Perchwick Furniture: A Comprehensive Managerial Accounting 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 16 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.
Prototype for author review, not a MyLab deployment. © 2027 Wendy M. Tietz. All rights reserved.
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 Managerial Accounting 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.
The Highwick, a freestanding modular cat tower, is Perchwick’s most ambitious product yet. 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 delaying kits that are otherwise ready to ship.
You are an analyst working with Perchwick’s controller, Daniel Reyes. Nora 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 nineteen questions in order; each question is submitted before the next opens. Watch each video when it appears. Managers explain facts you will need that are not in the exhibits, and the questions refer to what they said without repeating it. 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 7. Later questions redisplay any earlier figures you need.
Faculty note: Chapters covered by this case
This case is a capstone for Chapters 1, 2, 3, 6, 7, 8, 9, 10, 11, and 12. Chapters 1 and 2 are the foundation for every question: students use the managerial accounting cost terms throughout, so those two chapters are not listed separately below, except Chapter 2 for Question 1, where classifying costs is the task itself. Each of Chapters 3, 6, 7, 8, 10, 11, and 12 is the main chapter for at least one question. Chapter 9 (budgeting) supports Question 10 without being its main chapter. Chapters 4 and 5 are not part of this case. The emphasis falls on Chapter 7 (cost-volume-profit analysis) and Chapter 8 (relevant costs for short-term decisions), each the main chapter for five questions. In the list, each question’s main chapter comes first, and any other chapters it draws on follow in parentheses.
- Question 1: Chapter 2 (also 6, 8)
- Question 2: Chapter 6
- Question 3: Chapter 7
- Question 4: Chapter 7 (also 8)
- Question 5: Chapter 7 (also 8)
- Question 6: Chapter 3
- Question 7: Chapter 8
- Question 8: Chapter 8
- Question 9: Chapter 8
- Question 10: Chapter 10 (also 9)
- Question 11: Chapter 11
- Question 12: Chapter 11 (also 10)
- Question 13: Chapter 3
- Question 14: Chapter 8 (also 12)
- Question 15: Chapter 12
- Question 16: Chapter 12 (also 7, 8)
- Question 17: Chapter 7 (also 8)
- Question 18: Chapter 7 (also 6, 8, 12)
- Question 19: Chapter 8 (also 7)
Question 1: Classify the costs in the Highwick cost report. Watch the two videos, then answer the question below.
Nora explains why Perchwick built the Highwick, the decision she has to make, and what would change if the line were dropped.
Read the transcript (demo only): Nora Lindgren, Founder and General Manager
Hi, I am Nora Lindgren, the general manager of Perchwick Furniture. I am responsible for the whole business, including which products we keep making.
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, for everything we build.
Look at all of it. Then tell me what you would do.
- 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; Nora 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.
- Hannah runs assembly for everything Perchwick builds.
Related questions: Q1 (b, c), Q4, Q5, Q16, Q18, Q19. Setting: Her office off the shop floor; a finished Highwick behind her, a cat asleep in the hideaway.
Daniel walks through the Highwick cost report, explains how Perchwick costs a job, and says how some of the later figures should be read.
Read the transcript (demo only): Daniel Reyes, Controller
Hi, I am Daniel Reyes, the controller. I am responsible for Perchwick’s accounting: our books, our budgets, and the cost reports you are about to see.
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.
That per-kit spread is only for this report. In our books, every order or production batch is a job, and a job carries only manufacturing overhead, never office costs.
At the start of each year, we set an overhead rate from the budget. Then we charge every job for the machine hours it uses, because most of our overhead comes from the cutting and finishing machines.
A few 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.
Our website price for the Highwick has not changed since the pilot began, and that includes this month.
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. We also judge every equipment purchase over five years of use, whatever life the maker quotes.
So before you use a number, ask yourself what it actually changes, for the decision in front of you.
- 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.
- The website price has not changed since the pilot began, including this month.
- A job carries only manufacturing overhead, never office costs. The overhead rate is set from the budget at the start of each year, and every job is charged for the machine hours it uses.
- Equipment is held to a required return set by Nora and Daniel, shown on the proposal, and every equipment purchase is judged over five years of use, whatever life the maker quotes.
