Exam 12: Relevant Costs for Decision Making

If a company sells a product for less than its budgeted unit product cost under absorption costing,then the company will lose money.

The time and material approach pricing will result in attaining the company's desired profit only if forecasted billable activity is realized,holding all other things constant.

Dowchow Company makes two products from a common input. Joint processing costs up to the split-off point total $\$ 38,400$ a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below: Product X Product Y Total Allocated Joint Processing Costs 20,800 17,600 38,400 Sales Value at Split-Off Point 26,000 22,000 48,000 Costs of Further Processing 22,600 20,400 43,000 Sales Value after Further Processing 45,000 45,900 90,900 -What is the net monetary advantage of processing Product Y beyond the split-off point?

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: Variable Production Cost \ 4.60 Fixed Production Cost \ 1.80 Variable Selling Expense \ 1.00 If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $\$ 0.30$ per unit. -Suppose that total regular sales of jigs are 85,000 units per month,and all other conditions remain the same.If Immanuel accepts the special order,what will be the change in monthly operating income?

Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of its products.Data concerning the unit production costs of the axial tap follow: Direct Materials \ 35 Direct Labour \ 10 Variable Manufacturing Overhead \ 8 Fixed Manufacturing Overhead \ 20 Total Manufacturing Cost per Unit \ 73 An outside supplier has offered to sell Kramer Company all of the axial taps it requires.If Kramer Company decided to discontinue making the axial taps,40% of the above fixed manufacturing overhead costs could be avoided.Assume that direct labour is a variable cost. Required: a)Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps.If the outside supplier offers to sell the axial taps for $65 each,should Kramer Company accept the offer? Fully support your answer with appropriate calculations. b)Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually.What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps?

Managers should pay little attention to bottleneck operations because they have limited capacity for producing output.

The following information is available on Bruder Inc.'s Product A: Number of Units Sold Each Year 10,000 Selling Price per Unit \ 80 Unit Product Cost \ 50 Investment in Product A \ 400,000 Required Return on Investment 15\% The company uses the absorption costing approach to cost-plus pricing.Based on these data,what are the total selling,general,and administrative expenses each year?

Cost data relating to the single product produced by the Jones Company are given below: Per unit Total per year Direct materials \ 10 Direct labour 6 Variable Manufacturing overhead 3 Fixed manufacturing overhead \1 40,000 Variable selling, general, and administrative expense 1 Fixed selling,general, and administrative expese 180,000 The Jones Company uses the absorption costing approach with a desired markup of 60%.If the company plans to produce and sell 20,000 units each year,what would be the target selling price per unit?

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin,then the firm is better off economically if the product is dropped.

The following standard costs pertain to a component part manufactured by Ashby Company: Direct Materials \ 2 Direct Labour \ 5 Manufacturing Overhead \ 20 Standard Cost per Unit \ 27 The company can purchase the part from an outside supplier for $25 per unit.The manufacturing overhead is 60% fixed,and this fixed portion would not be affected by this decision.Assume that direct labour is an avoidable cost in this decision.What would be the relevant amount of the standard cost per unit in a decision of whether to make the part internally or buy it from the external supplier?

Consider the following statements: I.A vertically integrated firm is more dependent on its suppliers than a firm that is NOT vertically integrated. II.Many firms feel they can control quality better by making their own parts. III.A vertically integrated firm realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations. Which of the above statements represent advantages to a firm that is vertically integrated?

Barley Company makes four products in a single facility. Data concerning these products appear below: Product Selling Price per Unit \ 35.30 \ 30.20 \ 20.80 \ 26.00 Variable Manufacturing Cost per Unit \ 16.50 \ 15.80 \ 7.90 \ 8.50 Variable Selling Cost per Unit \ 3.80 \ 1.60 \ 1.90 \ 3.30 Milling Machine Minutes per Unit 3.20 1.80 2.20 2.50 Monthly Deman in Units 4,000 1,000 3,000 1,000 The milling machines are potentially a constraint in the production facility. A total of 22,600 minutes are available per month on these machines. -How many minutes of milling machine time would be required to satisfy demand for all four products?

Mercer Company is planning the introduction of a new product. The following information relating to the product has been assembled: Variable Costs (per unit): Materails, Labour, and Overhead \ 12 Selling and Administrative \ 3 Fixed Costs per Year: \ 360,000 Manufacturing Overhead \ 300,000 Selling and Administrative \ 650,000 Investment Required 25\% Required Rate of Return 60,000 Total Units to Be Produced and Sold Each Year The company uses the absorption costing approach to pricing. - The markup percentage that would be needed on the new product is closest to which of the following?

E-books Company is planning the introduction of a new product. The following information relating to the product has been assembled: Variable Costs (per unit): Materials, Labour, and Overhead \ 15 Selling and Administrative \ 3 Fixed Costs per Year: \ 375,000 Manufacturing Overhead \ 300,000 Selling and Administrative \ 750,000 Investment Required 20\% Required Rate of Return 75,000 Total Units to Be Produced and Sold Each Year The company uses the absorption costing approach to pricing. - The target selling price for one unit of the new product is closest to which of the following?

Glocker Company makes three products in a single facility.These products have the following unit product costs: Praducts A B C Direct materials \ 10.90 \ 15.80 \ 8.00 Direct labour 12.5 12.60 9.90 Variable manufacturing overhead 2.40 1.20 1.40 Fixed manufacturing overhead Unit product cost \ 37.40 Additional data concerning these products are listed below. Products A B C Mixing minutes per unit 2.00 1.00 0.50 Selling price per unit \ 55.80 \ 54.60 \ 43.10 Variable selling cost per unit \ 2.10 \ 1.40 \ 1.90 Monthly demand in units 2,000 1,000 3,000 The mixing machines are potentially a constraint in the production facility.A total of 5,900 minutes are available per month on these machines. Direct labour is a variable cost in this company. Required: a)How many minutes of mixing machine time would be required to satisfy demand for all four products? b)How much of each product should be produced,rounded to the nearest whole unit,to maximize operating income c)Up to how much should the company be willing to pay,rounded to the nearest whole cent,for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs.Of the fixed costs,$21,000 cannot be avoided.What would be the effect of discontinuing the department on Manor's overall operating income?

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: Direct Materials \ 4.20 Direct Labour \ 120 Variable Manufacturing Overhead \ 5.80 Fixed Manufactiong Overhead \ 6.50 Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $\$ 25$ per component. Assume that direct labour is a variable cost. -Assume that if the components were to be purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided,and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,what would be the impact on annual operating income due to accepting the offer?

The cost of resources that has no alternative use in a make or buy decision has an opportunity cost of zero.

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores, or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: Data for one spindle of yarn: Selling price \ 12 Variable Production Cost \ 8 Fixed Production Cost (based on 4,000 spindles of yarn produced) \ 2 Data for one afghan: Selling Price \ 32 Production Cost per Spindle of Yarn \ 10 Variable Production cost to process the yarn into an Afghan \ 9 Avoidable Fixed Production Cost to Process the Yarn into an Afghan (based on 4,000 afghans produced) \ 5 Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans. -If Austin chooses to produce 4,000 afghans each month,what will be the change in the monthly net operating income as compared to selling 4,000 spindles of yarn?

One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.