Exam 9: Relevant Costs: the Key to Decision Making

Reference: 09-13 Brown Company makes four products in a single facility. These products have the following unit product costs: Product A B C D Direct materials \ 15.60 \ 19.50 \ 12.50 \ 15.20 Direct labour 17.60 21.00 15.40 9.40 Variable manufacturing overhead 4.40 5.60 8.10 5.10 Fixed manufacturing overhead 27.50 14.40 14.50 16.50 Unit product cost \ 60.50 \ 50.50 \ 46.20 $\text { Additional data concerning these products are listed below. }$ Product A B C D Grinding minutes per unit 2.00 1.10 0.70 0.30 Selling price per unit \ 78.70 \ 71.10 \ 67.90 \ 62.60 Variable selling cost per unit \ 2.60 \ 3.10 \ 2.80 \ 3.50 Monthly demand in units 3,000 2,000 2,000 4,000 The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company. -Up to how much should the company be willing to pay for one additional hour of grinding machine time if the company has made the best use of the existing grinding machine capacity

The manufacturing capacity of Jordan Company's facilities is 30,000 units a year.

Green Company produces 2,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is: Variable manufacturing cost \ 12 Fixed manufacturing cost 9 Unit product cost The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

Costs that are always relevant in decision-making are:

Reference: 09-13 Brown Company makes four products in a single facility. These products have the following unit product costs: Product A B C D Direct materials \ 15.60 \ 19.50 \ 12.50 \ 15.20 Direct labour 17.60 21.00 15.40 9.40 Variable manufacturing overhead 4.40 5.60 8.10 5.10 Fixed manufacturing overhead 27.50 14.40 14.50 16.50 Unit product cost \ 60.50 \ 50.50 \ 46.20 $\text { Additional data concerning these products are listed below. }$ Product A B C D Grinding minutes per unit 2.00 1.10 0.70 0.30 Selling price per unit \ 78.70 \ 71.10 \ 67.90 \ 62.60 Variable selling cost per unit \ 2.60 \ 3.10 \ 2.80 \ 3.50 Monthly demand in units 3,000 2,000 2,000 4,000 The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company. -Which product makes the LEAST profitable use of the grinding machines

Reference: 09-13 Brown Company makes four products in a single facility. These products have the following unit product costs: Product A B C D Direct materials \ 15.60 \ 19.50 \ 12.50 \ 15.20 Direct labour 17.60 21.00 15.40 9.40 Variable manufacturing overhead 4.40 5.60 8.10 5.10 Fixed manufacturing overhead 27.50 14.40 14.50 16.50 Unit product cost \ 60.50 \ 50.50 \ 46.20 $\text { Additional data concerning these products are listed below. }$ Product A B C D Grinding minutes per unit 2.00 1.10 0.70 0.30 Selling price per unit \ 78.70 \ 71.10 \ 67.90 \ 62.60 Variable selling cost per unit \ 2.60 \ 3.10 \ 2.80 \ 3.50 Monthly demand in units 3,000 2,000 2,000 4,000 The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company. -How many minutes of grinding machine time would be required to satisfy demand for all four products?

Which of the statements below is correct about sunk costs

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. -Assume the company has 50 units left over from last year which have small defects an which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. What cost is relevant as a guide for setting a minimum price on these defective units?

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. -Cosmo is considering a promotional campaign at the Town Store that would not affec? the Mall Store. in Cosmo's operating income of:

Reference: 09-06 Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. Sales (6,500 Tams at \ 130 each ) \ 845,000 Variable cost of sales 390,000 Variable distribution costs 65,000 Fixed advertising expense 275,000 Salary of product line manager 25,000 Fixed manufacturing overhead 145,000 Net loss \ \ 55,000) Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company. -Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. should be:

Golden, Inc. has been manufacturing 5,000 units of Part 10541 which is used in one of its products. At this level of production, the unit product cost of Part 10541 is as follows: Direct materials \ 2 Direct labour 8 Variable manufacturing overhead 4 Fixed manufacturing overhead 6 Unit product cost \ 220 Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit. Golden has determined that two thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown. Assume that direct labour is an avoidable cost in this decision. To determine whether to accept Brown's offer, the relevant costs to Golden of manufacturing the parts internally are:

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped.

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 there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at ? manufacturing cost of $20,000. If the lanterns are remachined for $5,000, they could be sold for $9,000. Alternatively, the lanterns could be sold for scrap for $1,000. Which alternative is more desirable and what are the total relevant costs for that alternative?

The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.

SP Company makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials \ 5.50 Direct labour \ 5.60 Variable factory overhead \ 4.75 Fixed factory overhead \ 4.45 An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Company for this motor is $18. If SP Company decides not to make the motors, there would be no other use for the production facilities and total fixed factory overhead costs would not change. If SP Company Decides to continue making the motor, how much higher or lower would net income be than if the motors are purchased from the outside suppler Assume that direct labour is a variable cost in this company.

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. -Assume that Tolar decides to upgrade the calculators. At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

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 if the component is purchased from the outside supplier, $35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year. If Rogers chooses to buy the component from the outside supplier under these circumstances, then the impact on annual net operating income due to accepting the offer would be:

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 there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $76.40 per unit. the company's net operating income for the month?

The following standard costs pertain to a component part manufactured by Ashby Company: Direct materials \ 2 Direct labour 5 Manufacturing overhead Standard cost per unit The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed and this fixed portion would not be affected by this decision. Assume that direct labour is an avoidable cost in this decision. What is the relevant amount of the standard cost per unit to be considered in a decision of whether to make the part internally or buy it from the external supplier?