Exam 4: Fundamentals of Cost Analysis for Decision Making

Frank Industries manufactures 200,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials \ 200,000 Direct labor 320,000 Variable manufacturing overhead 120,000 Fixed manfacturing overhead 160,000 An outside supplier has offered to sell the component for $3.40 each. If Frank purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000. Required: a. If Frank purchases the component from the supplier instead of manufacturing it, the effect on income would be: b. What is the maximum price Frank would be willing to pay the outside supplier?

Horton Corporation makes a range of products. The company's predetermined overhead rate is $16 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead \7 5,000 Fixed manufacturing overhead \3 25,000 Direct labor-hour's 25,000 Management is considering a special order for 700 units of product 48 at $64 each. The normal selling price of product 48 is $75 and the unit product cost is determined as follows: Direct materials \ 37.00 Direct labor 18.00 Marufacturing overhead applied 16.00 Unit product cost \ 71.00 If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order. Required: If the special order were accepted, what would be the impact on the company's overall profit? (CIMA adapted)

The Sands Company manufactures and sells several products, one of which is called a slip differential. The company normally sells 30,000 units of the slip differentials each month. At this activity level, unit costs are: Direct materials \4 Direct labor 3 Variable manufacturing overhead 4 Fixed manufacturing overhead 5 Variable selling 3 Fixed selling \1 An outside supplier has offered to produce the slip differentials for the Sands Company, and to ship them directly to the Sands Company's customers. This arrangement would permit the Sands Company to reduce its variable selling expenses by one third (due to elimination of freight costs). The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level. The total fixed selling expenses of the company would be unaffected by this decision. Required: What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

You just got your first job after graduation. Your immediate supervisor received a special order at a price that is "below cost" during your first week at the company. The supervisor points to the proposal and says, "These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of running the business. If we sell below our full cost, we'll be out of business in no time." You remember from your course in cost accounting that this may not be as much trouble as the supervisor anticipates. How would you respond and not lose your first job?

Exporting a product to another country at a price below the domestic price is:

Carter Industries has two divisions: the West Division and the East Division. Information relating to the divisions for the year just ended is as follows: West East Units produced and sold 30,000 40,000 Selling price per unit \8 \1 5 Variable costs per unit 3 15 Direct fixed cost 48,000 110,000 Common fixed cost 40,000 40,000 Common fixed expenses have been allocated equally to each of the two divisions. Carter's segment margin for the West Division is:

The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000. Direct materials \ 20,000 Direct labor 55,000 Variable overhead 45,000 Fixed overhead Total The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year. -What are the relevant costs for the "make" alternative?

Which of the following statements regarding special orders is (are) true? (A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order. (B) 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.

Florence Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below: X1 R2 Z3 Selling price per unit \3 25.89 \5 43.15 \5 08.00 Variable cost per unit \2 51.94 \4 20.75 \3 97.60 Time on the constraint (minutes) 5.10 8.50 8.00 Required: a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work! b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

Target costs equal the difference between the target selling price and the desired profit margin.

Fixed costs are always classified as sunk costs in differential cost analysis.

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. Should Traker Company allow its internal division to purchase the tires from the outside supplier at $13.00 per unit?

The operations of Ranger Corporation are divided into the Stargate Division and the Cosmos Division. Projections for the next year are as follows: $\begin{array}{lrr}&\text { Stargate }&\text { Cosmos}\\&\text { Division }& \text { Division }& \text { Total }\\ \text {Sales } &\$500,000&\$360,000&\$860,000\\ \text {Less: Variable costs } &\underline{180,000}&\underline{200,000}&\underline{380,000}\\ \text { Contribution margin} &\$320,000&\$160,000&\$480,000\\ \text { Less: Direct fixed costs} &\underline{150,000}&\underline{125,000}&\underline{275,000}\\ \text {Segment margin } &\$170,000&\$35,000&\$205,000\\ \text {Less :Allocated common costs } &\underline{70,000}&\underline{55,000}&\underline{125,000}\\ \text { Operating income (loss)} &\underline{\$100,000}&\underline{\$(20,000)}&\underline{\$80,000}\end{array}$ Operating income for Ranger Corporation, as a whole, if the Cosmos Division were dropped would be

The Arthur Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75 each. Arthur sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If Arthur were to accept Benton's offer, what would be the increase in Arthur's operating profits?

Moxy Inc. has 9,600 machine hours available each month. The following information on the company's three products is available: Product X Product Y Product Z Contribution margin per unit \ 20.00 \ 21.00 \ 17.50 Machine hours per urit 8 12 6 Sales demand in units 500 750 1,000 Required: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin?

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted)

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. - What is the maximum possible contribution margin that Zantaq could make in any month?

The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000. Direct materials \ 20,000 Direct labor 55,000 Variable overhead 45,000 Fixed overhead Total The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year. -At what price would Bogart be indifferent to Conner's offer?

Explain the differences between life-cycle product costing and target costing.

The following information relates to a product produced by Orca Company: Direct materials \ 20 Direct labor 14 Variable overhead 12 Fixed overhead Unit cost Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year, Orca expects to produce only 400,000 units next year. The product normally sells for $80 each. A customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on the units purchased. If Orca accepts the special order, the effect on operating profits would be a: