Exam 12: Relevant Costs for Decision Making

Which of the following items are included in the cost base under the absorption costing approach to cost-plus pricing? Variable Cost Fixed Cost Production Selling Production Selling A) Yes Yes Yes No B) No Yes No Yes C) Yes Yes No No D) Yes No Yes No

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 markup on absorption cost is closest to which of the following?

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. -How much will the company's operating income be increased or (decreased)if it prices the 1,000 units in the special order at $8 each?

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year.A summary of operating results for last year follows: Sales (18,000 units @ \ 100) \ 1,800,000 Variable Costs \ 990,000 Contribution Margin \ 810,000 Fixed Costs \ 495,000 Operating Income \ 315,000 A foreign distributor has offered to buy 15,000 units at $90 per unit next year.Jordan expects its regular sales next year to be 18,000 units.If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity,what would be the total operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.)

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 ample idle capacity to produce the units required by the overseas customer,and the special discounted price on the special order is $76.40 per unit.By how much would this special order increase (decrease)the company's operating income for the month?