Perchwick Furniture: A Comprehensive Case: instructor review copy (printed )

This copy shows the whole case at once: every question in order with its exhibits, the instructor key and answer logic for each question, the feedback for every option with the named error behind each wrong one, the facts each video supplies, and the full transcript of every video. In the case itself, students see one question at a time and see feedback only after submitting.

Numbers are the faculty demonstration data set, which is not one of the 20 student versions. Question 14 branches on the sign of the cushion equipment’s NPV. In this data set the NPV is negative, so the key is d; in versions where it is positive, the key is b.

Learning Objective: Comprehensive Case: Use managerial accounting information to make a business recommendation (Chapters 2, 6, 7, 8, 9, 10, 11, 12)
Availability: Homework
Origin: Publisher

This comprehensive case walks you through one management decision at Perchwick Furniture, from understanding what a new product line costs through a final recommendation, so you can focus on which information matters and why the same cost can be treated differently in different decisions.

Perchwick Furniture: A Comprehensive Case

Perchwick Furniture is a fictitious company.

Perchwick Furniture makes wooden furniture for cats and the people who live with them. In its shop in western Michigan, about 40 employees cut, finish, and assemble window perches, scratching benches, and other pieces that Perchwick sells mainly through its own website.

Last year Perchwick designed its most ambitious product yet: the Highwick, a freestanding modular cat tower. The Highwick has a stable wooden base, climbing platforms that can be moved around, an enclosed hideaway, a washable cushion, and scratching panels that owners replace when they wear out. Perchwick cuts, drills, finishes, and assembles the wooden parts in its own shop, adds the scratching panels, checks every kit, and packs it flat for the customer to put together at home. The cushion is bought from an outside supplier. Extra platforms and a second hideaway are sold separately as add-ons.

In January, Perchwick began making and selling the Highwick as a one-year pilot, in one standard configuration. It is now mid-April. Rather than wait out the year, Nora Lindgren, Perchwick’s founder and general manager, wants to decide by the end of the month whether the Highwick becomes a permanent part of the business, so that Perchwick can plan the rest of the year around the answer. Three other matters have landed on her desk: a home-goods retailer, Brightwell Home, wants a large order in its own colors; the first quarter’s results came in below budget; and late cushion deliveries keep holding up kits that are otherwise ready to ship.

You are an analyst working with Perchwick’s controller, Daniel Reyes. Ms. Lindgren has asked you to work through the cost information, the retailer’s proposal, the first quarter’s results, and the cushion problem, and then to tell her what you would do.

The people you will hear from

Nora Lindgren, Founder and General Manager
Daniel Reyes, Controller
Keisha Coleman, Sales Manager
Luis Ortega, Production Manager
Hannah Ellis, Assembly Supervisor

Instructions. Work through the seventeen questions in order; each question is submitted before the next opens. Watch each video when it appears: the managers explain facts you will need that are not in the exhibits. Videos and exhibits stay available once they appear. Keep full precision in intermediate calculations. Report per-kit dollar amounts to the nearest cent. Round total dollar amounts to the nearest dollar, with amounts ending in 50 cents rounded up. For break-even volume, round up to the next whole kit. Use the present-value factors in Exhibit 5. Later questions redisplay any earlier figures you need.

Faculty demo note. As in MyLab, only Question 1 is open at first, and each question opens when the one before it is submitted. After each submission the page shows the correct answer and the named error behind any wrong choice. Use Show instructor answers to see every key, rationale, and video fact list, and Show all questions to see the whole case at once. The videos are not recorded yet; each has a placeholder and its full transcript.

Question 1: What the Highwick costs

Video 1 — Nora Lindgren, Founder and General Manager (about 2:17)

Ms. Lindgren explains why Perchwick built the Highwick, the decision she has to make, and what would change if the line were dropped.

Video placeholder: not yet recorded. The transcript below has the full script; the video and the transcript contain the same information.

Read the transcript: Nora Lindgren, Founder and General Manager

Thanks for helping with this. Let me give you some background first, because the numbers make more sense when you know who the Highwick is for.

I started Perchwick nine years ago with one idea. Cat furniture does not have to be carpet-covered plywood hiding in the corner. People share their homes with these animals. The furniture should work for both of them.

For years, our customers asked us for the same thing. A real tower. Tall, solid, something a cat will actually climb. Something that does not wobble when a twelve-pound cat jumps off the top, and that you do not mind seeing in your living room.

So we built the Highwick. A heavy wooden base. Platforms you can move around. A hideaway at the bottom. A cushion you can throw in the wash. And scratching panels you can replace when they are shredded. Which they will be.

We make all the wooden parts ourselves. We buy the cushion. Every kit gets checked before it ships flat, and the customer puts it together at home.

We started selling the Highwick in January as a one-year pilot. But I do not want to wait the whole year. I want to decide by the end of April whether it becomes a permanent part of Perchwick, so we can plan the rest of the year around it.

So let me be clear about what changes if I say no.

When we started the pilot, I hired a coordinator just for the Highwick. That person schedules Highwick production, deals with the cushion supplier, and handles Highwick customer questions. If I drop the Highwick, that position ends.

The same goes for the Highwick marketing. The ads, the photography, the product pages. Those contracts run month to month, and I can stop them.

What does not change is everything that was here before the Highwick. The building. The insurance. The office. The people who run the whole shop. All of that stays, with or without the Highwick.

Daniel has the cost information. Keisha has an offer from a retailer that needs an answer. Luis can tell you about the first quarter and our cushion problem. And Hannah runs assembly.

Look at all of it. Then tell me what you would do.

Instructor view: facts this video supplies

Perchwick makes all the wooden parts itself and buys the cushion; kits ship flat for home assembly.
The Highwick started in January as a one-year pilot; Ms. Lindgren wants an early decision, by the end of April, so Perchwick can plan the rest of the year.
The line coordinator was hired for the Highwick; the position ends if the line is dropped.
The Highwick marketing contracts run month to month and can be stopped.
The building, insurance, office and the people who run the whole shop stay with or without the Highwick.

Related questions: Q1 (b, c), Q4, Q14, Q16, Q17. Setting: Her office off the shop floor; a finished Highwick behind her, a cat asleep in the hideaway.

Video 2 — Daniel Reyes, Controller (about 2:29)

Mr. Reyes walks through the Highwick cost report and explains how two of the later figures should be read.

Video placeholder: not yet recorded. The transcript below has the full script; the video and the transcript contain the same information.

Read the transcript: Daniel Reyes, Controller

Let me walk you through the cost report, because a few of these lines look alike and mean very different things.

The costs of making and selling a kit are stated per kit. A kit is one complete Highwick in the standard configuration. That is the unit for everything you will do.

The top of the report is what it takes to make a kit. The wood and hardware. The scratching panels. The cushion we buy. The carton and the printed instructions.

Then there is assembly labor. Our standard is a set number of hours per kit, at the wage rate we planned to pay for that work. The assembly crew is paid by the hour, and we schedule their hours around the kits we need to build.

At Perchwick, assembly means all the hands-on work after the machines cut the parts. Sanding. Building the hideaway and the platforms. Finishing. Test-fitting the tower, inspecting it, and packing the kit. Hannah can tell you how that actually went.

Variable overhead is finishing materials, cutting tools that wear out, and power for the machines. The more kits we make, the more of it we use.

Getting a website order to the customer is its own line. We ship every kit by parcel, to the customer’s door, and we pay a card fee on every order.

Now the bottom of the report. Our accounting system spreads the shop’s rent, insurance, salaried staff, and office costs over every product, at a rate per kit. That includes the people on salary who run the cutting machines. It looks like a per-kit cost. But those costs were here before the Highwick, and they would be here without it.

The design and prototype work is done. We paid for it last year. It is on the report so you can see the whole history of the project.

Two more things, for later.

When I say expected annual sales, I mean a normal full year after the launch. I am not saying we will make up the sales we missed this winter. I mean what a typical year should look like once the Highwick is fully on the market.

And when we buy equipment, Nora and I hold it to a required rate of return. You will see the rate on the proposal. That is the rate to use.

So before you use a number, ask yourself what it actually changes, for the decision in front of you.

Instructor view: facts this video supplies

The costs of making and selling a kit are per kit; fixed costs are per year; past design spending is a total. A kit is one complete tower in the standard configuration.
The assembly crew is paid by the hour and scheduled to match the kits built; the salaried staff who run the cutting machines are part of the allocated shop costs.
Assembly labor is a standard (hours per kit at a planned wage) covering all hands-on work after machine cutting, including finishing, test-fitting, inspection and packing.
Variable overhead rises with the number of kits made.
Every website order is shipped by parcel and incurs a card fee.
The allocation spreads rent, insurance, salaried staff and office costs at a rate per kit; those costs existed before the Highwick and would continue without it.
Design and prototype work was completed and paid for last year.
’Expected annual sales’ means a normal full year after launch, not a catch-up of missed sales.
Equipment is held to a required return set by Ms. Lindgren and Mr. Reyes, shown on the proposal.

Related questions: Q1 (c, d), Q2, Q3, Q5, Q9, Q12, Q13. Setting: A small conference room; the cost report on the table, a disassembled Highwick platform beside it.

Exhibit 1 — The Highwick: cost report for the pilot line

Item	Amount	Note
Regular selling price (Perchwick website)	$269 per kit	One kit is one complete tower in the standard configuration
Wood and hardware	$39.00 per kit	Birch plywood, maple posts, steel connectors
Scratching panels and sisal	$7.20 per kit
Cushion, purchased	$18.50 per kit	Supplier’s price, delivered to Perchwick
Packaging and printed instructions	$9.30 per kit	Carton, inserts, assembly booklet
Assembly labor	$28.60 per kit	Standard: 1.30 hours at $22 per hour
Variable manufacturing overhead	$10.60 per kit	Finishing materials, cutting tools, machine power, shop supplies
Shipping and payment processing, website orders	$33.60 per kit	Parcel delivery to the customer’s door; card fees
Highwick line coordinator, salary and benefits	$75,000 per year	Schedules Highwick production; manages the cushion supplier
Highwick marketing	$165,000 per year	Online advertising, photography, product pages
Factory and administrative overhead, allocated	$19 per kit	Perchwick’s rate for rent, insurance, salaried shop staff (including machine operators) and the office
Assembly supervisor, salary	$68,000 per year	Supervises assembly for every Perchwick product
Design and prototype development	$88,000	Completed and paid for last year

Question 1. For each item, indicate how it should be treated when deciding whether Perchwick should continue the Highwick line. Use what the managers told you. (Choose a treatment for each item. 4 points, 1 for each.)

Instructor key: a. Variable cost, relevant; b. Fixed cost, relevant; c. Not relevant to the decision to continue the line; d. Not relevant to the decision to continue the line (4 points). Item b is the outline’s point that a salary is not avoidable merely because it is labeled with the line’s name: the founder has to say that the position ends. Item c is the central trap: an allocation quoted per kit looks variable.
Likely errors:

Item c, ’Variable cost, relevant’: reads a per-kit rate as variable cost. The most likely error, and the one the per-kit presentation invites.
Item b, ’Variable cost, relevant’ (labor is variable) or ’Not relevant’ (fixed means unavoidable). Both are answered by Ms. Lindgren’s statement that the position ends with the line.
Item d, ’Fixed cost, relevant’: treats spending that must be ’recovered’ as a cost of continuing.

Cost classification (Ch. 2); cost behavior, fixed versus variable (Ch. 6); relevant, avoidable and sunk costs (Ch. 8) · Video dependencies: V1 (coordinator position ends with the line; marketing contracts month to month; the building, insurance, office and shop management stay); V2 (the allocation is a reporting convention; design work completed last year) · Estimated time: 3.8 min, not counting video · Version-specific inputs: None (constant across versions; the items are named without amounts)

Item	Treatment
a. Wood and hardware	Bought for each kit; the amount rises and falls with kits made, and stops if the line stops.
b. Highwick line coordinator, salary and benefits	The same salary whatever the volume, so fixed. Ms. Lindgren says the position was created for the pilot and ends if the line is dropped (V1), so it is avoidable and relevant.
c. Factory and administrative overhead, allocated per kit	Stated per kit, but it is a share of rent, insurance, salaried shop staff and the office, which were there before the Highwick and stay without it (V1, V2). Dropping the line changes the allocation, not the costs.
d. Design and prototype development	Completed and paid for last year (Exhibit 1, V2). No alternative changes it: sunk.

Question 2: The variable cost of a kit

Exhibit 1 and the two videos from Question 1 stay available.

Question 2. What is the total variable cost of producing one Highwick kit and selling it through Perchwick’s website? (Select one. 1 point.)

a.$165.80
Named error: Adds the $19 allocation: C + S + allocation = $165.80.
b.$113.20
Named error: Variable manufacturing cost only; omits the $33.60 of shipping and payment processing that every website order incurs: C = $113.20.
c.$146.80
Keyed answer. C + S = wood $39.00 + scratching $7.20 + cushion $18.50 + packaging $9.30 + assembly labor $28.60 (1.30 × $22) + variable overhead $10.60 + shipping and payment processing $33.60 = $146.80.
d.$132.20
Named error: Adds the $19 factory and administrative allocation to variable manufacturing cost and omits website shipping and payment processing: $113.20 + $19 = $132.20. This mixes an allocated fixed amount into the variable-cost calculation and leaves out a variable selling cost.

Instructor key: c (1 point). C + S = wood $39.00 + scratching $7.20 + cushion $18.50 + packaging $9.30 + assembly labor $28.60 (1.30 × $22) + variable overhead $10.60 + shipping and payment processing $33.60 = $146.80. Six manufacturing items ($113.20) plus the regular-channel selling and delivery cost ($33.60).
Variable costs of producing and selling a unit (Ch. 6); product versus period costs (Ch. 2) · Video dependencies: V2 (what the assembly standard covers; overhead rises with kits made; every website order is shipped and incurs a card fee) · Estimated time: 2.9 min, not counting video · Version-specific inputs: wood, scratching, b, packaging, h, r, variable overhead, S, allocation (distractors)

Question 3: What a kit earns

Exhibit 1 and the two videos from Question 1 stay available.

Question 3. The variable cost of producing a kit and selling it through the website is $146.80 (from Question 2). What is the contribution margin on one regular kit? (Select one. 1 point.)

a.$122.20
Keyed answer. CM = P − (C + S) = $269 − $146.80 = $122.20.
b.$155.80
Named error: Price less variable manufacturing cost only, P − C = $155.80; drops the selling cost the stem includes.
c.$103.20
Named error: Also deducts the allocation: CM − $19 = $103.20. Full-cost thinking.
d.$136.80
Named error: Subtracts variable manufacturing cost and the $19 allocation from price, omitting website shipping and payment processing: $269 − $113.20 − $19 = $136.80. This does not calculate contribution margin.

Instructor key: a (1 point). CM = P − (C + S) = $269 − $146.80 = $122.20. The Highwick is a complete product, not an upgrade: unlike Blue Tower Premier, its contribution margin carries the full variable cost of making and selling a kit.
Contribution margin per unit (Ch. 7) · Video dependencies: V1, V2 · Estimated time: 1.0 min, not counting video · Version-specific inputs: P and the Question 2 key (redisplayed); allocation (distractors)

Question 4: Does the line pay for itself?

Exhibits and videos from earlier questions stay available above.

Exhibit 2 — The Highwick line: assumptions for a normal year

Assumption	Amount
Contribution margin per regular kit (from Question 3)	$122.20
Highwick line coordinator, salary and benefits, per year	$75,000
Highwick marketing, per year	$165,000
Expected regular kit sales in a normal full year after launch	5,000 kits

Regular kits are kits sold through Perchwick’s website. The normal-year forecast does not include the retailer’s proposal or sales of add-ons.

Question 4. How many regular kits per year must Perchwick sell for the Highwick line to break even? Round up to the next whole kit. (Select one. 1 point.)

a.893
Named error: Divides by the price instead of the contribution margin: $240,000 ÷ $269, rounded up.
b.2,326
Named error: Divides by the contribution margin after the allocation, $240,000 ÷ $103.20; carries full-cost thinking into CVP.
c.2,685
Named error: Adds the $88,000 design spending to the fixed costs to be covered: ($240,000 + $88,000) ÷ $122.20, rounded up. Treats a sunk cost as avoidable.
d.1,964
Keyed answer. Avoidable fixed costs ÷ CM = ($75,000 + $165,000) ÷ $122.20 = 1,963.99, rounded up to 1,964.

Instructor key: d (1 point). Avoidable fixed costs ÷ CM = ($75,000 + $165,000) ÷ $122.20 = 1,963.99, rounded up to 1,964. The line’s break-even uses only the fixed costs that exist because of the line. The purchased-cushion arrangement is the baseline; the equipment decision comes later and does not rescue an unviable line.
Break-even in units (Ch. 7); avoidable fixed costs (Ch. 8) · Video dependencies: V1 (coordinator and marketing end with the line) · Estimated time: 1.8 min, not counting video · Version-specific inputs: coordinator, marketing, CM (redisplayed in Exhibit 2); P, allocation, design spending (distractors)

Question 5: What the break-even means

Exhibit 2 stays available.

Question 5. Break-even is 1,964 kits (from Question 4), and Exhibit 2 shows expected regular sales of 5,000 kits in a normal full year after launch. Which statement best describes what these figures tell Ms. Lindgren? (Select one. 1 point.)

a.Because break-even is below expected volume, the Highwick line is sure to earn a profit once the launch period is over.
Named error: Treats a forecast as assured. Covering fixed costs at the forecast does not guarantee the forecast.
b.If the forecast, price and costs hold, sales could fall 3,036 kits short of the normal-year forecast before the line stopped covering its own fixed costs. The bigger question is whether customers keep buying at the planned price.
Keyed answer. Margin of safety N − BE = 5,000 − 1,964 = 3,036 kits, read conditionally.
c.Because the coordinator and the marketing are fixed costs, the line loses money in any year in which it sells fewer than 5,000 kits.
Named error: Confuses the forecast with break-even; fixed costs do not mean losses below plan.
d.The margin is too thin for the line to stand on its own; it is worth continuing only if Perchwick also makes its own cushions to lower the cost of each kit.
Named error: False in every version (margin of safety at least 35% of the forecast), and it makes the equipment a rescue rather than a separate improvement decision.

Instructor key: b (1 point). Margin of safety N − BE = 5,000 − 1,964 = 3,036 kits, read conditionally. The interpretation stays conditional on the forecast, price and costs. No percentage is asked for.
Margin of safety as interpretation; committed versus avoidable costs (Ch. 7, Ch. 6) · Video dependencies: V2 (what ’expected annual sales’ means) · Estimated time: 2.1 min, not counting video · Version-specific inputs: BE (redisplayed), N, N − BE inside option b

Question 6: The Brightwell Home order

Exhibits and videos from earlier questions stay available above.

Video 3 — Keisha Coleman, Sales Manager (about 1:55)

Ms. Coleman describes the Brightwell Home proposal and how it differs from a website order.

Video placeholder: not yet recorded. The transcript below has the full script; the video and the transcript contain the same information.

Read the transcript: Keisha Coleman, Sales Manager

Here is the offer I need you to look at.

Brightwell Home is a home-goods chain with stores across the Midwest. Their buyer saw the Highwick at a trade show, and she wants it in their stores.

But they want it in their own colors. An exclusive finish and cushion fabric that nobody else can buy. And they want their own packaging. A printed sleeve over our carton, their labels, and everything packed on pallets.

The quantity and the price are on the proposal. The price is well below what we charge on our website. That is normal. A retailer has to mark it up and still make money.

A few things work differently from a website order.

Brightwell sends its own trucks. They pick up full pallets at our dock, and they pay us by invoice. So there is no parcel shipping to anybody’s house, and no card fees.

The setup work only happens if we say yes. Matching their colors, making samples for them to approve, and the printing plates for the sleeve. If we turn them down, we never spend that money.

And this is one order. They have been clear that it is a single purchase for this year, not a standing contract. I would love for it to lead to more, but I cannot promise you that.

They have given us two choices for when the kits are finished. The first half of September, for their fall catalog. Or the first half of November, for the holidays.

They would prefer November. That is when people buy cat furniture as gifts. But they have told me September works if November does not.

I want this deal. It puts the Highwick in front of a lot of people who have never heard of us.

But Luis needs to tell you what those two windows look like in the finishing room. That part matters.

Instructor view: facts this video supplies

Brightwell Home wants the standard Highwick in an exclusive finish and cushion fabric, in its own sleeve and labels, on pallets.
The retailer collects full pallets at Perchwick’s dock and pays by invoice: no parcel shipping, no card fees.
Color matching, samples and printing plates are incurred only if the order is accepted.
It is a single order for this year, not a standing contract.
Finishing windows: first half of September or first half of November; the retailer prefers November but will take September.

Related questions: Q6, Q7, Q8, Q14, Q17. Setting: Perchwick’s small showroom; a Highwick sample in a gray finish and a printed retail sleeve on the table.

Video 4 — Luis Ortega, Production Manager (about 2:46)

Mr. Ortega explains what the two windows look like in the finishing room, what happened in the first quarter, and the problem with cushion deliveries.

Video placeholder: not yet recorded. The transcript below has the full script; the video and the transcript contain the same information.

Read the transcript: Luis Ortega, Production Manager

Let me start with Keisha’s two windows, because in the finishing room they are completely different.

September is easy. It is a slow month. We would have open rack time for the whole Brightwell order, and nobody else’s kits would have to wait.

November is the opposite. It is our busiest stretch of the year. Every year, holiday website orders fill the finishing room right up to the delivery deadlines, and we are planning on that again.

Every Highwick takes the same space on the racks while the finish cures, whoever it is for. So every Brightwell kit we finish in November is a website kit we cannot deliver in time. And a holiday customer who cannot get it by the date does not wait. That sale is gone.

People always ask why we cannot just build ahead. Website customers choose from several finishes when they order, just days before we build their kit, and we do not keep finished kits in stock. Brightwell will not release its final color until about two weeks before the window, and by then we are already busy with holiday orders.

We can cut and sand parts ahead, but that does not help, because the bottleneck is finishing and curing. Overtime does not fix it either. We already run long hours in November, and the finish still takes the time it takes. No outside shop can match our finishes, and we promise our holiday customers a delivery date.

Now, the first quarter. Before the public launch, we had a group of customers build test kits at home, and a lot of them got stuck. The instructions were not clear. So Nora held the public launch, the website listing and the ads, until the middle of February while we rewrote them. In January we sold only to existing customers we contacted directly.

The new instructions fixed it, and March met its original plan. One good month does not prove a whole year. But it tells me the launch delay explains most of the slow start. We will keep watching whether demand holds.

Last thing. Cushions. Our supplier keeps shipping late. When that happens, a kit can be finished, inspected and packed, except for the cushion, and it just sits. We have not lost an order over it, and nothing was waiting at the end of March. But customers notice when their ship date slips, and we cannot leave it the way it is.

We have choices. The supplier has offered to sign delivery guarantees, with penalties, at the same price. Another supplier has quoted about the same delivered price, with no setup charge, and their samples passed our quality checks. Or we make our own cushions. Daniel has the numbers on that.

Instructor view: facts this video supplies

September: open finishing capacity for the whole order; no other kits wait.
November: as every year, holiday website orders are expected to fill finishing capacity up to the delivery deadlines; each retailer kit takes the rack space of one website kit, and a holiday sale that misses its date is lost, not delayed.
The work cannot be done ahead: website customers choose among several finishes days before their kit is built, and there is no finished stock; the retailer’s final color arrives about two weeks before the window, when the room is already busy with holiday orders; prebuilt unfinished parts do not get past the finishing bottleneck. Overtime, outside finishers and moving customer dates are not options.
Test customers could not follow the instructions, so the public launch (website listing and ads) was held until the middle of February; January sales went only to existing customers.
The instructions were rewritten and March met its original plan; the launch delay explains most of the slow start, but one month does not prove a year.
Late cushions leave finished kits waiting; no orders lost and none waiting at the end of March, but the problem has to be fixed.
The current supplier offers delivery guarantees with penalties at the same price; a second supplier quotes about the same delivered price with no setup charge, and its samples passed Perchwick’s quality checks; or Perchwick makes its own.

Related questions: Q6, Q7, Q8, Q9, Q14, Q15, Q16, Q17. Setting: The finishing room; racks of curing platforms behind him.

Exhibit 3 — Brightwell Home proposal

Term	Amount	Note
Kits ordered	500 kits	Standard configuration in Brightwell Home’s exclusive finish and cushion fabric
Price Brightwell Home offers	$158 per kit	Perchwick’s website price is $269
Variable manufacturing cost per kit, including the purchased cushion	$113.20 per kit	Same materials, labor and overhead as a regular kit; only the colors differ
Brightwell sleeve, labels and pallet preparation	$6.40 per kit	Brightwell’s kits only
Shipping and payment processing, website orders	$33.60 per kit
One-time setup: color matching, sample approval, sleeve printing plates	$9,500
Finishing windows offered	Early September or early November	Finishing done in the first half of the month; Brightwell Home will take either

Question 6. If Perchwick accepts Brightwell Home’s order for the September window, by how much will Perchwick’s operating income change? (Select one. 1 point.)

a.$19,200 increase
Named error: Omits the one-time setup, which is incurred only if the order is accepted: Q × (R − C − W) = $19,200 increase.
b.$7,100 decrease
Named error: Charges the $33.60 website shipping and payment cost to Brightwell Home’s kits, which V3 says they do not incur: Q × (R − C − W − S) − K = $7,100 decrease.
c.$9,700 increase
Keyed answer. Q × (R − C − W) − K = 500 × ($158 − $113.20 − $6.40) − $9,500 = 500 × $38.40 − $9,500 = $9,700 increase. No shipping or card fees: Brightwell Home collects pallets and pays by invoice (V3). Unused capacity, so nothing is displaced (V4).
d.$200 increase
Named error: Charges the $19 allocation to each kit: Q × (R − C − W − allocation) − K = $200 increase.

Instructor key: c (1 point). Q × (R − C − W) − K = 500 × ($158 − $113.20 − $6.40) − $9,500 = 500 × $38.40 − $9,500 = $9,700 increase. No shipping or card fees: Brightwell Home collects pallets and pays by invoice (V3). Unused capacity, so nothing is displaced (V4). Same quantity, price and order costs as Question 7: only capacity changes between the windows.
Special order with unused capacity; relevant costs (Ch. 8) · Video dependencies: V3 (pickup at the dock and payment by invoice; setup only if accepted; a single order); V4 (September has open finishing capacity) · Estimated time: 3.2 min, not counting video · Version-specific inputs: Q, R, C (redisplayed), W, K, S and allocation (distractors)

Question 7: The Brightwell Home order, continued

Exhibit 3 and the two videos from Question 6 stay available.

Question 7. If Brightwell Home’s order is instead finished in the November window, what opportunity cost must be added to the analysis? (Select one. 1 point.)

a.$61,100
Keyed answer. Each Brightwell Home kit displaces one website kit (V4), whose contribution margin is lost: Q × CM = 500 × $122.20 = $61,100. November net effect $9,700 − $61,100 = ($51,400).
b.$134,500
Named error: Lost revenue instead of lost contribution margin: Q × P = $134,500.
c.$0
Named error: Ignores the capacity constraint.
d.$77,900
Named error: Lost margin before the shipping and payment cost the displaced website kits would have incurred: Q × (P − C) = $77,900.

Instructor key: a (1 point). Each Brightwell Home kit displaces one website kit (V4), whose contribution margin is lost: Q × CM = 500 × $122.20 = $61,100. November net effect $9,700 − $61,100 = ($51,400). The displaced sale would have earned P − C − S, so the full contribution margin is the opportunity cost.
Opportunity cost; special order at full capacity (Ch. 8) · Video dependencies: V4 (November expected to be full with holiday website orders; one-for-one displacement; a missed holiday sale is lost; finishes are chosen too late to work ahead; overtime, outside finishers and moving customer dates are not options) · Estimated time: 1.5 min, not counting video · Version-specific inputs: Q, CM (on Exhibit 2); P and C (distractors; on Exhibit 3)

Question 8: The Brightwell Home order, continued

Exhibit 3 and the two videos from Question 6 stay available.

Question 8. What should Perchwick do about Brightwell Home’s proposal? (Select one. 1 point.)

a.Accept the order for November. The finishing room is fully staffed then anyway, so the order uses capacity Perchwick is already paying for.
Named error: Treats full capacity as free capacity and ignores the website kits the order displaces.
b.Decline the order in both windows. The price is far below the website price, so the order would reduce operating income.
Named error: Compares the offer with the regular price instead of with the costs it changes.
c.Accept the order in either window. The price covers the variable cost of the kits in both.
Named error: Covering variable costs alone is not enough. The order must also cover its $9,500 setup cost and, in November, the contribution margin of the displaced website sales. September’s order covers its incremental costs; November’s does not cover those costs plus the opportunity cost.
d.Offer Brightwell Home the September window only, and decline the November window.
Keyed answer. In September the order adds $9,700 of operating income; in November it reduces operating income by $51,400 once the opportunity cost is counted.

Instructor key: d (1 point). In September the order adds $9,700 of operating income; in November it reduces operating income by $51,400 once the opportunity cost is counted. The retailer will take either window, so offering September only is a real alternative, not a refusal.
Special-order decision with and without a capacity constraint (Ch. 8) · Video dependencies: V3 (the retailer accepts either window), V4 · Estimated time: 1.2 min, not counting video · Version-specific inputs: None (the conclusion is the same in every version by construction)

Question 9: The first quarter

Exhibits and videos from earlier questions stay available above.

Video 5 — Hannah Ellis, Assembly Supervisor (about 1:41)

Ms. Ellis explains how she staffed Highwick assembly during the first quarter.

Video placeholder: not yet recorded. The transcript below has the full script; the video and the transcript contain the same information.

Read the transcript: Hannah Ellis, Assembly Supervisor

Assembly on the Highwick is not like anything else we build. The connectors have to line up perfectly, because the customer is the one putting it together, at home, with nobody to help. If a hole is off, that is our mistake, sitting in their living room.

The plan assumed I would staff Highwick assembly with new hires at our starting wage.

That is not what I did.

The Highwick was brand new, the tolerances are tight, and these were the first kits our customers would ever see. I was not going to take chances. So I put my most experienced builders on the Highwick. People who have been here five or six years. They earn more per hour than a new hire, and on busy days a few of them worked overtime.

I do not set anybody’s pay. That is the company’s pay scale. But I decide who works on which line, and putting my senior people on the Highwick was my call. I would make it again.

Here is the other side of it. They are fast. They know where every piece goes, and they get it right the first time. We did not skip anything to save time. Every kit still got the full test-fit and the inspection checklist, and we reworked fewer kits than the plan expected.

