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

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 Beta?

Which of the following is a disadvantage of using an outside supplier?

Joint costs

Reason Food Store has 4,000 pounds of raw pork approaching its expiration date.Each pound has a cost of $4.50.The pork could be sold 'as is' for $3.00 per pound to the dog food processing plant, or roasted and sold in the deli.The cost of roasting the pork will be $2.80 per pound and each pound could be sold for $6.50.What should be done with the pork and why?

When deciding whether to eliminate a segment, the segment should be dropped if its contribution margin less the avoidable fixed costs is positive.

Two or more products that result from common inputs are called

Diva Footwear is contemplating if it should continue producing platform shoes.The following information is available for the company's segments. Platform Shoes Athletic Shoes Boots Sales \ 120,000 \ 420,000 \ 360,000 Variable costs 64,000 220,000 140,000 Contribution margin 56,000 200,000 220,000 Direct fixed costs 45,000 70,000 90,000 Allocated fixed costs 20,000 70,000 60,000 Net income ( \9 ,000) \6 0,000 \7 0,000 If platform shoes are dropped, what effect will occur to Diva Footwear's net income?

The allocation of joint costs to joint products influences

The following are production and cost data for two products, buckets and pails, produced in batches of 600 each. Buckets Pails Contribution margin per batch \ 360 \ 250 Machine set-ups needed per batch 14 9 The company can only perform 9,450 set-ups each period, yet there is unlimited demand for each product.What is the maximum contribution margin for the year?

Way Living sells unfinished oak shelves for $35 each.Budgeted sales for the year are expected to be 4,000 shelves.Each shelf requires 4 linear feet of wood to produce.The cost of wood is $4.80 per linear foot.Direct labor is $6.00 per shelf.Variable overhead and fixed overhead costs per unfinished shelf are $1.00 and $0.50 respectively.Way Living is considering whether it should stain the shelves so it can sell them for $48.00 each.It estimates it will sell 60% of the budgeted shelves 'stained' with the others unfinished.The direct costs of staining each shelf are $9.00.How much is the incremental effect on profit if the company stains the shelves?

Which of the following statements is(are) true concerning common costs? I.They are costs that are directly traceable to an individual product line. II.They are normally avoidable.

Ralston Tile produces three types of ceramic tiles, models 33, 41, and 56 from clay, which is mined in the Arizona desert.Budgeted data for next month follows: 33 41 56 Units produced 3,000 4,500 6,000 Sales value at split-off per unit \ 15 \ 18 \ 24 Additional processing costs per unit \ 4 \ 6 \ 7 Joint production costs per unit \ 2 \ 5 \ 5 Sales value if processed further per unit \ 20 \ 23 \ 32 The joint cost of mining the clay is $\$ 80,000$ . Which of the products should be produced beyond the split-off point? $\quad\underline{33} \quad\quad \underline{41} \quad \underline{56}$ A. $\text { Yes\quad Yes\quad Yes }$ B. $\text { Yes \quad Yes\quad No }$ C. $\text { No } \quad \text { Yes } \quad \text { Yes }$ D. $\text { Yes } \quad \text { No } \quad \text { Yes }$

Marshal Costumes owns two stores and management is considering eliminating the Mandarin store due to declining sales.Common fixed costs are allocated on the basis of sales.Contribution income statements are as follows: $\begin{array}{lrrr}&\text { Arlington }&\text {Mandarin}&\text { Total }\\\text { Sales } & \$ 300,000 & \$ 200,000 & \$ 500,000 \\\text { Variable costs } & 160,000 & 130,000 & 290,000 \\\text { Direct fixed costs } & 40,000 & 20,000 & 60,000 \\\text { Allocated fixed costs } & 80,000 & 65,000 & 145,000 \\\text { Net Income } & \$ 20,000 & \$(15,000) & \$ 5,000\end{array}$ Marshal's management feels that if they eliminate the Mandarin store, that sales in the Arlington store will increase by 10%.If the Mandarin store is closed, what is the incremental effect on profit for Marshal Costumes?

Sunk costs are incremental costs because they increase or decrease with the choice of one alternative over another.

Samson Designers produces a lady's handbag that normally sells for $120.The company produces 800 units annually but has the capacity to produce 1,100 units.An order from a customer has been received for 200 handbags at $85 each that would not disrupt current operations.Current costs for the handbag are as follows: Direct materials \ 23.00 Direct labor 45.00 Variable overhead 7.00 Fixed overhead 12.00 Total \ 87.00 In addition, the customer would like to add a monogram to each bag which would require an additional $4 per bag in additional labor costs.Samson would also have to purchase a piece of equipment to create the monogram which would cost $800.This equipment would not have any other uses.Which statement is true with regard to this situation?

Publix has 2,700 pounds of bananas with a total cost of $864.Because the bananas have become too ripe, Publix is contemplating whether it should use the bananas to bake banana bread or sell the bananas 'as is' to the homeless center for $1,485.In addition to the cost of the bananas, it would cost $2,565 to convert the bananas into bread, which could then be sold for a total of $4,480.However, a special oven to bake the bread will have to be rented for an additional $300.What is the incremental effect on income if Publix converts the bananas to banana bread?