CB2101

Review of Chapter 1 – 11

12-1
Final Exam
Time:
7 December, 2020 (2:00 pm -5:00 pm)

Modes:
Online Examination.

Format:
Section A 20 multiple choice questions (30%)
Section B 9 problems (70%)

※ Topics covered in Chapter 1 – 11 will be tested in both Section A and

B.

Coverage:
The whole chapters

12-2
Final Exam
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12-3
Managerial Accounting and
Cost Concepts
Chapter 1

12-4
 Cost Classifications
 Direct materials (DM)
• Costs in manufacturing firms  Direct labor (DL)
 Manufacturing cost (product cost)  Manufacturing overhead (MOH)
 Nonmanufacturing cost (period cost)
 Selling costs
• Cost behavior  Administrative costs
 Variable cost
 Fixed cost
 Direct materials (DM)
• Cost assignment method
 Direct labor (DL)
 Direct cost  Direct selling/admin cost
 Indirect cost  Manufacturing overhead (MOH)
 Indirect selling/admin cost
• Decision relevance
 Differential cost  Financial Reporting
 Relevant cost
 Opportunity cost  Product cost
 Irrelevant cost  Sunk cost
 Period cost
12-5
 Mixed Costs (1 of 2)
A mixed cost contains both variable and fixed
elements. Consider the example of utility cost.
Y
Total Utility Cost

Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours) Utility Charge

12-6
 Mixed Costs (2 of 2)

The total mixed cost line can be expressed

as an equation: Y = a + bX

Where: Y = The total mixed cost.

a = The total fixed cost (the
vertical intercept of the line).
b = The variable cost per unit of
activity (the slope of the line).
X = The level of activity.

12-7
Job-Order Costing

Chapter 2&3

12-8
 Job-Order Costing: An Overview

Job-order costing systems are used when:

1. Many different products are produced each period.
2. Products are manufactured to order.
3. The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.

 Where as process costing systems are used when a

single (uniform) product is produced each period
(e.g., cereals, paper towels etc.)  Chapter 5

12-9
Job-Order Costing – An Example

Direct Materials Trace \ Actual

Trace direct
Job No. 1 material and
direct labor
Direct Labor costs to
Job No. 2
each job as
Job No. 3 work is
performed.

12-10
Job-Order Costing – An Example
Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated
Manufacturing
to all jobs
Job No. 3
Overhead Allocate \ rather than
Estimates
directly traced
to each job.
12-11
Manufacturing Overhead Application

The predetermined overhead rate (POHR) used to apply

overhead to jobs is determined before the period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total amount of
allocation base for the coming period

Ideally, the allocation base

is a cost driver that causes
overhead.
12-12
Flow of Costs: A Conceptual Overview
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials
Direct materials

Direct Labor Work in

Process
Cost of goods
Manufacturing manufactured
Overhead Cost of
Finished
Goods
Goods Sale
Sold

Selling and Period Costs Selling and

Administrative Administrative
12-13
 Applying Manufacturing Overhead
Raw Work in Process
Finished Goods
Materials (Job Cost Sheet)
Material Direct Direct Cost of Cost of Cost of
Purchases Materials Materials Goods Goods Goods
Mfd. Mfd. Sold
Direct
Labor
Overhead
Mfg. Overhead Applied
Cost of Goods
Actual Applied Sold
Indirect PDHR*
Overhead Actual Quantity
Materials Applied to Cost of
Indirect Work in Goods
Labor Process Sold
Other MOH
Over Under Under Over
Applied Applied Applied Applied
OH OH OH OH 12-14
Activity-Based Costing
Chapter 4

12-15
Activity-Based Costing (ABC)

12-16
Activity-Based Costing (ABC)
An event that causes
Activity the consumption of
overhead resources

Activity-Based Costing (ABC)

Examples of Activities

Inspecting
Setting up Scheduling Maintaining
material
machines production equipment
for defects
12-17
Activity-Based Costing (ABC)
A “cost bucket” in which
Activity costs related to a single
Cost Pool activity measure are
accumulated
Expresses how much of the
Activity activity is carried out and is
Measure used as the allocation base
for applying overhead costs.

