Problem 7: 191 Per 16 Ounce T Bone Revenue From Further Proc

Problem 7 191per 16 Ounce T Bonerevenue From Further Processingsales

Analyze decision-making scenarios involving profitability from processing T-bone steaks further, costs and revenues from product sales, and the implications of closing or keeping a plant operational based on contribution margins, fixed and variable costs, and external factors. Evaluate cost savings, contribution margins, and alternative sources of supply for production components, considering relevant and irrelevant costs. Use profitability analysis to determine whether to process further, continue operation, or outsource components. Consider additional qualitative factors such as customer goodwill, quality, and supply reliability.

Paper For Above instruction

Decision-making in manufacturing operations often hinges upon an accurate understanding of relevant costs, contribution margins, and strategic considerations. The scenarios presented—ranging from processing T-bone steaks further to analyzing plant closure implications—demonstrate the criticality of differentiating between relevant and irrelevant costs, as well as evaluating both quantitative and qualitative factors. The following analysis explores these dimensions in detail.

Processing T-bone Steaks Further: A Profitability Analysis

The decision to process T-bone steaks further into filet mignon and New York cuts hinges on incremental profitability. The key figures include the sales prices of the resulting products, with a combined revenue of $2.35 per 16-ounce T-bone steak, versus $2.25 from selling the T-bone outright. The incremental revenue generated from further processing per pound amounts to $0.10, while the additional processing cost per pound is $0.20. This results in a net incremental profit of -$0.10 per pound, indicating that further processing would actually decrease profit.

Importantly, the analysis recognizes that the $0.55 profit per pound for T-bone steaks, which includes allocated joint costs, is irrelevant to the decision. Joint costs are sunk at this stage, and since they will be incurred regardless of the decision, ignoring them aligns with accounting principles of relevance. The conclusion of the analysis is that, based solely on cost and revenue figures, processing further is not financially advantageous. The overall profit diminishes by $0.10 per pound, suggesting that the steak should be sold as-is rather than processed further.

Plant Closure vs. Continuing Operations

The evaluation extends to a scenario where a plant produces a product with a contribution margin of $14 per gallon, with an anticipated loss of $308,000 if the plant is closed over a two-month period—due to the lost contribution margin on 22,000 gallons. However, closure also entails cost savings, notably in fixed manufacturing overhead and fixed selling costs, totaling significant amounts. After accounting for avoided costs and start-up expenses for reopening, the net disadvantage of closure is estimated at $140,000. This indicates that, strictly from a financial standpoint, operation should continue.

Further analysis suggests that if sales decrease to 12,000 gallons over the two months, the company would be indifferent—cost savings roughly offset lost contribution margins. Nevertheless, qualitative factors, such as potential damage to customer relationships and employee morale, are crucial considerations that may tip the strategic decision toward maintaining operations despite apparent short-term losses.

Make-or-Buy Decision for Cartridges

When considering whether to produce cartridges internally or purchase from an external supplier for Zippo pens, the pertinent variable costs include direct materials, direct labor, and variable manufacturing overhead. Internal production costs are lower by $0.05 per box of pens compared to outsourcing. The analysis demonstrates that producing all 150,000 boxes internally would total $94,500, including fixed costs. Purchasing externally, costing $0.48 per box, would amount to $72,000, making it less cost-effective overall. However, a hybrid approach—producing 100,000 boxes internally and purchasing 50,000 externally—results in a total cost of approximately $67,000, which is economically advantageous.

Decisions must also account for reliability, quality, and capacity planning. For example, external suppliers can provide flexibility and reduce capital investments, while internal production allows for better quality control but incurs higher fixed costs. The analysis underscores that procurement decisions should be driven by cost comparisons augmented with considerations of supply risk and quality standards.

Product Mix Optimization: Contribution Margin Analysis

Analyzing various products based on contribution margins and contribution margins per direct labor hour (DLH) guides optimal product mix decisions. For instance, among different dolls and sewing kits, Cari exhibits the lowest contribution margin per DLH, leading to recommendations to reduce its production by 17,000 units to free capacity for more profitable products. Additional capacity could be generated through overtime or process improvements, with the company willing to pay up to $21 per DLH, which exceeds the normal wage rate, indicating potentials for overtime employment to enhance profitability.

Decision-makers should also understand that the classification of labor as variable or fixed impacts ranking. When labor is a constraint, classifying it as variable for contribution margin calculations is appropriate. The analysis highlights that ignoring fixed costs can facilitate prioritization, but overall effectiveness depends on the capacity constraints and cost structures.

Investment Evaluation: Simple Rate of Return and Payback Period

Investment analysis employing the simple rate of return and payback period indicates whether capital projects are financially viable. For example, a cost-saving project with annual savings of ¥108,000 and an initial investment of ¥480,000 yields a simple rate of return of approximately 14.2%. The payback period—about 4.4 years—also supports proceeding with the investment, as it is within acceptable thresholds. Conversely, the internal rate of return, derived from cash flow tables, suggests a higher return (~20%) justifying the project.

These methods, combined with qualitative factors, provide comprehensive support for capital budgeting decisions. They demonstrate that the project’s earnings recovery time and return percentage are key criteria influencing go/no-go decisions.

Summary

In conclusion, sound managerial decision-making requires a nuanced understanding of relevant costs, contribution margins, and capacity constraints. The analyses highlight that financial data alone may sometimes lead to different conclusions than strategic considerations. Therefore, managers must balance quantitative profitability assessments with qualitative factors such as customer loyalty, supplier reliability, and employee morale to arrive at well-rounded decisions. Proper segregation of fixed and variable costs, along with sensitivity analysis, is crucial to making sound operational choices that align with long-term organizational goals.

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