Exam 7: The Use of Cost Information in Management Decision Making

Decision alternatives that provide the largest incremental profit are always the best option.

The Book Rack has two locations, downtown and on campus. During March, the company reported net income of $164,000 and sales of $1.2 million. The contribution margin in the downtown store was $320,000 (32% of sales). The contribution margin in the campus store is $110,000. Direct fixed costs are $90,000 in the downtown store and $93,000 in the campus location. How much are total variable costs?

Brevall Industries makes corn oil and corn meal from harvested corn in a joint process. Corn oil can be further processed into margarine, and the corn meal can be further processed into corn muffin mix. The joint cost incurred to process the corn to the split-off point is $140,000. Information on the quantities, value, and further processing costs for the joint product appears below: Ouantity Sales Value Estimated Further Sales Value At Snlit-off Processing Cost After Processing Corn Oil 800,000. \ 0.30/ \ 0.15/. \ 0.60/ . Corn Meal 1,600,000. 0.10/ 0.46/. 0.55/. Brevall allocates the joint cost to the products based on physical units. Corn oil is assigned $46,667 of joint cost and corn meal is assigned $93,333 of joint cost. Which products should be processed further?

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma. Ore costs $20 per pound. A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point. The selling price for a unit of Beta is $80. The selling price for a unit of Gamma is $40. If the relative sales value method is used to allocate the joint costs, what is the total cost allocated to each unit of Beta?

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma. Ore costs $20 per pound. A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point. The selling price for a unit of Beta is $80. The selling price for a unit of Gamma is $40. If the relative sales value method is used to allocate the joint costs, what is the total cost allocated to each unit of Gamma?

Avoidable costs are always relevant.

One advantage of using an outside supplier is the possibility that the outside supplier is particularly efficient at manufacturing the needed part or component.

Which of the following is a cost that was incurred in the past that will never be incremental?

Marshal Costumes owns two stores and management is considering eliminating the Mandarin store due to declining sales. Common fixed costs are allocated on the basis of sales. Contribution income statements are as follows: $\begin{array}{lrrr}&\text { Arlington }&\underline{\text { Mandarin }} &\underline{\text { Total }}\\\text { Sales } & \$ 300,000 & \$ 200,000 & \$ 500,000 \\\text { Variable costs } & 160,000 & 130,000 & 290,000 \\\text { Direct fixed costs } & 40,000 & 20,000 & 60,000 \\\text { Allocated fixed costs } & \underline{80,000} & \underline{65,000} & \underline{145,000} \\\text { Net Income } & \underline{\$ 20,000} & \underline{\$(15,000)} & \underline{\$ 5,000}\end{array}$ Marshal's management feels that if they eliminate the Mandarin store, that sales in the Arlington store will increase by 10%. If the Mandarin store is closed, what is the incremental effect on profit for Marshal Costumes?

Swell Computers has 12 obsolete computers that are carried in its inventory at a cost of $13,200. If these computers are upgraded at a cost of $7,500, they could be sold for $15,300. Alternatively, the computers could be sold "as is" for $9,000. What is the net advantage or disadvantage of upgrading the computers?

Conviser Tools manufactures a number of products from the same raw material. Joint processing costs total $10,000. Product A could be sold at the cut-off point for $18,000 or it can be further processed at a cost of $9,000 and then sold for $35,000. Conviser should:

Which of the following is quite often not incremental?

The value of benefits foregone by selecting one decision alternative over another is a(n)

A manufacturing company will have a binding constraint unless the capacity in all its departments exceeds the demand of its products.

Hurley Processors processes clay into two joint products, molding foam and craft blocks. When processed, each pound of clay yields 20 units of foam and 80 units of blocks. Foam sells for $2 per unit and blocks sells for $1.50 per unit. The total cost to process a 100-pound batch of clay is $35. If the relative sales value method is used to allocate the joint costs, what is the total amount that will be allocated to each batch?

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma. Ore costs $20 per pound. A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point. The selling price for a unit of Beta is $80. The selling price for a unit of Gamma is $40. If the physical quantities method is used to allocate the joint costs, what is the total cost that will be allocated to each unit of Gamma?

A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department?

When applying the theory of constraints, management attempts to improve throughput in factory bottlenecks.

Tool Time manufactures carpenter-grade screwdrivers. The company is trying to decide whether to continue to make the case in which the screwdrivers are sold, or to outsource the case to another company. The direct material and direct labor cost to produce the cases total $2.00 per case. The overhead cost is $1.00 per case which consists of $0.40 in variable overhead that would be eliminated if the cases are bought from the outside supplier. The $0.60 of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the case production manager of $40,000 per year, along with the remainder consisting of rent, insurance, and depreciation on equipment that will have no resale value. The manager will be laid off if the cases were bought externally. The outside supplier has offered to supply the cases for $2.80 each. How much will Tool Time save or lose if the cases are bought externally?

Diva Footwear is contemplating if it should continue producing platform shoes. The following information is available for the company's segments Platform Shoes Athletic Shoes Boots Sales \ 120,000 \ 420,000 \ 360,000 Variable costs 64,000 220,000 140,000 Contribution margin 56,000 200,000 220,000 Direct fixed costs 45,000 70,000 90,000 Allocated fixed costs 20,000 70,000 60,000 Net income ( \9 ,000) \6 0,000 \7 0,000 Based on the information provided, which of the following is most likely to be the basis of allocating the fixed costs to the segments?