Exam 10: Relevant Costing for Managerial Decisions

Spilker Linens Store has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below: Sales \ 2,100,000 \ 1,000,000 \ 600,000 \ 500,000 Cost of goods sold Gross profit 840,000 500,000 200,000 140,000 Direct expenses (420,000) (200,000) (100,000) (120,000) Allocated expenses Net income (loss) Based on this income statement, management is planning on eliminating the Bedding department, as it is generating a net loss. If the Bedding department is eliminated, the Kitchen department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of Bedding's allocated expenses will be avoided, but they will be reallocated to Bath and Kitchen. Bath will be allocated $100,000 additional expenses, and Kitchen will be allocated $75,000 additional expenses. Prepare a new income statement for Spilker Linens Store, showing the results if the Bedding Department is eliminated and indicate whether eliminating the department is advisable.

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $1,250 on the special order, the size of the order would need to be:

A(n) ________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Wheeler for $45. If Wheeler buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.

The cost of equipment purchased by a company last year would be an avoidable cost.

Frederick Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 5,000 units follows: Direct material \ 62,000 Direct labor 47,000 Variable factory overhead \ldots\ldots\ldots\ldots\ldots\ldots. 38,000 Factory overhead 52,000 If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:

Cornish Company had the following results of operations for the past year: Sales (20,000 units at \ 22) \ 440,000 Direct materials and direct labor \ 200,000 Overhead (40\% variable) 100,000 Selling and administrative expenses (all fixed) 92,000 (392,000) Operating income \ 48,000 A foreign company (whose sales will not affect Cornish's market) offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Cornish accepts the offer, its profits will:

A company puts four products through a common production process. This process costs $100,000 each year. The four products can be sold when they emerge from this process at the "split-off point," or processed further and then sold. Data about the four products for the coming period are: Unit Sales Unit Sales Price per unit Price per unit Additional at Split-Off after Further Processing Stroller 20,000 \ 28.00 \ 42.00 \ 400,000 Walker 10,0001 7.00 28.00 144,000 Jogger 5,000 36.00 58.00 120,000 Runner 5,000 18.00 22.00 40,000 Determine which products should be sold at the split-off point and which should be processed further.

Employee morale, timeliness of delivery, and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.

Epsilon Co. can produce a unit of product for the following costs: Direct material \8 Direct labor 24 Overhead Total costs per unit \7 2 An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:

Lattimer Company had the following results of operations for the past year: Sales (15,000 units at \ 12) \ 180,000 Variable manufacturing costs \ 97,500 Fixed manufacturing costs 21,000 Selling and administrative expenses (all fixed) Operating income A foreign company whose sales will not affect Lattimer's market offers to buy 5,000 units at $7.50 per unit. In addition to existing costs, selling these units would add a $0.25 selling cost for export fees. Lattimer's annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin per unit of operating capacity.

Marshall Company currently manufactures one of its parts at a cost of $3.25 per unit. This cost is based on a normal production rate of 50,000 units. Variable costs are $2.10 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Marshall is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.

Additional power for operating machines, extra supplies, and added cleanup costs are examples of incremental overhead costs.

Sunk costs are irrelevant to future decisions.

Identify the five steps involved in managerial decision making.

Beta Inc. can produce a unit of Zed for the following costs: Direct material \ 10 Direct labor 20 Overhead 50 Total costsper unit \ 80 An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit. If Beta buys from the supplier, it will still incur 40% of its overhead. Beta should:

Derby Inc. manufactures a product which contains a small part. The company has always purchased this motor from a supplier for $125 each. Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it. The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. Direct materials \ 38 Direct labor 50 Overhead (fixed and variable) 75 Total \ 163 The required volume of output to produce the motors will not require any incremental fixed overhead. Incremental variable overhead cost is $21 per motor. What is the effect on income if Derby decides to make the motors?