Exam 9: Relevant Costs: the Key to Decision Making

Cook Company has two divisions-Eastern and Western. of:

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs.:

Managers will always seek to eliminate all unprofitable product lines.

Reference: 09-14 Crane Company makes four products in a single facility. Data concerning these products appear below: Product A B C D Selling price per unit \ 35.30 \ 30.20 \ 20.80 \ 26.00 Variable manuf. cost per unit \ 16.50 \ 15.80 \ 7.90 \ 8.50 Variable selling cost per unit \ 3.80 \ 1.60 \ 1.90 \ 3.30 Milling machine minutes per unit 3.30 1.70 2.10 2.50 Monthly demand in units 4,000 1,000 3,000 1,000 The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines. -Which product makes the LEAST profitable use of the milling machines

Reference: 09-12 Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials \ 11.30 Direct labour 22.70 Variable manufacturing overhead 1.20 Fixed manufacturing overhead Unit product cost An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year. If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. -What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

Reference: 09-14 Crane Company makes four products in a single facility. Data concerning these products appear below: Product A B C D Selling price per unit \ 35.30 \ 30.20 \ 20.80 \ 26.00 Variable manuf. cost per unit \ 16.50 \ 15.80 \ 7.90 \ 8.50 Variable selling cost per unit \ 3.80 \ 1.60 \ 1.90 \ 3.30 Milling machine minutes per unit 3.30 1.70 2.10 2.50 Monthly demand in units 4,000 1,000 3,000 1,000 The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines. -How many minutes of milling machine time would be required to satisfy demand for all four products?

Reference: 09-11 Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: Direct materials \ 4.20 Direct labour \ 12.00 Variable manufacturing overhead \ 5.80 Fixed manufacturing overhead \ 6.50 Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost. -Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rogers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income?

Reference: 09-10 Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year. -The change in the company's overall annual net operating income that would result from making the component, rather than buying it, would be:

Reference: 09-01 The following are Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity): Manufacturing: Direct materials \ 1.00 Direct labour 2.00 Variable overhead 0.50 Fixed overhead 0.90 Selling and administrative: Variable 1.50 Fixed 0.60 Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labour is a variable cost. -How much will the company's net operating income be increased or (decreased)if it prices the 1,000 units in the special order at $6 each?

Future costs that do not differ among the alternatives are not relevant in a decision.

A plant operating at capacity would suggest that most likely:

In a make or buy decision, which of the costs below are relevant

Reference: 09-02 Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200. -What is the net advantage or disadvantage to the company from upgrading the calculators?

A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen.

Consider a decision facing a firm of either accepting or rejecting a special offer for on of its products. A cost that is not relevant is:

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate, or to accept the product.

Reference: 09-15 Madison Company produces three products with the following costs and selling prices: A B C Selling price per unit \ 16 \ 21 \ 21 Variable cost per unit 7 11 13 Contribution margin per unit \ 9 \ 10 \ 8 Direct labour hours per unit 1.0 1.5 2.0 Machine hours per unit 4.5 2.0 2.5 -If machine-hours are Madison's production constraint, then the three products should be produced in which order?

Reference: 09-04 Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are as follows: Direct materials \ 20 Direct labour 10 Variable manufacturing overhead 5 Fixed manufacturing overhead 7 Variable selling expense 8 Fixed selling expense 2 The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a variable cost. -If Varone has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:

Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck)?

A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would: