Exam 4: Fundamentals of Cost Analysis for Decision Making

Halfway Industries produces two products. Information about the products is as follows: Clocks Headphone: Units produced and sold 8,000 20,000 Selling price per unit \ 16 \1 4 Variable costs per unit 10 9 The company's fixed costs totaled $140,000, of which $30,000 can be directly traced to Clocks and $90,000 can be directly traced to Headphones. Required: The effect on the firm's profits if the Headphone product is dropped would be:

Price discrimination is the practice of selling identical goods or services to different customers at different prices.

Short Inc. has 5,200 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 \ 45.00 \ 54.00 \ 22.50 Machine hours per unit 3 2 1 Sales demand in urits 900 1,000 Required: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin?

Why is it important to consider opportunity costs in a make-or-buy decision?

Ralston Company makes 10,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials \ 13.20 Direct labor 20.80 Variable manufacturing overhead 3.00 Fixed manufacturing overhead 10.90 Unit product cost \ 47.90 An outside supplier has offered to sell the company all of these parts for $42.30 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $39,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $6.40 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $47.90 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 10,000 units required each year?

When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs.

The full-cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.

Zantaq Inc. has 5,400 machine hours available each month. The following information on the company's three products is available: Side Bookcases Chairs Tables Contribution margin per unit \ 15.00 \ 18.00 \ 7.50 Machine hours per unit 3 2 1 The market demand is limited to 2,000 units of each of the three products. -How many units of each should Zantaq produce and sell? Bookcases Chairs Side Tables A. 2,000 2,000 2,000 B. 0 2,000 2,000 C. 0 2,000 1,400 D. 1,800 0 0

Bacon Company makes four products in a single facility. These products have the following unit product costs: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Products }$ A B C D Direct materials \ 14.30 \ 10.20 \ 11.00 \ 10.60 Direct labor 19.40 27.40 33.60 40.40 Variable manufacturing 4.30 2.70 2.60 3.20 overhead Fixed manufacturing 26.50 34.80 26.60 37.20 overhead Unit product cost \ 64.50 \ 75.10 \ 73.80 \ 91.40 Additional data concerning these products are listed below. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Products }$ A B C D Grinding minutes per unit 3.80 5.30 4.30 3.40 Selling price per unit \ 76.10 \ 93.50 \ 87.40 \ 104.20 Variable selling cost per \ 2.20 \ 1.20 \ 3.30 \ 1.60 unit Monthly demand in units 4,000 4,000 3,000 2,000 The grinding machines are the constraint in the production facility. A total of 53,600 minutes is available per month on these machines. Direct labor is a variable cost in this company. - Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)

The King Company has two divisions-North and South. The divisions have the following revenues and expenses: $\begin{array}{lrr}&\text {North}&\text {South}\\ \text { Sales } & \$ 900,000 & \$ 800,000 \\\text { Variable expenses } & 450,000 & 300,000 \\\text { Traceable fixed expenses } & 260,000 & 210,000 \\\text { Allocated common corporate expenses } & 240,000 & 190,000\\\text { Net operating income (loss) }&\$(50,000)&\$100,000\end{array}$ Management at King is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of:

Differential costs are: (CMA adapted)

The operations of Jorge Corporation are divided into the Northern Division and the Eastern Division. Projections for the next year are as follows: Required: a. Operating income for Jorge Corporation, as a whole, if the Eastern Division were dropped would be: b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Jorge Corporation's operating income be?

Item N29 is used by Tyner Corporation to make one of its products. A total of 11,000 units of this item are produced and used every year. The company's Accounting Department reports the following costs of producing Item N29 at this level of activity Per Unit Direct materials \ 5.90 Direct labor 1.70 Variable manufacturing overhead 5.40 Supervisor's salary 2.60 Depreciation of special equipment 3.20 Allocated general overhead 3.30 An outside supplier has offered to make Item N29 and sell it to the company for $21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the Item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the items were purchased instead of produced internally. In addition, the space used to make Item N29 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product. What would be the impact on the company's overall net operating income of buying Item N29 from the outside supplier?

The practice of setting the selling price below cost with the intent to drive competitors out of business is:

Short-run decisions often have long-run implications.

The Hammer Division of Excel Company produces hardened sledge hammers. One-third of Hammer's output is sold to the Government Products Division of Excel; the remainder is sold to outside customers. Hammer's estimated operating profit for the year is: Government Products Outside Division Customers Sales \1 5,000 \4 0,000 Variable costs (10,000) (20,000) Fixed costs Operating profits Unit sales 10,000 20,000 The Government Products Division has an opportunity to purchase 10,000 hammers of the same quality from an outside supplier on a continuing basis. The Hammer Division cannot sell any additional products to outside customers. Should the Excel Company allow its Government Products Division to purchase the hammers from the outside supplier at $1.25 per unit?

Giant Inc. has 3,600 machine hours available each month. The following information on the company's three surgical kits is available: Surgical Kit Surgical SurgicaL 1 Kit 2 Kit 3 Contribution margin per unit \ 5.00 \ 4.00 \ 2.50 Machine hours per unit 2 1 3 Sales demand in units 1.000 800 900 Required: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin?

Flower Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 18,000 medals each month; current monthly production is 17,100 medals. The company normally charges $88 per medal. Cost data for the current level of production are shown below: Variable costs: Direct materials \ 495,900 Direct labor \ 324,900 Selling and administrative \ 30,780 Fixed costs: Manufacturing \ 345,420 Selling and administrative \ 164,160 The company has just received a special one-time order for 600 medals at $73 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? (CMA adapted)

A student in your cost accounting class says, "This whole subject of differential costing is easy; variable costs are the only costs that are relevant." Using an example, what would you tell that student?

The time from initial research and development to the time that support to the customer ends is the: