Exam 9: Measuring Relevant Costs and Revenues for Decision-Making

Firms may be asked to accept a special order of their product for a reduced price if

The operations of Knickers Ltd. are divided into the Pacers Division and the Bulls Division. Projections for the next year are as follows: Pacers Bulls Divisi on Division Total Sales £420,000 £252,000 £672,000 Variable costs 147,000 115,500 262,500 Contributi on margin £273,000 £136,500 £409,500 Direct fixed costs 126,000 105,000 231,000 Segment margin £147,000 £31,500 £178,500 Allocated common costs 63,000 47,250 110,250 Operating income (loss) £84,000 £(15,750) £68,250 Operating income for Knickers Ltd. as a whole if the Bulls Division were dropped would be

If the firm is at full capacity, the minimum special-order price must cover

Figure 9-4 The following information pertains to Ewing Company's three products: D E F Unit sales per month 900 1,400 800 Selling price per unit £6.00 £11.25 £7.50 Variable costs per unit 3.00 9.00 7.80 Unit contribution margin -Refer to Figure 9-4. Assume that product F is discontinued and the space used to produce product F is rented for £600 per month. Monthly profits will

Houston Ltd. manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Direct materials £32 Direct labour 40 Variable overhead 16 Fixed overhead 32 Total £120 Johnson Company has offered to sell Houston Ltd. 5,000 units of the part for £112 per unit. If Houston Ltd. accepts Johnson Company's offer, total fixed costs will be reduced to £60,000. What alternative is more desirable and by what amount is it more desirable? Alternative Amount a. Make £20,000 b. Make £120,000 c. Buy £40,000 d. Buy £100,000 e. Buy £140,000

Figure 9-9 Boone Products had the following unit costs: Direct materials £24 Direct labour 10 Variable factory overhead 8 Fixed factory overhead (allocated) 18 -Refer to Figure 9-9. A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is £8 per unit. How much additional profit (loss) will be generated by accepting the special order?

Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume is as follows: Direct materials £10.00 Direct labour 14.00 Variable overhead 6.00 Fixed overhead 4.00 Total £34.00 An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of £31.00. If Harris Company accepts this offer, it can eliminate 50 per cent of the fixed costs assigned to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to another company for £24,000 per year. If Harris Company accepts the offer of the outside supplier, annual profits will

Figure 9-8 Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials £12 Direct labour 36 Variable manufacturing overhead 18 Fixed manufacturing overhead 24 The company has the capacity to produce 90,000 units. The product regularly sells for £120. -Refer to Figure 9-8. A wholesaler has offered to pay £110 a unit for 7,500 units. If the special order is accepted, the effect on operating income would be a

Figure 9-8 Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials £12 Direct labour 36 Variable manufacturing overhead 18 Fixed manufacturing overhead 24 The company has the capacity to produce 90,000 units. The product regularly sells for £120. -Refer to Figure 9-8. If a wholesaler offered to buy 4,500 units for £100 each, the effect of the special order on income would be a

Which of the following costs is NOT relevant to a special-order decision?

Figure 9-5 Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Direct materials £2,400 Direct labour 960 Factory overhead (30\% variable) 1,800 Selling expenses ( 50\% variable) 900 Administrative expenses (10\% variable) 840 Total per unit £6,900 Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order. -Refer to Figure 9-5. If Reggie Ltd. wants to increase its profit by £18,000 on the special order, what is the minimum price it should charge per unit?

Figure 9-1 Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials £150,000 Direct labour 240,000 Variable manufacturing overhead 90,000 Fixed manufacturing overhead -120,000 Total £600,000 An outside supplier has offered to sell the component for £25.50. -Refer to Figure 9-1. What is the effect on income if Foster purchases the component from the outside supplier?

Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: Direct materials £10 Direct labour 14 Variable overhead 6 Fixed overhead 83 Total unit cost £38 Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32. Required: a.What is the effect on income if Solomon purchases the component from the outside supplier? b.Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

If a cost is identical under each alternative under consideration within a given decision context, the cost is considered:

The theory of constraints focuses on

Figure 9-7 Meco Company produces a product that has a regular selling price of £360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to £270. Included in this average is £120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to £30,000 per month. Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. -Refer to Figure 9-7. Assuming Meco Company is operating at capacity and accepting the order would require an offsetting reduction in regular sales, the effect on profits of accepting the order would be a

Zandy Beverage Company plans to eliminate a branch that has a contribution margin of £50,000 and fixed costs of £75,000. Of the fixed costs, £55,000 cannot be eliminated. The effect of eliminating this branch on net income would be a(n)

Tactical decision-making relies

Figure 9-6 The following information relates to a product produced by Creamer Company: Direct materials £24 Direct labour 15 Variable overhead 30 Fixed overhead 18 Unit cost £87 Fixed selling costs are £500,000 per year, and variable selling costs are £12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for £120 each. A customer has offered to buy 60,000 units for £90 each. -Refer to Figure 9-6. The incremental cost per unit associated with the special order is

Rippey Ltd. manufactures a single product with the following unit costs for 5,000 units: Direct materials £60 Direct labour 30 Factory overhead (40\% variable) 90 Selling expenses (60\% variable) 30 Administrative expenses (20\% variable ) 15 Total per unit £225 Recently, a company approached Rippey Ltd. about buying 1,000 units for £225. Currently, the models are sold to dealers for £412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses would be incurred on the special order. a.What is the profit earned by Rippey Ltd. on the original 5,000 units? b.Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be affected? c.Determine the minimum price Rippey would want to receive in order to increase profits by £7,500 on the special order. d.When making a special order decision, what nonquantitative aspects of the decision should Rippey Ltd. consider?