Exam 22: Relevant Information and Decisions

Calaveras makes two products in a joint manufacturing process. At the point of separation, costs of $8,000 have been incurred. Each product can be sold at the point of separation or processed further. At the split-off point, Product 1 can be sold for $20,000 and Product 2 can be sold for $36,000. Product 1 can be further processed at a cost of $24,000 to make Product 1a which could be sold for $60,000. Product 2 can be further processed at a cost of $28,000 to make Product 2b which could be sold for $56,000.

Differential costs are relevant when making which of the following types of decisions?

Assume that the monthly capacity of a sporting goods business is 25,000 soccer balls. Current sales and production are averaging 20,000 soccer balls per month, and the soccer balls sell for $40 each. The business receives an offer from an exporter for 5,000 footballs at $36 each. Pricing policies in the domestic market will not be affected, and production can be spread over three months. Variable costs per unit consist of $11.00 for direct materials, $9.00 for direct labor, and $5.00 for variable manufacturing overhead. Fixed costs are $15.00 per unit. What is the differential income or loss from accepting the special order?

West Star Company manufactures computers. The following cost information for the manufacture of one computer has been compiled: West Star received an offer for a special order for 1,000 computers. In addition to normal costs, West Star would also incur a $10 shipping charge per computer. In negotiating a price, what is the minimum selling price West Star should accept? (Assume that other variables do not change and West Star has enough capacity to fulfill the order.)

CharCore mixes together wood chips and pine oil. After joint manufacturing costs of $2,000 have been incurred, the mixture separates into two products, granulated charcoal and methyl alcohol. At the split-off point, granulated charcoal can be sold for $5,000 and the alcohol can be sold for $9,000. The charcoal can be further processed at a cost of $6,000 to make air filters which could be sold for $15,000. The alcohol can be further processed at a cost of $7,000 to make a cleaning solvent which could be sold for $14,000. What is the net increase (decrease) in operating income from air filters?

Exhibit 22-3 Shasta Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows: Up to now, the company has been buying 2,000 units of the part for a total of $124,000. Refer to Exhibit 22-3. If Shasta Company uses a differential-cost analysis in deciding whether to make the part, the total differential cost of making the part would be:

The relevant costs of buying a component from a supplier are:

If a decision regarding special orders is based only on costs, management should:

The total-cost approach to considering alternatives includes analyzing:

When considering whether or not to drop a market segment of a business, past costs that CANNOT be recovered regardless of whether the segment is dropped are:

Merced Corporation is considering adding a new product line. Market research indicates that sales revenue for the new line would be $80,000 for 35,000 units. Variable costs would be $1.70 per unit; direct fixed costs, $0.40 per unit; and indirect fixed costs, $0.50 per unit. If Merced added the new line, its income would:

Tulare Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows: Until now, Tulare has been buying 4,000 units of the part for a total of $408,000.

The price charged for a product should normally be high enough to cover:

When a segment of a business consistently shows net losses, it should:

Exhibit 22-4 Lauria Electronics has excess capacity that could be used to make 2,000 antennas for the cell phones that the company produces. The following cost figures are available: Lauria can buy the antennas from an outside supplier for $10.50. Refer to Exhibit 22-4. Given the data above, Lauria would:

When pricing special orders in a situation where there is unused capacity, management should charge a price that is greater than the:

Which of the following costs are always relevant for decision making?