Related questions: Q1 (c, d), Q2, Q3, Q5, Q6, Q10, Q13, Q15, Q17. Setting: A small conference room; the cost report on the table, a disassembled Highwick platform beside it.
| Item | Amount | Note |
|---|---|---|
| Regular selling price (Perchwick website) | $269 per kit | One kit is one complete tower in the standard configuration |
| Direct materials: wood and hardware | $39.00 per kit | Birch plywood, maple posts, steel connectors |
| Direct materials: scratching panels and sisal | $7.20 per kit | |
| Direct materials: cushion, purchased | $18.50 per kit | Supplier’s price, delivered to Perchwick |
| Direct materials: packaging and printed instructions | $9.30 per kit | Carton, inserts, assembly booklet |
| Direct labor: assembly | $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 | $33.60 per kit | |
| Line coordinator, salary and benefits | $75,000 per year | |
| Marketing | $165,000 per year | Online advertising, photography, product pages |
| Factory and administrative overhead | $19 per kit | |
| Assembly supervisor, salary | $68,000 per year | |
| Design and prototype development | $88,000 |
Question 1. For each item, indicate how it should be treated when deciding whether Perchwick should continue the Highwick line. Use Exhibit 1 and what Nora and Daniel told you. (Choose a treatment for each item. 2 points, ½ point for each.)
Likely errors:
- Item c, ’Variable cost, relevant’: takes a rate quoted per kit for a variable cost. Daniel said it spreads fixed shop and office costs over every product.
- Item b, ’Not relevant’: treats a fixed salary as unavoidable, but Nora said the position ends if the line is dropped. ’Variable cost, relevant’ treats a salary as varying with kits.
- Item d, ’Fixed cost, relevant’: treats completed spending as a cost of continuing. Daniel said it was paid for last year.
| Item | Treatment |
|---|---|
| a. Wood and hardware | Bought for each kit, so the cost rises and falls with kits made and stops if the line stops. |
| b. Line coordinator, salary and benefits | The same salary whatever the volume, so fixed. Nora said she hired the coordinator for the pilot and the position ends if she drops the Highwick, so it is avoidable and relevant. |
| c. Factory and administrative overhead, per kit | Quoted per kit, but Daniel said it spreads the shop’s rent, insurance, salaried staff, and office over every product, and Nora said those costs stay with or without the Highwick. Dropping the line changes the spread, not the costs. |
| d. Design and prototype development | Daniel said the design and prototype work is done and was paid for last year. No alternative changes it: sunk. |
Question 2: Calculate the variable cost of a website kit from the cost report.
Question 2. Using Exhibit 1 and what Daniel told you about the cost report, what is the total variable cost of producing one Highwick kit and selling it through Perchwick’s website? (Select one. 1 point.)
- Misconception: Treating spread fixed overhead as a variable cost. Adds the $19 factory and administrative overhead. Daniel said it spreads the shop’s rent, insurance, salaried staff, and office over every product; it does not rise with kits. C + S + overhead = $165.80.
- Misconception: Leaving out the variable selling cost of a website order. Leaves out the $33.60 of shipping and payment processing, which Daniel said every website order incurs: C = $113.20.
- Keyed answer. C + S = wood $39.00 + scratching $7.20 + cushion $18.50 + packaging $9.30 + direct labor $28.60 (1.30 × $22) + variable overhead $10.60 + shipping and payment processing $33.60 = $146.80. Daniel: the overhead per kit spreads fixed costs; every website kit is shipped and pays a card fee.
- Misconception: Counting spread fixed overhead and leaving out the variable selling cost. Adds the $19 overhead and leaves out shipping and payment processing: $113.20 + $19 = $132.20. Daniel said the overhead is spread fixed cost and every website kit is shipped and pays a card fee.
Question 3: Calculate the contribution margin of a website kit from its price and variable cost.
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.)
- Keyed answer. CM = P − (C + S) = $269 − $146.80 = $122.20.
- Misconception: Leaving out the variable selling cost. Price less variable manufacturing cost only, P − C = $155.80; drops the selling cost the stem includes.
