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

Two or more products which result from common inputs are called cut-off products.

Which one of the following is the preferred alternative when deciding between two alternatives?

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 Beta?

Barnett Brass sells economy door knobs for $15 each. Unit product costs are as follows: Direct materials \ 3 Direct labor 2 Manufacturing overhead \ 4 Total \ 9 An order to purchase 4,000 units was recently received from a new customer. There is enough capacity to fill the order and filling this order would not disrupt current operations. Barnett Brass would incur an additional $1.50 per unit for shipping costs. Thirty percent 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?

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 not a relevant value in this problem?

The qualitative aspects of a decision must receive the same careful attention as the quantitative aspects.

Which of the following is never considered in incremental analysis?

The following are production and cost data for two products, buckets and pails, produced in batches of 600 each. Buckets Pails Contribution margin per batch \ 360 \ 250 Machine set-ups needed per batch 14 9 The company can only perform 9,450 set-ups each period, yet there is unlimited demand for each product. What is the maximum contribution margin for the year?

Wedding Supply is trying to decide whether or not to continue distributing reception supplies. The following information is available for Wedding Supply's business segments. ReceptionSunplies BridaL Dresses EloraL Decorations Sales \ 160,000 \ 110,000 \ 210,000 Variable costs 84,000 50,000 120,000 Contribution margin 76,000 60,000 90,000 Direct fixed costs 50,000 20,000 25,000 Allocated common fixed costs 30,000 25,000 30,000 Net income ( \4 ,000) \1 5,000 \3 5,000 If reception supplies are dropped, what change will occur to profit?

Wedding Supply is trying to decide whether or not to continue distributing reception supplies. The following information is available for Wedding Supply's business segments. ReceptionSunplies BridaL Dresses EloraL Decorations Sales \ 160,000 \ 110,000 \ 210,000 Variable costs 84,000 50,000 120,000 Contribution margin 76,000 60,000 90,000 Direct fixed costs 50,000 20,000 25,000 Allocated common fixed costs 30,000 25,000 30,000 Net income ( \4 ,000) \1 5,000 \3 5,000 If reception supplies are dropped, floral decorations sales are expected to increase by 20%. What impact will the increase in floral decorations have on overall profitability?

Reason Food Store has 4,000 pounds of raw pork approaching its expiration date. Each pound has a cost of $4.50. The pork could be sold 'as is' for $3.00 per pound to the dog food processing plant, or roasted and sold in the deli. The cost of roasting the pork will be $2.80 per pound and each pound could be sold for $6.50. What should be done with the pork and why?

The proper way to analyze the decision to drop a product line is to compare sunk costs to incremental costs.

Speedo produces signature goggles which it sells for $35. The company produces 15,000 pairs of these goggles annually but has the capacity to produce 20,000. An order for manufacturing and selling 1,000 pairs at $25 has been received from the U.S. Olympic swim team that would not disrupt current operations. Current costs for the signature goggles are as follows: Direct materials \ 6.00 Direct labor 10.00 Variable overhead 3.00 Fixed overhead \ 8.00 Total \ 27.00 In addition, the Olympic coach would like to add the U.S. Olympic logo to each pair which would require an additional $2 per pair of goggles in additional labor costs. The company would also have to rent a logo stamper to stamp the logo which would cost $600. Which statement is true with regard to this order?

Common costs are not directly traceable to an individual product line.

One advantage of using an outside supplier is that

Meehan Gifts manufactures a number of products from the same raw material. Joint processing costs total $4,000. Product Z could be sold at the cut-off point for $6,000 or it can be further processed at a cost of $9,000 and then sold for $14,000. Meehan Company should

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, what effect will occur to Diva Footwear's net income?

Opportunity costs represent the benefits foregone by selecting one alternative over another.

Which of the following is a disadvantage of using an outside supplier?

In deciding whether to sell or process further, the costs that have been incurred to process the product to the split-off point are incremental costs.