOR DECISION MAKERS
11TH EDITION
Solution to Exercise 2.4
Sofiski Services
€
The relevant cost of skilled labour as such is zero because the staff will be
employed and paid irrespective of the contract. However, if the contract is
undertaken, the business will lose sales in the alternative activity. The
effective cost of this will be the lost sales revenue net of the ‘other costs’ that
will be saved, which amounts to €32 an hour (that is, €24 + €8). So cost is
27 hours × €32 = 864
Semi-skilled staff are being paid anyway, so their wages are not relevant.
The additional cost to be incurred will be the wages paid to the unskilled
labour taken on to replace them. Thus:
14 hours × €18 = 252
As unskilled labour will be specifically employed for the contract, the relevant
hourly wage rate is €18. Thus:
20 hours × £18 = 360
General costs 450
The rental income forgone is a relevant opportunity cost. 375
The €1,800 already spent on the specialised study is a sunk cost and is not
relevant. The relevant cost is the forgone opportunity to sell the results: 600
Rent would have to be paid anyway and are therefore not relevant
Minimum price -
2,901
,Solution to Exercise 2.5
Sharma Food Processing
(a) For sales of up to 1,500 tonnes
Since Product A’s market seems to be limited to 500 tonnes, there can be no opportunity cost
relating to Product A of producing up to 1,500 tonnes of Product X. (The business currently holds
2,000 tonnes of the raw material.) This means that the relevant cost per tonne of Product X will be:
Opportunity cost of disposing of the material ($36), plus the relevant outlay cost ($80) = $116 a
tonne.
(b) For sales between 1,500 and 2,000 tonnes
Clearly, the business would choose to produce Product A were Product X sales to be 1,500 or less,
rather than sell the material for $36 a tonne. This is because, by spending $60 more ($96 in total), it
can be sold as Product A for $105 a tonne. Any sales of Product X above 1,500 tonnes would be at
the expense of Product A. The opportunity cost of not making Product A is $105 less $60 = $45.
Thus, the relevant cost of Product X will be:
Opportunity cost of using the material ($45), plus the relevant outlay cost ($80) = $125 a tonne.
(c) For sales above 2,000 tonnes
To make more than 2,000 tonnes of Product X, the company will have to buy in additional
inventories of the raw material at $48 a tonne.
Thus, the relevant cost of Product X will be:
Outlay cost of buying the inventories ($48), plus the relevant outlay cost ($80) = $128 a tonne.
,Solution to Exercise 2.8
Choi Manufacturers
Material £
‘Regular’ material (75% × £120,000) 90,000
Special foaming chemical (see Note 1 below) 24,000
Labour
General (£80,000 − (2 × £15,000); see Note 2 below) 50,000
Managerial 40,000
Rent saving (see Note 3 below) 15,750
Plant (£28,000/2, see Note 4 below) 14,000
Maintenance (see Note 5 below) 9,900
243,650
The quotation is 250,000
On the basis of this analysis, the tender from the outside supplier should be accepted in respect of
the first year. This is not the case for the second year, however (see Note 1 below).
This is a difficult decision to make because it has longer-term implications that are not really
capable of being assessed on the basis of the information provided. For example:
• If the container work is continued, how much will it cost to replace the plant in two years’ time?
• If the container work ceases and the staff are transferred or declared redundant, how easily
could this decision be reversed if, say, the outside supplier raised its prices for subsequent
years?
Strictly, the analysis should take account of the fact that the various cash flows in the above analysis
occur at different times. It is not, therefore, fair to compare them directly. How comparisons should
be made, where there are timing differences, is the subject of much of the discussion in Chapter 8.
, NOTES
1. As the chemical is valued at £30,000 (that is, 25% × £120,000) at cost, we can conclude that
there are 40 tonnes in inventories (that is, £30,000/£750). This, according to the question, is
sufficient for one year’s production of the containers. Since the alternative to using the chemical
on the containers appears to be selling it at £600 a tonne, the relevant cost for the first year is
£24,000 (that is, 40 tonnes @ £600 a tonne).
By the end of the first year, the existing inventories will have been exhausted, and so further
supplies will have to be bought. This costs £1,050 a tonne (according to the question), increasing
the annual internal cost for the second year by £18,000 (that is, (40 × £1,050) −£24,000)
compared with the first.
2. It has been assumed that keeping on the two part-time employees, at £15,000 salary a year each,
will not cause any salary savings to be made elsewhere.
3. The allocation of the factory rent is irrelevant since this will not be saved if the containers work
is ended. The cost of the outside warehouse is, however, a saving.
4. The depreciation charge is irrelevant, since it is based on past cost. What is relevant is the
£28,000 cash inflow that will result from stopping the container work, the equivalent of £14,000
for each year. This assumes that the plant could be sold for £14,000 at the end of the first year.
5. It has been assumed that the maintenance costs are specific to the container work and will be
saved if this work is stopped.
