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

Fanatic Footwear has two store locations, midtown and at the beach. During October, the company reported net income of $80,000 on sales of $450,000. Sales in the midtown store were $170,000 and variable costs in the beach store were 40% of sales. The contribution margin in the midtown store was $85,000. If total direct fixed costs are $40,000, how much are total fixed costs for Fanatic Footwear?

Trebecker Construction plans to discontinue its roofing segment which last year generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. If the segment is discontinued, half of the fixed costs will be avoided. What effect is expected to occur to the company's overall profit?

Harrison Enterprises currently produces 8,000 units of part B13. Current unit costs for part B13 are as follows: Direct materials \ 12 Direct labor 9 Factory rent 7 Administrative costs 10 General factory overhead (allocated) 7 Total If Harrison decides to buy part B13, 50% of the administrative costs would be avoided. All of the company's items, including part B13, are manufactured in the same rented production facility. The company has an offer from a wholesaler that wishes to sell the part to Harrison for $31 per unit. What will occur if the company accepts the offer?

Incremental profit is the additional revenue received as a result of selecting one decision alternative over another.

Which of the following is a common input resulting in joint products?

Differential costs are relevant in decision-making.

Which of the following costs are always incremental and relevant in decision analysis?

Which of the following statements regarding opportunity costs is true?

When a department or product line is dropped, the common fixed costs that had been allocated to that department

Avoidable fixed costs are incremental in a make-or-buy decision.

Which of the following is a cost that does not differ between decisions?

Avoidable costs are always incremental to business decisions.

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 craft blocks?

Macho Sports Company sells soccer and baseball merchandise. The company is trying to decide whether or not to continue the baseball merchandise given the decline in the demand and current loss of this product line. The following information is available for the segments: Baseball Soccer Sales \ 120,000 \ 420,000 Variable costs 72,000 220,000 Contribution margin 48,000 200,000 Direct fixed costs 32,000 70,000 Allocated common fixed costs 20,000 70,000 Net income \ 4,000) \ 60,000 The company will allocate more space to the soccer product line if the baseball line is dropped. This will allow soccer sales to increase by 25%. What is the incremental effect of the decision to drop the baseball line?

Which of the following is not a joint product?

When operating in a constrained environment, which products should be produced?

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 will savings be in the second year?

B&B Flooring produced 8,000 yards of its economy-grade carpet. In the coloring process, there was a pigment defect and the resulting color faded. The carpet normally sells for $18 per yard, with $6 of variable cost per yard and $3 of fixed cost per yard assigned to the carpet. The company realizes that it cannot sell the faded carpet for $18 per yard through its normal channels, unless the coloring process is repeated. The incremental cost of the coloring process is $4 per yard. Ace Apartments is willing to buy the carpet in its current faded condition for $13 per yard. Should B&B repeat the coloring process or sell the carpet to Ace Apartments?

Publix has 2,700 pounds of bananas with a total cost of $864. Because the bananas have become too ripe, Publix is contemplating whether it should use the bananas to bake banana bread or sell the bananas 'as is' to the homeless center for $1,485. In addition to the cost of the bananas, it would cost $2,565 to convert the bananas into bread, which could then be sold for a total of $4,480. However, a special oven to bake the bread will have to be rented for an additional $300. What is the incremental effect on income if Publix converts the bananas to banana bread?

Sanders Toys is beginning to manufacture Bungey Wagons. The product will be sold to toy store chains for $12 each. Management allocates $120,000 of fixed manufacturing overhead costs to Bungey Wagons. The manufacturing cost for each wagon at the expected production of 10,000 wagons is as follows: Direct material \ 13.00 Direct labor 4.00 Overhead ( \ 1.20 fixed and \ 2.00 variable) 3.20 Total \ 20.20 The company has contacted a number of suppliers to determine whether it is better to buy or manufacture the wheels. The lowest quote for a set of 4 wheels needed for each wagon is $3.15. It is estimated that purchasing the wheels from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Sanders Toys' manufacturing space is highly constrained. By purchasing the wheels, the company will not have to lease additional manufacturing space that currently cost $8,000 per year. What is the incremental cost or benefit of buying the wheels as opposed to making them?