Exam 4: Fundamentals of Cost Analysis for Decision Making

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e., the time value of money).

The Valor Company manufactures two products: L and M. The costs and revenues are as follows: Product L Product M Sales price \ 150 \ 112 Variable cost per unit 90 68 Machine hours per unit 15 10 Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a scarce resource. During the year, 36,000 machine hours are available. Required: a. How many units of Products L and M should Valor produce?

Everett Tool Company has two retail stores, one in Dallas and the other in Sand Creek. The Dallas store had sales of $200,000, a contribution margin of 35 percent, and a segment margin of $28,000. The company's two stores have total sales of $500,000, an average contribution margin of 32 percent, and a total segment margin of $62,000. Required: Prepare a segmented income statement for Everett.

Morgan Inc. has 5,400 machine hours available each month. The following information on the company's three products is available: Product 1 Product 2 Product 3 Contribution margin per unit \ 15.00 \ 18.00 \ 7.50 Machine hours per unit 3 2 1 If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000. Direct materials \ 20,000 Direct labor 55,000 Variable overhead 45,000 Fixed overhead Total The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year. - What are the relevant costs for the "make" alternative?

The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated operating profit for the year is: Internal Outside Sales \1 50,000 \4 0,000 Variable costs 100,000 200,000 Fixed costs Operating profits Unit sales 10,000 20,000 - The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis. The Tire Division cannot sell any additional products to outside customers. What is the minimum selling price that Tire should accept from the internal division?

The Widner Company manufactures two products: Stainless Serving Spoons and Stainless Serving Forks. The costs and revenues are as follows: Spoons Forks Sales price \ 150 \ 88 Variable cost per urit 80 42 Total demand for Spoons is 14,000 units and for Forks is 9,000 units. Machine time is a scarce resource. During the year, 54,000 machine hours are available. Spoons require 5 machine hours per unit, while Forks require 3 machine hours per unit. How many units of Spoons and Forks should Widner produce? Spoons Forks A. 14,000 0 B. 8,307 4,154 C. 10,800 0 D. 5,400 9,000

The Morris Company manufactures wiring tools. The company is currently producing well below its full capacity. The Baker Company has approached Morris with an offer to buy 5,000 tools at $17.50 each. Morris sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed costs. Required: a. If Morris were to accept Baker's offer, what would be the increase in Morris' operating profits? b. Assume that Morris is operating at full capacity. If Morris were to accept Baker's offer, what would be the change in Morris' operating profits?

A target cost is computed as:

The Crispy Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market?

Which of the following statements regarding differential costs is (are) true? (A) The full-cost fallacy occurs when a decision-maker includes fixed manufacturing overhead in the product's cost. (B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

Brothers Corp. is considering dropping its talking dog product line due to continuing losses. Revenue and cost data for the talking dog line for the past year follow: Sales (20,000 units) 300,000 Variable costs 180,000 Contribution margin 120,000 Fixed costs 140,000 If the talking dog is discontinued, then Brothers could avoid $110,000 per year in fixed costs. Required: a. What is the change in annual operating income from discontinuing the talking dog product line? b. Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units) should Brothers be indifferent to discontinuing or continuing the product line? c. Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to generate a $15,000 increase in the contribution margin received from the other products. If all other conditions are the same, what is the change in annual operating income from dropping the talking dog?

Darren Company produces three products with the following costs and selling prices: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Products }$ X Y Z Selling price per unit \ 40 \ 30 \ 35 Variable costs per unit 24 16 20 Contribution margin per unit \ 16 \ 14 \ 15 Direct labor hours per unit 4 2 3 Machine hours per unit 5 7 4 - If Darren has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

The following information relates to the Klear Company for the upcoming year, based on 300,000 units: Amount Per Unit Sales \ 9,000,000 \ 30.00 Cost of goods sold 7,200,000 24.00 Gross margin 1,800,000 6.00 Operating expenses 675,000 2.25 Operating profits \1 ,125,000 \3 .75 The cost of goods sold includes $3,000,000 of fixed manufacturing overhead; the operating expenses include $450,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $25.00 per unit has been made to Klear. Fortunately, there will be no additional operating expenses associated with the order and Klear has sufficient capacity to handle the order. Required: a. How much will operating profits increase if Klear accepts the special order? b. Assume that Klear is operating at full capacity. How much will operating profits change if Klear accepts the special order?

The Rapid Delivery Service is considering the expansion of its business into afternoon retail delivery service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail deliveries. However, it is estimated that an additional $10,000 would be required per month for gas, oil, and maintenance. It is further estimated that the retail delivery use of the trucks would be allocated 45% of the existing $13,000 fixed vehicle costs. What is the differential delivery cost per month for expanding into the retail delivery market?

The period of time over which capacity will be unchanged is:

The Minton Company has gathered the following information for a unit of its most popular product: Direct materials \ 6 Direct labor 3 Overhead (40\% variable) 5 Cost to manufacture 14 Desired markup (50\%) 7 Target selling price \ 21 The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, Minton's operating profits will increase by:

Agreement among business competitors to set prices at a particular level is:

The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

The Fair Play Division of Fast Company produces wheels for off-road sport vehicles. One-half of Fair Play's output is sold to the Glow Division of Fast; the remainder is sold to outside customers. Fair Play's estimated operating profit for the year is: Internal Outside Sales \ 300,000 \ 400,000 Variable costs 200,000 200,000 Fixed costs 60,000 60,000 Operating profits \4 0,000 \1 40,000 Unit sales 20,000 20,000 Glow Division has an opportunity to purchase 20,000 wheels of the same quality from an outside supplier on a continuing basis. Required: a. The Fair Play Division cannot sell any additional products to outside customers. Should the Fast Company allow Glow Division to purchase the wheels from the outside supplier at $13.00 per unit? b. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Fast of requiring that the wheels be made internally and sold to Glow Division? c. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the minimum selling price that Fair Play should accept from Glow Division? d. The Fair Play Division cannot sell any additional products to outside customers. What is the minimum selling price that Fair Play should accept from the Glow Division?