Exam 13: Relevant Costs for Decision Making

The constraint at Artis Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below: -Assume that sufficient time is available on the constrained machine 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 this constrained resource?

Two or more different products that are manufactured in the same production period are known as joint products.

Kava Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as K65. Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost. -The company has received a special, one-time-only order for 500 units of component K65. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Kava has no excess capacity and this special order would require 10 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $11,000. What is the minimum price per unit on the special order below which the company should not go?

Ries Corporation has received a request for a special order of 8,000 units of product R34 for $34.20 each. The normal selling price of this product is $35.70 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product R34 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 R34 that would increase the variable costs by $6.30 per unit and that would require a one-time investment of $40,000 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!

The constraint at Artis Corporation is time on a particular machine. The company makes three products that use this machine. 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.

Opportunity costs are recorded in the accounts of an organization.

Hayase Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $35 to buy from farmers and $14 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 $27 or processed further for $11 to make the end product industrial fiber that is sold for $40. The beet juice can be sold as is for $36 or processed further for $21 to make the end product refined sugar that is sold for $46. -Which of the intermediate products should be processed further?

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200. -What is the net advantage or disadvantage to the company from upgrading the calculators?

A year ago, Crunchy Cola Corporation bought a stamping machine to make the cans for its cola. The cost of the machine was $60,000. The machine has a useful life of 5 years and a salvage value of zero at the end of those five years. Annual depreciation on the machine is $12,000. One year of depreciation has been recorded. The variable manufacturing cost of producing the cans is $0.05 per can. The only fixed manufacturing cost is the annual depreciation of $12,000 on the stamping machine. Crunchy needs 200,000 cans annually. Dagmar Stamping Company recently gave Crunchy an offer to supply all of its can needs for the next four years at $0.07 per can. If Crunchy buys from Dagmar, the stamping machine would not be needed and would be sold for $35,000. If Crunchy buys from Dagmar, what will be the total dollar increase or decrease in income for the next four years?

Curly Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 16,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows: Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 2 minutes on the constraining machine and that has a contribution margin of $8.10 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

Sheela Dairy Corporation buys unprocessed cows' milk from local farmers. At the dairy, this unprocessed milk is broken down into cream and low-fat milk. The cream can be sold at this point or can be further processed into butter. Which of the following would be relevant in the decision to further process the cream into butter?

Dodge Company makes two products from a common input. Joint processing costs up to the split-off point total $44,800 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below: -What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

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. -Which product makes the LEAST profitable use of the milling machines?

Kava Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as K65. Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost. -The company has received a special, one-time-only order for 500 units of component K65. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Kava has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?

Gloster Company makes three products in a single facility. These products have the following unit product costs: The mixing machines are potentially the constraint in the production facility. A total of 27,400 minutes are available per month on these machines. Direct labor is a variable cost in this company. Required: a. How many minutes of mixing machine time would be required to satisfy demand for all three products? b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.) c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows: Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually. Required: Based on this information, would Janeiro be better off to continue making the wheels or to buy them from Kasba? SHOW YOUR COMPUTATIONS.

Zaccagnino Corporation makes a range of products. The company's predetermined overhead rate is $14 per direct labor-hour, which was calculated using the following budgeted data: Management is considering a special order for 300 units of product D03C at $119 each. The normal selling price of product D03C is $157 and the unit product cost is determined as follows: If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order. Required: If the special order were accepted, what would be the impact on the company's overall profit?

Fouch Company makes 30,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $51.90 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $219,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $6.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $52.30 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 30,000 units required each year?

In a plant operating at capacity:

Mccubbin Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: -What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?