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

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

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

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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?

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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?

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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?

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

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Which of the following is never considered in incremental analysis?

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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?

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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?

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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?

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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?

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

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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?

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

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One advantage of using an outside supplier is that

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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

(Multiple Choice)
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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?

(Multiple Choice)
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Opportunity costs represent the benefits foregone by selecting one alternative over another.

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

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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.

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