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

The following information is available for Diva Footwear'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 Diva Footwear normally sells boots for $90 per pair. An exporter has approached Diva about buying 1,000 pairs of boots for a one-time export deal for $81 per pair. Diva can avoid $3.00 per pair of the normal variable cost on this sale, but Diva must pay a fixed cost of $4,000 to have the boots shipped. Diva has the capacity to produce this order, and no regular sales will be affected. What affect will occur on Diva's profits if the order is accepted?

Two or more products that result from common inputs are called

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 If the baseball segment is dropped, soccer sales will be unaffected. What will be the effect on overall profits if the baseball segment is eliminated?

When deciding whether to eliminate a segment, the segment should be dropped if its contribution margin less the avoidable fixed costs is positive.

Watson Wheels currently makes 6,000 wheels annually that are used in other products it manufactures. Current unit costs for the wheels are as follows: Direct materials \ 22.00 Direct labor 16.00 Variable manufacturing overhead 12.00 Fixed manufacturing overhead Total \ 65.00 The company has an offer from a manufacturer to produce the wheels for $60 per wheel. If the company decides to buy the wheels, the empty warehouse space could be rented for $22,000 annually. In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the wheels. If the company decides to accept the offer, what is the incremental effect on the company's net income?

In a make-or-buy decision, direct materials and direct labor are usually incremental costs.