Exam 12: Decision Making: Relevant Costs and Benefits

Which of the following best defines the concept of a relevant cost?

The City of Newmarket is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision?

The Cosmetics Department at the Webb's Department Store is being considered for closure. The following information relates to cosmetics activity: Sales revenue \ 300,000 Variable costs: Cost of goods sold 200,000 Sales commissions 20,000 Fixed operating costs 100,000 If all of the fixed operating costs are avoidable, should the Cosmetics Department be closed?

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:

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

Kline Enterprises, which has three departments, recently reported the following results: $\begin{array}{|l|c|c|c|c|}\hline & A&B&C\\\hline \text { Sales revenue } & \$ 12,000 & \mid \$ 48.000 & \mid \$ 40,000 \\\hline \text { Less: Operating costs } & \underline {11.400}& \mid\underline{59.800} &\mid\underline {50.500}\\\hline \text { Operating income (loss) } & \underline{\$ 600} &\mid\underline {\$(11.800)} &\mid \underline{\$(10,500)} \\\hline\end{array}$ The company incurred variable operating costs as well as $25,000 of fixed operating costs. The $25,000 amount was allocated to A, B, and C on the basis of sales revenue and is included in the cost figures noted above. If none of the fixed operating costs can be avoided, which operating loss should be considered first in choosing which department to close?

When deciding whether to sell a product at the split-off point or process it further, joint costs are not usually relevant because:

Quantum manufactures parts that are used in the production of washers and dryers. The following costs are associated with Part No. 41: Direct materials \ 60 Direct labour 29 Variable manufacturing overhead 32 Fixed manufacturing overhead 10 Variable selling costs 9 The company has received a special-order inquiry from an appliance manufacturer in Portugal for 16,000 units of Part No.41. A total of 30% of Quantum's fixed manufacturing overhead can be avoided on the order, and the variable selling costs per unit will amount to only $6. The minimum price that Quantum should charge the Portuguese manufacturer is:

Don Olsen builds custom homes in Ottawa, Ontario. Olsen was approached not too long ago by a client about a potential project, and he submitted a bid of $557,000, derived as follows: Land \ 100,000 Construction materials 130,000 Subcontractor labour costs \ 390,000 Construction overhead: 30\% of direct costs 117,000 Allocated corporate overhead Total cost \ 557,000 Olsen adds a 35% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $194,950 ($557,000 x 35%), producing a bid price of $751,950. Assume that 50% of construction overhead is fixed. Required: A. Suppose that business is presently very slow, and the client countered with an offer on this home of $550,000. Should Olsen accept the client's offer? Briefly explain your response. B. If Olsen has more business than he can handle, how much should he be willing to accept for the home? Briefly explain your response.

Information is said to be useful in decision making if it possesses three characteristics. Required: A. List the three characteristics of useful information. B. Frequently, there is a conflict between two of the characteristics requested in part "A." Briefly explain what this conflict is. C. What distinguishes relevant from irrelevant information?

Outdoors Inc. manufactures two products: Canoes and Kayaks. The results of operations for 2012 follow. Units Sales Less: Cost of Goods Sold Gross Margin Less: Selling Expenses Operating Income Canoes 12.000 \ 288,000 72,000 Kayaks 4,000 \ 800,000 284,000 Total 16,000 \ 1,080,000 348,000 Fixed manufacturing costs included in cost of goods sold amount to $2 per unit for Canoes and $19 per unit for Kayaks. Variable selling expenses are $5 per unit for Canoes and $21 per unit for Kayaks; remaining selling amounts are fixed. Assume Outdoors Inc. eliminates Canoes but there is no reduction in company-wide fixed manufacturing overhead costs. Instead, Outdoors Inc. uses the available capacity to produce and sell an additional 2,000 units of Kayaks. Under this scenario, the impact on operating income would be:

Chocolate Company currently has excess capacity. A special order for 5,000 units is received at a price of $13 per unit. Currently, production and sales are anticipated to be 20,000 units without considering the special order. Budget information for the current year follows. Sales \ 300,000 Less: Cost of goods sold Gross margin Cost of goods sold includes $20,000 of fixed manufacturing cost. If the special order is accepted, the company's income will:

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

Whispers Inc. has $150,000 of inventory that suffered minor smoke damage from a fire in the warehouse. The company can sell the goods "as is" for $70,000; alternatively, the goods can be cleaned and shipped to the firm's outlet centre at a cost of $48,000. There the goods could be sold for $90,000. What alternative is more desirable and what is the relevant cost for that alternative?

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. The contribution margin per machine hour for Peanut Butter is:

Beatbox Company reported the following results from the sale of 24,250 units of Product 123: Sales \ 608,000 Variable manufacturing costs 388,000 Fixed manufacturing costs 120,000 Variable selling costs 60,000 Fixed administrative costs 30,000 Bongo Inc. has offered to purchase 2,000 of Product 123 at $20 each. Beatbox 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 $20.95. Which of the following correctly notes the change in income if the special order is accepted?

Wright Enterprises, which produces various goods, has limited processing hours at its manufacturing plant. The following data apply to Product No. 607: Sales price per unit: $9.60 Variable cost per unit: $6.20 Process time per unit: 4 hours Management is now studying whether to devote the firm's limited hours to Product No. 607 or to other products. What key dollar amount should management focus on when determining Product No. 607's "value" to the firm and deciding the best course of action to follow?

Managerial accountants:

An opportunity cost may be described as a(n):

Cornell Corporation manufactures faucets. Several weeks ago, the company received a special-order inquiry from Yale Incorporated. Yale desires to market a faucet similar to Cornell's Model No. 55 and has offered to purchase 3,000 units. The following data are available: ▪ Cost data for Cornell's Model No. 55 faucet: direct materials, $45; direct labour, $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, Yale has offered Cornell only $115 because of the large quantity it is willing to purchase. ▪ Yale requires a design modification that will allow a $4 reduction in direct-material cost. ▪ Cornell'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 labour hour. This figure is based, in part, on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labour hours. ▪ Cornell will allocate $5,000 of existing fixed administrative costs to the order as "…part of the cost of doing business." Required: A. One of Cornell's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Cornell currently has excess capacity? Show calculations to support your answer. B. If Cornell currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain. C. Assume that Cornell currently has no excess capacity. Would outsourcing be an option that Cornell could consider if management truly wanted to do business with Yale? Briefly discuss, citing several key considerations for Cornell in your answer.