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

If a company decides to eliminate a product, fixed costs allocated to that product line will be avoided.

Allocating joint costs to products based on physical quantities will make all of the products have the same gross margin ratio if they are sold at the split-off point.

Zanatech's market for its remote control has changed significantly, and Zanatech has had to drop the selling price per unit from $45 to $38. There are some units in the work in process inventory that have costs of $30 per unit associated with them. Zanatech can sell these units in their current state for $22 each. It will cost Zanatech $11 per unit to rework these units so that they can be sold for $38 each. How much is the financial impact if the units are processed furthur?

Havenstock produces lime juice and lime margarita mix. A 500-pound batch of limes costing $70 is processed and results in two components-concentrate and nectar. The labor to achieve this process is $120 per batch. The concentrate is used to produce lime juice and the nectar is used to produce margarita mix. The concentrate is processed into 80 pints of lime juice at a batch cost of $30, and the nectar is processed into 40 bottles of margarita mix at a cost of $20 per batch. The sales price of each pint of juice is $5, and each bottle of margarita mix has a sales value of $2.50. How much is the joint cost allocated to lime juice using the relative sales value method?

Foot Print has three product lines in its retail stores: shoes, boots, and sandals. The allocated fixed costs are based on units sold and are unavoidable. Results of June follow: $\begin{array}{lrrrr}& \text { Socks } & \text { Boots } & \text { Sandals } & \text { Total } \\ \text { Units sold } & 800 & 1,200 & 2,400 & 4,400 \\\hline\text { Revenue } & \$ 24,800 & \$ 30,400 & \$ 36,600 & \$ 91,800 \\\text { Variable costs } & 13,600 & 13,200 & 16,800 & 43,600 \\\text { Direct fixed costs } & 5,000 & 7,000 & 6,500 & 18,500 \\\text { Allocated fixed costs } & 8,000 & 9,000 & 8,000 & 25,000\\\text { Net income (loss) }&\$(1,800)&\$1,200&\$5,300&\$4,700\end{array}$ Demand of individual products is not affected by changes in other product lines. How much is the incremental effect on income of dropping socks?

Way Living sells unfinished oak shelves for $35 each. Budgeted sales for the year are expected to be 4,000 shelves. Each shelf requires 4 linear feet of wood to produce. The cost of wood is $4.80 per linear foot. Direct labor is $6.00 per shelf. Variable overhead and fixed overhead costs per unfinished shelf are $1.00 and $0.50 respectively. Way Living is considering whether it should stain the shelves so it can sell them for $48.00 each. It estimates it will sell 60% of the budgeted shelves 'stained' with the others unfinished. The direct costs of staining each shelf are $9.00. How much is the incremental effect on profit if the company stains the shelves?

Samson Designers produces a lady's handbag that normally sells for $120. The company produces 800 units annually but has the capacity to produce 1,100 units. An order from a customer has been received for 200 handbags at $85 each that would not disrupt current operations. Current costs for the handbag are as follows: Direct materials \ 23.00 Direct labor 45.00 Variable overhead 7.00 Fixed overhead -12.00 Total In addition, the customer would like to add a monogram to each bag which would require an additional $4 per bag in additional labor costs. Samson would also have to purchase a piece of equipment to create the monogram which would cost $800. This equipment would not have any other uses. Which statement is true with regard to this situation?

Soren Company makes two products from a joint input that have the following information: Units Sales Value Total Additional Sales Value Per Unit Processing Per Unit After Produced At Split-Off Costs Additional Processing Product A 40,000 \ 10 \ 400,000 \ 15 Product B 150.000 4 300,000 7 The joint cost incurred to produce the two products to the split-off point is $600,000. How much joint cost should be allocated to Product A using the relative sales value at split-off as the allocation method?

The theory of constraints seeks to

Ralston Tile produces three types of ceramic tiles, models 33, 41, and 56 from clay, which is mined in the Arizona desert. Budgeted data for next month follows: 33 41 56 Units produced 3,000 4,500 6,000 Sales value at split-off per unit \ 15 \ 18 \ 24 Additional processing costs per unit \ 4 \ 6 \ 7 Joint production costs per unit \ 2 \ 5 \ 5 Sales value if processed further per unit \ 20 \ 23 \ 32 The joint cost of mining the clay is $80,000. Which of the products should be produced beyond the split-off point? 33 41 56 A. Yes Yes Yes B. Yes Yes No C. No Yes Yes D. Yes No Yes

Zanatech's market for its remote control has changed significantly, and Zanatech has had to drop the selling price per unit from $45 to $38. There are some units in the work in process inventory that have costs of $30 per unit associated with them. Zanatech can sell these units in their current state for $22 each. It will cost Zanatech $11 per unit to rework these units so that they can be sold for $38 each. Which of the following is the amount of sunk costs in this problem?

Soren Company makes two products from a joint input that have the following information: Units Sales Value Total Additional Sales Value Per Unit Processing Per Unit After Produced At Split-Off Costs Additional Processing Product A 40,000 \ 10 \ 400,000 \ 15 Product B 150.000 4 300,000 7 The joint cost incurred to produce the two products to the split-off point is $600,000. Which product(s) should be processed further?

Brevall Industries makes corn oil and corn meal from harvested corn in a joint process. The 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 products appear 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 the relative sales value at split-off point. How much joint cost should be assigned to the corn oil?

The following are production and cost data for two products, A and B, produced in batches of 100 units. Product A Product B Contribution margin per batch \ 450 \ 340 Machine set-ups needed per batch 25 20 The company can only perform 12,000 set-ups each period yet there is unlimited demand for each product. What is the incremental profit from producing Product A instead of Product B for the year?

What is the stage of production at which the individual joint products are identified?

Teruba Melons purchased a truckload of watermelons weighing 3,000 pounds for $900. The company separated the melons into two grades: superior and economy. The superior grade melons have a total weight of 2,400 pounds and the economy grade melons total 600 pounds. The company sells the superior grade at $0.60 per pound and the economy grade at $0.30 per pound. How much of the $900 cost of the truckload will be allocated to the superior grade melons using the relative sales value method? Use five significant digits in calculations.

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 If platform shoes are dropped, sales of athletic shoes are expected to drop by 10%. What impact will occur to Diva Footwear's net income?

The stage of production at which individual products are identifiable is referred to as the spin-off point.

Blue Chip Company sells gears for $9 per unit. The unit cost of each gear follows: Direct materials \ 1.50 Direct labor 2.20 Manufacturing overhead Total \ 5.80 An order to purchase 4,000 gears was recently received from a new customer. There is enough capacity to fill the order and filling this order would not disrupt current operations. Blue Chip Company would incur an additional $1.80 per gear for shipping costs. Half of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced. In negotiating a price, how much is the minimum acceptable selling price?

Mel's Diner owns a single restaurant, which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of square footage. Restaurant Total Sales \ 800,000 \ 200,000 \ 1,000,000 Variable costs 475,000 160,000 635,000 Direct fixed costs 50,000 15,000 65,000 Allocated fixed costs 212,500 37,500 250,000 Net income \6 2,500 ( \1 2,500) \5 0,000 What effect will occur if Mel's Diner eliminates the cantina if there is no effect on restaurant sales?