Exam 13: Relevant Costs for Decision Making

A cost that will be incurred regardless of which course of action a manager takes is relevant to the manager's decision.

Supreme Celery Corporation manufactures four celery based products. Floods and fire on the west coast are going to cause a shortage of celery for Supreme next month. Information related to the four celery products that it produces are shown below. The numbers relate to the cost per case and the amount of celery per case of product: To maximize profit next month, in what order would it be best for Supreme to schedule production (first to last)?

Costs associated with two alternatives, code-named Q and R, being considered by Lang Corporation are listed below: Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives?

Mcneilly Inc. is considering using stocks of an old raw material in a special project. The special project would require all 220 kilograms of the raw material that are in stock and that originally cost the company $1,804 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $8.55 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.75 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $97.00 for all 220 kilograms. What is the relevant cost of the 220 kilograms of the raw material when deciding whether to proceed with the special project?

Allocated common fixed costs:

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 the intermediate product beet juice into refined sugar rather than selling it as is?

Biello Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 15,000 medals each month; current monthly production is 14,250 medals. The company normally charges $115 per medal. Cost data for the current level of production are shown below: The company has just received a special one-time order for 600 medals at $102 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs. Required: Should the company accept this special order? Why?

Elgot Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 30,000 units per month is as follows: The normal selling price of the product is $51.10 per unit. An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.50 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. -Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $44.70 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

JB Lumber Corporation is downsizing operations and has to decide which of its large saws should be sold. JB currently has four saws but only needs to keep three. All four saws have a remaining useful life of 3 years and will all have a salvage value of zero at the end of those 3 years. Also, all four saws have equal annual operating costs and output efficiency. Information related to the four saws is provided below: In order to maximize profits for the next three years, which machine would be most beneficial for JB to sell?

A customer has requested that Daleske Corporation fill a special order for 2,000 units of product D84 for $20.30 a unit. While the product would be modified slightly for the special order, product D84's normal unit product cost is $18.50: 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 D84 that would increase the variable costs by $2.50 per unit and that would require an investment of $7,000 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:

The book value of old equipment is not a relevant cost in a decision.