A predetermined overhead
Activity
rate for each activity
Rate cost pool.

12-18
Activity-Based Costing (ABC)

For each activity in

isolation, this system works exactly
like the job-order costing system
described in Chapter 2.

A predetermined overhead rate is computed for

each activity and then applied to jobs and
products based on the amount of activity
consumed by the job or product.
12-19
 Graphic Example of
Activity-Based Costing – Stage 2
Various Manufacturing Overhead Costs

First-Stage Cost Assignment

$450,000

Labor- Machine- Machine Production Parts General

Related Pool Related Pool Setup Pool Order Pool Admin. Pool Factory Pool

Second-Stage Allocations
1,200 Orders

$/DLH $/MH $/Setup $/Order $/Part Type $/MH

$375/Order

Products
Unit-Level Batch-Level Product-Level Facility-Level
Activity Activity Activity Activity12-20
Activity-Based Costing - Steps
1. Identify activities that consume resources and define
cost pools
2. Map resource expenses to activities (First-Stage Cost
Assignment)
(wherever possible, directly trace overhead costs to activities and
cost objects. If not, allocate indirect costs to activity cost pools)

3. Identify cost drivers for each cost pool and calculate

activity cost driver rates
4. Trace costs from activities to products (Second-Stage
Cost Assignment)

12-21
 Comparing the Two Approaches

Activity-Based Costing Direct Labor Costing

Phone Unit GPS Unit Phone Unit GPS Unit
Direct material $ 90.00 $ 50.00 $ 90.00 $ 50.00
Direct labor 20.00 20.00 20.00 20.00
Manufacturing overhead 97.80 25.55 40.00 40.00
Unit product cost $ 207.80 $ 95.55 $ 150.00 $ 110.00

Overhead cost shifts from high-volume to low-volume

products due to batch & product level activities.

12-22
Process Costing

Chapter 5

12-23
Differences Between Job-Order and
Process Costing
Process costing: Job-Order costing:
1. A single product is 1. Many different jobs are
produced either on a worked on during each
continuous basis or for period, with each job
long periods of time having unique features.
2. Costs are accumulated 2. Costs are accumulated
by department. by individual job.
3. Unit costs are computed 3. Unit costs are
by department. computed by job on
the job cost sheet.
12-24
 Treatment of Direct Labor

Direct
Materials Direct labor and
Conversion manufacturing
Dollar Amount

overhead may be
Direct
Labor combined into
one classification
Direct Manufacturing of product
Overhead
Labor cost called
conversion costs.
Type of Product Cost

12-25
 Process Costing Computations:
Three Key Concepts – Part 1
Key Concept #1: There are two methods for performing
the computations, the weighted-average method and the
FIFO method.

The weighted-average The FIFO method of

method of process costing process costing, which
calculates unit costs by appears in Chapter 5
combining costs and outputs Supplement, calculates unit
from the current and prior costs based solely on the
periods. costs and outputs from the
current period.

12-26
Equivalent Units of Production
Equivalent Units =
# of partially completed units×Percentage completion

Two half-completed products are

equivalent to one complete product.

+ = 1

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.
12-27
Step 1: Compute the Equivalent Units of Production
- WA
6,000 Units Started
Materials

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

5,400 Units Completed

540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
12-28
Step 1: Compute the Equivalent Units of Production –
FIFO Method
6,000 Units Started
Materials

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

300 ×
60%
180 Equivalent Units
5,100 Units Completed
900 ×
540 Equivalent Units 60%
5,820 Equivalent units
of production
12-29
Cost per equivalent unit

Cost of beginning WIP

+ Cost added during the period

Cost per Total Costs

=
unit # of units produced

Units transferred out

+ Equivalent units in ending WIP

12-30
 Step 2: Compute the Cost per Equivalent Unit (WA)
- Part 2

The formula for computing the cost per equivalent

unit is:

Weighted-Average Method (a separate

calculation is made for each cost category
in each processing department)

Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit
Equivalent units of production
12-31
 How about FIFO?
Step 2: Compute the Cost per Equivalent
Unit (FIFO)
FIFO Method
(a separate calculation is made for each cost category in each
processing department)

Equivalent units of production = Equivalent units to complete beg

work in process inventory* + Units started and
completed during the period + Equivalent units in ending work
in process inventory

*Equivalent units to complete beginning work in process inventory = Units in

beginning work in process inventory × (100% − Percentage completion of
beginning work in process
inventory)
12-32
Cost-Volume-Profit
Relationships
Chapter 6

12-33
 Basics of Cost-Volume-Profit Analysis
The contribution income statement is helpful to managers
in judging the impact on profits of changes in selling price,
cost, or volume. The emphasis is on cost behavior.
Racing Bicycle Company (RBC)
Contribution Income Statement
For the Month of June
Sales (500 bicycles) $ 250,000
Less: Variable expenses 150,000
Contribution margin 100,000
Less: Fixed expenses 80,000
Net operating income $ 20,000

• Contribution Margin (CM) is the amount remaining from sales

revenue after variable expenses have been deducted.
• CM is used first to cover fixed expenses. Any remaining CM
contributes to net operating income. 12-34
Break-Even/Target Profit
Break-even: unit sales or dollar sales needed to achieve a
target profit of zero.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit CM Ratio
Sales (500 bicycles) $ 250,000 $ 500 100%
Less: Variable expenses 150,000 300 60%
Contribution margin 100,000 $ 200 40%
Less: Fixed expenses 80,000
Net operating income $ 20,000
Operating Leverage
Operating leverage is a measure of how sensitive
net operating income is to percentage changes in
sales. It is a measure, at any given level of sales,
of how a percentage change in sales volume will
affect profits.
Degree of Contribution margin
operating leverage = Net operating income

High Operating Leverage ratio:

 signals the existence of high fixed costs.
 increases risk of making loss in adverse
market conditions.
 increases opportunity to make profit when
higher demand exists.
12-36
Variable Costing and Segment
Reporting: Tools for Management

Chapter 7

12-37
 Overview of Variable and Absorption
Costing
Variable Absorption
Costing Costing
Direct Materials
Product
Direct Labor Product
Costs
Variable Manufacturing Overhead Costs
Fixed Manufacturing Overhead
Period
Variable Selling and Administrative Expenses Period
Costs
Fixed Selling and Administrative Expenses Costs

12-38
 Three Key Concepts
Variable vs Absorption Costing
1. Both formats include product and period costs,
but cost classifications are defined differently.
2. Variable costing income statements are
grounded in the contribution format and
categorize expenses based on cost behavior.
3. Both methods’ net operating incomes often differ
because of the fact that the methods account for
fixed manufacturing overhead differently.

12-39
 Unit Cost Computations

Harvey Company produces a single product with the

following information: available:

12-40
 Explaining Changes in Net Operating
Income
Variable costing income is only affected by
changes in unit sales. It is NOT affected
by the number of units produced. As a
general rule, when sales go up, net
operating income goes up, and vice versa.

Absorption costing income is influenced by

changes in unit sales and units of
production. Net operating income can be
increased simply by producing more units
even if those units are not sold.
12-41
 Explaining Changes in Net Operating
Income
Variable
Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Variable COGS (20,000×$10) $ 200,000
Variable SG&A (20,000×$3) 60,000
Contribution margin 340,000
Less fixed expenses:
Fixed MOH $ 150,000
Fixed SG&A 100,000
Net operating income $ 90,000

Unit FMOH= FMOH / # of units produced

= 150,000 / 25,000
= $6 / unit
12-42
 Supporting Decision Making
Variable costing correctly identifies the additional
variable costs incurred to make one more unit ($10
per unit for Harvey Company). It also emphasizes
the impact of total fixed costs on profits.
Because absorption costing assigns fixed
manufacturing overhead costs to units produced ($6
per unit for Harvey Company), it gives the impression
that fixed manufacturing overhead is variable with
respect to the number of units produced, but it is not.
The result can be inappropriate pricing decisions and
product discontinuation decisions.
12-43
 9-44

Master Budgeting

Chapter 8
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activities is known
as budgetary control.

