Exam 6: Relevant Information and Decision-Making: Product Decisions

The contribution margin is computed using variable manufacturing costs and variable selling and administrative costs.

The absorption approach to the income statement is used by companies for external financial reporting.

Qualitative factors do not affect a make- or- buy decision.

Agua Company provided the following information regarding its one and only product -skateboards. Direct materials used \ 200,000 Direct labor \ 0,000 Fixed overhead 100,000 Fixed selling and adminis trative costs 150,000 Variable overhead 20,000 Variable selling and administrative 60,000 Selling unit price 75 Units produced and sold 10,000 is the gross margin if the absorption approach is used.

The difference between book value and the cash received upon disposal

Depreciation is:

Opportunity cost:

Tangerine Manufacturing Company produces three products using a joint process which accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 10,000 units. The following unit information is also available: Separable Processing Sales V alue at Costs after Sales Value at Product Split- off Completion \ 12 \ 9 \ 21 10 4 17 15 6 19 If product A is processed beyond the split- off point, profit will:

Hoopster Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: Direct materials \ 108,000 Direct labor 156,000 Variable factory overhead 72,000 Fixed factory overhead Total costs Of the fixed factory overhead costs, $72,000 are avoidable. Knight Company has offered to sell 5,000 units of the same part to Hoopster for $86.40 per unit. Assuming there is no other use for the facilities, Hoopster Company should:

Mailman Company is considering the replacement of a machine that is presently used to produce its single product. The following data are available: Replacement Old Machine Machine Original cost \ 210,000 \ 40,000 Useful lif e in years 12 7 Current age in years 5 0 Book value \ 65,000 - Disposal value now \ 30,000 - Disposal value in 7 years 0 0 Annual cash op erating \ 10,000 \ 9,000 costs Required: Ignoring income taxes, prepare a cost comparison of all relevant items for the next seven years together. Indicate the best alternative for Mailman Company.

Joe Smith has paid off the mortgage on his house and continues to live in the house. The interest income forgone by not selling the house and investing the proceeds is an example of a(n):

Opportunity cost depends on alternatives available at a point in time.

Future costs are relevant if they are the same under all feasible alternatives.

Burt Company currently produces 10,000 units of a key part at a total cost of $210,000. Variable costs are $170,000. Of the fixed cost, $10,000 relate specifically to this part. The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $190 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $25,000. Alternately, the facilities could be rented out at $55,000. is the opportunity cost to Burt Company for making the part.

Woods Corporation has a joint process that produces three products: P, G, and A. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $25,000. Other relevant data are as follows: Separable Processing Product Sales Value at Split-off Costs after Split-off Sales Value at Completion \ 32,000 \ 5,000 \ 88,000 12,500 6,500 19,000 9,400 5,000 12,000 Product G:

are costs of manufacturing two or more products that are not separately identifiable as individual products until their split- off point.

Derwood Company is considering replacing a machine that is presently used in the production of its product. The following data are available: Old Machine R eplacem M achine Original cost \ 99,000 \ 88,000 Useful life in years 9 6 Current age in years 3 0 Book value \ 33,000 - Disposal value now \ 28,000 - Disposal value in 5 years 0 0 Annual cash operating costs \ 17,000 \ 14,000 is a sunk cost.

The choice of the absorption or contribution approach affects a firm's contribution margin because:

Bull Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Direct materials \ 3 Direct labor 5 Variable factory overhead 4 Fixed factory overhead Total costs The fixed factory overhead costs are unavoidable. Assume that Bull Company has been offered 5,000 units of the part from another producer for $14 each. The facilities currently used could be used to make 5,000 units of a product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred. Bull Company should:

Opportunity costs apply to resources that will be owned.