Exam 12: Relevant Costs for Decision Making

Under time and material pricing,the materials loading charge includes which of the following items? Cost of Ordering, Invoice Cost of Materials Handling, and Strong Materials Desired Profit on Materials A) Yes Yes Yes B) No Yes Yes C) No No Yes D) Yes Yes No

Manico Company produces three products-X,Y,& Z-with the following characteristics: Selling price per unit \ 20100\% \ 16100\% \ 15100\% Variable cost per unit Contribution margin per unit \ 840\% \ 425\% \ 960\% = = = Machine hours per unit 5 3 6 The company has only 2,000 machine hours available each month.If demand exceeds the company's capacity,in what sequence should orders be filled if the company wants to maximize its total contribution margin?

Under time and material pricing,what is(are)included in the time component?

Consider the following production and cost data for two products,L and C: Product L Product C Contribution Margin per Unit \ 130 \ 120 Machine Setups Needed per Unit 10 setups 8 setups The company can only perform 65,000 machine setups each period due to limited skilled labour,and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

Which of the following is NOT an effective way of dealing with a production constraint (i.e.,bottleneck)?

Products A,B,and C are produced from a single raw material input.The raw material costs are $90,000,from which 5,000 units of A,10,000 units of B,and 15,000 units of C can be produced each period.Product A can be sold at the split-off point for $2 per unit,or it can be processed further at a cost of $12,500 and then sold for $5 per unit.What is the correct course of action regarding Product A?

WP Company produces products X,Y,and Z from a single raw material input in a joint production process.Budgeted data for the next month is as follows: X Y Z Units Produced 1,500 2,000 3,000 Per Unit Sales Value at Split-Off \ 19 \ 21 \ 24 Added Processing Costs per Unit \ 7 \ 7.50 \ 7 Per Unit Sales Value if Processed Further \ 29 \ 29 \ 30 The cost of the joint raw material input is $149,000.Which of the products should be processed beyond the split-off point? A) Yes Yes No B) No Yes No C) Yes No Yes D) No Yes Yes

Redner,Inc.produces three products.Data concerning the selling prices and unit costs of the three products appear below: \begin{array} {r} \quad\quad\quad \quad\quad\quad \quad\quad\quad\quad\quad\quad\quad\quad\text { Products }\\ \end{array}\\ \begin{array}{|l|r|r|r|} \hline & \text { A } & \text { B } & \text { C } \\ \hline \text { Selling price } & \$ 80 & \$ 60 & \$ 90 \\ \hline \text { Variable costs } & 50 & 40 & 55 \\ \hline \text { Fixed costs } & 25 & 8 & 22 \\ \hline \text { Grinding machine time } & 10 \mathrm{~min} & 5 \mathrm{~min} & 7 \mathrm{~min} \\ \hline \end{array} Fixed costs are applied to the products on the basis of direct labour hours. Demand for the three products exceeds the company's productive capacity.The grinding machine is the constraint,with only 2,400 minutes of grinding machine time available this week. Required: a)Given the grinding machine constraint,which product should be emphasized? Support your answer with appropriate calculations. b)If there is still unfilled demand for the product that the company should emphasize in part a)above,up to how much should the company be willing to pay for an additional hour of grinding machine time?

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 produced and sold 4,000 afghans and zero spindles of yarn the total contribution margin would be closest to:

The Clemson Company reported the following results last year for the manufacture and sale of one of its products, known as a Tam: Sales (6.500 Tams at \ 130 each) \ 845,000 Variable Cost of Sales \ 390,000 Variable Distribution Costs \ 65,000 Fixed Adertising Expense \ 275,000 Salary of Product Line Manager \ 25,000 Fixed Manufacturing Overhead \ 145,000 Operating Income (Loss) \ \ 55,000) Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were discontinued, there would be no change in the fixed manufacturing costs of the company. -Assume that discontinuing the Tam product would result in a $120,000 increase in the contribution margin of other product lines.How many Tams would have to be sold next year for the company to be as well off as if it just dropped the line and enjoyed the increase in contribution margin from other products?

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 there is no other use for the capacity now being used to produce the component,and the total fixed manufacturing overhead of the company would not be affected by this decision.If Rodgers Company were to purchase the components rather than making them internally,what would be the impact on the company's annual operating income?

