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

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, how much will be allocated to craft blocks?

Joint costs

Which statement is true of the relative sales value method if all joints products are sold at the split-off point? I. The products will have the same gross margin ratio. II. The products will have the same gross margin per unit.

In a make-or-buy decision, the original purchase price of equipment that is currently used in the manufacturing process is usually a relevant cost because the equipment can be sold for its salvage value.

Which of the following is a direct cost of a specific department in a retail store?

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. What is the amount of avoidable costs if Diamond Brands buys rather than makes the rice cereal?

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 physical quantities method is used to allocate the joint costs, how much will be allocated to each batch of modeling foam?

Denray Deli has two locations, downtown and in the town mall. During March, the company reported total net income of $144,000 with sales of $1,200,000. The contribution margin in the downtown store was 30%. The contribution margin in the town mall store is $80,000. Total fixed costs are allocated as $110,000 in the downtown store and $90,000 in the town mall location. How much are sales at the downtown location?

Costs that will be eliminated if a particular course of action is undertaken are called

A product line should be dropped when

In theory of constraints, what does "break the binding constraint" mean?

Tannimen Square has 800 obsolete calculators in its inventory which have a cost of $16 each. If the calculators are reworked they could be sold for $23 each. If sold 'as-is', the revenue would be only $12 each. If Tannimen decides to rework the calculators, how much should the company be willing to invest to ensure that no additional loss occurs on the sale of the calculators?

State University is considering hiring an outside company for its grounds maintenance. In this regard, State University has received a bid from Mackin Services. Mackin states that its bid of $410,000 will cover all services and planting materials required to "keep State University's grounds in a condition comparable to prior years." State University's cost for grounds maintenance in the preceding year was $412,000 as follows: Salary of three full-time gardeners \ 295,000 Plant materials 80,000 Fertilizer 9,000 Fuel 8,000 Depreciation of other equipment 5,000 Depreciation of tractor and mowers 15,000 Total \ 412,000 If State University hires Mackin, it will be able to sell its other equipment for $30,000, and the three gardeners will be laid off. What is the first year financial impact of hiring the outside company for its grounds maintenance?

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. A new employee looks at the analysis and exclaims, "We'll lose money with either of these alternatives! Let's just throw these units in the trash!" What effect will this option have on net income?

Abacus has 800 obsolete calculators that are carried in inventory at a cost of $1,920. If these calculators are upgraded at a cost of $3,100, they could be sold for $4,500. Alternatively, the calculators could be sold "as is" for $1,600. What is the net advantage or disadvantage of reworking the calculators?

A primary disadvantage of using an outside supplier is that the supplier may not be able to deliver the needed parts or components on a timely basis.

Wilson is currently producing a component for one of its products. Wilson has received an offer to buy the component from an outside supplier. A machine is currently being rented to manufacture the component. If the company buys the component, the rental will be cancelled. What is the rent on the machine, in relation to the decision to make or buy the component?

Fixed costs are always sunk costs.

Which method of allocating joint costs is based on the proportional sales values at the split-off point?

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, how much will be allocated to each batch of modeling foam?