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

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

Mills SA. manufactures 50,000 components per year. The manufacturing cost per unit of the components is as follows: Direct materials £12 Direct labour 13 Variable overhead 5 Fixed overhead -10 Total unit cost £40 An outside supplier has offered to sell the component to Mills SA. for £35. Required: a.What is the effect on income if Mills SA. purchases the component from the outside supplier? b.Assume that Mills SA. can avoid £700,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Mills SA. purchases the component from the outside supplier?

Caddo Ltd. produces two products using the same manufacturing equipment. Information about the two products is as follows: Alpha Beta Sales £15 £35 Variable costs £5 £10 Machine hours required 0.5 2.0 Demand (units) 30,000 10,000 Demand (machine hours) 15,000 20,000 If Caddo can produce only one of the products in the next period, which product should be produced?

Bridge Industries manufactures a product with the following costs per unit at the expected production of 78,000 units: Direct materials £15 Direct labour 22 Variable manufacturing overhead 12 Fixed manufacturing overhead 19 The company has the capacity to produce 80,000 units. The product regularly sells for £90. A wholesaler has offered to pay £75 each for 2,000 units. If Bridge's special order is accepted, the effect on operating income would be a

Which of the following costs is NOT relevant for special decisions?

Figure 9-2 Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials £75,000 Direct labour 120,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 60,000 Total £300,000 An outside supplier has offered to sell the component for £12.75. -Refer to Figure 9-2. What is the effect on income if Vest purchases the component from the outside supplier?

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 1,000 units at a special price of £48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated from the special order?

Which of the following BEST describes relevant costs?

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

Figure 9-2 Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials £75,000 Direct labour 120,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 60,000 Total £300,000 An outside supplier has offered to sell the component for £12.75. -Refer to Figure 9-2. What is the effect on income if Vest Industries purchases the component from the outside supplier?

Sunk costs are

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 has excess capacity, the effect on profits of accepting the order would be

When there is one scarce resource, the product that should be produced first is the product with the highest

The Dash Company manufactures two products: A and B. Information about the products is as follows: Product A Product B Revenue per unit £150 £125 Variable costs per unit -80 -70 Contribution margin per unit Total demand 15,000 units 12,000 units Machine hours per unit .5 .25 There are 5,000 machine hours available during the quarter. Required: a.Which of the products should Dash Company produce if it can only produce one of the products? b.Assume that Dash Company uses half of the hours available to produce Product A and half of the hours available to produce Product B. What is Dash's total contribution margin? c.Assume that Dash Company produces the product mix that will maximize profit. What is Dash's total contribution margin?

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 Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the net income if the special order of 100 units is accepted?

Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: Direct materials £4 Direct labour 12 Variable manufacturing overhead 6 Fixed manufacturing overhead 8 The company has the capacity to produce 40,000 units. The product regularly sells for £40. A wholesaler has offered to pay £32 a unit for 2,000 units. If the firm is at capacity and the special order is accepted, the effect on operating income would be

Which of the following statements is true when making a decision between two alternatives?

Rose Manufacturing Company had the following unit costs: Direct materials £24 Direct labour 8 Variable factory overhead 10 Fixed factory overhead (allocated) 18 A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated by accepting the special order?

Application of the theory of constraints will improve all of the following EXCEPT

KnitWorks Ltd. produces three kinds of yarn. Details of each type of yarn are as follows: Type I Type II Type III Price per unit £200 £250 £100 Unit variable cost £150 £100 £60 Machine hours required 0.5 2.0 0.1 KnitWorks has 15,000 machine hours available for production. a.Determine the amount of each type of yarn that KnitWorks should produce. b.Assume that the demand for each type of yarn is limited to 10,000 units each. Determine the amount of each type of yarn that KnitWorks should produce. c.Assume that the demand for each type of yarn is limited to 10,000 units each. Determine KnitWorks' contribution margin.