Exam 14: Decision Making: Relevant Costs and Benefits

At which step or steps in the decision-making process do qualitative considerations generally have the greatest impact?

The book value of equipment currently owned by a company is an example of a(n):

Buchnell Manufacturing has 31,000 labor hours available for producing M and N.Consider the following information: If Buchnell follows proper managerial accounting practices in terms of setting a production schedule,how much contribution margin would the company expect to generate?

If Smythe follows proper managerial accounting practices,how many units of Product Y should it produce?

Maddox,a division of Stanley Enterprises,currently performs computer services for various departments of the firm.One of the services has created a number of operating problems,and management is exploring whether to outsource the service to a consultant.Traceable variable and fixed operating costs total $80,000 and $25,000,respectively,in addition to $18,000 of corporate administrative overhead allocated from Stanley.If Maddox were to use the outside consultant,fixed operating costs would be reduced by 70%.The irrelevant costs in Maddox's outsourcing decision total:

Allegiance,Inc.has $125,000 of inventory that suffered minor smoke damage from a fire in the warehouse.The company can sell the goods "as is" for $45,000;alternatively,the goods can be cleaned and shipped to the firm's outlet center at a cost of $23,000.There the goods could be sold for $80,000.What alternative is more desirable and what is the relevant cost for that alternative?

CompuTronics,a manufacturer of computer peripherals,has excess capacity.The company's Utah plant has the following per-unit cost structure for item no.89: The traceable fixed administrative cost was incurred at the Utah plant;in contrast,the allocated administrative cost represents a "fair share" of CompuTronics' corporate overhead.Utah has been presented with a special order of 5,000 units of item no.89 on which no selling cost will be incurred.The proper relevant cost in deciding whether to accept this special order would be:

The amount of joint cost allocated to Nuts and Bolts,respectively,would be:

The concept of a relevant cost can be defined as a past cost that differs among alternatives.

Indiana Corporation has $200,000 of joint processing costs and is studying whether to process J and K beyond the split-off point.Information about J and K follows. If Indiana desires to maximize total company income,what should the firm do with regard to Products J and K?

Consider the following costs and decision-making situations: I.The cost of existing inventory,in a keep vs.disposal decision. II.The cost of special electrical wiring,in an equipment acquisition decision. III.The salary of a supervisor who will be transferred elsewhere in the organization,in a department-closure decision. Which of the above costs is (are)relevant to the decision situation noted?

Riverside Company manufactures G and H in a joint process.The joint costs amount to $80,000 per batch of finished goods.Each batch yields 20,000 liters,of which 40% are G and 60% are H.The selling price of G is $8.75 per liter,and the selling price of H is $15.00 per liter. Required: A.Each batch of 20,000 liters yields 8,000 liters of G (40%)and 12,000 liters of H (60%).Thus,the sales values at split-off are: G,$70,000 (8,000 * $8.75)and H,$180,000 (12,000 * $15.00),for a total of $250,000.The joint cost allocation is: G: ($70,000 / $250,000)* $80,000 = $22,400 H: ($180,000 /$250,000)*$80,000 = $57,600 A.If the joint costs are allocated on the basis of the products' sales value at the split-off point,what amount of joint cost will be charged to each product? B. Riverside should go ahead with the new process as it is profitable for the firm. B.Riverside has discovered a new process by which G can be refined into Product GG,which has a sales price of $12 per liter.This additional processing would increase costs by $2.10 per liter.Assuming there are no other changes in costs,should the company use the new process? Show calculations.

Summers Corporation is composed of five divisions.Each division is allocated a share of Summers's overhead to make divisional managers aware of the cost of running the corporate headquarters.The following information relates to the Metro Division: If the Metro Division is closed,100% of the traceable fixed operating costs can be eliminated.What will be the impact on Summers's overall profitability if the Metro Division is closed?

Cornwall Corporation manufactures faucets.Several weeks ago,the company received a special-order inquiry from Yates,Inc.Yates desires to market a faucet similar to Cornwall's model no.55 and has offered to purchase 3,000 units.The following data are available: · Cost data for Cornwall's model no.55 faucet: direct materials,$45;direct labor,$30 (2 hours at $15 per hour);and manufacturing overhead,$70 (2 hours at $35 per hour). · The normal selling price of model no.55 is $180;however,Yates has offered Cornwall only $115 because of the large quantity it is willing to purchase. · Yates requires a design modification that will allow a $4 reduction in direct-material cost. · Cornwall's production supervisor notes that the company will incur $8,700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture these units.The device will be discarded once the special order is completed. · Total manufacturing overhead costs are applied to production at the rate of $35 per labor hour.This figure is based,in part,on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labor hours. · Cornwall will allocate $5,000 of existing fixed administrative costs to the order as "¼part of the cost of doing business." Required: A.One of Cornwall's staff accountants wants to reject the special order because "financially,it's a loser." Do you agree with this conclusion if Cornwall currently has excess capacity? Show calculations to support your answer. B.If Cornwall currently has no excess capacity,should the order be rejected from a financial perspective? Briefly explain. B.Yes,the order should be rejected.An environment of no excess capacity implies a very strong marketplace.Cornwall would be giving up sales at $180 per faucet,to be replaced with sales of $115 per unit and the need to incur additional set-up costs and the cost of a special device.Company profitability would suffer. C.Assume that Cornwall currently has no excess capacity.Would outsourcing be an option that Cornwall could consider if management truly wanted to do business with Yates? Briefly discuss,citing several key considerations for Cornwall in your answer. No,the conclusion is incorrect because the order generates a net contribution of $66,000 for the firm.Note: The fixed administrative cost is irrelevant to the decision. *Fixed manufacturing overhead: $624,000 / 24,000 labor hours = $26 per hour Variable manufacturing overhead: $35 - $26 = $9 C.Yes,outsourcing is an option.Cornwall could have another manufacturer produce the faucets for Yale or perhaps even for another customer.Price,product quality,and supplier reliability would be important considerations in this decision.As in all special order decisions,if Cornwall's regular customers find out that Yates is purchasing the faucets at a lower price than them,there may be negative repercussions.

Snyder,Inc. ,which has excess capacity,received a special order for 4,000 units at a price of $15 per unit.Currently,production and sales are anticipated to be 10,000 units without considering the special order.Budget information for the current year follows. Cost of goods sold includes $30,000 of fixed manufacturing cost.If the special order is accepted,the company's income will:

S'Round Sound,Inc.reported the following results from the sale of 24,000 units of IT-54: Rhythm Company has offered to purchase 3,000 IT-54s at $16 each.Sound has available capacity,and the president is in favor of accepting the order.She feels it would be profitable because no variable selling costs will be incurred.The plant manager is opposed because the "full cost" of production is $17.Which of the following correctly notes the change in income if the special order is accepted?

A trade-off in a decision situation sometimes occurs between information:

To be useful in decision making,information should possess which of the following characteristics?

A technique that is useful in exploring what would happen if a key decision prediction or assumption proved wrong is termed:

Linear programming would be used by decision makers when there are: