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

Junior Company currently buys 30,000 units of a part used to manufacture its product at £40 per unit. Recently the supplier informed Junior Company that a 20 percent increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): If the units are purchased from the supplier, £200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for £20,000 per year if the parts are purchased externally. Required: Should Junior Company buy the part externally or make it internally?

Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: The company has the capacity to produce 40,000 units. The product regularly sells for £40. A wholesaler has offered to pay £32 a unit for 2,000 units. If the firm is at capacity and the special order is accepted, the effect on operating income would be

Boone Products had the following unit costs: A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is £8 per unit. How much additional profit (loss) will be generated by accepting the special order?

What is an opportunity cost? Under what circumstances are opportunity costs relevant to a decision? Construct an example of an opportunity cost. Briefly discuss why you think financial reports for investors and managerial reports for mangers may or may not differ in their treatment of opportunity costs.

WJE Company has only 4,000 machine hours available each month. The following information on the company's three products is available: If demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

Zandy Beverage Company plans to eliminate a branch that has a contribution margin of £50,000 and fixed costs of £75,000. Of the fixed costs, £55,000 cannot be eliminated. The effect of eliminating this branch on net income would be a(n)

Salish Industries manufactures a product with the following costs per unit at the expected production of 60,000 units: The company has the capacity to produce 70,000 units. The product regularly sells for £60. A wholesaler has offered to pay £55 each for 5,000 units. If the special order is accepted, the effect on operating income would be a

Firms may be asked to accept a special order of their product for a reduced price if

Scott Company has an annual capacity of 18,000 units. Budgeted operating results for 2004 are as follows: A foreign wholesaler wants to buy 1,000 units at a price of £40 per unit. All fixed costs would remain within the relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular orders. Required: a. Determine the effect on operating income if the company produces the special order. b. Should the company produce the special order? c. Determine operating income if the customer had wanted a special order of 3,000 units and the company produced the special order. d. Should the company produce the 3,000-unit special order? e. Discuss any nonquantitative factors the company might want to consider when making the decision.

Rose Manufacturing Company had the following unit costs: A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated by accepting the special order?

Tactical decision-making relies

The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A £200 cost per component was determined as follows: James Industries uses 4,000 components per year. After Light, SA., submitted a bid of £80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light, SA., James's unused production facilities could be leased to another company for £50,000 per year. Required: a. Determine the maximum amount per unit James should pay an outside supplier. b. Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative. c. Assume the company could eliminate production supervisors with salaries totaling £30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative.

Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32. Required: a. What is the effect on income if Solomon purchases the component from the outside supplier? b. Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

Which of the following costs is NOT relevant to a make-or-buy decision?

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. Foster 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 Foster purchases the component from the outside supplier?

Which of the following costs is NOT relevant to a make-or-buy decision?

Which item is not an example of a sunk cost?

The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship, its book value is a(n)

What is a sunk cost? Under what circumstances are sunk costs relevant to a decision? Construct an example of a sunk cost. Briefly discuss why you think financial reports for investors and managerial reports for mangers may or may not differ in their treatment of sunk costs.

An important qualitative factor to consider regarding a special order is the