Exam 9: Relevant Costs: the Key to Decision Making

Lusk Company produces and sells 15,000 units of Product A each month. price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product A should be discontinued. The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product were discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would:

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 direct labour-hours are the company'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 can expect to sell 32,000 Homs next year through regular channels, at wha? special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order:

Which statement below is the most correct about the cost-plus approach to pricing

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 24.70 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. -How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

Reference: 09-05 Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: Direct materials \ 42.60 Direct labour 8.10 Variable manufacturing overhead 1.10 Fixed manufacturing overhead 17.30 Variable selling \& administrative expense 1.80 Fixed selling \& administrative expense 8.00 The normal selling price of the product is $86.10 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company. -Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

Assuming all units that are produced can be sold, in deciding which of alternative products to produce in circumstances of constrained resources, managers will always seek to maximize the production of the product with the highest per-unit contribution margin.

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 net total dollar advantage (disadvantage)of purchasing the part rather than making it?

Reference: 09-08 The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: Annual sales 3,000 units Selling price per unit \ 309 Variable costs per unit: Production \ 130 Selling \ 50 Avoidable fixed costs per year: Production \ 51,000 Selling \ 75,000 Unavoidable allocated fixed corporate costs per year \ 54,000 If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year. -If the new product is added next year, the increase in net income resulting from this decision would be:

Reference: 09-07 Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. Total Mall Store Town Store Sales \ 200,000 \ 80,000 \ 120,000 Less variable costs 116,000 32,000 84,000 Contribution margin 84,000 48,000 36,000 Less traceable fixed expenses 60,000 20,000 40,000 Store segment margin 24,000 28,000 (4,000) Less common fixed expenses 10,000 4,000 6,000 Operating income \ 14,000 \ 24,000 \ (10,000) Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars. Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales. The operating results for November are representative of all months. -A decision by Cosmo Inc. in Cosmo's operating income of:

Reference: 09-09 Bingham Company manufactures and sells Product J. Results for last year's manufacture and sale of Product J are as follows: Sales: 10,000 units at \ 160 each \ 1,600,000 Less costs: Variable production costs 960,000 Sales commissions: 15\% of sales 240,000 Salaries of line supervisors 195,000 Traceable fixed advertising expense 180,000 Fixed general factory overhead (allocated to products on the basis of square feet occupied) 170,000 Total costs 1,745,000 Net loss \ (145,000) Bingham Company anticipates no change in the operating results for Product J in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision. -Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines. How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products?

Reference: 09-03 Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: Variable production cost \ 4.60 Fixed production cost 1.80 Variable selling expense 1.00 If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. -Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly operating income will be?

Wagner Company sells product A for $21 per unit. full capacity of 200,000 units is as follows: Direct materials \ 4 Direct labour 5 Manufacturing overhead 6 Unit product cost A special order offering to buy 20,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $2 per unit for shipping. Wagner has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labour is an avoidable cost in this decision. In negotiating a price for The special order, the minimum acceptable selling price per unit should be:

Which of the statements below is correct about opportunity costs

Which of the following is one of the advantages to the target costing approach

Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay's predictions for next year, 240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased or decreased as a result of the special order?

Jimbob Co. is considering offering each of the three products the company manufactures at two levels - "Standard" and "Advanced". Currently all products are processed to the "Standard" level and all products manufactured at this level can be sold. Management believes that it will be possible to generate additional sales revenue and profits by further processing some of units of the "Standard" level products to the "Advanced" level. Fixed costs will not change in total. In making the decision whether it should process products further which decision rule should be followed?

Manico Company produces three products-X, Y, & Z-with the following characteristics: X Y Z Selling price per unit \ 20 100\% \ 16 100\% \ 15 100\% Variable cost per unit 12 60\% 12 75\% 6 40\% Contribution margin per unit \ 8 40\% \ 4 25\% \ 9 60\% Machine hours per unit 5 3 6 The company has only 2,000 machine-hours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin?

A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $40,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $30,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company's overall net operating income would:

In the target costing approach to pricing, the total cost of a product is first determined and then an expected level of mark-up is added to get the desired selling price.