Exam 13: Short-Run Decision Making: Relevant Costing

Kara Ring owns a successful flower shower called Always Blooming.Kara wants to expand the shop by leasing the space next door for $1,200 per month,and adding refrigerators to keep the flowers fresh and two checkout counters so the customers do not have to wait in long lines.She currently pays $1,000 per month for her current store space and has two refrigerators that cost her $6,000 each two years ago.She figures that the new refrigerators and counters will cost $25,000.She also has determined that the current cash register that initially cost her $1,000 two years ago and has been depreciated $250 each year would have to be replaced with two new cash registers costing $1,500 each.She thinks sales would increase by $10,000 per month.Variable costs are 40% of sales. Required:

Flexible resources may have unused capacity.

Welker Company is designing an all-in-one grill and cooler aimed at sports fans.The company believes that the product can be sold for $180; and it requires a 30% profit on new products.What is the target cost of the all-in-one grill and cooler?

Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not achieving the expected results.The following information is available: Which of these items is irrelevant?

Raffles Company routinely bids on construction jobs.Raffles first determines the budgeted product cost of the job and then applies a markup of 50%.If a bid of $15,000 is submitted for a new job,which of the following is true?

Information about three joint products follows: The cost of the joint process is $140,000.Which of the joint products should be processed further?

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.Now suppose that Santorino Company can sell only 5,500 units of each model.How many units of Model P-4 should be produced?

Figure 13-9. Sabor Inc.is a medical testing laboratory that performs several tests and analyses for hospitals in the area.Four of the tests that they perform require the use of a specialized machine that can supply 14,000 hours per year.Information on the four lab tests follows: Refer to Figure 13-9.What is the contribution margin per unit of machine time for Test D?

_____________________ are simply those factors that are hard to put a number on,including things like political pressure and product safety.

Figure 13-6. Autry Company manufactures veterinary products.One joint process involves refining a chemical (dactylyte)into two chemicals - dac and tyl.One batch of 5,000 gallons of dactylyte can be converted to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of $12,000.At the split-off point,dac can be sold for $3 per gallon and tyl can be sold for $4 per gallon.Autry has just learned of a new process to convert dac into prodac.The new process costs $4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac.Prodac sells for $5 per gallon. Refer to Figure 13-6.Should Autry process dac further?

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 a qualitative factor that Fuller would consider in making the decision to accept or reject the special order?

Victor's Detailing customers would be willing to pay $57 per detail.The company requires a 40% profit on each job.The average job would cost $30. Victor's Detailing uses target-costing.What is the price they should quote a new customer?

In keep-or-drop decisions,both the segment's contribution margin and its segment margin are useful in evaluating the performance of the segment.

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 costs of the special order relate to flexible resources?

Figure 13-2. ColorPro uses part 87A in the production of color printers.Unit manufacturing costs for part 87A are: ColorPro uses 100,000 units of 87A per year.Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12.Fixed overhead is unavoidable. Refer to Figure 13-2.Now suppose that ColorPro discovers that other costs will increase by $7,000 per year if the component is purchased rather than made internally.Should ColorPro make or buy the part?

Linear programming is a special technique that can be used to determine the optimal product mix when there are multiple constraints.

The difference between the summed costs of two alternatives in a decision is known as the __________________.

Tapeo Company has always made its electronic components that go into their GPS systems in-house.Streeter Company has offered to supply these electronic components at a price of $38 each.Tapeo uses 18,000 units of these components each year.The cost per unit of this component is as follows: Assume that 45% of Tapeo Company's fixed overhead would be eliminated if the electronic component was no longer produced in-house. Required: A.If Tapeo decided to purchase the electronic component from Streeter Company how much would its operating income increase or decrease? B.Should Tapeo continue to make the electronic component or buy it from Streeter Company?

Target costing is a method of determining the cost of a product or service based on the price (target price)that customers are willing to pay.

Vest Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $12.75.Fixed costs will remain the same if the component is purchased from an outside supplier. What is the effect on income if Vest Industries purchases the component from the outside supplier?