Exam 10: Relevant Costs and Product Planning Decisions

List at least two factors that should be considered in a make or buy decision.

You overhear the manager of a sign shop say,'I'd never accept a special order! How could you ever make money selling products below full cost?' Do you agree? Why or why not?

For the upcoming year,there is a maximum of 4050 direct labour hours available.Management believes that the demand for both the standard and deluxe detailing is limited to 900 each per year.If the company maximises profits,what is the maximum contribution margin the company could have in the upcoming year?

Averette & Averette Averette & Averette, a local dental practice, currently makes its own dentures for customers. The dental practice has one part-time employee who comes in weekly to make dentures. The employee is paid $150 per denture set. The direct materials and variable overhead cost per set of dentures is $75 and $25, respectively. In addition, the practice allocates $10 000 of fixed overhead to the denture-making department. The practice makes 1000 sets of dentures per year. An outside company who specialises in the making of dentures has offered to make each set of dentures for Averette & Averette for $255 per set. -What are Averette & Averette's total relevant costs to make the dentures themselves?

Refer to the Kellerman Detailing Service information below. Kellerman Detailing Service Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected data related to each package is as follows: Standard Deluxe Sales price \ 85 \ 200 Direct materials 5 10 Direct labour 15 40 Variable overhead 5 15 Direct labour hours 2 3 Most of the car detailing is done by hand. -There is a maximum of 4050 direct labour hours available each year.If demand were equally strong for both packages and the company could sell an unlimited number of either package,how many of which kind(s)of package(s)should be sold in order to maximise profits?

Which of the following will never be considered in special order decisions?

Which of the following would not be a factor in the consideration of whether or not a special order is accepted or not?

Carlton Products has three product lines: A,B,and C. $\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$50000&\$550200&\$700000&\$1750000\\ \text { Variable costs } &\underline{280000}&\underline{420000}&\underline{300000}&\underline{1000000}\\ \text {Contribution margin } &220000&130000&400000&750000\\ \text { Fixed costs} &\underline{100000}&\underline{140000}&\underline{150000}&\underline{390000}\\ \text { Net income} &\underline{\$120000}&\underline{\$10000}&\underline{\$(250000)}&\underline{\$360000}\\ \text { } &\\\end{array}$ Management is considering dropping product line B.If it is discontinued,all of its fixed costs can be avoided.The discontinuation of product line B would:

When are fixed costs relevant in a make or buy decision? Give one example of a relevant fixed cost.

Averette & Averette Averette & Averette, a local dental practice, currently makes its own dentures for customers. The dental practice has one part-time employee who comes in weekly to make dentures. The employee is paid $150 per denture set. The direct materials and variable overhead cost per set of dentures is $75 and $25, respectively. In addition, the practice allocates $10 000 of fixed overhead to the denture-making department. The practice makes 1000 sets of dentures per year. An outside company who specialises in the making of dentures has offered to make each set of dentures for Averette & Averette for $255 per set. -If Averette & Averette outsources the making of dentures,net income will:

Mountaineer Products Mountaineer Products manufactures two types of tents: single-wall and double-wall. Selected data related to each type of tent is as follows: Single-wall Double-wall Sales price \ 250 \ 375 Direct materials 25 50 Direct labour 20 40 Variable overhead 10 15 Machine hours 2 3 Total fixed overhead is $150 000. Most of the manufacturing process is done on specialised machines. For the upcoming year, there is a maximum of 9000 machine hours available. Management believes there is sufficient demand for 3000 single-wall and 4000 double-wall tents each year. -In order to maximise profits,how many of each type of tent should be produced?