MANAGEMENT ACCOUNTING FOR DECISION MAKERS
11TH EDITION
Solution to Exercise 2.4
Sofiski Services
€
The relevant cost of skilled labour as such is zero because the staff will be
employed and paid irrespective of the contract. However, if the contract is
undertaken, the business will lose sales in the alternative activity. The
effective cost of this will be the lost sales revenue net of the ‘other costs’ that
will be saved, which amounts to €32 an hour (that is, €24 + €8). So cost is
27 hours × €32 = 864
Semi-skilled staff are being paid anyway, so their wages are not relevant.
The additional cost to be incurred will be the wages paid to the unskilled
labour taken on to replace them. Thus:
14 hours × €18 = 252
As unskilled labour will be specifically employed for the contract, the relevant
hourly wage rate is €18. Thus:
20 hours × £18 = 360
General costs 450
The rental income forgone is a relevant opportunity cost. 375
The €1,800 already spent on the specialised study is a sunk cost and is not
relevant. The relevant cost is the forgone opportunity to sell the results: 600
Rent would have to be paid anyway and are therefore not relevant
Minimum price -
2,901
,Solution to Exercise 2.5
Sharma Food Processing
(a) For sales of up to 1,500 tonnes
Since Product A’s market seems to be limited to 500 tonnes, there can be no opportunity cost
relating to Product A of producing up to 1,500 tonnes of Product X. (The business currently holds
2,000 tonnes of the raw material.) This means that the relevant cost per tonne of Product X will be:
Opportunity cost of disposing of the material ($36), plus the relevant outlay cost ($80) = $116 a
tonne.
(b) For sales between 1,500 and 2,000 tonnes
Clearly, the business would choose to produce Product A were Product X sales to be 1,500 or less,
rather than sell the material for $36 a tonne. This is because, by spending $60 more ($96 in total), it
can be sold as Product A for $105 a tonne. Any sales of Product X above 1,500 tonnes would be at
the expense of Product A. The opportunity cost of not making Product A is $105 less $60 = $45.
Thus, the relevant cost of Product X will be:
Opportunity cost of using the material ($45), plus the relevant outlay cost ($80) = $125 a tonne.
(c) For sales above 2,000 tonnes
To make more than 2,000 tonnes of Product X, the company will have to buy in additional
inventories of the raw material at $48 a tonne.
Thus, the relevant cost of Product X will be:
Outlay cost of buying the inventories ($48), plus the relevant outlay cost ($80) = $128 a tonne.
,Solution to Exercise 2.8
Choi Manufacturers
Material £
‘Regular’ material (75% × £120,000) 90,000
Special foaming chemical (see Note 1 below) 24,000
Labour
General (£80,000 − (2 × £15,000); see Note 2 below) 50,000
Managerial 40,000
Rent saving (see Note 3 below) 15,750
Plant (£28,000/2, see Note 4 below) 14,000
Maintenance (see Note 5 below) 9,900
243,650
The quotation is 250,000
On the basis of this analysis, the tender from the outside supplier should be accepted in respect of
the first year. This is not the case for the second year, however (see Note 1 below).
This is a difficult decision to make because it has longer-term implications that are not really
capable of being assessed on the basis of the information provided. For example:
• If the container work is continued, how much will it cost to replace the plant in two years’ time?
• If the container work ceases and the staff are transferred or declared redundant, how easily
could this decision be reversed if, say, the outside supplier raised its prices for subsequent
years?
Strictly, the analysis should take account of the fact that the various cash flows in the above analysis
occur at different times. It is not, therefore, fair to compare them directly. How comparisons should
be made, where there are timing differences, is the subject of much of the discussion in Chapter 8.
, NOTES
1. As the chemical is valued at £30,000 (that is, 25% × £120,000) at cost, we can conclude that
there are 40 tonnes in inventories (that is, £30,000/£750). This, according to the question, is
sufficient for one year’s production of the containers. Since the alternative to using the chemical
on the containers appears to be selling it at £600 a tonne, the relevant cost for the first year is
£24,000 (that is, 40 tonnes @ £600 a tonne).
By the end of the first year, the existing inventories will have been exhausted, and so further
supplies will have to be bought. This costs £1,050 a tonne (according to the question), increasing
the annual internal cost for the second year by £18,000 (that is, (40 × £1,050) −£24,000)
compared with the first.
2. It has been assumed that keeping on the two part-time employees, at £15,000 salary a year each,
will not cause any salary savings to be made elsewhere.
3. The allocation of the factory rent is irrelevant since this will not be saved if the containers work
is ended. The cost of the outside warehouse is, however, a saving.
4. The depreciation charge is irrelevant, since it is based on past cost. What is relevant is the
£28,000 cash inflow that will result from stopping the container work, the equivalent of £14,000
for each year. This assumes that the plant could be sold for £14,000 at the end of the first year.
5. It has been assumed that the maintenance costs are specific to the container work and will be
saved if this work is stopped.
