Exam 13: Short-Run Decision Making: Relevant Costing

Why does a special order decision frequently ignore fixed overhead?

Brorsen,Inc.,has just designed a new product with a target cost of $64.Brorsen requires new product to have a profit of 20%.What is the target price for the new product?

Resources that are acquired in advance of usage are flexible resources.

Mickey Company manufactures three joint products: X,Y,and Z.The cost of the joint process is $30,000.Information about the three products follows: Required:

Houston Corporation manufacturers a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit.If Houston Corporation accepts Johnson Company's offer,total fixed costs will be reduced to $60,000.What alternative is more desirable and by what amount is it more desirable? Alternative Amount

A _________________ can be used to structure the decision maker's thinking and to organize the information to make a good decision.

Figure 13-1. Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame,to be priced at $40 each.Normally,Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame,variable overhead (machining,electricity)is $4 per frame,direct labor is $12 per frame,and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently,the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible. Refer to Figure 13-1.Which of the following is irrelevant to the special order decision?

Short-run decision making only involves short-run decisions that have nothing to do with the firm's overall strategy.

The solution of the product mix problem in the presence of multiple constraints requires the use of

Figure 13-5. Santorino Company produces two models of a component,Model K-3 and Model P-4.The unit contribution margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14.Each model must spend time on a special machine.The firm owns two machines that together provide 4,000 hours of machine time per year.Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time. Refer to Figure 13-5.What is the contribution margin per unit of scarce resource (machine time)for Model K-3?

Resources that can be purchased in the amount needed and at the time of use are

______________ is the point at which products become distinguishable after passing through a common process.

Figure 13-1. Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame,to be priced at $40 each.Normally,Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame,variable overhead (machining,electricity)is $4 per frame,direct labor is $12 per frame,and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently,the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible. Refer to Figure 13-1.If Fuller accepts the special order,by how much will operating income increase or decrease?

Figure 13-3. Elegance Bath Products,Inc.(EBP)makes a variety of ceramic sinks and tubs.EBP has just developed a line of sinks and tubs made from a mixture of glass and ceramic.The sinks sell for $150 each and have variable costs of $80.The tubs sell for $600 and have variable costs of $450.The glass and ceramic sinks and tubs require the use of specialized molding equipment.The specialized molding equipment has 4,050 hours of capacity per year.A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of specialized molding equipment time. Refer to Figure 13-3.Assuming that specialized molding equipment time is the only constrained resource,and that EBP can sell as many tubs and sinks as it can produce,how many sinks should be sold?

__________________ have common processes and costs of production up to a split-off point.

Segmented reports are helpful for managers to make _______________ decisions.

Meco Company produces a product that has a regular selling price of $360 per unit.At a typical monthly production volume of 2,000 units,the product's average unit cost of goods sold amounts to $270.Included in this average is $120,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit.The buyer will pay transportation,and the regular selling price will not be affected if Meco accepts the order. Assuming Meco Company has excess capacity,the effect on profits of accepting the order would be

Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: The company has the capacity to produce 90,000 units.The product regularly sells for $120.A wholesaler has offered to pay $110 per unit for 7,500 units.If the special order is accepted,the effect on operating income would be a

A situation in which management tells divisions that they must reduce costs by 10% is called target costing.

The following information pertains to Dodge Company's three products: Assume that product C is discontinued and the extra space is rented for $300 per month.All other information remains the same as the original data.Annual profits will