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

Diamond Brands manufactures rice, wheat, and oat cereals.Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds.The following costs are associated with production of 20,000 pounds of rice cereal: Direct material \ 13,000 Direct labor 5,000 Manufacturing overhead 7,000 Total \ 25,000 The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs, which are 30% unavoidable.What is the incremental cost per pound that Diamond will (incur) or save if it buys the rice cereal from Sanders?

Which of the following is a direct cost of a specific department in a retail store?

Tool Time manufactures carpenter-grade screwdrivers.The company is trying to decide whether to continue to make the case in which the screwdrivers are sold, or to outsource the case to another company.The direct material and direct labor cost to produce the cases total $2.00 per case.The overhead cost is $1.00 per case which consists of $0.40 in variable overhead that would be eliminated if the cases are bought from the outside supplier.The $0.60 of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the case production manager of $40,000 per year, along with the remainder consisting of rent, insurance, and depreciation on equipment that will have no resale value.The manager will be laid off if the cases were bought externally.The outside supplier has offered to supply the cases for $2.80 each.How much will Tool Time save or lose if the cases are bought externally?

Barnett Brass sells economy door knobs for $15 each.Unit product costs are as follows: Direct materials \ 3 Direct labor 2 Manufacturing overhead Total An order to purchase 4,000 units was recently received from a new customer.There is enough capacity to fill the order and filling this order would not disrupt current operations.Barnett Brass would incur an additional $1.50 per unit for shipping costs.Thirty percent of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced.In negotiating a price, how much is the minimum acceptable selling price?

Allocating joint costs to products based on physical quantities will make all of the products have the same gross margin ratio if they are sold at the split-off point.

Which method of allocating joint costs is based on the proportional sales values at the split-off point?

Tannimen Square has 800 obsolete calculators in its inventory which have a cost of $16 each.If the calculators are reworked they could be sold for $23 each.If sold 'as-is', the revenue would be only $12 each.If Tannimen decides to rework the calculators, how much should the company be willing to invest to ensure that no additional loss occurs on the sale of the calculators?

Which of the following is not a joint product?

Sanders Toys is beginning to manufacture Bungey Wagons.The product will be sold to toy store chains for $30 each.Management allocates $120,000 of fixed manufacturing overhead costs to Bungey Wagons.The manufacturing cost for each wagon at the expected production of 10,000 wagons is as follows: Direct material \ 13.00 Direct labor 4.00 Overhead ( \ 1.20 fixed and \ 2.00 variable) 3.20 Total \ 20.20 The company has contacted a number of suppliers to determine whether it is better to buy or manufacture the wheels.The lowest quote for a set of 4 wheels needed for each wagon is $3.15.It is estimated that purchasing the wheels from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead.Sanders Toys' manufacturing space is highly constrained.By purchasing the wheels, the company will not have to lease additional manufacturing space that currently cost $8,000 per year.What is the incremental cost or benefit of buying the wheels as opposed to making them?

In deciding whether to sell or process further, the costs that have been incurred to process the product to the split-off point are incremental costs.

Foot Print has three product lines in its retail stores: shoes, boots, and sandals.The allocated fixed costs are based on units sold and are unavoidable.Results of June follow: $\begin{array}{lrrrr}& \text { Socks } & \text { Boots } & \text { Sandals } & \text { Total } \\ \text { Units sold } & 800 & 1,200 & 2,400 & 4,400 \\\hline \text { Revenue } & \$ 24,800 & \$ 30,400 & \$ 36,600 & \$ 91,800 \\\text { Variable costs } & 13,600 & 13,200 & 16,800 & 43,600 \\\text { Direct fixed costs } & 5,000 & 7,000 & 6,500 & 18,500 \\\text { Allocated fixed costs } & 8,000 & 9,000 & 8,000 & 25,000 \\\text { Net income (loss) } & \$(1,800) & \$ 1,200 & \$ 5,300 & \$ 4,700 \\\end{array}$ Demand of individual products is not affected by changes in other product lines.How much is the incremental effect on income of dropping socks?

Hurley Processors processes clay into two joint products-molding foam and craft blocks.When processed, each pound of clay yields 20 units of foam and 80 units of blocks.Foam sells for $2 per unit and blocks sells for $1.50 per unit.The total cost to process a 100-pound batch of clay is $35.If the physical quantities method is used to allocate the joint costs, how much will be allocated to each batch of modeling foam?

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma.Ore costs $20 per pound.A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point.The selling price for a unit of Beta is $80.The selling price for a unit of Gamma is $40.If the physical quantities method is used to allocate the joint costs, what is the total cost that will be allocated to each unit of Gamma?

Diamond Brands manufactures rice, wheat, and oat cereals.Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds.The following costs are associated with production of 20,000 pounds of rice cereal: Direct material \ 13,000 Direct labor 5,000 Manufacturing overhead 7,000 Total \ 25,000 The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated fixed costs.Should Diamond Brands make or buy the rice cereal?

Abacus has 800 obsolete calculators that are carried in inventory at a cost of $1,920.If these calculators are upgraded at a cost of $3,100, they could be sold for $4,500.Alternatively, the calculators could be sold "as is" for $1,600.What is the net advantage or disadvantage of reworking the calculators?

Hurley Processors processes clay into two joint products, molding foam and craft blocks.When processed, each pound of clay yields 20 units of foam and 80 units of blocks.Foam sells for $2 per unit and blocks sells for $1.50 per unit.The total cost to process a 100-pound batch of clay is $35.If the relative sales value method is used to allocate the joint costs, how much will be allocated to each batch of modeling foam?

Opportunity costs represent the benefits foregone by selecting one alternative over another.

The best way to allocate the cost of common inputs to joint products is based on the physical quantities of the outputs.

Deep South Dairy gathered the following data about the two products that it produces: Current Sales Estim ated Added Sales Value if Product Value Processing Costs Processed Further Milk \ 8,000 \ 2,000 \ 11,000 Yogurt 12,000 7,000 18,000 Which of the products should be processed further?

Which of the following statements regarding opportunity costs is true?