12-45
The Master Budget: An Overview
Sales budget

Selling and
Ending inventory administrative
Production budget
budget budget

Direct materials Direct labor Manufacturing

budget budget overhead budget

Cash budget

Budgeted
Budgeted
income
balance sheet
statement

12-46
The Sales Budget
The individual months of April, May, and June are
summed to obtain the total budgeted sales in units
and dollars for the quarter ended June 30th

Expected Cash Collections Production Budget 12-47

Expected Cash Collections

30% 60,000 60,000

30% 150,000 150,000

From the Sales
Budget for April.
410,000 360,000 940,000
12-48
The Production Budget

20%

March 31
ending inventory.
12-49
The Direct Materials Budget

10%

March 31 inventory.
12-50
Expected Cash Disbursement for Materials

140,000 lbs. × $0.40/lb. = $56,000 12-51

The Direct Labor Budget

$ 13,000 $ 23,000 $ 14,500 $ 50,500

12-52
Manufacturing Overhead Budget

Total mfg. OH for quarter $251,000

= $49.70 per hour
Total labor-hours required 5,050
12-53
Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $ 24,950

POHR Production Budget.

12-54
Selling and Administrative Expense Budget

Budgeted Income Statement 12-55

 The Cash Budget
April May June Quarter
Beginning cash balance $ 40,000 $ 30,000 $ 40,000 $ 40,000
Add: Cash collections 170,000 410,000 360,000 940,000
Total cash available $ 210,000 $ 440,000 $ 400,000 $ 980,000
Less: Cash disbursements
Materials 40,000 72,300 72,700 185,000
Direct labor 13,000 23,000 14,500 50,500
Manufacturing overhead 56,000 76,000 59,000 191,000
Selling and administrative 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividend 49,000 - - 49,000
Total disbursements 228,000 400,000 269,500 897,500
Excess (deficiency) (18,000) 40,000 130,500 82,500
Financing:
Borrowing 48,000 - 48,000
Repayment - - (48,000) (48,000)
Interest - - (1,920) (1,920)
Total financing 48,000 - (49,920) (1,920)
Ending cash balance $ 30,000 $ 40,000 $ 80,580 $ 80,580
12-56
The Budgeted Income Statement
Sales Budget.
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Ending Finished
Sales (100,000 units @ $10) $ 1,000,000
Goods Inventory
Cost of goods sold (100,000 @ $4.99) 499,000
Gross margin 501,000 Budget.
Selling and administrative expenses 260,000
Operating income 241,000
Interest expense 1,920 Selling and
Net income $ 239,080 Administrative
Expense Budget.
Cash Budget

12-57
 9-58

Flexible Budgets, Standard Costs

and Variance Analysis

Chapter 9
 Variance Analysis
• Budgets offer feedback in the form of variances: actual
results deviate from budgeted targets

• Variance analysis is a necessary step to understand why

a difference occurred.

• Favorable variance (F) – increases operating income

relative to the budgeted or standard amount.

• Unfavorable variance (U) – decreases operating income

relative to the budgeted or standard amount.

12-59
Deficiencies of the Static Planning Budget
Larry’s Actual Results Compared with the Planning Budget

Since these variances are unfavorable, has

Larry done a poor job controlling costs?

Since these variances are favorable, has

Larry done a good job controlling costs?

12-60
Characteristics of Flexible Budgets
May be prepared for any activity
level in the relevant range.

Show costs that should have been

incurred at the actual level of
activity, enabling “apples to apples”
cost comparisons.

Help managers control costs.

Improve performance evaluation.

