Exam 13: Relevant Costs for Decision Making

Two alternatives, code-named X and Y, are under consideration at Donat Corporation. Costs associated with the alternatives are listed below. -Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.)

Two alternatives, code-named X and Y, are under consideration at Donat Corporation. Costs associated with the alternatives are listed below. -What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs?

Corado Corporation has in stock 77,000 kilograms of material N that it bought five years ago for $7.15 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material N can be sold as is for scrap for $4.50 per kilogram. An alternative would be to use material N in one of the company's current products, M01Y, which currently requires 2 kilograms of a raw material that is available for $7.15 per kilogram. Material N can be modified at a cost of $0.94 per kilogram so that it can be used as a substitute for this material in the production of product M01Y. However, after modification, 4 kilograms of material N is required for every unit of product M01Y that is produced. Corado Corporation has now received a request from a company that could use material N in its production process. Assuming that Corado Corporation could use all of its stock of material N to make product M01Y or the company could sell all of its stock of the material at the current scrap price of $4.50 per kilogram, what is the minimum acceptable selling price of material N to the company that could use material N in its own production process?

Gudger Corporation processes sugar cane in batches. The company purchases a batch of sugar cane for $53 from farmers and then crushes the cane in the company's plant at the cost of $10. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $29 or processed further for $15 to make the end product industrial fiber that is sold for $60. The cane juice can be sold as is for $38 or processed further for $22 to make the end product molasses that is sold for $52. Which of the intermediate products should be processed further?

Consider a decision facing a company of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is:

Products A, B, and C are produced from a single raw material input. The raw material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of $12,500 and then sold for $5 per unit. Product A should be:

Product L28N has been considered a drag on profits at Beets Corporation for some time and management is considering discontinuing the product altogether. 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 $41,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product L28N is discontinued. What would be the effect on the company's overall net operating income if product L28N were dropped?

A merchandising company that buys all of its inventory from outside suppliers is an example of a company that is vertically integrated.

Rosiek Corporation uses part A55 in one of its products. The company's Accounting Department reports the following costs of producing the 4,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $32.30 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 $4,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part A55 could be used to make more of one of the company's other products, generating an additional segment margin of $26,000 per year for that product. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part A55 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?

Witch's Brew Company manufactures and sells three potions that all use gargoyle eyelashes as an ingredient. The high demand for all three of these potions exceeds the supply of gargoyle eyelashes that Witch's Brew is able to buy from its suppliers. Information related to the three potions is provided below: Each year, Witch's Brew is only able to buy 6,000 gargoyle eyelashes. Annual fixed costs at Witch's Brew are $45,000. Required: Based on these restrictions, what is the maximum annual net operating income that Witch's Brew can make each year?

Brittman Corporation makes three products that use the current constraint-a particular type of 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.

Scales Corporation has received a request for a special order of 6,000 units of product Y45 for $13.70 each. Product Y45's unit product cost is $11.50, determined 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 modifications made to product Y45 that would increase the variable costs by $8.10 per unit and that would require an investment of $20,000 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. If the special order is accepted, the company's overall net operating income would increase (decrease) by:

Iacollia Company makes two products from a common input. Joint processing costs up to the split-off point total $47,600 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: Required: a. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

In a decision to drop a segment, the opportunity cost of the space occupied by the segment would be the profit that could be derived from the best alternative use of the space.

The management of Austin Corporation is considering dropping product R97C. 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 $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued. What would be the effect on the company's overall net operating income if product R97C were dropped?

The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity): Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labor is a variable cost. -How much will the company's net operating income be increased or (decreased) if it prices the 1,000 units in the special order at $6 each?

For which of the following decisions are opportunity costs relevant?

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 net monetary advantage (disadvantage) of processing Product X beyond the split-off point?

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. -The sunk cost in this situation is:

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. -How much profit (loss) does the company make by processing the intermediate product cane juice into molasses rather than selling it as is?