Exam 12: Relevant Costs for Decision Making

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. -Which lowest selling price per unit could be charged for the new product that would still make it economically desirable to add the new product?

Lacy Corporation uses the absorption costing approach to cost-plus pricing to set prices for its products.Based on budgeted sales of 86,000 units next year,the unit product cost of a particular product is $81.60.The company's selling,general,and administrative expenses for this product are budgeted to be $1,247,000 in total for the year.The company has invested $360,000 in this product and expects a return on investment of 12%.The markup on absorption cost for this product would be closest to which of the following?

What is the opportunity cost of making a component part in a factory with no excess capacity?

The Anaconda Mining Company currently is operating at less than 50% of practical capacity.The management of the company expects sales to drop below the present level of 15,000 tonnes of ore per month very soon.The selling price per tonne of ore is $2,and the variable cost per tonne is $1.Fixed costs per month total $15,000. Management is concerned that a further drop in sales volume will generate a loss and,accordingly,is considering the temporary suspension of operations until demand in the metals markets returns to normal levels and prices rebound.Management has implemented a cost reduction program over the past year that has been successful in reducing costs.Nevertheless,suspension of operations appears to be the only viable alternative.Management estimates that suspension of operations would reduce fixed costs from $15,000 to $5,000 per month. Required: a)Why does management estimate that fixed costs will persist at $5,000 per month although the mine is temporarily closed? b)At what sales volume should management suspend operations at the mine?

Gildersleeve Corporation manufactures a product that has the following costs: Per unit Per year Direct materials \ 6.00 Direct labour 5.00 Variable manufacturing overhead 4.00 Fixed manufacturing overhead \ 360,000 Variable SG\&A expenses 5.00 Fixed SG\&A expenses 120,000 The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 30,000 units per year. The company has invested $600,000 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.

Foster Company makes 20,000 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 Direct Labour \ 24.70 Variable Manufacturing Overhead \ 16.30 Fixed Manufacturing Overhead \ 2.30 Unit Product Cost \ 13.40 \ 56.70 An outside supplier has offered to sell the company all the parts that Foster needs for $51.80 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 $44,000 per year. If the part were purchased from the outside supplier,all of the direct labour cost of the part would be avoided.However,$5.10 of the fixed manufacturing overhead cost that is 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. Required: a)How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? b)What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it? c)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 20,000 units required each year?

Straus Company,a manufacturer of electronic products,wants to introduce a new calculator.To compete effectively,the calculator could not be priced at more than $40.The company requires a 20% rate of return on investment on all new products.In order to produce and sell 30,000 calculators each year,the company would have to make an investment of $850,000.What would be the target cost per calculator?

Golden,Inc.has been manufacturing 5,000 units of Part 10541,which is used in one of its products.At this level of production,the unit product cost of Part 10541 is as follows: Direct Materials \ 2 Direct Labour \ 8 Variable Manufacturing Overhead \ 4 Fixed Manufacturing Overhead \ 6 Unit Product Cost \ 20 Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.Golden has determined that two-thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown.Assume that direct labour is an avoidable cost in this decision.To determine whether to accept Brown's offer,what are the relevant costs to Golden of manufacturing the parts internally? (Do not round intermediate calculations.)

The Sloan Company must invest $120,000 to produce and market 16,000 units of Product X each year.Other cost information regarding Product X is as follows: Per unit Total Direct materials \ 7 Direct labour 5 Variable Manufacturing overhead 4 Fixed manufacturing overhead Variable selling, general, and administrative expense 3 \ 80,000 Fixed selling,general, and administrative expese \ 72,000 If Sloan Company requires a 15% return on investment,what would be the markup percentage on absorption cost for Product X,rounded to the nearest percent?

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. -Assume that Tolar decides to upgrade the calculators.At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

Wagner Company sells Product A for $21 per unit.Wagner's unit product cost based on the full capacity of 200,000 units is as follows: Direct Materials \ 4 Direct Labour \ 5 Marufacturing Overhead \ 6 Unit Product Cost \ 15 A special order offering to buy 20,000 units has been received from a foreign distributor.The only selling costs that would be incurred on this order would be $3 per unit for shipping.Wagner has sufficient idle capacity to manufacture the additional units.Two-thirds of the manufacturing overhead is fixed and would not be affected by this order.Assume that direct labour is an avoidable cost in this decision.In negotiating a price for the special order,what should be the minimum acceptable selling price per unit?

Timax Company,a manufacturer of moderately priced time pieces,would like to introduce a new electronic watch into the market.To compete effectively,the watch could not be priced at more than $50.The company requires a return on investment of 25% on all new products.The plan is to produce and sell 20,000 watches each year.This would require a $500,000 investment.What would be the target cost per watch?

The Cook Company has two divisions: Eastern and Western.The divisions have the following revenues and expenses: Eastern Western Sales \ 550,000 \ 500,000 Variable Costs \ 275,000 \ 200,000 Direct Fixed Costs \ 180,000 \ 150,000 Allocated Corporate Costs \ 170,000 \ 135,000 Operating Income (Loss) (\ 75,000) \ 15,000 The management of Cook is considering the elimination of the Eastern Division.If the Eastern Division were eliminated,the direct fixed costs associated with this division could be avoided.However,corporate costs would still be $305,000 in total.Given these data,what would be the overall company's operating income (loss)if the Eastern Division were eliminated?

Northern Stores is a retailer in British Columbia.The most recent monthly income statement for Northern Stores is given below: Total Store 1 Store II Sales \ 2,100,000 \ 1,300,000 \ 800,000 Less variable expense 1,260,000 \ 882,000 378,000 Contribution margin \ 840,000 \ 418,000 \ 422,000 Less traceable fixed expense 420,000 231,000 Segment margin \ 420,000 \ 187,000 \ 233,000 Less common fixed expense 350,000 210,000 140,000 Operating Income \ 70,000 \ 23,000 \ 93,000

Eckert Company uses the absorption costing approach to cost-plus pricing to set prices for its products. Based on budgeted sales of 18,000 units next year, the unit product cost of a particular product is $60.40. The company's selling, general, and administrative expenses for this product are budgeted to be $370,800 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 11%. - The target selling price based on the absorption costing approach for this product would be closest to which of the following?

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 and the special order is accepted at 15% off the regular selling price,what would be the effect on operating income next year due to accepting this order?

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 sunk cost in this situation?

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. -Given the current capacity what is the greatest total contribution margin Brown Company can earn?

Condensed monthly operating income data for Cosmo Inc.for November is presented below.Additional information regarding Cosmo's operations follows the statement: Mall Town Total Store Store Sales \ 200,000 \ 80,000 \ 120,000 Less: Variable Costs \ 116,000 \ 32,000 \ 84,000 Contribution Margin \ 84,000 \ 38,000 \ 36,000 Less: Traceable Fixed \ 60,000 \ 20,000 \ 40,000 Expenses Store Segment Margin \ 24,000 \ 28,000 (\ 4,000) Less: Common Fixed \ 10,000 \ 4,000 \ 6,000 Expenses Operating Income (Loss) \ 14,000 \ 24,000 (\ 10,000) Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars. Management estimates that closing the Town Store would result in a 10% decrease in Mall Store sales,while closing the Mall Store would not affect Town Store sales. The operating results for November are representative of all months. A decision by Cosmo Inc.to close the Town Store would result in what monthly increase (decrease)in Cosmo's operating income?

Ritchie Corporation manufactures a product that has the following costs: Per unit Per year Direct materials \ 20.70 Direct labour 11.80 Variable manufacturing overhead 3.20 Fixed manufacturing overhead \ 817,700 Variable SG\&A expenses 4.10 Fixed SG\&A expenses 691,900 The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 37,000 units per year. The company has invested $160,000 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.