12-61
Preparing a Flexible Budget
Larry’s Flexible Budget

12-62
Revenue and Spending Variances
Larry’s Flexible Budget Compared with the Actual Results

12-63
Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.

Quantity standards Price standards

specify how much of an specify how much
input should be used to should be paid for
make a product or each unit of the
provide a service. input.

12-64
A General Model for Variance Analysis

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(2) – (1) (3) – (2)

Spending Variance
(3) – (1)

12-65
 Responsibility for Materials
Variances
Materials Quantity Variance Materials Price Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
12-66
Responsibility for Materials Variances
Your poor scheduling
I am not responsible for sometimes requires me to
this unfavorable materials rush order materials at a
quantity variance. higher price, causing
You purchased cheap unfavorable price variances.
material, so my people
had to use more of it.

Production Manager Purchasing Manager 12-67

Responsibility for Labor Variances
Production managers are Mix of skill levels
usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.

Quality of production
supervision.

Quality of training
provided to employees.
Production Manager
12-68
Responsibility for Labor Variances
I think it took more time
to process the
I am not responsible for materials because the
the unfavorable labor Maintenance
efficiency variance! Department has poorly
maintained your
You purchased cheap equipment.
material, so it took more
time to process it.

12-69
 8-70

Performance Measurement in
Decentralized Organizations

Chapter 10
Responsibility Centers
• A responsibility center is an organization unit for which
a manager is held accountable.

• Organizations use financial control to provide a summary

measure of how well their responsibility centers are
working.

• The accounting report prepared for a responsibility center

should reflect the degree to which the responsibility
center manager controls revenue, cost, profit, or return
on investment.

12-71
Cost, Profit, and Investment Centers

Cost Profit
Investment
Center Center
Center

Cost, profit, and

investment
centers are all
known as Responsibility
responsibility Center
centers.

12-72
Return on Investment (ROI) Formula

Income before interest

and taxes (EBIT)

Net operating income

ROI =
Average operating assets

Cash, accounts receivable, inventory,

plant and equipment, and other
productive assets.

12-73
Understanding ROI
Net operating income
ROI = Average operating assets

Net operating income

Margin =
Sales
Sales
Turnover =
Average operating assets

ROI = Margin × Turnover

12-74
Criticisms of ROI

In the absence of the balanced

scorecard, management may
not know how to increase ROI.

Managers often inherit many

committed costs over which
they have no control.

Managers evaluated on ROI

may reject profitable
investment opportunities.

12-75
Calculating Residual Income

Residual
income
=
Net
operating -
income
(Average
operating
assets
×
Minimum
required rate of
return
)
This computation differs from ROI.
ROI measures net operating income earned
relative to the investment in average operating
assets.
Residual income measures net operating income
earned less the minimum required return on
average operating assets.
12-76
Motivation and Residual Income

Residual income encourages managers to

make profitable investments that would
be rejected by managers using ROI.

12-77
Divisional Comparisons and Residual
Income
The residual
income approach
has one major
disadvantage.
It cannot be used
to compare the
performance of
divisions of
different sizes.

12-78
The Balanced Scorecard
Management translates its strategy into
performance measures that employees
understand and influence.

Financial Customer

Performance
measures
Internal Learning
business and growth
processes
12-79
 The Balanced Scorecard –
Non-financial Measures
The balanced scorecard relies on non-financial measures
in addition to financial measures for two reasons:

 Financial measures are lag indicators that summarize

the results of past actions. Non-financial measures are
leading indicators of future financial performance.

 Top managers are ordinarily responsible for financial

performance measures – not lower level managers.
Non-financial measures are more likely to be
understood and controlled by lower level managers.
12-80
 The Balanced Scorecard – Important
Links
A balanced scorecard should have measures
that are linked together on a cause-and-effect basis.

If we improve Another desired

Then
one performance performance measure
measure . . . will improve.

