Exam 13: Relevant Costs for Decision Making

Outram Corporation is presently making part I14 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 make and sell the part to the company for $14.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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 I14 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?

Nowak Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 1,600 units of component FHB. Each unit of FHB requires 8 units of material N95 and 1 unit of material K78. Data concerning these two materials follow: Material N95 is in use in many of the company's products and is routinely replenished. Material K78 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product FHB?

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

For which of the following decisions are sunk costs relevant?

United Industries manufactures a number of products at its highly automated factory. The products are very popular, with demand far exceeding the factory's capacity. To maximize profit, management should rank products based on their:

Brubacher Company makes four products in a single facility. These products have the following unit product costs: The grinding machines are potentially the constraint in the production facility. A total of 20,500 minutes are available per month on these machines. Direct labor is a variable cost in this company. -Which product makes the LEAST profitable use of the grinding machines?

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. -How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

The constraint at Crumedy Inc. is an expensive milling machine. The three products listed below use this constrained resource. 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?

All future costs are relevant in decision making.

All other things equal, it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.

Lounsberry Inc. regularly uses material O55P and currently has in stock 360 liters of the material for which it paid $2,484 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $6.35 per liter. New stocks of the material can be purchased on the open market for $6.90 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material O55P is:

Rowena Corporation manufactures laser printers. Rowena currently manufactures the 32,000 imaging drums that it uses in its printers. The annual costs to manufacture these 32,000 drums are as follows: Hardware Solutions, Inc. has offered to provide Rowena with all of its imaging drum needs for $72 per drum. If Rowena accepts this offer, 70% of the fixed manufacturing cost above could be totally eliminated. Also, Rowena will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products. -Assume that demand for Rowena printers goes up from 32,000 annually to 40,000 annually. Also assume that Rowena has the idle capacity to produce the extra 8,000 drums needed for the printers. Under these conditions, would Rowena be better off to make the drums or buy the drums and by how much? (Assume that there is no change in cost structure.)

Two products, TD and IB, emerge from a joint process. Product TD has been allocated $31,200 of the total joint costs of $48,000. A total of 5,000 units of product TD are produced from the joint process. Product TD can be sold at the split-off point for $24 per unit, or it can be processed further for an additional total cost of $15,000 and then sold for $26 per unit. If product TD is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?

Oran Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $76 to buy from farmers and $18 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $21 or processed further for $12 to make the end product industrial fiber that is sold for $43. The cane juice can be sold as is for $47 or processed further for $21 to make the end product molasses that is sold for $88. -Which of the intermediate products should be processed further?

Govoni Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 9,500 units of component AIG. Each unit of AIG requires 6 units of material M51 and 4 units of material M93. Data concerning these two materials follow: Material M51 is in use in many of the company's products and is routinely replenished. Material M93 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product AIG?

Isaac Corporation processes sugar beets in batches that it purchases from farmers for $47 a batch. A batch of sugar beets costs $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 $22 or processed further for $13 to make the end product industrial fiber that is sold for $42. The beet juice can be sold as is for $45 or processed further for $27 to make the end product refined sugar that is sold for $67. Which of the intermediate products should be processed further?

Part J88 is used in one of Quinney Corporation's products. The company makes 3,000 units of this part each 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 this part and sell it to the company for $32.10 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 $3,000 of these allocated general overhead costs would be avoided. If management decides to buy part J88 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?

The management of Thews Corporation is considering dropping product E28I. 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 $86,000 of the fixed manufacturing expenses and $67,000 of the fixed selling and administrative expenses are avoidable if product E28I is discontinued. Required: a. What is the net operating income earned by product E28I according to the company's accounting system? Show your work! b. What would be the effect on the company's overall net operating income of dropping product E28I? Should the product be dropped? Show your work!

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. -In addition to the facts given above, assume that the space used to produce part I50 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the impact on the company's overall net operating income of buying part I50 from the outside supplier and using the freed space to make more of the other product?

Which product would be selected in a decision that involves the utilization of a constrained resource?