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

LanaTech produces three products, X, Y, and Z, from recycled paper. Budgeted data for next month follows: Units produced 800 2,400 1,600 Sales value at split-off per unit \ 6 \ 15 \ 12 Additional processing costs per unit \ 1 \ 4 \ 5 Joint production costs per unit \ 2 \ 6 \ 4 Sales value if processed further per unit \ 9 \ 20 \ 16 The joint cost of the recycled paper is $110,000. Which of the products should be produced beyond the split-off point? X Y Z A. No Yes Yes B. Yes Yes No C. No No No D. No Yes No

Sunk costs are incremental costs because they increase or decrease with the choice of one alternative over another.

You have tickets to go to Jamaica over spring break. Just this week your best friend informs you that he (she) is getting married over spring break. Your friend would like you to stay back in the city and be the wedding attendant. The tickets to Jamaica are nonrefundable. Which of the following is a sunk cost relating to your decision of attending the wedding or going on the trip to Jamaica?

Which of the following statements is(are) true concerning common costs? I. They are costs that are directly traceable to an individual product line. II. They are normally avoidable.

The allocation of joint costs to joint products influences

The best way to allocate the cost of common inputs to joint products is based on the physical quantities of the outputs.

A company is trying to decide whether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units. Which of the following is not relevant to the decision?

At the split-off point,

As it pertains to the theory of constraints, inspections should be conducted

Which of the following is most likely relevant in a make-or-buy decision?

Production of all the joint products should cease if

Deep South Dairy gathered the following data about the two products that it produces: Current Sales Estimated Added Sales Value if Product Value Processing Costs Prosed Further Milk \ 8,000 \ 2,000 \ 11,000 Yogurt 12,000 7,000 18,000 Which of the products should be processed further?

Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal: Direct material \ 13,000 Direct labor 5,000 Manufacturing overhead 7000 Total \2 5,000 The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs, which are 30% unavoidable. What is the incremental cost per pound that Diamond will (incur) or save if it buys the rice cereal from Sanders?

Winton Corporation currently makes rolls for deli sandwiches it produces. It uses 30,000 rolls annually in the production of deli sandwiches. The costs to make the rolls are given below: Materials \ 0.24 per roll Labor \ 0.40 per roll Variable overhead \ 0.16 per roll Fixed overhead \ 0.20 per roll A potential supplier has offered to sell Winton the rolls for $0.90 each. If the rolls are purchased, 30% of the fixed overhead could be avoided. If Winton accepts the offer, what will the effect on profit be?

Throughput is the amount of inventory produced in a period. Material from the appendix to the chapter is marked with an asterisk (*).

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 physical quantity method? Use five significant digits in calculations.

When making a decision to sell a joint product at the split-off point or process it further, which of the following is not relevant?

Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal: Direct material \ 13,000 Direct labor 5,000 Manufacturing overhead 7000 Total \2 5,000 The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated fixed costs. Should Diamond Brands make or buy the rice cereal?

Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2014 follows: Footballs Basketballs Bats Total Sales \ 600,000 \ 800,000 \ 400,000 \ 1,800,000 Cost of goods sold 260,000 400,000 230,000 890,000 Gross margin 340,000 400,000 170,000 910,000 Less other variable costs 85,000 120,000 80,000 285,000 Contribution margin 255,000 280,000 90,000 625,000 Less direct salaries 50,000 60,000 45,000 155,000 Less common fixed costs 85,000 100,000 55,000 240,000 Net income \1 20,000 \1 20,000 ( \1 0,000) \2 30,000 Since the profit for bats is relatively low, the company is considering dropping this product line. What is the incremental effect of dropping bats?

According to the theory of constraints, everything else should be subordinate to the binding constraint.