- Misconception: Charging spread fixed overhead to each kit. Also deducts the $19 overhead: CM − $19 = $103.20. Full-cost thinking.
- Misconception: Computing a full-cost margin instead of contribution margin. Subtracts variable manufacturing cost and the $19 overhead from price, omitting website shipping and payment processing: $269 − $113.20 − $19 = $136.80. This does not calculate contribution margin.
Question 4: Calculate the Highwick line’s break-even volume from the annual assumptions.
| Assumption | Amount |
|---|---|
| Contribution margin per regular kit (from Question 3) | $122.20 |
| Line coordinator, salary and benefits, per year | $75,000 |
| Marketing, per year | $165,000 |
| Assembly supervisor, salary, per year | $68,000 |
| Expected regular kit sales per year | 5,000 kits |
- Regular kits are kits sold through Perchwick’s website. The forecast does not include the retailer’s proposal or sales of add-ons.
Question 4. Using Exhibit 2 and what Nora told you about what would change if the Highwick ended, 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.)
- Misconception: Counting a shared salary that stays as avoidable. Also counts the $68,000 assembly supervisor’s salary. Nora said Hannah runs assembly for everything Perchwick builds and that the people who run the whole shop stay with or without the Highwick, so that salary stays.
- Misconception: Treating cancelable marketing as committed and a shared salary as avoidable. Leaves out the marketing, which Nora said runs month to month and can be stopped, and counts the supervisor’s salary, which stays.
- Misconception: Treating cancelable marketing as committed. Leaves out the marketing, which Nora said she can stop, so it ends with the line.
- Keyed answer. (Coordinator + marketing) ÷ CM = ($75,000 + $165,000) ÷ $122.20 = 1,963.99, rounded up to 1,964. Nora: the coordinator’s position ends and the marketing contracts can be stopped; Hannah runs assembly for everything Perchwick builds, so her salary stays.
Question 5: Interpret the break-even volume against the expected sales in the annual assumptions.
Question 5. Break-even is 1,964 kits (from Question 4), and Exhibit 2 shows expected regular sales of 5,000 kits a year. Using what Nora and Daniel told you, which statement best describes what these figures tell Nora? (Select one. 1 point.)
- Misconception: Reading the forecast as this year’s sales with the winter’s shortfall made up. Daniel said expected annual sales mean a normal full year after the launch, not a promise to make up the winter’s missed sales.
- Keyed answer. Margin of safety N − BE = 5,000 − 1,964 = 3,036 kits of a normal year (Daniel), against fixed costs that end with the line (Nora), read conditionally.
- Misconception: Treating costs that end with the line as committed for the pilot year. Nora said the coordinator’s position ends and the marketing contracts can be stopped if the line is dropped.
- Misconception: Both: a catch-up forecast and avoidable costs treated as committed. Both premises are wrong: Daniel said the forecast is a normal year, and Nora said these costs end with the line.
Question 6: Calculate the Brightwell Home order’s job cost from the exhibits.
| 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 per kit as a regular kit |
| Brightwell sleeve, labels, and pallet materials | $6.40 per kit | Brightwell’s kits only |
| Shipping and payment processing | $33.60 per kit | |
| One-time setup: color matching, sample approval, sleeve printing plates | $9,500 | |
| Finishing time periods to evaluate | Early September and early November | Finishing done in the first half of the month |
| Item | Budget for the year | Actual, first quarter |
|---|---|---|
| Manufacturing overhead | $540,000 | $131,400 |
| Machine hours | 9,000 | 2,050 |
| Direct labor hours | 24,000 | 5,600 |
- Each Highwick kit, regular or Brightwell Home, takes 0.40 machine hours and 1.30 direct labor hours. The amounts cover all of Perchwick’s products, not only the Highwick.
Question 6. Perchwick would record Brightwell Home’s order as a job. Using Exhibits 1, 3, and 4 and what Daniel told you about how Perchwick costs a job, what total cost would the job cost record show for the order? (Select one. 1 point.)
- Misconception: Thinking overhead reaches a job only at year-end. Daniel said Perchwick sets its overhead rate from the budget at the start of the year, so each job is charged overhead as the work is done, not at year-end.
