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

Rush Company gathered the following information regarding its one and only product: Direct materials used \ 9,000 Direct labor 17,000 Variable factory overhead 13,000 Fixed factory overhead 8,000 Variable selling and administrative expenses 15,000 Fixed selling and adminis trative expenses 8,000 Units produced and sold 10,000 Selling price p er unit \ 10 Required: a. Compute the unit manufacturing cost of the product under the absorption approach. b. Compute the unit manufacturing cost of the product under the contribution approach. c. Compute the effect on net income of accepting a special order for 500 units at $10 per unit assuming excess capacity.

Jeannie Company is considering replacing a machine that is presently used in the production of its product. The following data are available: Replacement Old Machine Machine Original cost \ 333,000 \ 222,000 Useful life in years 6 5 Current age in years 1 0 Book value \ 198,000 - Disposal value now \ 132,000 - Disposal value in 5 years 0 0 Annual cash operating \ 45,000 \ 34,000 costs is a sunk cost.

Gain or loss on disposal of equipment is relevant in deciding whether to keep or replace equipment.

The Cyclone Corporation is contemplating the replacement of some old equipment. The pertinent information is as follows: Old Equipment Replacement Equipment Original cost \ 93,000 \ 60,000 U seful life in years 13 6 Current age in years 7 0 Book value \ 57,000 - Disposal value now \ 45,000 - Disposal value in 6 years 0 0 Annual cash operating costs \ 15,000 \ 11,000 Required: Prepare a cost comparison of all relevant items for the next six years together. Ignore income taxes. Comment on the best alternative for Cyclone Corporation.

Book value is defined as:

are a qualitative factor of a make- or- buy decision.

Which of the following is correct?

Another term for differential cost when one alternative includes all the costs of the other plus some additional costs

Reagan Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: Direct materials \ 20 Direct labor 15 Variable factory overhead 16 Fixed factory overhead Total costs \ 61 The fixed factory overhead costs are unavoidable. Assuming no other use of their facilities, the highest price that Reagan Company should be willing to pay for the part is:

It is profitable to extend processing or to incur additional distribution costs on a joint product if the additional revenue exceeds joint cost.

Generally, companies use aggregate measures to determine performance evaluations.

Mother Hubbard Company purchases 8,000 units of a part that it needs for production of its product. Notification has just been received from the supplier that a price increase will take effect shortly which will bring the price of each part to $25. Mother Hubbard Company is considering using some idle facilities to produce the part. The production costs to produce the needed 5,000 parts are as follows: Direct materials \ 17,500 Direct labor 30,000 Variable factory overhead 14,000 Fixed factory overhead 33,500 The idle facilities could also be rented out at an annual rent of $99,000. All the factory overhead costs are avoidable. Required: Determine if Mother Hubbard Company should continue to buy the part or produce it in- house.

Brady Company provided the following information regarding its one and only product -skateboards. Direct materials used \ 200,000 Direct labor 180,000 Fixed overhead 100,000 Fixed selling and adminis trative costs 150,000 Variable overhead 120,000 Variable selling and administrative 60,000 Selling unit price 75 Units produced and sold 10,000 is the difference in total product cost between the absorption approach and the contribution approach.

Goldwater Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: Direct materials \ 20 Direct labor 15 Variable factory overhead 16 Fixed factory overhead Total costs \ The fixed factory overhead costs are unavoidable. Assume that Goldwater Company can buy 10,000 units of the part from another producer for $56 each. The current facilities could be used to make 10,000 units of a product that has a contribution margin of $20 per unit. No additional fixed costs would be incurred. Goldwater Company should:

Tony Company is considering replacing a machine that is presently used in the production of its product. The following data are available: Replacement Old Machine Machine Original cost \ 295,000 \ 188,000 Useful lif e in years 11 5 Current age in years 6 0 Book value \ 130,000 - Disposal value now \ 52,000 - Disposal value in 5 years 0 0 Annual cash op erating \ 39,000 \ 24,000 costs is irrelevant.

The juncture in manufacturing where the joint products become individually identifiable

Geren Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $200,000 per year. If production decreases from 50,000 to 40,000 units, the cost per unit will:

Por Favor Company provided the following information regarding its one and only product -skateboards. Direct materials used \ 200,000 Direct labor \ 0,000 Fixed overhe ad 100,000 Fixed s elling and administrative 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 manufacturing cost per unit if the contribution approach is used.

Mad Cow Company manufactures a part for its production cycle. The costs per unit for 38,000 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. Assuming no other use of their facilities, the highest price that Mad Cow Company should be willing to pay for the part is:

In a make- or- buy decision, if facilities are and will remain idle when the decision is made to not make a part internally, then the opportunity cost is zero.