India 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. $\begin{array} { | l | r | r | } \hline & \text { Product J } & \text { Product K } \\ \hline \text { Tons produced } & 25,000 & 15,000 \\ \hline \text { Scparable variable processing eosts bcyond split-olI } & \$ 64,000 & \$ 100.000 \\ \hline \text { Selling price per ton at split-off } & 15 & 52 \\ \hline \text { Selling price per ton after additional processing } & 21 & 58 \\ \hline \end{array}$ If India desires to maximize total company income, what should the firm do with regard to Products J and K? $\begin{array} { | l | l | l | } \hline & \text { Product J } & \underline { \text { Product K } } \\ \hline 1 & \text { Sell at split-off } & \text { Sell at split-off } \\ \hline 2 & \text { Sell at split-off } & \text { Process beyond split-off } \\ \hline 3 & \text { Process beyond split-off } & \text { Sell at split-off } \\ \hline 4 & \text { Process beyond split-off } & \text { Process beyond split-off } \\ \hline 5 & \text { There is not enough information to judge. } \\ \hline \end{array}$

A) 1 B) 2 C) 3 D) 4 E) 5 A) 1 B) 2 C) 3 D) 4 E) 5

Pillsbury Corporation makes two types of ice cream: Chocolate and Peanut Butter. Operating information from the previous year follows: $\begin{array} { l r r } & \text { Chocolate } & \text { Peanut Butter } \\ \text { Units produced and sold } & 6,000 & 5,000 \\ \text { Machine hours used } & 6,000 & 2,500 \\ \text { Sales price per unit } & \$ 8 & \$ 11 \\ \text { Variable cost per unit } & \$ 5 & \$ 9 \end{array}$ Fixed costs of $30,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed costs would remain the same. Assuming there is unlimited demand for both products and Pillsbury has 20,000 machine hours available, how many units of each product should be produced and sold respectively?

A) 0, 0. B) 0, 40,000. C) 6,000, 20,000. D) 6,000, 40,000. E) 20,000, 0. A) 0, 0. B) 0, 40,000. C) 6,000, 20,000. D) 6,000, 40,000. E) 20,000, 0.

Heritage Homemakers Corp. (HHC) is composed of eight divisions across Canada, and each division is allocated a share of HHC overhead to make divisional managers aware of the cost of running the corporate headquarters. The following information relates to the Ontario Division: $\begin{array} { | l | l | } \hline \text { Sales revenue } & \$ 8,500,000 \\ \hline \text { Variable operating costs } & 6,000,000 \\ \hline \text { Traceable fixed operating costs } & 2,000,000 \\ \hline \text { Allocated corporate overhead } & 200,000 \\ \hline \end{array}$ If the Ontario Division is closed, 100% of the traceable fixed operating costs can be eliminated. The impact on HHC's profitability if the Ontario Division is closed is a:

A) decrease by $300,000. B) decrease by $500,000. C) decrease by $2,300,000. D) decrease by $2,500,000. E) decrease by $6,500,000. A) decrease by $300,000. B) decrease by $500,000. C) decrease by $2,300,000. D) decrease by $2,500,000. E) decrease by $6,500,000.

The following costs relate to a variety of decision settings: \(\begin{array}{|l|l|l|} \hline &\underline { \text { Cost}}& \underline { \text { Decision}}\\ \hline \text { 1. } & \text { Allocated corporate overhead } & \text { Closing a money-losing department } \\ \hline \text { 2. } & \text { Cost of an old ear } & \text { Vehicle replacement } \\ \hline \text { 3. } & \text { Direct materials } & \text { Make or buy a product } \\ \hline \text { 4. } & \text { Salary of marketing manager } &\text { Project discontinuance; manager to be } \\ &&\text { transferred clsewhere in the firm }\\ \hline \text { 5. } & \text { Home theater installation } & \text { Purchase of a new home } \\ \hline 6 . & \text { Unavoidable lixed overhead } & \text { Plant closuru } \\ \hline \text { 7. } & \begin{array}{r} \text { Rescarch expenditures incured last } \\ \text { year. related to new product } \end{array} & \text { Product introduction to marketplace } \\ \hline 8 . & \$ 4 \text { million advertising program } & \text { Whether to promote produet A or B with the } \\ &&\text {\$4 million program }\\ \hline 9 . & \text { Manufactured cost of existing } & \text { Whether to discard the goods or sell them to a } \\ &\text { inventory }&\text { third-world country }\\ \hline \end{array}\) Required: Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

1. Irrelevant-The cost will be incurred

Triumph Incorporated is studying whether to expand operations by adding a new product line. Which of the following costs should be considered in this decision? $\begin{array}{|l|l|c|} \hline &\text { Opportunity Cost } & \text { Sunk Cost } \\ \hline 1& \text { Yes } & \text { Yes } \\ \hline 2& \text { Yes } & \text { Sometimes } \\ \hline3 & \text { Yes } & \text { No } \\ \hline4 & \text { No } & \text { Yes } \\ \hline 5& \text { No } & \text { No } \end{array}$

A) 1 B) 2 C) 3 D) 4 E) 5 A) 1 B) 2 C) 3 D) 4 E) 5

Exam 12: Decision Making: Relevant Costs and Benefits

Kinsey Company recently discontinued the manufacture of Product #627. The standard costs for this product were: Direct material Direct labour Variable overhead Fixed overhead Total \ 60 30 24 There are 900 units of this product in finished-goods inventory. The units are technologically obsolete, and the following alternatives are being considered. 1. Dispose of as scrap. The proceeds from the sale will equal the cost of transportation to the disposal site. 2. Sell to an exporter for sale in a developing country. The sales price to the exporter would be $13 per unit. 3. Remanufacture the products to convert them into Model M55, a model that normally sells for $300. The additional cost to convert the Product #627 units would be $55; the standard cost to manufacture M55 is $135. Presently, there is sufficient capacity to manufacture M55 directly or to do the necessary conversion work on Product #627. Required: A. Determine the current carrying value of the Product #627 inventory. B. Evaluate each alternative and determine the financial benefit to Kinsey if the alternative is pursued.

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Question 1

Correct Answer:

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A. Ending inventory: 900 units $\times \$ 159=\$ 143,100$

B. 1. Scrap: no financial benefit.

2. Sell to exporter: 900 units $x \$ 13=\$ 11,700$

3.
$\begin{array}{lcc}&\underline{\text { Modify}}&\underline{\text { Manufacture M55 }}\\&\underline{\text { Product}}\\&\underline{\text { \#627}}\\\text { Incremental revenue } & \$ 300 & \$ 300 \\\text { Less: Incremental cost } & \underline{55}& \underline{135} \\\text { Net benefit } & \underline{\$ 245} &\underline{\$ 165}\end{array}$

The conversion of Product $\# 627$ into $M 55$ will yield a $\$ 245$ benefit, more than producing M55s directly. Note that the $\$ 159$ cost of existing Product $\# 627 \mathrm{~s}$ is sunk

Lido Company manufactures A and B from a joint process (cost = $80,000). Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and then sold for $25. Ten thousand pounds of B can be sold at split-off for $15 per pound or processed further at an additional cost of $20,000 and later sold for $16. If Lido decides to process B beyond the split-off point, operating income will:

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Question 2

Correct Answer:

Verified

C

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 litres, of which 40% are G and 60% are H. The selling price of G is $8.75 per litre, and the selling price of H is $15.00 per litre. Required: 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 has discovered a new process by which G can be refined into Product GG, which has a sales price of $12 per litre. This additional processing would increase costs by $2.10 per litre. Assuming there are no other changes in costs, should the company use the new process? Show calculations.

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Question 3

Correct Answer:

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A. Each batch of 20,000 litres yields 8,000 litres of G (40%) and 12,000 litres of H (60%). Thus, the sales values at split-off are; G, $70,000 (8,000 x $8.75) and H, $180,000 (12,000 x $15.00), for a total of $250,000. The joint cost allocation is.
G: ($70,000 ÷ $250,000) x $80,000 = $22,400
H: ($180,000 ÷ $250,000) x $80,000 = $57,600
B. $\begin{array} { l r } \text { Incremental revenue per litre } & \$ 3.25 \\\text { Less: incremental costs per litre } &\underline { 2.10 }\\\text { Incremental profit per litre } & \$ 1.15 \\\text { Volume in litres } & \underline { x 8.000 } \\\text { Incremental profit } & \underline {\underline {\$ 9.200}}\end{array}$ Riverside should go ahead with the new process as it is profitable for the firm.

