Exam 9: Relevant Costs: the Key to Decision Making

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. -What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product?

In deciding the profitability of processing joint products further after the split-off point, all costs should be considered including joint costs incurred prior to the split-off point.

The opportunity cost of making a component part in a factory with no excess capacity is the:

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect on the profit of Manor Company of discontinuing this department would be:

Beryl Enterprise is considering closing down its Jamaica location. This location presently has a contribution margin of $1,000,000. Overhead allocated to it is $2,500,000, of which $250,000 cannot be eliminated. If this location were to discontinue operations, by what amount would Beryl's pre-tax income increase?

To maximize total contribution margin, a firm faced with a production constraint should:

The book value of old equipment is not a relevant cost in an equipment replacement decision problem.

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. -If Immanuel accepts this special order, the change in the monthly net operating incom? will be a:

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. -What would the annual cost of additional supervision have to be in order for Hadley to be economically indifferent between making or buying the component

Consider the following production and cost data for two products, L and C: Product L Product C Contribution margin per unit \ 130 \ 120 Machine set-ups needed per unit 10 set-ups 8 set-ups The company can only perform 65,000 machine set-ups each period due to limited skilled labour and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?