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

Relevant costs are

Scott Company has an annual capacity of 18,000 units. Budgeted operating results for 2011 are as follows: Revenues (16,000 units @£60) £960,000 Variable costs: Manufacturing £384,000 Selling -128,000 Contribution margin £448,000 Fixed costs: Manufacturing £160,000 Selling and administrative Operating income £168,000 A foreign wholesaler wants to buy 1,000 units at a price of £40 per unit. All fixed costs would remain within the relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular orders. a.Determine the effect on operating income if the company produces the special order. b.Should the company produce the special order? c.Determine operating income if the customer had wanted a special order of 3,000 units and the company produced the special order. d.Should the company produce the 3,000-unit special order? e.Discuss any nonquantitative factors the company might want to consider when making the decision.

Majestic Company manufactures a product that has the following unit costs: direct materials, £5; direct labour, £7; variable overhead, £3; and fixed overhead, £5. Fixed selling costs are £200,000 per year. Variable selling costs of £1 per unit cover the transportation cost. Although production capacity is 80,000 units per year, the company expects to produce only 65,000 units next year. The product normally sells for £30 each. A customer has offered to buy 10,000 units for £18 each. The customer will pay the transportation charge on the units purchased. Required: a.What is the incremental cost per unit to Majestic Company for the special order? b.What is the effect on Majestic's income if the special order is accepted?

If there is excess capacity, the minimum acceptable price for a special order must cover

The operations of Smits Ltd. are divided into the Childs Division and the Jackson Division. Projections for the next year are as follows: Childs Jackson Division Division Total Sales £250,000 £180,000 £430,000 Variable costs 90,000 100,000 190,000 Contributi on margin £160,000 £80,000 £240,000 Direct fixed costs 75,000 62,500 137,500 Segment margin £85,000 £17,500 £102,500 Allocated common costs 35,000 27,500 62,500 Operating income (loss) £50,000 £(10,000) £40,000 Operating income for Smits Ltd. as a whole if the Jackson Division were dropped would be

The following information pertains to Dodge Company's three products: A B C Unit sales per year 250 400 250 Selling price per unit £9.00 £12.00 £9.00 Variable costs per unit 3.60 9.00 9.90 Unit contribution margin £5.40 £3.00 £(0.90) Contribution margin ratio 60\% 25\% 10)\% Assume that product C is discontinued and the extra space is rented for £300 per month. All other information remains the same as the original data. Annual profits will

The operations of Grant Ltd. are divided into the Fix Division and the Roach Division. Projections for the next year are as follows: Fix Roach Division Division Total Sales £60,000 £40,000 £100,000 Variable costs Contribution margin £40,000 £25,000 £65,000 Direct fixed costs Segment margin £27,500 £(5,000) £22,500 Allocated common costs Operating income(loss) £17,500 £(12,500) £5,000 a.Determine operating income for Grant Ltd. as a whole if the Roach Division is dropped. b.Should the Roach Division be eliminated?

For a cost or revenue to be relevant to a particular decision, the cost or revenue must

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 is used to produce E. Product E's production is increased to 2,200 units per month, but E's selling price of all units of E is reduced to £10.20. Monthly profits will

Which of the following costs is relevant to a make-or-buy decision?

____ are future costs that differ across alternatives.

Figure 9-3 Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: Variable costs per unit: Fixed costs per month: Direct materials £9.00 Factory overhead £120,000 Direct labour 4.50 Selling and admin. 60,000 Factory overhead 3.00 Total Distribution 1.50 Total £18.00 The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. -Refer to Figure 9-3. An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of £25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £6,000. In addition, assume that overtime production is not possible and that all other information remains the same as the original data. What is the effect on profits if the special order is accepted?

The Bilko Company manufactures two products: widgets and gadgets. Information about the products is as follows: Widgets Gadgets Revenue per unit £200 £150 Variable costs per unit -110 Contribution margin per unit Total demand 20,000 units 20,000 units Direct labour hours per unit 1.5 1.2 There are 40,000 direct labour hours available during the year. a.Which of the products should Bilko Company produce if it can only produce one of the products? b.Assume that Bilko Company uses half of the hours available to produce widgets and half of the hours available to produce gadgets. What is Bilko's total contribution margin? c.Assume that Bilko Company produces the product mix that will maximize profit. What is Bilko's total contribution margin?

The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A £200 cost per component was determined as follows: Direct materials £15 Direct labour 40 Variable manufacturing overhead 10 Fixed manufacturing overhead 35 Total £100 James Industries uses 4,000 components per year. After Light, SA., submitted a bid of £80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light, SA., James's unused production facilities could be leased to another company for £50,000 per year. a.Determine the maximum amount per unit James should pay an outside supplier. b.Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative. c.Assume the company could eliminate production supervisors with salaries totaling £30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative.

Which item is not an example of a sunk cost?

WJE Company has only 4,000 machine hours available each month. The following information on the company's three products is available: Product Product Product AA B B CC Contribution margin per unit £10 £13 £5 Machine hours per unit 2 1.5 0.5 If demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship, its book value is a(n)

Which of the following is a qualitative factor that should be considered when evaluating a make-or-buy decision?

Figure 9-3 Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: Variable costs per unit: Fixed costs per month: Direct materials £9.00 Factory overhead £120,000 Direct labour 4.50 Selling and admin. 60,000 Factory overhead 3.00 Total Distribution 1.50 Total £18.00 The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. -Refer to Figure 9-3. A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of £24 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £3,000. All other information remains the same as the original data. What is the effect on profits if the special order is accepted?

Figure 9-3 Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: Variable costs per unit: Fixed costs per month: Direct materials £9.00 Factory overhead £120,000 Direct labour 4.50 Selling and admin. 60,000 Factory overhead 3.00 Total Distribution 1.50 Total £18.00 The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. -Refer to Figure 9-3. A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of £6.00 per unit. If Miller Company accepts the offer, it will be able to reduce variable costs by 30 per cent and rent unused space to an outside firm for £18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm?