Exam 12: Relevant Costs for Decision Making

The SP Company makes 40,000 motors to be used in the production of its sewing machines.The average cost per motor at this level of activity consists of: Direct Materials \ 5.50 Direct Labour \ 5.60 Variable Manufacturing Overhead \ 4.75 Fixed Manufacturing Overhead \ 4.45 An outside supplier recently began producing a comparable motor that could be used in the sewing machine.The price offered to SP Company for this motor is $18.If SP Company decides not to make the motors,there would be no other use for the production facilities,and total fixed factory overhead costs would not change.If SP Company decides to continue making the motor,how much higher or lower would net income be than if the motors are purchased from the outside suppler? Assume that direct labour is a variable cost in this company.

Juanita earns $68,000 annually as a marketing specialist in Mexico City,Mexico.She has applied for admission to the M.B.A program at Dalhousie University.If accepted,she will resign and move to Halifax,Nova Scotia.Juanita has assembled the following data to make the decision: Juanita's annual salary \ 68,000 Annual tuition and fees 14,000 Annual book and supply expense 3,000 Monthly living expenses in Mexico City 800 Monthly living expenses in Halifax 1,600 Monthly auto expenses in Mexico city 350 Monthly auto expenses in Halifax 350 Cost of two business suits purchased just prior to resigning 600 Moving expenses 5,500 Required: a)Calculate the following in the context of Juanita's decision: (i)Total sunk costs (if any) (ii)Total differential or incremental costs (if any) (iii)Total opportunity costs (if any) b)What is your best estimate of the total cost to Juanita of earning an M.B.A.degree if it will take her 12 months to complete the program? c).Suppose you are Juanita.What specific additional information would you need in order to make a rational decision to pursue and successfully complete the MBA program at Dalhousie? Explain.

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 markup percentage needed on Product S in order to achieve the company's required return on investment?

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 net total dollar advantage (disadvantage)of purchasing the part rather than making it?

Holding all other things constant,if the unit sales increase,what will happen to the markup under absorption costing?

Opportunity costs are recorded in the accounts of an organization.

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. -How many minutes of grinding machine time would be required to satisfy demand for all four products?

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. -How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. New equipment for producing the subassemblies can be purchased at a cost of $400,000.The equipment would have a five-year useful life (the company uses straight-line depreciation)and a $50,000 salvage value. Alternatively,the subassemblies could be purchased from an outside supplier.The supplier has offered to provide the subassemblies for $9 each under a five-year contract. Hyatt Company's present costs per unit of producing the subassemblies internally (with the old equipment)are given below.The costs are based on a current activity level of 40,000 subassemblies per year: Direct Materials \ 3 Direct Labour \ 4.20 Variable Overhead \ 0.60 Fixed Overhead ( \0 .80 supervision, \ 0.90 depreciation, and \ 2 general \ 3.70 company overhead) Total Cost per Unit \ 11.50 The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%.Supervision cost ($30,000 per year)and direct materials cost per unit would not be affected by the new equipment.The company has no other use for the space now being used to produce the subassemblies.The company's total general company overhead would not be affected by this decision.Assume direct labour is a variable cost. Required: Assume that 40,000 subassemblies are needed each year.Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action.

Kircher,Inc.manufactures a product with the following costs: Per unit Per year Direct materials \ 24.90 Direct labour 13.90 Variable Manufacturing overhead 2.10 \ 1,182,600 Fixed manufacturing overhead Variable SG\&A expenses 2.00 1,166,400 Fixed SG\&A expenses The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 81,000 units per year.The company has invested $220,000 in this product and expects a return on investment of 15%.The target selling price based on the absorption costing approach would be closest to which of the following?

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. -At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer?

Dickson Company makes a product with the following costs: Per unit Per year Direct materials \ 180.20 Direct labour 22.30 Variable Manufacturing overhead 2.90 Fixed manufacturing overhead \ 1,296,000 Variable SG\&A expenses 1.10 Fixed SG\&A expenses \ 1,104,000 The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 60,000 units per year. The company has invested $\$ 320,000$ in this product and expects a return on investment of $15 \%$ . Direct labour is a variable cost in this company. - The target selling price based on the absorption costing approach is closest to which of the following?

Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y: Number of Units Sold Annually 20,000 Required Investment \ 400,000 Unit Product Cost \ 25 Selling, General, and Administrative \ 130,000 Expenses If the company uses the absorption costing approach to cost-plus pricing and desires a 15% rate of return on investment (ROI),what would be the required markup on absorption cost for product Y?

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product or not.

All other things equal,it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.

An avoidable cost is a cost that can be eliminated (in whole or in part)by choosing one alternative over another.

Iaci Company makes two products from a common input.Joint processing costs up to the split-off point total $42,000 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 \ 22,000 \ 19,600 \ 42,000 Sales value at split-off point \ 32,000 \ 28,000 \ 60,000 Costs of further processing \ 11,600 \ 25,300 \ 36,900 Sales value after further processing \ 40,800 \ 54,200 \ 95,000 Required: a)What is the net monetary advantage (disadvantage)of processing Product X beyond the split-off point? b)What is the net monetary advantage (disadvantage)of processing Product Y beyond the split-off point? c)What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d)What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

The following are the Baby Clothes Company's unit costs of making and selling an item at a volume of 12,000 units per month, which represents the company's capacity: Manufacturing: Direct Materials \ 1.50 Direct Labour \ 2.00 Variable Overhead \ 0.50 Fixed Overhead \ 0.90 Selling and Administrative: Variable \ 2.00 Fixed \ 0.60 Present sales amount to 11,000 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?

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 (disadvantage)of processing Product X beyond the split-off point?

Benjamin Signal Company produces products R,J,and C from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced.Data for Benjamin's operations for the current year are as follows: Units Allocated Joint Sales Value Product Produced Production Cost At Split-off R 8,000 \ 32,000 \ 76,000 10,000 40,000 71,000 C 5,000 20,000 48,000 Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000.Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000.Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000. Required: Which products should be processed beyond the split-off point? $\begin{array}{|l|r|r|r|}\hline& \mathrm{R} & \mathrm{J} & \mathrm{C} \\\hline \text { Sales value after further processing } & \$ 105,000 & \$ 117,000 & \$ 57,000 \\\hline \text { Sales value at split-off } & \underline{76,000 \mathrm{U}} & \underline{71,000} & \underline{48,000} \\\hline \text { Added sales value from processing } & \$ 29,000 & \$ 46,000 & \$ 9,000 \\\hline \text { Added processing costs } & 26,000 & 38,000 & \underline{12,000} \\\hline \text { Net gain (loss) from further processing } & \$ 3,000 & \$ 8,0000 & \$(3,000) \\\hline\end{array}$