Juett Company produces a single product.The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: Direct Materials \ 29.6 Direct Labour \ 5.80 Variable Manufacturing Overhead \ 2.50 Fixed Manufacturing Overhead \ 17.20 Variable Selling \& Administrative Expense \ 1.80 Fixed Selling \& Administrative Expense \ 6.70 The normal selling price of the product is $72.90 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price.This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs.The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales. Direct labour is a variable cost in this company. Required: a)Suppose there is ample idle capacity to produce the units required by the overseas customer,and the special discounted price on the special order is $66.10 per unit.By how much would this special order increase (decrease)the company's operating income for the month? b)Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer? c)Suppose there is not enough idle capacity to produce all of the units for the overseas customer,and accepting the special order would require cutting back on production of 1,300 units for regular customers.What would be the minimum acceptable price per unit for the special order?

When Mr.Ding L.Berry,president and chief executive of Berry,Inc.,first saw the segmented income statement below,he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" $\text { Product Lines }$ $\begin{array}{|l|r|r|r|r|}\hline & \text { Total } & \text { U } & \text { V } & \text { W } \\\hline \text { Sales } & \$ 250,000 & \$ 100,000 & \$ 75,000 & \$ 75,000 \\\hline \text { Variable expenses } & \$ 119,000 & \$ 37,500 & \$ 35,000 & \$ 47,000 \\\hline \text { Contribution margin } & \$ 131,000 & \$ 63,000& \$ 40,00 0 & \$ 28,000 \\\hline \text { Traceable fixed expenses* } & \$ 98,000 & \$ 31,00 & \$ 37,000 & \$ 30,000 \\\hline \text { Common expenses, allocated } & \$ 32,900 & \$ 18,000& \$ 10,500 & \$ 4,400 \\\hline \text { Operating income (loss) } & \$ 100 & \$ 14,000 & \$(7,500) & \$(6,400) \\\hline\end{array}$ *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued. Required: Recommend which segments,if any,should be eliminated.Prepare a report in good form to support your answer.

A study has been conducted to determine if Product A should be dropped.Total sales of the product are $200,000 per year; total variable expenses are $140,000 per year.Total fixed expenses charged to the product are $90,000 per year.The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped.These data indicate that if Product A is dropped,the company's overall operating income per year would change by how much?

Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs, which would be allocated to this part, amount to $300,000 per year. -What would be the change in the company's overall annual operating income that would result from making the component,rather than buying it?

Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: Direct Materials \ 42.60 Direct Labour \ 8.10 Variable Manufacturing Overhead \ 1.10 Fixed Manufacturing Overhead \ 17.30 Variable Selling \& Administrative Expense \ 1.8 Fixed Selling \& Administrative Expense \ 8.00 The normal selling price of the product is $\$ 86.10$ per unit.An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company. -Suppose there is not enough idle capacity to produce all of the units for the overseas customer,and accepting the special order would require cutting back on production of 700 units for regular customers.The minimum acceptable price per unit for the special order is closest to which of the following?

Madison Optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago.Selected information on the two machines is given below: Old New Machine Machine Original cost when new \ 80,000 \8 5,000 Accumulated depreciation to date 32,000 Current salvage value 26,000 Annual operating cost 4,000 3,000 Remaining useful life 4 years 4 years Ignore income taxes and the time value of money in this problem. Required: Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years.

The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month, which represents the company's capacity: Manufacturing: Direct Materials \ 1.00 Direct Labour \ 2.00 Variable Overhead \ 0.50 Fixed Overhead \ 0.90 Selling and Administrative: Variable \ 1.50 Fixed \ 0.60 Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labour is a variable cost. -Assume the company has 50 units left over from last year that have small defects and which will have to be sold at a reduced price as scrap.This would have no effect on the company's other sales.What cost is relevant as a guide for setting a minimum price on these defective units?

The absorption costing approach to cost-plus pricing will result in attaining the company's required rate of return only if forecasted unit sales are realized,holding all other things constant.

The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per-unit costs to produce and sell one Hom at that activity level follow: Direct Materials \ 20 Direct Labour \ 10 Variable Manufacturing Overhead \ 5 Fixed Manufacturing Overhead \ 7 Variable Selling Expense \ 8 Fixed Selling Expense \ 2 The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order is accepted, the variable selling expense will be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000, and Varone would have no use for it after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a variable cost. -If Varone can expect to sell 32,000 Homs next year through regular channels,at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?