India 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. Product J Product K Tons produced 25,000 15,000 Scparable variable processing eosts bcyond split-olI \ 64,000 \ 100.000 Selling price per ton at split-off 15 52 Selling price per ton after additional processing 21 58 If India desires to maximize total company income, what should the firm do with regard to Products J and K? Product J 1 Sell at split-off Sell at split-off 2 Sell at split-off Process beyond split-off 3 Process beyond split-off Sell at split-off 4 Process beyond split-off Process beyond split-off 5 There is not enough information to judge.

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Question 4

Pillsbury Corporation makes two types of ice cream: Chocolate and Peanut Butter. Operating information from the previous year follows: Chocolate Peanut Butter Units produced and sold 6,000 5,000 Machine hours used 6,000 2,500 Sales price per unit \ 8 \ 11 Variable cost per unit \ 5 \ 9 Fixed costs of $30,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed costs would remain the same. Assuming there is unlimited demand for both products and Pillsbury has 20,000 machine hours available, how many units of each product should be produced and sold respectively?

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Question 5

Capacity restrictions often change the way that managers make decisions. For example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding which new products to carry? How would this differ, say, from a concert promoter that desires to bring a rock group to an arena-type facility?

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Question 6

Heritage Homemakers Corp. (HHC) is composed of eight divisions across Canada, and each division is allocated a share of HHC overhead to make divisional managers aware of the cost of running the corporate headquarters. The following information relates to the Ontario Division: Sales revenue \ 8,500,000 Variable operating costs 6,000,000 Traceable fixed operating costs 2,000,000 Allocated corporate overhead 200,000 If the Ontario Division is closed, 100% of the traceable fixed operating costs can be eliminated. The impact on HHC's profitability if the Ontario Division is closed is a:

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Question 7

Two months ago, Tippett Inc. purchased 5,500 litres of Drysol at $2.40 per litre, paying $13,200. The demand for this product has been very strong since the acquisition, with the current market price at $5.05 per litre. The company recently received a special-order inquiry, one that would require the use of 4,000 litres of Drysol. Which of the following is (are) relevant in deciding whether to accept the special order?

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Question 8

St. Joseph Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labour market, have prompted the organization to contact Nationwide Institutional Food Service (NIFS) about the possibility of an outsourcing arrangement. The hospital's business office has provided the following information for food service for the year just ended: food costs, $890,000; labour, $85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria sales revenue, $80,000. Conversations with NIFS personnel revealed the following information. ▪ NIFS will charge St. Joseph Hospital $14 per day for each patient served. Note: This figure has been "marked up" by NIFS to reflect the firm's cost of operating the hospital cafeteria. ▪ St. Joseph's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%. ▪ Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labour costs will drop by 90%. NIFS plans to use St. Joseph facilities for meal preparation. ▪ Cafeteria sales revenue is expected to increase by 15% because NIFS will offer an improved menu selection. Required: A. What is meant by the term "outsourcing"? B. Should St. Joseph outsource its food-service operation to NIFS? C. Factors to consider would include improvement in food quality, reliability of NIFS, elimination of labor problems, and data validity in future years.

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Question 9

Garner Corporation has met all production requirements for the current month and has an opportunity to manufacture additional units with its excess capacity. Unit selling prices and unit costs for three product lines follow. Selling price \ 60 \ 86 \ 85 Direct material 22 26 32 Direct labour (at \2 8 per hour) 14 21 28 Variable overhead 10 22 26 Fixed overhead 8 17 8 Variable overhead is applied on the basis of direct labour dollars, whereas fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional manufacture of all products. Required: A. If Garner Corporation has excess machine capacity and can add more labour as needed with no constraints, which product is the most attractive to produce? B. If Garner Corporation has excess machine capacity but a limited amount of labour time available, which product or products should be manufactured in the excess capacity?

