Exam 6: Relevant Information for Decision Making With a Focus on Operational Decisions

Cesar Company has three product lines: A,B and C.The following annual information is available: $\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 44,000 \\\text { Variable costs } & \underline{76,000} & \underline{48,000} & \underline{35,000}\\\text { Contribution margin } & 24,000 & 42,000 & 9,000 \\\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable fixed costs } & 6,000 & 9,000 & 7,700\\\text { Operating income(loss) }&\$9,000&\$15,000&\$(1,700)\end{array}$ Assume Cesar Company drops Product C.Cesar Company then doubles the production and sales of Product B without increasing fixed costs.What will happen to operating income?

Which of the following cost is relevant to an equipment replacement decision?

Sealy Company has a joint process,which produces three products called A,B and C.Each product may be sold at split-off or processed further and then sold.Joint processing costs for a year are $20,000.Other relevant data are: Sales Value Separable Processing Sales Value Product at Split-Off Costs after Split-Off at Completion A \ 94,000 \ 28,000 \ 115,000 B 60,000 10,000 82,000 C 66,000 14,000 79,000 Required: A) Which products should be processed further? Why? B) If the Sealy Company maximizes profits, what is the operating income?

Olson Company has three departments.Data for the most recent year is presented below: $\begin{array}{llll}&\text { Dept. } C&\text { Dept. } A&\text { Dept. } T\\\text { Sales } & \$ 4,000 & \$ 1,920 & \$ 2,240 \\\text { Variable expenses } & 3,280 & 1,420 & 520 \\\text { Unavoidable fixed expenses } & 480 & 180 & 440 \\\text { Avoidable fixed expenses } & \underline{555} & \underline{265} & \underline{360} \\\text { Operating income (loss) } & \$(315) & \$ 55 & \$ 920\end{array}$ Olson Company is considering eliminating Dept.C because it is operating at a loss. Required: A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace it. B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept. T without increasing fixed costs.

In deciding whether to add or delete a product or service,common costs are probably ________.

Equipment to be sold has a book value of $4,000.The cost of the equipment is $10,000.The cash received at sale is $2,000.What is the gain or loss on disposal of the equipment?

The key to determining the financial difference between two alternative courses of action is to identify the ________.

________ costs are costs of manufacturing two or more products that are not separately identifiable as individual products until their split-off point.