Exam 12: Relevant Costs for Decision Making

Two or more different products that are manufactured in the same production period are known as joint products.

A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what action is chosen.

Riley Company makes a product that has the following costs: Per unit Per year Direct materials \ 27.00 Direct labour 22.00 Variable manufacturing overhead 14.00 Fixed manufacturing overhead \ 1,080,000 Variable SG\&A expenses 12.00 Fixed SG\&A expenses 960,000 The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 48,000 units per year. The company has invested $500,000 in this product and expects a return on investment of 15%. Required: a)Compute the markup on absorption cost. b)Compute the target selling price of the product using the absorption costing approach.

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 minimum amount the company should accept for Product X if it is to be sold at the split-off point?

Cardinal Company needs 20,000 units of a certain part to use in one of its products.The following information is available: Cost to Cardinal to make the part: Direct Materials \ 4 Direct Labour \ 16 Variable Manufacturing Overhead \ 8 Fixed Manufacturing Overhead \ 10 \ 38 Cost to buy the part from the Oriole Company: \ 36 Oriole Company has offered to sell this part to Cardinal Company for $36 each.If Cardinal were to buy the part from Oriole instead of making it,Cardinal would not have any use for the released capacity.In addition,60% of the fixed manufacturing overhead costs would continue regardless of what decision is made.Assume that direct labour is an avoidable cost in this decision.In deciding whether to make or buy the part,what would be the total relevant costs to make the part?

Variable costs are always relevant costs.

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 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?

Magner,Inc.uses the absorption costing approach to cost-plus pricing to set prices for its products.Based on budgeted sales of 34,000 units next year,the unit product cost of a particular product is $61.80.The company's selling,general,and administrative expenses for this product are budgeted to be $809,200 in total for the year.The company has invested $400,000 in this product and expects a return on investment of 9%.The target selling price for this product based on the absorption costing approach would be closest to which of the following?

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 target selling price for one unit of the new product is closest to which of the following?

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct Materials \ 11.30 Direct Labour \ 22.70 Variable Manufacturing Overhead \ 1.20 Fixed Manufactiong Overhead \ 24.70 Unit Product Cost \ 59.90 An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year. If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. -What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

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. -What maximum amount (rounded to the nearest whole cent)should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity?

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. -If Immanuel accepts this special order,what will be the increase in the monthly operating income?

What should a firm faced with a production constraint do to maximize total contribution margin?

Turnhilm,Inc.is considering adding a small electric mower to its product line.Management believes that in order to be competitive,the mower cannot be priced above $139.The company requires a minimum return of 25% on its investments.Launching the new product would require an investment of $8,000,000.Sales are expected to be 40,000 units of the mower per year. Required: a)Compute the target cost of a mower. b)Suppose the target cost calculated in part (b)above is not attainable using the company's current manufacturing facilities.Specifically,the average cost of producing the 40,000 units is $100 per unit.Besides abandoning the idea,what specific options are available to Turnhilm? c)Suppose,using the company's current manufacturing facilities the average cost of producing the 40,000 units is only $80.What other specific options are available to Turnhilm?

Future costs that do NOT differ among the alternatives are NOT relevant in a decision.

Qualls Company makes a product that has the following costs: Per unit Per year Direct materials \ 17.30 Direct labour 12.90 Variable manufacturing overhead 4.20 Fixed manufacturing overhead \ 916,800 Variable SG\&A expenses 2.00 Fixed SG\&A expenses 907,200 The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 48,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 15%. Required: a)Compute the markup on absorption cost. b)Compute the target selling price of the product using the absorption costing approach.

Joeston Corporation makes a product with the following costs: Per unit Per year Direct materials \ 14.70 Direct labour 14.1 Variable Manufacturing overhead 3.70 Fixed manufacturing overhead \ 305,200 Variable SG\&A expenses 3.00 Fixed SG\&A expenses 163,800 The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 14,000 units per year.The company has invested $540,000 in this product and expects a return on investment of 10%.The markup on absorption cost would be closest to which of the following?

Crane Company makes four products in a single facility. Data concerning these products appear below: $\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 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 3.30 1.70 2.10 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?

Harris Corp.manufactures three products from a common input in a joint processing operation.Joint processing costs up to the split-off point total $200,000 per year.The company allocates these costs to the joint products on the basis of their total sales value at the split-off point.Each product may be sold at the split-off point or processed further.The additional processing costs and sales value after further processing for each product (on an annual basis)are: Product Sales Value at Split-Off Further Processing Cost Sales Value after Further Processing \ 180,00 \ 60,000 \ 230,000 \ 135,000 \ 105,000 \ 280,000 \ 95,000 \ 85,000 \ 160,000 The "Further Processing Costs" consist of variable and avoidable fixed costs. Required: Which product or products should be sold at the split-off point,and which product or products should be processed further? Show computations.

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 manufacture and sale of Tams will have no effect on the sale of other product lines.If the company discontinues the Tam product line,what will be the change in the annual operating income (loss)?