When we added up the quarter, we had used fewer hours than the standard allows for the kits we completed.

So when you look at my labor numbers, do not stop at one of them. Look at what we paid per hour. Look at how many hours we used. And think about why those two things happened together.

Instructor view: facts this video supplies

The plan assumed new hires at the starting wage; she assigned experienced builders instead, with some overtime.
The reason: a new product, tight tolerances, and the first kits customers would see.
She does not set pay rates (the company’s pay scale does) but she decides who works on which line; the staffing was her decision.
Experienced builders were faster; every kit still got the full test-fit and inspection, and rework was below plan.
Hours used were below the standard allowed for the kits completed.

Related questions: Q10, Q11, Q15. Setting: The assembly benches; a half-built hideaway in front of her.

Exhibit 4 — The Highwick: first-quarter performance report (January–March)

Item	Static budget	Actual
Kits sold: January	360	140
Kits sold: February	400	270
Kits sold: March	440	450
Kits sold: first quarter	1,200	860
Kits completed (good output)	1,200	860
Selling price and nonlabor variable costs per kit	As budgeted	On budget
Contribution margin per kit (budgeted)	$122.20
Highwick contribution margin	$146,640
Assembly labor standard	1.30 hours per kit at $22 per hour
Assembly hours worked		1,050
Average assembly wage paid		$24.60 per hour
Assembly labor cost		$25,830
Kits test-fitted and inspected	Every kit	Every kit
Kits reworked after inspection	2%	1%

Kits completed equal kits sold: work in process and finished kits did not change during the quarter. No kits were waiting for cushions at the beginning or end of the quarter.

Question 9. Highwick contribution margin for the quarter came in well below the static budget of $146,640. Which statement best explains the shortfall and what it means for expected regular sales in a normal full year after launch? (Select one. 1 point.)

a.Revenue fell short by 340 kits × $269 = $91,460. A gap that size shows that customers want the Highwick far less than planned, so the normal-year forecast should be cut by more than a quarter.
Named error: Measures the shortfall in revenue and draws a demand conclusion the launch evidence contradicts.
b.About $41,548 of contribution margin at budgeted rates was lost to volume (340 kits × $122.20). The launch was held until mid-February for new instructions and March met plan, so the shortfall alone does not justify cutting the normal-year forecast, though it should be watched.
Keyed answer. (B − A) × CM = (1,200 − 860) × $122.20 = $41,548 U, with the launch evidence read cautiously.
c.Contribution margin fell short by 340 kits × $155.80 = $52,972. This shows customers are resisting the price, so Perchwick should lower the website price before it relies on the normal-year forecast for planning again.
Named error: Uses the margin before selling cost, and draws an unsupported pricing conclusion.
d.The shortfall came mainly from assembly labor, which cost more per hour than the standard allowed. The problem is cost control in assembly, not volume, and the normal-year forecast can stay as it is.
Named error: The net labor variance ($1,234 U) is a small fraction of the volume effect ($41,548 U) in every version.

Instructor key: b (1 point). (B − A) × CM = (1,200 − 860) × $122.20 = $41,548 U, with the launch evidence read cautiously. Static-budget CM $146,640; CM at budgeted rates for actual volume $105,092; difference $41,548 U. The launch evidence supports keeping the normal-year forecast as a planning assumption. It does not show that the missed winter sales will be recovered this year.
Static versus flexible budget; volume effect at budgeted contribution margin; using results to revisit a forecast (Ch. 9, Ch. 10) · Video dependencies: V4 (launch held until mid-February for rewritten instructions; January sold only to existing customers; March met its original plan; one month does not prove a year); V2 (normal-year convention) · Estimated time: 3.5 min, not counting video · Version-specific inputs: B, A, CM, P, C

Question 10: The first quarter, continued

Exhibit 4 and the video from Question 9 stay available.

Question 10. What is the assembly labor efficiency variance for the first quarter? (Select one. 1 point.)

a.$11,220 favorable
Named error: Standard hours from budgeted kits (1,200 × 1.30 = 1,560) instead of kits completed; counts the volume shortfall as efficiency.
b.$1,496 unfavorable
Named error: Correct amount, direction reversed: fewer hours than allowed is favorable.
c.$2,730 unfavorable
Named error: The labor rate variance, (AR − r) × AH = ($24.60 − $22) × 1,050, mistaken for the efficiency variance.
d.$1,496 favorable
Keyed answer. Standard hours allowed = A × h = 860 × 1.30 = 1,118. (AH − SHA) × r = (1,050 − 1,118) × $22 = $1,496 F.

Instructor key: d (1 point). Standard hours allowed = A × h = 860 × 1.30 = 1,118. (AH − SHA) × r = (1,050 − 1,118) × $22 = $1,496 F. Good output equals kits sold (Exhibit 4 note), so the kits in the volume analysis are the output the labor standard is applied to.
Labor efficiency variance; standard hours allowed for actual output (Ch. 11) · Video dependencies: V5 (fewer hours than the standard allows for the kits completed) · Estimated time: 1.6 min, not counting video · Version-specific inputs: A, h, AH, r; B and AR (distractors)

Question 11: The first quarter, continued

Exhibit 4 and the video from Question 9 stay available.

Question 11. Assembly labor was paid an average of $24.60 per hour against a $22 standard, and used fewer hours than the standard allows for the kits completed. Taken together, what do the assembly labor results most likely indicate? (Select one. 1 point.)

a.The time standard is too loose. It should be tightened so that the favorable efficiency variance disappears and future results show the true cost of assembly.
Named error: Credits a loose standard for what experienced builders achieved, with inspection unchanged.
b.The rate variance should be left out of the assembly supervisor’s evaluation, because the company’s pay scale, not the supervisor, sets the wage each builder earns per hour.
Named error: She does not set pay, but she chose who worked the line (V5), so the rate effect follows from her decision.
c.The supervisor’s decision to assign experienced builders raised the average wage and cut the hours per kit without skipping inspection. She is responsible for both variances, which should be judged together.
Keyed answer. One staffing decision, two effects: rate $2,730 U, efficiency $1,496 F, net $1,234 U in this data set. The key does not claim the decision saved money.
d.The supervisor should move new hires at the standard wage onto Highwick assembly, which would eliminate the unfavorable rate variance and bring labor cost back to plan.
Named error: Looks at one variance and ignores the hours and the quality reasons she gave.

Instructor key: c (1 point). One staffing decision, two effects: rate $2,730 U, efficiency $1,496 F, net $1,234 U in this data set. The key does not claim the decision saved money. Either net direction is consistent with the key, so the question holds in every version; across the simulated versions the net labor variance runs from favorable to unfavorable.
Interpreting rate and efficiency variances together; responsibility accounting (Ch. 10, Ch. 11) · Video dependencies: V5 (she assigns builders; she does not set pay; inspection and test-fit unchanged; less rework) · Estimated time: 1.7 min, not counting video · Version-specific inputs: AR and r in the stem

Question 12: The cushions

Exhibits and videos from earlier questions stay available above.

Exhibit 5 — Cushion equipment proposal

Item	Amount
Cutting table, foam saw, three industrial sewing machines and a cushion bagger, installed, including operator training	$104,000
Useful life / salvage value	5 years / none
Cushions needed per year (one per kit; expected regular kit sales in a normal full year after launch)	5,000
Purchased cushion, delivered (current cost, included in the variable manufacturing cost)	$18.50 per cushion
In-house cost per cushion: fabric, foam and zipper	$6.80
In-house cost per cushion: sewing labor (0.20 hour at $18 per hour)	$3.60
In-house cost per cushion: variable overhead	$0.80
Added fixed cash operating costs per year: part-time sewing lead, maintenance contract	$12,500
Required rate of return on equipment purchases	10%
Present value of an annuity of $1 for 5 years	8%: 3.993 · 10%: 3.791 · 12%: 3.605
Present value of $1 received at the end of 5 years	8%: 0.681 · 10%: 0.621 · 12%: 0.567

Assume the cash savings occur at the end of each year. Ignore income taxes; there is no change in working capital. The equipment would go in warehouse space that has no other planned use. With the added sewing staff, it can make a full year’s cushions to Perchwick’s current quality standard. It makes cushions only and does not change finishing capacity.

Question 12. If Perchwick buys the equipment and makes its own cushions, what are the annual net cash savings? (Select one. 1 point.)

a.$24,000
Keyed answer. In-house variable cost m = $6.80 + $3.60 + $0.80 = $11.20. N × (b − m) − O = 5,000 × ($18.50 − $11.20) − $12,500 = $24,000.
b.$80,000
Named error: Treats the whole purchase price as saved, ignoring the in-house variable costs: N × b − O = $80,000.
c.$12,612
Named error: Uses four times the first-quarter actual kits (4 × 860) instead of the normal-year forecast retained as a planning assumption in Question 9.
d.$3,200
Named error: Deducts straight-line depreciation ($104,000 ÷ 5 = $20,800), which is not a cash flow.

Instructor key: a (1 point). In-house variable cost m = $6.80 + $3.60 + $0.80 = $11.20. N × (b − m) − O = 5,000 × ($18.50 − $11.20) − $12,500 = $24,000. Savings are documented cost differences only: no revenue is assumed from better deliveries. The tower assembly costs, line fixed costs and the equipment outlay are not part of the annual saving.
Relevant cash flows; make or buy (Ch. 8, Ch. 12) · Video dependencies: V2 (normal full year; required return); V4 (the problem must be fixed; alternatives at the same price) · Estimated time: 3.7 min, not counting video · Version-specific inputs: N, b, in-house materials, sewing hours and rate, variable overhead, O; A and I (distractors)

Question 13: The cushions, continued

Exhibit 5 stays available.

Question 13. Annual net cash savings from making cushions are $24,000 (from Question 12). What is the net present value of the cushion equipment? Use the present-value factors in Exhibit 5. (Select one. 1 point.)

a.$16,000
Named error: Ignores the time value of money: savings × 5 − I = $16,000.
b.($13,016)
Keyed answer. $24,000 × 3.791 − $104,000 = $90,984 − $104,000 = ($13,016).
c.($89,096)
Named error: Uses the single-sum factor (0.621) instead of the annuity factor: ($89,096).
d.$90,984
Named error: Present value of the savings without subtracting the investment: $90,984.

Instructor key: b (1 point). $24,000 × 3.791 − $104,000 = $90,984 − $104,000 = ($13,016). Payback here is 4.33 years, inside the five-year life, while NPV is negative; instructors who want to discuss payback can use it.
Net present value with an annuity (Ch. 12) · Video dependencies: V2 (the required return is set by Ms. Lindgren and Mr. Reyes and shown on the proposal) · Estimated time: 1.3 min, not counting video · Version-specific inputs: Savings (redisplayed), AF and single-sum factor at r, I

Question 14: Your recommendation

Exhibits and videos from earlier questions stay available above.

Correct answers so far

These are the correct figures for the earlier questions, from your data set’s answer key, shown so that the remaining questions start from the right numbers whether or not you answered them correctly.

Figure	Correct figure
Contribution margin per regular kit	$122.20
Break-even volume	1,964 kits
Expected regular kit sales, normal full year after launch	5,000 kits
Brightwell Home order, September window: change in operating income	$9,700 increase
Brightwell Home order, November window: opportunity cost	$61,100
Brightwell Home order, November window: net effect	($51,400)
First-quarter volume shortfall in contribution margin (budgeted rates)	$41,548 U
Assembly wage rate, actual	$24.60 per hour
Assembly wage rate, standard	$22 per hour
Assembly labor efficiency variance	$1,496 F
Annual net cash savings from making cushions	$24,000
Cushion equipment NPV at 10%	($13,016)

Question 14. Based on everything you have analyzed and what Perchwick’s managers told you, which recommendation to Ms. Lindgren is best supported? (Select one. 1 point.)

a.Discontinue the Highwick line. The first-quarter results show that it cannot cover its costs, and the cushion problem would only add to them.
Named error: Reads a quarter below budget as failure, against the break-even analysis and the launch explanation.
b.Continue the Highwick line, accept Brightwell Home’s order for the September window only, and buy the cushion equipment to make cushions in-house.
Named error: Buys equipment whose NPV of ($13,016) is negative at the required return; correct only in versions where NPV is positive.
c.Pause the Highwick line until the first-quarter shortfall is better understood, and postpone both the Brightwell Home and the cushion decisions until then.
Named error: Treats an explained shortfall as unexplained and leaves the cushion problem in place.
d.Continue the Highwick line and accept Brightwell Home’s order for the September window only. Do not buy the equipment; hold the current supplier to delivery guarantees or switch to the second supplier.
Keyed answer. Correct here: the equipment NPV of ($13,016) is negative, so Perchwick does not buy it, and the delivery problem is still fixed through the supplier.
e.Continue the Highwick line, accept Brightwell Home’s order for the September window only, and keep buying cushions from the current supplier on the present terms.
Named error: Wrong in both branches: a negative NPV rejects the equipment, not the need to fix deliveries.

Instructor key: d in this data set (equipment NPV negative). In versions where NPV is positive, the key is b (1 point). Key b when NPV is positive, d when negative. Option e is wrong in every version. Every option that mentions Brightwell Home agrees with Question 8.
Integrated recommendation: CVP, special order, first-quarter reading, NPV, and an operating problem that must be addressed in either branch · Video dependencies: V1, V2, V4 · Estimated time: 3.1 min, not counting video · Version-specific inputs: NPV sign (branch)

Question 15: Your recommendation, continued

The ’Correct answers so far’ table stays available through Question 17.

Question 15. Which TWO pieces of evidence most strongly support continuing the Highwick line? (Select exactly two. 1 point; both selections must be correct.)

a.Perchwick spent $88,000 on Highwick design and prototypes before the pilot began.
Named error: True, but the spending has already occurred and does not differ between continuing and discontinuing the line. It therefore does not support the continuation decision.
b.Brightwell Home’s order adds operating income if it is finished in the September window.
Named error: True, but a profitable one-time order does not establish that recurring sales will cover the line’s annual avoidable fixed costs.
c.Expected regular sales in a normal full year are well above the break-even volume.
Keyed answer. The quantitative case for the line.
d.The assembly labor efficiency variance was favorable in the first quarter.
Named error: True, but it reflects one staffing decision and is small beside the line’s contribution margin.
e.The first-quarter shortfall followed a launch delay caused by unclear instructions, which have been rewritten, and March sales met the original plan.
Keyed answer. The qualitative evidence: it supports keeping the normal-year forecast as a planning assumption.
f.The website price covers the factory and administrative overhead allocated to each kit, as well as the variable costs.
Named error: True in every version, but the allocated costs stay whether or not the line continues.

Instructor key: c and e (1 point). The quantitative case for the line. The qualitative evidence: it supports keeping the normal-year forecast as a planning assumption. Every distractor is a true statement, so the question cannot be answered by eliminating false ones.
Evaluating evidence: quantitative (margin of safety) and qualitative (the launch explanation) · Video dependencies: V4 · Estimated time: 1.8 min, not counting video · Version-specific inputs: Design spending in option a (version-specific amount)

Select exactly two (0 selected).

Question 16: Your recommendation, continued

Exhibits and videos from earlier questions stay available above.

Question 16. Beyond the figures you have calculated, which risk deserves the most weight in Ms. Lindgren’s decision? (Select one. 1 point.)

a.Customers may not keep buying at the planned price. Coordinator and marketing spending won’t fall automatically with sales while the line continues, and cushion equipment would need an upfront cash investment.
Keyed answer. The main uncertainty is sustained demand at the planned price. Fixed line spending does not adjust automatically with sales volume, although the coordinator and marketing costs are avoidable if management changes its commitments or discontinues the line. An equipment purchase would commit cash at the outset. The margin of safety shows how far sales can fall before the line’s fixed costs are no longer covered; it does not measure the probability of that decline.
b.The unfavorable labor rate variance will keep growing if experienced builders stay on Highwick assembly, raising the cost of every kit above the standard.
Named error: The rate variance alone does not establish a growing cost problem. The rate, efficiency, output and quality evidence should be considered together.
c.Dropping the Highwick would leave the factory and administrative overhead it now absorbs to be spread over Perchwick’s other products, making them look less profitable.
Named error: An allocation shifts; no cost changes. Not a risk of continuing.
d.The design and prototype spending will not be recovered unless the Highwick keeps selling for several more years, so stopping now would waste that investment.
Named error: Sunk cost.

Instructor key: a (1 point). The main uncertainty is sustained demand at the planned price. Fixed line spending does not adjust automatically with sales volume, although the coordinator and marketing costs are avoidable if management changes its commitments or discontinues the line. An equipment purchase would commit cash at the outset. The margin of safety shows how far sales can fall before the line’s fixed costs are no longer covered; it does not measure the probability of that decline. No other unaddressed risk of equal weight appears among the options.
Qualitative factors and risk; fixed line spending that is avoidable only by changing the line; an upfront investment (Ch. 6, Ch. 7, Ch. 12) · Video dependencies: V1 (coordinator and marketing are fixed while the line runs and end if it is dropped); V4 (one good month does not prove a year) · Estimated time: 1.6 min, not counting video · Version-specific inputs: None

Question 17: Your recommendation, continued

Exhibits and videos from earlier questions stay available above.

Question 17. Why can Perchwick accept Brightwell Home’s order for September, decline the same order for November, and still conclude that the Highwick line is worth continuing? (Select one. 1 point.)

a.Special orders are judged on total cost and product lines on variable cost, so the same order can pass one test and fail the other, while the line passes both.
Named error: Reverses the logic.
b.Retail orders should be accepted whenever there is unused capacity and declined whenever there is none, whatever the price, while product lines are judged on their sales growth alone.
Named error: Ignores price and the costs it must cover.
c.Brightwell Home’s price is below the full cost of a kit, so the order loses money in any month; the line is worth keeping because it absorbs allocated overhead.
Named error: Wrong on both counts: the September order adds income, and allocations do not make a line worthwhile.
d.A one-time order with unused capacity must cover only its incremental costs. With full capacity, it must also cover the contribution margin of the regular sales it displaces. The ongoing line must cover its own fixed costs over a year.
Keyed answer. Three decisions, three relevant-cost comparisons; the regular kit’s contribution margin connects them.

Instructor key: d (1 point). Three decisions, three relevant-cost comparisons; the regular kit’s contribution margin connects them. The case’s connecting idea, stated as the outline gives it.
Integration: one-time versus recurring decisions; capacity; opportunity cost (Ch. 8, Ch. 7) · Video dependencies: V1, V3, V4 · Estimated time: 1.8 min, not counting video · Version-specific inputs: None

Running total