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

Incremental profit is the additional revenue received as a result of selecting one decision alternative over another.

Macho Sports Company sells soccer and baseball merchandise.The company is trying to decide whether or not to continue the baseball merchandise given the decline in the demand and current loss of this product line.The following information is available for the segments: Baseball Soccer Sales \ 120,000 \ 420,000 Variable costs 72,000 220,000 Contribution margin 48,000 200,000 Direct fixed costs 32,000 70,000 Allocated common fixed costs 20,000 70,000 Net income ( \4 ,000) \6 0,000 The company will allocate more space to the soccer product line if the baseball line is dropped.This will allow soccer sales to increase by 25%.What is the incremental effect of the decision to drop the baseball line?

The Book Rack has two locations, downtown and on campus.During March, the company reported net income of $164,000 and sales of $1.2 million.The contribution margin in the downtown store was $320,000 (32% of sales).The contribution margin in the campus store is $110,000.Direct fixed costs are $90,000 in the downtown store and $93,000 in the campus location.How much are total variable costs?

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 craft blocks?

Blue Chip Company sells gears for $9 per unit.The unit cost of each gear follows: Direct materials \ 1.50 Direct labor 2.20 Manufacturing overhead 2.10 Total \ 5.80 An order to purchase 4,000 gears was recently received from a new customer.There is enough capacity to fill the order and filling this order would not disrupt current operations.Blue Chip Company would incur an additional $1.80 per gear for shipping costs.Half 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?

The value of benefits foregone by selecting one decision alternative over another is a(n)

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, what is the total amount that will be allocated to each batch?

Costs that will be eliminated if a particular course of action is undertaken are called

A company is trying to decide whether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units.Which of the following is not relevant to the decision?

Decision alternatives that provide the largest incremental profit are always the best option.

Which statement is true of the relative sales value method if all joints products are sold at the split-off point? I.The products will have the same gross margin ratio. II.The products will have the same gross margin per unit.

Teruba Melons purchased a truckload of watermelons weighing 3,000 pounds for $900.The company separated the melons into two grades: superior and economy.The superior grade melons have a total weight of 2,400 pounds and the economy grade melons total 600 pounds.The company sells the superior grade at $0.60 per pound and the economy grade at $0.30 per pound.How much of the $900 cost of the truckload will be allocated to the superior grade melons using the relative sales value method? Use five significant digits in calculations.

Which of the following costs are always incremental and relevant in decision analysis?

Macho Sports Company sells soccer and baseball merchandise.The company is trying to decide whether or not to continue the baseball merchandise given the decline in the demand and current loss of this product line.The following information is available for the segments: Baseball Soccer Sales \ 120,000 \ 420,000 Variable costs 72,000 220,000 Contribution margin 48,000 200,000 Direct fixed costs 32,000 70,000 Allocated common fixed costs 20,000 70,000 Net income ( \4 ,000) \6 0,000 If the baseball segment is dropped, soccer sales will be unaffected.What will be the effect on overall profits if the baseball segment is eliminated?

Avoidable fixed costs are incremental in a make-or-buy decision.

Which of the following is a cost that does not differ between decisions?

Zanatech's market for its remote control has changed significantly, and Zanatech has had to drop the selling price per unit from $45 to $38.There are some units in the work in process inventory that have costs of $30 per unit associated with them.Zanatech can sell these units in their current state for $22 each.It will cost Zanatech $11 per unit to rework these units so that they can be sold for $38 each.Which of the following is not a relevant value in this problem?

Which one of the following is the preferred alternative when deciding between two alternatives?

Wedding Supply is trying to decide whether or not to continue distributing reception supplies.The following information is available for Wedding Supply's business segments. Reception Supplies Bridal Dresses Floral Decorations Sales \ 160,000 \ 110,000 \ 210,000 Variable costs 84,000 50,000 120,000 Contribution margin 76,000 60,000 90,000 Direct fixed costs 50,000 20,000 25,000 Allocated common fixed costs 30,000 25,000 30,000 Net income ( \4 ,000) \1 5,000 \3 5,000 If reception supplies are dropped, floral decoration sales are expected to increase by 20%.What impact will the increase in floral decorations have on overall profitability?

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.What is the amount of avoidable costs if Diamond Brands buys rather than makes the rice cereal?