Exam 12: Relevant Costs for Decision Making

Gata Co.plans to discontinue a department that has a $48,000 contribution margin and $96,000 of fixed costs.Of these fixed costs,$42,000 cannot be avoided.What would be the effect of discontinuing the department on Gata's overall operating income?

Which of the following statements is NOT consistent with target costing?

Relay Corporation manufactures batons.Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Relay's predictions for next year,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price.Total fixed costs would be unaffected by this order.By what amount would the company's operating income be increased or decreased as a result of the special order?

Raymond Company estimates that an investment of $\$ 800,000$ would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be: Variable Costs (per unit): Materials, Labour, and Manufacturing Overhead \ 30 Selling and Administrative \ 5 Fixed Cost per Year: Manufacturing Overhead \ 300,000 Selling and Administrative \ 240,000 The company requires a $20 \%$ return on the investment in all products. The company uses the absorption costing approach to pricing. - What is the target selling price based on the absorption costing approach?

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200. -What is the net advantage or disadvantage to the company from upgrading the calculators?

What is a joint product?

Lusk Company produces and sells 15,000 units of Product A each month.The selling price of Product A is $20 per unit,and variable expenses are $14 per unit.A study has been conducted concerning whether Product A should be discontinued.The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product were discontinued.These data indicate that if Product A were discontinued,the company's overall monthly operating income would change by how much?

The following information is available on Browning Inc.'s Product A: Number of Units Sold Each Year 20,000 Selling Price per Unit \ 96 Unit Product Cost \ 60 Investment in Product A \ 500,000 Required Return on Investment 16\% 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?

The markup over cost under the absorption costing approach would increase if the unit product cost increases,holding everything else 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 has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price,what would be the effect on operating income next year due to accepting this order?

Bingham Company manufactures and sells Product J. Results for last year for the manufacture and sale of Product J are as follows: Sales (10,000 units at \ 160 each) \ 1,600,000 Less: Costs; \ 960,000 Variable Production Costs \ 240,000 Sales Commisions -15\% of Sales \ 195,000 Salaries of Line Supervisors \ 180,000 Traceable Fixed Factory Overhead (Allocated to \ 170,000 product on the Basis of Square Meters Occupied) Total Cost \ 1,745,000 Operating Income (Loss) \ 145,000 Bingham Company anticipates no change in the operating result for Product $\mathrm{J}$ in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether or not to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision. -Assume that discontinuing Product J would result in a $30,000 increase in the contribution margin of other product lines.If Bingham chooses to discontinue Product J,what will be the change in operating income next year due to this action?

The markup over cost under the absorption costing approach would increase if the required rate of return increases,holding everything else constant.

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 markup percentage that would be needed on the new product is closest to which of the following?

Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products.Which of the following costs is NOT relevant?

The Wyeth Company produces three products-A,B,and C-from a single raw material input.Product A can be sold at the split-off point for $40,000,or it can be processed further at a total cost of $15,000 and then sold for $58,000.Joint product costs total $60,000 annually.What is the correct course of action regarding Product A?

Brown Company makes four products in a single facility. These products have the following unit product costs: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$ A B C D Direct Materials \ 15.60 \ 19.50 \ 12.50 \ 15.20 Direct Labour \ 17.60 \ 21.00 \ 15.40 \ 9.40 Variable Manufacturing Overhead \ 4.40 \ 5.60 \ 8.10 \ 5.10 Fixed Manufacturing Overhead \ 27.50 \ 14.40 Unit Product Cost \ 65.10 \ 60.50 \ 50.50 Additional data concerning these products are listed below. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Product }$ Grinding Minutes per Unit A B C D Selling Price per Unit 2.00 1.10 0.70 0.30 Variable Selling Cost per Unit \ 2.60 7\ 1.10 \ 67.90 \ 62.60 Monthly Demand in Units 3,000 \ 3.10 \ 2.80 \ 3.50 The grinding machines are potentially a constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company. -What maximum amount (rounded to the nearest whole cent)should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity?

Which of the following costs are always relevant in decision making?

iBurst Technology is developing a high-speed modem to connect notebook computers with iSun's satellite-based data network.The cross-functional team in charge of the project has assembled the following information: Expected market price \ 150 Required return on sales 20\% Product life 3 years Currently feasible cost \ 50,000,000 Expected average annual sales 100,000 Required: a)Given the above information calculate the cost reduction target. b)If the cross-functional team believes the cost of the modem cannot be reduced by any more than 18%,is this a feasible product for iBurst Technology? Why or why not? c)Whether the cost reduction target is feasible or not,what can the cross-functional team do to further reduce cost?

The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: Annual Sales 3,000 Units Selling Price per Unit \ 309 Variable Costs (Per Unit) \ 130 Production \ 50 Selling Avoidable Fixed Costs per Year: \ 51,000 Production \ 75,000 Selling Unavoidable Allocated Fixed Corporate \ 54,000 Costs per Year If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year. -If the new product is added next year,what will be the increase in operating income resulting from this decision?

Dresser Company uses time and material pricing.The time rate is $30 per hour.The material loading charge is 15% for ordering,handling,and storing materials and 25% for the desired profit on these materials.Given these data,what would be the total charge for a job that requires 3 hours of labour time and $80 in materials?