- Misconception: Allocating overhead on direct labor hours instead of machine hours. Allocates overhead on direct labor hours: $540,000 ÷ 24,000 direct labor hours = $22.50 per hour, times 650 hours. Daniel said Perchwick charges every job for the machine hours it uses.
- Keyed answer. Direct materials 500 × ($39.00 + $7.20 + $18.50 + $9.30 + $6.40) = $40,200; direct labor 500 × $28.60 = $14,300; overhead $540,000 ÷ 9,000 machine hours = $60 per machine hour, times 200 machine hours = $12,000; setup $9,500. Total $76,000. Daniel: a job carries only manufacturing overhead, charged at a rate set from the year’s budget on the machine hours it uses. The variable overhead in Exhibit 1 is not added; the allocated overhead includes it.
- Misconception: Confusing a job’s cost with the costs relevant to accepting it. Confuses costing a job with deciding whether to accept it. Daniel said every job is charged manufacturing overhead at the year’s rate, fixed overhead included; whether the order is worth taking is a separate question.
Question 7: Calculate how the Brightwell Home proposal changes operating income in September. Watch the two videos, then answer the question below.
Keisha describes the Brightwell Home proposal and how it differs from a website order.
Read the transcript (demo only): Keisha Coleman, Sales Manager
Hi, I am Keisha Coleman, the sales manager. I am responsible for selling everything we make, on our website and to stores.
Here is the offer I need you to look at.
Brightwell Home is a home-goods chain with stores across the Midwest. Brightwell Home’s 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 to pick up full pallets at our dock, and Brightwell pays 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 time periods look like in the finishing room. That part matters.
- Brightwell Home wants the standard Highwick in an exclusive finish and cushion fabric, in its own sleeve and labels, and 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 time periods: first half of September or first half of November; the retailer prefers November but will take September.
Related questions: Q7, Q8, Q9, Q16, Q17, Q19. Setting: Perchwick’s small showroom; a Highwick sample in a gray finish and a printed retail sleeve on the table.
Luis explains what the two time periods look like in the finishing room, what happened in the first quarter, and the problem with cushion deliveries.
Read the transcript (demo only): Luis Ortega, Production Manager
Hi, I am Luis Ortega, the production manager. I am responsible for everything we make in the shop, from cutting the parts to packing the finished kits.
Let me start with Keisha’s two time periods, 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 that time period, 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, both 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. If we do, we would not hire anyone to lead the sewing. One of our finishers has done upholstery and has the time to run it in her regular paid hours, with no extra pay. Daniel put the numbers on that in a proposal.
- 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 time period, 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. If it does, no one would be hired to lead the sewing: a finisher who has done upholstery has the time to run it in her regular paid hours, with no extra pay.
Related questions: Q7, Q8, Q9, Q10, Q14, Q16, Q17, Q18, Q19. Setting: The finishing room; racks of curing platforms behind him.
Question 7. Using Exhibit 3 and what Keisha and Luis told you, by how much will Perchwick’s operating income change if it accepts Brightwell Home’s order for the September time period? (Select one. 1 point.)
- Misconception: Treating September as full, so website margin is given up. Also subtracts the margin on 500 website kits (500 × $122.20). Luis said September has open rack time for the whole order, so no website kits are pushed aside.
- Misconception: Charging website shipping and card fees to a retailer order. Charges $33.60 of shipping and payment processing to each Brightwell kit. Keisha said Brightwell’s trucks collect full pallets and it pays by invoice: no parcel shipping, no card fees.
- Keyed answer. Q × (R − C − W) − K = 500 × ($158 − $113.20 − $6.40) − $9,500 = 500 × $38.40 − $9,500 = $9,700 increase. Keisha: Brightwell’s trucks collect the pallets and it pays by invoice, so no shipping or card fees. Luis: September has open rack time, so no website kits are pushed aside.
- Misconception: Both: website channel costs and displaced margin in September. Charges shipping and payment processing (Keisha: Brightwell collects and pays by invoice) and subtracts displaced website margin (Luis: September has open rack time).
Question 8: Measure the opportunity cost of a November finish that Luis described.
Question 8. Using what Luis told you, what opportunity cost, if any, should Perchwick count if Brightwell Home’s order is finished in the November time period instead? (Select one. 1 point.)
- Keyed answer. Q × CM = 500 × $122.20 = $61,100. Luis: every Brightwell kit finished in November is a website kit Perchwick cannot deliver in time, and a holiday customer who cannot get it by the date does not wait. November net effect $9,700 − $61,100 = ($51,400).
- Misconception: Valuing displaced sales at revenue, on top of doubling the kits displaced. Two errors: 2 × 500 × $269 = $269,000. It counts lost revenue instead of lost contribution margin, but Perchwick would not have spent the variable costs of the displaced kits either, so only their margin is given up. And Luis said each Brightwell kit displaces one website kit, not two.
- Misconception: Assuming each Brightwell kit displaces two website kits. Luis said every Brightwell kit finished in November is a website kit Perchwick cannot deliver in time: one website kit for each Brightwell kit, not two.
- Misconception: Assuming displaced holiday sales are only delayed. Luis said a holiday customer who cannot get the kit by the date does not wait: that sale is gone.
Question 9: Decide which time period to offer Brightwell Home from what Keisha and Luis described.
Question 9. Using what Keisha and Luis told you, what should Perchwick do about Brightwell Home’s proposal? (Select one. 1 point.)
- Misconception: Assuming November has room for the order. Luis said November’s finishing room is full with holiday website orders.
- Misconception: Assuming Brightwell won’t take September and November has room. Keisha said Brightwell will take September if November does not work, and Luis said November is full.
- Misconception: Assuming Brightwell will take only November. Keisha said Brightwell has told her September works if November does not.
- Keyed answer. September increases operating income by $9,700; November decreases it by $51,400 after the opportunity cost. Keisha: Brightwell will take either time period. Luis: September has open rack time.
Question 10: Explain the first quarter’s shortfall from the performance report and what Luis and Daniel described.
| 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 | |
| Direct labor standard | 1.30 hours per kit at $22 per hour | |
| Direct labor hours worked | 1,050 | |
| Average direct labor rate paid | $24.60 per hour | |
| Direct labor cost | $25,830 |
- Kits completed equal kits sold: work in process and finished kits did not change during the quarter.
Question 10. Highwick contribution margin for the quarter came in well below the static budget of $146,640. Using Exhibit 5 and what Luis and Daniel told you, which statement best explains the shortfall and what it means for expected annual sales? (Select one. 1 point.)
- Misconception: Measuring the shortfall in revenue and reading it as lost demand. Measures the shortfall in revenue rather than contribution margin, and draws a demand conclusion that Luis’s account contradicts: the launch delay explains most of the slow start, and March met its plan.
- Keyed answer. (B − A) × CM = (1,200 − 860) × $122.20 = $41,548 U. Luis: test customers got stuck on the instructions, the launch waited until mid-February, and March met its plan; one month does not prove a year.
- Misconception: Blaming late cushions for lost orders. Luis said no order has been lost over late cushions, and nothing was waiting at the end of March.
- Misconception: Blaming the price for the launch delay. Luis said test customers got stuck because the instructions were unclear; the launch waited while they were rewritten.
Question 11: Calculate the direct labor efficiency variance from the performance report. Watch the video, then answer the question below.
Hannah explains how she staffed Highwick assembly during the first quarter.
Read the transcript (demo only): Hannah Ellis, Assembly Supervisor
Hi, I am Hannah Ellis, the assembly supervisor. I am responsible for the assembly crew, for everything we build.
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.
I do not set anybody’s pay. That is the company’s pay scale, and nobody got a raise this quarter. But I decide who works on which line, and putting my senior people on the Highwick was my call. I would make it again. If we keep the Highwick, I plan to keep my experienced builders on it through the holidays.
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.
- The plan assumed new hires at the starting wage; she assigned experienced builders instead, who earn more per hour.
- 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) and nobody got a raise, but she decides who works on which line; the staffing was her decision, and she would make it again.
- If the Highwick continues, she plans to keep experienced builders on it through the holidays.
