Exam 4: Measuring Relevant Costs and Revenues for Decision-Making

Vance Company manufactures a product that has the following unit costs: direct materials, £15; direct labour, £12; variable overhead, £8; and fixed overhead, £12. Fixed selling costs are £1,500,000 per year. Variable selling costs of £4 per unit cover the transportation cost. Although production capacity is 800,000 units per year, the company expects to produce only 650,000 units next year. The product normally sells for £70 each. A customer has offered to buy 50,000 units for £45 each. The customer will pay the transportation charge on the units purchased. Required: a. What is the incremental cost to Vance Company for the special order? b. What is the effect on Vance's income if the special order is accepted?

Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: The company has the capacity to produce 90,000 units. The product regularly sells for £120. A wholesaler has offered to pay £110 a unit for 7,500 units. If the special order is accepted, the effect on operating income would be a

Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume is as follows: An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of £31.00. If Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to another company for £24,000 per year. If Harris Company accepts the offer of the outside supplier, annual profits will

When there is one scarce resource, the product that should be produced first is the product with the highest

If the firm is at full capacity, the minimum special-order price must cover

Sunk costs are

A decision to make a component internally versus through a supplier is a

The Bilko Company manufactures two products: widgets and gadgets. Information about the products is as follows: There are 40,000 direct labour hours available during the year. Required: a. Which of the products should Bilko Company produce if it can only produce one of the products? b. Assume that Bilko Company uses half of the hours available to produce widgets and half of the hours available to produce gadgets. What is Bilko's total contribution margin? c. Assume that Bilko Company produces the product mix that will maximize profit. What is Bilko's total contribution margin?

Rippey Ltd. manufactures a single product with the following unit costs for 5,000 units: Recently, a company approached Rippey Ltd. about buying 1,000 units for £225. Currently, the models are sold to dealers for £412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses would be incurred on the special order. Required: a. What is the profit earned by Rippey Ltd. on the original 5,000 units? b. Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be affected? c. Determine the minimum price Rippey would want to receive in order to increase profits by £7,500 on the special order. d. When making a special order decision, what nonquantitative aspects of the decision should Rippey Ltd. consider?

Caddo Ltd. produces two products using the same manufacturing equipment. Information about the two products is as follows: If Caddo can produce only one of the products in the next period, which product should be produced?

The following information relates to a product produced by Creamer Company: Fixed selling costs are £500,000 per year, and variable selling costs are £12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for £120 each. A customer has offered to buy 60,000 units for £90 each. The incremental cost per unit associated with the special order is

Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for £12.75. Vest Industries can rent its unused manufacturing facilities for £45,000 if it purchases the component from the outside supplier. What is the effect on income if Vest purchases the component from the outside supplier?

Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of £6.00 per unit. If Miller Company accepts the offer, it will be able to reduce variable costs by 30 percent and rent unused space to an outside firm for £18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm?

_____ are future costs that differ across alternatives.

If there is excess capacity, the minimum acceptable price for a special order must cover

Barron Company's 2004 income statement is as follows: In an attempt to improve the company's profit performance, management is considering a number of alternative actions. Required: Determine the effect of each of the following on monthly profit. Each situation is to be evaluated independently of all the others. a. Purchasing automated assembly equipment. This action should reduce direct labour costs by 40 percent. It also will increase variable overhead costs by 10 percent and fixed factory overhead by £2,500. b. Reducing the unit selling price by £2 per unit. This should increase the monthly sales by 5,000 units. Fixed factory overhead will increase by £1,500. c. Increase fixed selling and administrative expenses by £1,000 for advertising costs. The number of units sold will increase to 8,000 units.

Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for £25.50. What is the effect on income if Foster Industries purchases the component from the outside supplier?

Which of the following statements is true when making a decision between two alternatives?

The following information pertains to the Ewing Company's three products: Assume that the selling price of product F is increased to £8.25 with a reduction in monthly sales to 400 units. Monthly profits will

Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of £25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £6,000. In addition, assume that overtime production is not possible and that all other information remains the same as the original data. What is the effect on profits if the special order is accepted?