Exam 13: Relevant Costs for Decision Making

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product.

Green Company produces 1,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is: The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

Brittman Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below: -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?

Part F77 is used in one of Wilcutt Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 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 $28.30 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 $9,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part F77 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?

Arline Cane Products, Inc., processes sugar cane in batches. The company buys a batch of sugar cane from farmers for $56 which is then crushed in the company's plant at a cost of $14. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $24 or processed further for $14 to make the end product industrial fiber that is sold for $34. The cane juice can be sold as is for $40 or processed further for $23 to make the end product molasses that is sold for $80. How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

Hon Company makes three products in a single facility. Data concerning these products follow: The mixing machines are potentially the constraint in the production facility. A total of 24,500 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.)

Defective units should be detected and scrapped or reworked after the bottleneck operation rather than before it.

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 MOST profitable use of the grinding machines?

When Mr. Ding L. Berry, president and chief executive of Berry, Inc., first saw the segmented income statement below, he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued. Required: Recommend which segments, if any, should be eliminated. Prepare a report in good form to support your answer.

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. -What would be the effect on the company's overall net operating income if product R10C were dropped?

Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop. Aunt Joop purchased the car 25 years ago for $5,000. Cybil is either going to sell the car for $2,000 or have it restored and sell it for $16,000. The restoration will cost $10,000. Cybil would be better off by:

The constraint at Bulman 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 the constrained resource?

Variable costs are always relevant costs.

Mccubbin Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: -Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.)

Knedler Corporation is preparing a bid for a special order that would require 720 liters of material C01D. The company already has 200 liters of this raw material in stock that originally cost $9.90 per liter. Material C01D is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $9.60 per liter. New stocks of the material can be readily purchased for $10.10 per liter. What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order?

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. -Refer to the original data in the problem. What is the current contribution margin per unit for component K65 based on its selling price of $180 and its annual production of 4,000 units?

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 Y beyond the split-off point?

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. -How many minutes of grinding machine time would be required to satisfy demand for all four products?

Crick Corporation makes 11,000 units of part W28 each year. This part is used in one of the company's products. 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 $25.50 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. If the outside supplier's offer were accepted, only $18,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part W28 would be used to make more of one of the company's other products, generating an additional segment margin of $12,000 per year for that product. What would be the impact on the company's overall net operating income of buying part W28 from the outside supplier?

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. -Assume that Tolar decides to upgrade the calculators. At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?