The balanced scorecard lays out concrete

actions to attain desired outcomes.
12-81
 The Balanced Scorecard and
Compensation

Incentive compensation should be

linked to balanced scorecard
performance measures.

12-82
Differential Analysis: The Key to
Decision Making

Chapter 11

12-83
Decision Making – Six Key Concepts
Relevant costs
ONLY those costs and benefits that differ between
alternatives are relevant in decision.
• A future cost/revenue that differs between any two
alternatives is known as a differential cost/ revenue.
• An incremental cost is an increase in cost between two
alternatives.
• An avoidable cost is a cost that can be eliminated by
choosing one alternative over another.
• An opportunity cost is the potential benefit that is given
up when one alternative is selected over another.

12-84
Decision Making – Six Key Concepts
Irrelevant costs
• A future cost/revenue that do not differs between any
two alternatives is irrelevant to the decision-making
process.
• A sunk cost is a cost that has already been incurred and
cannot be changed regardless of what a manager
decides to do.

12-85
1. Adding/Dropping Segments

One of the most important

decisions managers make
is whether to add or drop a
business segment.
Ultimately, a decision to
drop an old segment or add
a new one is going to hinge
primarily on the impact the To assess this
decision will have on net impact, it is
operating income. necessary to
carefully analyze
the costs.
12-86
Adding/Dropping Segments
Segment Income Statement Drop
Digital Watches
Sales $ 500,000
Less: variable expenses
Variable manufacturing costs $ 120,000
Variable shipping costs 5,000
Commissions 75,000 200,000
Contribution margin $ 300,000 -$300,000
Less: fixed expenses
General factory overhead $ 60,000
Salary of line manager 90,000
Depreciation of equipment 30,000 +$260,000
Advertising - direct 100,000
Rent - factory space 70,000
General admin. expenses 30,000 380,000
Net operating loss $ (80,000) -$40,000
12-87
2. Special Orders

 Jet, Inc., makes a single product whose

normal selling price is $20 per unit.
 A foreign distributor offers to purchase 3,000
units for $10 per unit.
 This is a one-time order that would not affect
the company’s regular business.
 Annual capacity is 10,000 units, but Jet, Inc.,
is currently producing and selling only 5,000
units.
Should Jet accept the offer?
12-88
 Special Orders
If Jet accepts the special order, the incremental
revenue will exceed the incremental costs. In other
words, net operating income will increase by $6,000.
This suggests that Jet should accept the order.

Increase in revenue (3,000 × $10) $ 30,000

Increase in costs (3,000 × $8 variable cost) 24,000
Increase in net income $ 6,000

Note: This answer assumes that the fixed costs are

unavoidable and that variable marketing costs must be
incurred on the special order.
12-89
3.Utilization of a Constrained Resource

• Fixed costs are usually unaffected in these situations,

so the product mix that maximizes the company’s
total contribution margin should ordinarily be
selected.
• A company should not necessarily promote those
products that have the highest unit contribution
margins.
• Rather, total contribution margin will be maximized by
promoting those products or accepting those orders
that provide the highest contribution margin in
relation to the constraining resource.

12-90
Utilization of a Constrained Resource: An
Example

Ensign Company produces two products and selected data

are shown below:

1 2
Selling price per unit $ 60 $ 50
Less variable expenses per unit 36 35
Contribution margin per unit $ 24 $ 15
Current demand per week (units) 2,000 2,200
Contribution margin ratio 40% 30%
Processing time required
on machine A1 per unit 1.00 min. 0.50 min.
Contribution margin per minute $24 $30

12-91
Value of a Constrained Resource

Increasing the capacity

of a constrained
resource should lead to
increased production
and sales.

How much should

Ensign be willing to pay
for an additional minute
of A1 machine time?
12-92
Value of a Constrained Resource

The additional machine time would be used to

make more units of Product 1, which had a
contribution margin per minute of $24.

Ensign should be willing to pay up to $24

per minute. This amount equals the
contribution margin per minute of machine
time that would be earned producing more
units of Product 1.

12-93
End of Review

12-94