In resource utilisation decisions,managers should:

Mountaineer Products Mountaineer Products manufactures two types of tents: single-wall and double-wall. Selected data related to each type of tent is as follows: Single-wall Double-wall Sales price \ 250 \ 375 Direct materials 25 50 Direct labour 20 40 Variable overhead 10 15 Machine hours 2 3 Total fixed overhead is $150 000. Most of the manufacturing process is done on specialised machines. For the upcoming year, there is a maximum of 9000 machine hours available. Management believes there is sufficient demand for 3000 single-wall and 4000 double-wall tents each year. -If the company maximises profits,what is the maximum contribution margin for the upcoming year?

Ergo Products manufactures a variety of ergonomic household tools including a cordless drill.The cordless drill comes with a battery recharger.Currently,the company manufactures its own recharger for the drill with the following unit costs: Direct materials \ 3.00 Direct labour \ 3.00 Variable overhead \ 1.00 In addition,when 5000 rechargers are produced each year,Ergo applies $2 of fixed overhead costs to each recharger.Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each.If Ergo accepts the offer,80% of the fixed overhead allocated to the rechargers will be avoidable. Required: A. List at least two qualitative factors that Ergo Products should consider in this make or buy decision. B. What is the relevant cost of each recharger if they make it themselves? C. What is the relevant cost of each recharger if they outsource? D. From a quantitative basis, should they make or buy the rechargers? By what amount will the company's net income increase or decrease if they outsource?

Quality Products produces and sells screen-printed t-shirts to local organisations.The normal sales price per shirt is $12.Due to setup costs,they only accept orders of at least 100 shirts.The setup cost per order is $40 and the variable costs per shirt are $3.Fixed overhead costs per month total $2000.Quality Products has the capacity to screen-print as many as 5000 shirts per month,but is currently producing around 3000.On 1 May,the company was approached by a local non-profit group who wishes to place a single order for 100 shirts.The non-profit group has indicated that they can only pay $5 per shirt. Required: A. List two qualitative factors that should be considered by Quality Products before accepting the special order. B. What are the total relevant costs of accepting the special order? C. From a quantitative basis, should they accept the special order? By what amount will Quality Product's net income increase or decrease if they accept the special order?

A local vendor at the county fair sells snow cones for $3 each.When 250 snow cones are sold,each snow cone is estimated to have $.10 in variable costs and $.15 in fixed costs.A local school group plans on attending the fair next week and wishes to purchase 50 snow cones for $.25 each.The vendor can sell as many as 400 snow cones per day.If the special order were accepted,net income would:

In deciding whether to sell a product 'as is' or process it further,which of the following costs are relevant to the decision?

Kane Manufacturing has three product lines: A,B,and C.The following information is available for each product line: $\begin{array}{lr}&\underline{\text { A }} &\underline{\text { B }} &\underline{ \text { C }} &\underline{ \text { Total }}\\ \text { Sales } &\$30000&\$350000&\$155000&\$805000\\ \text { Variable costs } &\underline{100000}&\underline{110000}&\underline{105000}&\underline{315000}\\ \text {Contribution margin } &2000&240000&50000&490000\\ \text { Fixed costs} &\underline{40000}&\underline{55000}&\underline{52000}&\underline{147000}\\ \text { Net income} &\underline{\$160000}&\underline{\$185000}&\underline{\$(2000)}&\underline{\$343000}\\ \text { } &\\\end{array}$ Management is considering dropping product line C. Required: A. What is one qualitative factor that Kane should consider before dropping product line $\mathrm{C}$ ? B. If it is determined that all of product line C's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped? C. If it is determined that none of product line C's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped? D. If it is determined that half of product line C's fixed costs are avoidable, what would be the effect on the company's overall net income if it were dropped?

Which of the following statements is true regarding special order decisions?

Morris Inc.manufactures two products: Widgets and Gizmos.Widgets have a contribution margin per unit of $30 and require 2 hours of direct labour while Gizmos have a contribution margin per unit of $39 and require 3 hours of direct labour. A. In the short-run, how should the company choose which product to produce or sell first if direct labour hours are a constraint? B. Assuming there is sufficient demand for each of these products, which of the above products should the company maximise production of first? Show calculations to support your answer.