Exam 13: Relevant Costs for Decision Making

Badal Corporation processes sugar beets in batches. A batch of sugar beets costs $55 to buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20 or processed further for $16 to make the end product industrial fiber that is sold for $53. The beet juice can be sold as is for $33 or processed further for $23 to make the end product refined sugar that is sold for $60. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

Consider the following statements: I. A vertically integrated company is more dependent on its suppliers than a company that is not vertically integrated. II. Many companies feel they can control quality better by making their own parts. III. A vertically integrated company realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations. Which of the above statements represent advantages to a company that is vertically integrated?

Creelman Company makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially the constraint in the production facility. A total of 13,000 minutes are available per month on these machines. -How many minutes of milling machine time would be required to satisfy demand for all four products?

The management of Dorl Corporation has been concerned for some time with the financial performance of its product I54J and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $95,000 of the fixed manufacturing expenses and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is discontinued. -What would be the effect on the company's overall net operating income if product I54J were dropped?

A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $50,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company's overall net operating income would:

In deciding whether to manufacture a part or buy it from an outside supplier, which of the following costs are irrelevant?

A sunk cost is a cost that has already been incurred but that can be avoided at least in part depending on the action a manager takes.

Closter Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below: Required: a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work! b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.

Kleffman Corporation is presently making part X31 that is used in one of its products. A total of 2,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $23.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $1,000 of these allocated general overhead costs would be avoided. -In addition to the facts given above, assume that the space used to produce part X31 could be used to make more of one of the company's other products, generating an additional segment margin of $23,000 per year for that product. What would be the impact on the company's overall net operating income of buying part X31 from the outside supplier and using the freed space to make more of the other product?

The management of Dorl Corporation has been concerned for some time with the financial performance of its product I54J and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $95,000 of the fixed manufacturing expenses and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is discontinued. -According to the company's accounting system, what is the net operating income earned by product I54J?

Vanikoro Corporation currently has two divisions which had the following operating results for last year: Since the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division. All of the fixed costs for the division could be eliminated if the division was dropped. If the Rubber Division was dropped at the beginning of last year, how much higher or lower would Vanikoro's total net operating income have been for the year?

The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tax product were dropped, there would be no change in the fixed manufacturing costs of the company. -Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be:

The management of Drummer Corporation is considering dropping product D84L. Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $201,000 of the fixed manufacturing expenses and $156,000 of the fixed selling and administrative expenses are avoidable if product D84L is discontinued. Required: What would be the effect on the company's overall net operating income if product D84L were dropped? Should the product be dropped? Show your work!

The management of Zorrilla Corporation is considering dropping product R10C. Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued. -According to the company's accounting system, what is the net operating income earned by product R10C?

A customer has asked Clougherty Corporation to supply 4,000 units of product M97, with some modifications, for $40.10 each. The normal selling price of this product is $48.00 each. The normal unit product cost of product M97 is computed as follows: Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product M97 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. Required: Determine the effect on the company's total net operating income of accepting the special order. Show your work!

Which of the following costs are always irrelevant in decision making?

Libbee Corporation is presently making part I50 that is used in one of its products. A total of 8,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $24.50 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. -If management decides to buy part I50 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

Managers should pay little attention to bottleneck operations because they have limited capacity for producing output.

An automated turning machine is the current constraint at Greenleaf Corporation. Three products use this constrained resource. Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.