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Question 10

Carol-Lynn is contemplating a job offer with an advertising agency where she will make $64,000 in her first year of employment. Alternatively, Carol-Lynn can begin to work in her uncle's business where she will earn an annual salary of $48,000. If Carol-Lynn decides to work with her uncle, the opportunity cost would be:

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Question 11

A factory that makes a part has significant idle capacity. The factory's opportunity cost of making this part is equal to:

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Question 12

Factors in a decision problem that cannot be expressed in numerical terms are:

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Question 13

Sunk costs and opportunity costs are inherent in decision making. Required: A. Define the terms "sunk cost" and "opportunity cost." B. How are sunk costs treated when making decisions? C. "Information about sunk costs can be found in the financial statements and accounting records; however, information about opportunity costs is omitted." Do you agree with this statement? Explain.

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Question 14

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

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Question 15

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

(Multiple Choice)

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Question 16

The following costs relate to a variety of decision settings: 1. Allocated corporate overhead Closing a money-losing department 2. Cost of an old ear Vehicle replacement 3. Direct materials Make or buy a product 4. Salary of marketing manager Project discontinuance; manager to be transferred clsewhere in the firm 5. Home theater installation Purchase of a new home 6. Unavoidable lixed overhead Plant closuru 7. Rescarch expenditures incured last year. related to new product Product introduction to marketplace 8. \ 4 million advertising program Whether to promote produet A or B with the \4 million program 9. Manufactured cost of existing Whether to discard the goods or sell them to a inventory third-world country Required: Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

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Question 17

Triumph Incorporated is studying whether to expand operations by adding a new product line. Which of the following costs should be considered in this decision? Opportunity Cost Sunk Cost 1 Yes Yes 2 Yes Sometimes 3 Yes No 4 No Yes 5 No No

(Multiple Choice)

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Question 18

In early July, Jim Smith purchased a $70 ticket to the December 15 game of the Toronto Raptors. Parking for the game was expected to cost approximately $22, and Smith would probably spend another $15 for a souvenir program and food. It is now December 14. The Raptors were having a miserable season and the temperature was expected to peak at 5 degrees Celsius on game day. Jim is thinking about skipping the game and taking his wife to the movies and dinner, at a cost of $50. The amount of sunk cost that should influence Jim's decision to spend some time with his wife is:

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Question 19

Fowler Industries produces two bearings: C15 and C19. Data regarding these two bearings follow. 15 Machine hours required per unit 2.00 2.50 Standard cost per unit: Direct material \ 2.50 \ 4.00 Direct labour 5.00 4.00 Manufacturing overhead: Variable (Applied on the basis of direct labour hours) 3.00 2.50 Fixed (Applied on the basis of machine hours) 4.00 5.00 Total \ 14.50 \ 15.50 The company requires 8,000 units of C15 and 11,000 units of C19. Recently, management decided to devote additional machine time to other product lines, resulting in only 31,000 machine hours per year that can be dedicated to production of the bearings. An outside company has offered to sell Fowler the bearings at prices of $13.50 for C15 and $13.50 for C19. Required: A. Assume that Fowler decided to produce all C15s and purchase C19s only as needed. Determine the number of C19s to be purchased. B. Compute the net benefit to the company of manufacturing (rather than purchasing) a unit of C15. Repeat the calculation for a unit of C19. C. Fowler lacks sufficient machine time to produce all of the C15s and C19s needed. Which component (C15 or C19) should Fowler manufacture first with the limited machine hours available? Why? Be sure to show all supporting computations.

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Question 20

A factory that makes a part has significant idle capacity. The factory's opportunity cost of making this part is equal to:

Factors in a decision problem that cannot be expressed in numerical terms are:

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

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

Triumph Incorporated is studying whether to expand operations by adding a new product line. Which of the following costs should be considered in this decision? Opportunity Cost Sunk Cost 1 Yes Yes 2 Yes Sometimes 3 Yes No 4 No Yes 5 No No

The Changing Role of Managerial Accounting

Basic Cost Management Concepts

Product Costing and Cost Accumulation

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behaviour, and Cost Estimation

Cost-Volume-Profit Analysis, Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing and Flexible Budgeting

Cost Management Tools

Responsibility Accounting, Investment Centres, and Transfer Pricing

Target Costing and Cost Analysis for Pricing Decisions

Capital Expenditure Decisions

Allocation of Support Activity Costs and Joint Costs

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