- 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: Q11, Q12, Q18. Setting: The assembly benches; a half-built hideaway in front of her.
Question 11. What is the direct labor efficiency variance for the first quarter? (Select one. 1 point.)
- Misconception: Using budgeted output instead of actual output for standard hours. Standard hours from budgeted kits (1,200 × 1.30 = 1,560) instead of kits completed; counts the volume shortfall as efficiency.
- Misconception: Reversing the direction of the variance. Correct amount, direction reversed: fewer hours than allowed is favorable.
- Misconception: Computing the rate variance instead of the efficiency variance. The direct labor rate variance, (AR − r) × AH = ($24.60 − $22) × 1,050, mistaken for the efficiency variance.
- Keyed answer. Standard hours allowed = A × h = 860 × 1.30 = 1,118. (AH − SHA) × r = (1,050 − 1,118) × $22 = $1,496 F.
Question 12: Interpret the direct labor results from what Hannah described.
Question 12. Using Exhibit 5 and what Hannah told you, what do the direct labor results most likely indicate? (Select one. 1 point.)
- Misconception: Assuming the crew skipped test-fits to save hours. Hannah said nothing was skipped: every kit still got the full test-fit and inspection checklist.
- Misconception: Blaming a company-wide raise that did not happen. Hannah said nobody got a raise; the average rose because she put her senior people on the line, which was her call.
- Keyed answer. One staffing decision, two effects: rate $2,730 U, efficiency $1,496 F, net $1,234 U. Hannah made the decision, so both variances are hers and are judged together, whether or not the decision saved money overall.
- Misconception: Both: a raise that did not happen and skipped test-fits. Hannah said nobody got a raise and nothing was skipped; putting senior builders on the line was her decision.
Question 13: Compare allocated and actual manufacturing overhead for the first quarter from the overhead exhibit.
Question 13. Using Exhibit 4 and what Daniel told you about how Perchwick costs a job, what does the first quarter show about manufacturing overhead for all of Perchwick’s products? (Select one. 1 point.)
- Misconception: Thinking a predetermined rate charges jobs exactly the overhead incurred. The rate is set from the budget, so the overhead charged to jobs is the rate times the machine hours actually worked, while actual overhead is whatever the shop spends. The two rarely match.
- Keyed answer. Allocated: 2,050 machine hours × $60 = $123,000. Actual $131,400. $131,400 − $123,000 = $8,400, so overhead is underallocated. Daniel: jobs are charged on machine hours.
- Misconception: Allocating overhead on direct labor hours instead of machine hours. Allocates on direct labor hours: 5,600 × $22.50 = $126,000. Daniel said Perchwick charges jobs for the machine hours they use.
- Misconception: Thinking the difference exists only at year-end. Allocated and actual overhead can be compared whenever the actual overhead and hours are known. At year-end the remaining balance is closed to cost of goods sold, but the difference exists all year.
Question 14: Compare the annual cash cost of making cushions with buying them, from the equipment proposal and what Luis described.
| Item | Amount |
|---|---|
| Cutting table, foam saw, three industrial sewing machines, and a cushion bagger, installed, including operator training | $104,000 |
| Useful life; salvage value | 7 years; none |
| Cushions needed per year (one per kit) | 5,000 |
| Purchased cushion, delivered (current cost, included in the variable manufacturing cost) | $18.50 per cushion |
| In-house cost per cushion: direct materials (fabric, foam, and zipper) | $6.80 |
| In-house cost per cushion: direct labor (0.20 sewing hour at $18 per hour) | $3.60 |
| In-house cost per cushion: variable manufacturing overhead | $0.80 |
| Maintenance contract and supplies, per year | $12,500 |
| Sewing lead, part-time, per year | $7,500 |
| Required rate of return on equipment purchases | 10% |
- 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. 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 14. Using Exhibit 6 and what Luis told you about making cushions in-house, what are the annual net cash savings if Perchwick buys the equipment and makes its own cushions? (Select one. 1 point.)
- 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. Luis said Perchwick would not hire a sewing lead, because a finisher already on staff has the time to run the sewing in her regular paid hours, with no extra pay, so the lead’s pay is not a cost of making cushions.
- Misconception: Treating the whole purchase price as saved. Treats the whole purchase price as saved, ignoring the in-house variable costs: N × b − O = 5,000 × $18.50 − $12,500 = $80,000.
- Misconception: Counting a sewing lead Perchwick will not hire. Subtracts the sewing lead’s pay as well: $24,000 − $7,500 = $16,500. Luis said Perchwick would not hire anyone to lead the sewing; a finisher already on staff has the time to run it in her regular paid hours, with no extra pay, so the lead’s pay is not an added cost.
- Misconception: Deducting depreciation, which is not a cash flow, and counting a sewing lead Perchwick will not hire. Two errors: $24,000 − $7,500 − $14,857.14 = $1,643. It deducts straight-line depreciation over the useful life on the proposal ($104,000 ÷ 7), which is not a cash flow, and it subtracts the sewing lead’s pay, though Luis said no one would be hired to lead the sewing.
Question 15: Calculate the net present value of the cushion equipment from the equipment proposal and what Daniel described.
| Periods | $1, 8% | $1, 10% | $1, 12% | Annuity, 8% | Annuity, 10% | Annuity, 12% |
|---|---|---|---|---|---|---|
| 1 | 0.926 | 0.909 | 0.893 | 0.926 | 0.909 | 0.893 |
| 2 | 0.857 | 0.826 | 0.797 | 1.783 | 1.736 | 1.690 |
| 3 | 0.794 | 0.751 | 0.712 | 2.577 | 2.487 | 2.402 |
| 4 | 0.735 | 0.683 | 0.636 | 3.312 | 3.170 | 3.037 |
| 5 | 0.681 | 0.621 | 0.567 | 3.993 | 3.791 | 3.605 |
| 6 | 0.630 | 0.564 | 0.507 | 4.623 | 4.355 | 4.111 |
| 7 | 0.583 | 0.513 | 0.452 | 5.206 | 4.868 | 4.564 |
| 8 | 0.540 | 0.467 | 0.404 | 5.747 | 5.335 | 4.968 |
- The $1 columns give the present value of $1 received at the end of the period. The annuity columns give the present value of $1 received at the end of each period. Factors are rounded to three decimals, as in the textbook’s tables.
Question 15. Annual net cash savings from making cushions are $24,000 (from Question 14). Using Exhibits 6 and 7 and what Daniel told you about how Perchwick evaluates equipment purchases, what is the net present value of the cushion equipment? (Select one. 1 point.)
- Misconception: Ignoring the time value of money, over the maker’s seven-year life. Two errors: $24,000 × 7 − $104,000 = $64,000. It ignores the time value of money, and it uses the seven-year useful life on the proposal, though Daniel said Perchwick judges every equipment purchase over five years of use.
- Keyed answer. $24,000 × 3.791 − $104,000 = $90,984 − $104,000 = ($13,016). Daniel said Perchwick judges every equipment purchase over five years of use, whatever life the maker quotes, so the factor is the five-period annuity at 10%.
- Misconception: Using the single-sum factor for an annuity, over the maker’s seven-year life. Two errors: $24,000 × 0.513 − $104,000 = ($91,688). It uses the single-sum factor, though the savings come every year, and the seven-year useful life on the proposal, though Daniel said Perchwick judges every equipment purchase over five years of use.
- Misconception: Using the maker’s seven-year life instead of Perchwick’s five-year horizon. Uses the seven-year useful life on the proposal, which is the maker’s figure: $24,000 × 4.868 − $104,000 = $12,832. Daniel said Perchwick judges every equipment purchase over five years of use, whatever life the maker quotes.
Question 16: Recommend a course of action to Nora from your analysis and what the managers told you.
These are the correct figures for the earlier questions, 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 per year | 5,000 kits |
| Brightwell Home order: total job cost | $76,000 |
| Brightwell Home order, September time period: change in operating income | $9,700 increase |
| Brightwell Home order, November time period: opportunity cost | $61,100 |
| Brightwell Home order, November time period: net effect | ($51,400) |
| First-quarter sales volume variance | $41,548 U |
| Direct labor rate, actual | $24.60 per hour |
| Direct labor rate, standard | $22 per hour |
| Direct labor efficiency variance | $1,496 F |
| First-quarter manufacturing overhead, all products | $8,400 underallocated |
| Annual net cash savings from making cushions | $24,000 |
| Cushion equipment NPV at 10% | ($13,016) |
Question 16. Based on everything you have analyzed and what Perchwick’s managers told you, which recommendation to Nora is best supported? (Select one. 1 point.)
- Misconception: Leaving a problem the production manager says must be fixed. Luis said Perchwick cannot leave the cushion problem the way it is, even though no order has been lost yet.
- Misconception: Buying equipment whose NPV is negative. The equipment NPV of ($13,016) is negative, so it does not earn the required return. Buying it is not justified on the figures, even though it would fix the delivery problem.
- Misconception: Assuming the current supplier refused guarantees. Luis said the current supplier has offered to sign delivery guarantees, with penalties, at the same price.
- Keyed answer. The equipment NPV of ($13,016) is negative, so Perchwick does not buy it, and the delivery problem is still fixed through a supplier, as Luis described.
- Misconception: Assuming the second supplier failed and the current one refused guarantees. Luis said the second supplier’s samples passed Perchwick’s quality checks and the current supplier offered guarantees.
Question 17: Select the two strongest pieces of evidence for continuing the Highwick line from what the managers told you.
Question 17. Using what the managers told you, which TWO pieces of evidence most strongly support continuing the Highwick line? (Select exactly two. 1 point; both selections must be correct.)
- Misconception: Treating a one-time order as evidence for the ongoing line. True, but a one-time order does not show that recurring sales will cover the line’s fixed costs, so it is weak evidence for continuing the line.
- Misconception: Blaming late cushions for the slow start. Luis said no order has been lost over cushions and nothing was waiting at the end of March; the slow start was the launch.
- Keyed answer. 5,000 expected kits a year against 1,964 to break even: a margin of safety of 3,036 kits.
- Misconception: Assuming a price cut that never happened. Daniel said the website price has not changed since the pilot began, including this month.
- Keyed answer. Luis explained the slow start: a launch delay, now fixed, and March met its plan. That supports keeping expected annual sales as a planning assumption.
- Misconception: Assuming the retailer order will repeat. Keisha said Brightwell has been clear that this is a single purchase for this year, not a standing contract.
Question 18: Weigh the risks in Nora’s decision from what the managers told you.
Question 18. Beyond the figures you have calculated, and using what the managers told you, which risk deserves the most weight in Nora’s decision? (Select one. 1 point.)
- 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.
- Misconception: Treating cancelable costs as committed for the pilot year. Nora said the coordinator’s position ends if the line is dropped and the marketing contracts run month to month.
- Misconception: Blaming late cushions for lost orders and assuming the backup supplier failed. Luis said no order has been lost over cushions and the second supplier’s samples passed.
- Misconception: Assuming the experienced crew will be moved before the holidays. Hannah said that if Perchwick keeps the Highwick, she plans to keep her experienced builders on it through the holidays.
Question 19: Explain why the September order, the November order, and the ongoing line need different cost comparisons.
Question 19. 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.)
- Misconception: Both: website costs charged to the retailer order and a shared salary counted. Both premises are wrong. Keisha said Brightwell’s trucks collect the pallets and it pays by invoice, so the order carries no website shipping or card fees. Nora said Hannah runs assembly for everything Perchwick builds and that the people who run the whole shop stay with or without the Highwick, so her salary stays.
- Misconception: Charging website shipping and card fees to a retailer order. Keisha said Brightwell’s trucks collect the pallets and it pays by invoice, so the order carries no website shipping or card fees.
- Misconception: Counting a shared salary that stays as a cost of the line. Nora said Hannah runs assembly for everything Perchwick builds and that the people who run the whole shop stay with or without the Highwick, so her salary stays.
- Keyed answer. Three decisions, three relevant-cost comparisons; the regular kit’s contribution margin connects them. Keisha: Brightwell collects at the dock and pays by invoice. Nora: Hannah runs assembly for everything Perchwick builds, so her salary stays either way.