Exam 10: Relevant Costing for Managerial Decisions

Cornish Company had the following results of operations for the past year: A foreign company offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Cornish accepts the offer, its profits will:

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

Opportunity costs are the additional or incremental revenues generated by selecting a certain course of action.

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

A company puts four products through a common production process. This process costs $100,000 each year. The four products can be sold when they emerge from this process at the "split-off point," or processed further and then sold. Data about the four products for the coming period are: Determine which products should be sold at the split-off point and which should be processed further.

Luxury Linens has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below: Based on this income statement, management is considering eliminating the Kitchen department. If the Kitchen department is eliminated, the other departments will expand to fill the space but sales are not expected to change. Twenty percent of Kitchen's allocated expenses will be avoided due to restructuring and the remainder reallocated equally to Bath and Bedding. Show an analysis indicating whether the Kitchen department should be eliminated.

Carly's Clips charges for their grooming services based on the following: Using time and materials pricing, what is the total price for a job requiring 3 direct labor hours and $50 of materials?

Hordel Company needs to determine a markup for a new product. Hordel expects to sell 5,000 units and wants a target profit of $82 per unit. Additional information is as follows: Using the variable cost method, what markup percentage to variable cost should be used?

Incremental costs should be considered in a make or buy decision.

Contribution margin lost from a decline in sales is an opportunity cost.

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the machine is an example of a(n):

Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,000. The division sales for the year were $960,000 and the variable costs were $475,000. The fixed costs of the division were $527,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's operating income for eliminating this business segment would be:

A company manufactures two products. Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. If the company can sell all that it produces of both products, what should the sales mix be?

A sunk cost will change with a future course of action.

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n):

Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An outside supplier has offered to sell the product to Paxton for $32. Compute the net incremental cost or savings of buying the component.

An additional cost incurred only if a company pursues a particular course of action is a(n):

A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a cost of $1.50 per unit. Normal cost data, excluding stamping, follows: Direct materials…………………………… $ 10 per unit Direct labor……………………………….. 16 per unit Variable overhead………………………… 4 per unit Allocated fixed overhead…………………. 12 per unit Allocated fixed selling expense…………… 8 per unit Prepare an analysis that indicates the selling price per unit this company will require to earn $3,000 on the order.