Exam 13: Short-Run Decision Making: Relevant Costing

Figure 13-4. Connolly Company produces two types of lamps, classic and fancy, with unit contribution margins of $13 and $21, respectively. Each lamp must spend time on a special machine. The firm owns four machines that together provide 18,000 hours of machine time per year. The classic lamp requires 0.20 hours of machine time, the fancy lamp requires 0.50 hours of machine time. -Refer to Figure 13-4. How many of each type of lamp must be sold to optimize total contribution margin?

MATCHING Match each statement with the correct item below. a. the difference in total cost between the alternatives in a decision b. determine whether or not a segment should be kept or dropped c. limited resources and limited demand for each product d. a specific set of procedures that produces a decision e. the point that products that have common processes and costs of production become distinguishable f. method of determining the cost of a product based on the price that customers are willing to pay g. decisions involving a choice between internal and external production h. products that have common processes and costs of production up to a point i. past costs that cannot be affected by future decisions j. a percentage applied to the base cost to cover other costs plus profit k. determine whether a specially priced order should be accepted or rejected l. determine whether it is more profitable to process a joint product further -Decision model

Figure 13-4. Connolly Company produces two types of lamps, classic and fancy, with unit contribution margins of $13 and $21, respectively. Each lamp must spend time on a special machine. The firm owns four machines that together provide 18,000 hours of machine time per year. The classic lamp requires 0.20 hours of machine time, the fancy lamp requires 0.50 hours of machine time. -Refer to Figure 13-4. What is the contribution margin per hour of machine time for a fancy lamp?

"The accounting decision making model is not useful in real life because it only looks at the numbers." Critique this statement and give an example for which it does not hold true.

Figure 13-1. Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible. -Refer to Figure 13-1. Which of the following is a qualitative factor that Fuller would consider in making the decision to accept or reject the special order?

In order to be classified as a _________________, a cost must possess two characteristics, that they are future costs and they differ across alternatives.

Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order. How much will income change if the special order is accepted?

If a future cost is the same for more than one alternative, and it has no effect on the decision is known as a(n) _____________ cost.

The difference between the summed costs of two alternatives in a decision is known as the __________________.

Figure 13-2. ColorPro uses part 87A in the production of color printers. Unit manufacturing costs for part 87A are: ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12. Fixed overhead is unavoidable. -Refer to Figure 13-2. Which of the following is a qualitative factor that might affect ColorPro's decision?

MATCHING Match each statement with the correct item below. a. the difference in total cost between the alternatives in a decision b. determine whether or not a segment should be kept or dropped c. limited resources and limited demand for each product d. a specific set of procedures that produces a decision e. the point that products that have common processes and costs of production become distinguishable f. method of determining the cost of a product based on the price that customers are willing to pay g. decisions involving a choice between internal and external production h. products that have common processes and costs of production up to a point i. past costs that cannot be affected by future decisions j. a percentage applied to the base cost to cover other costs plus profit k. determine whether a specially priced order should be accepted or rejected l. determine whether it is more profitable to process a joint product further -Special-order decisions

Brorsen, Inc., has just designed a new product with a target cost of $64. Brorsen requires new product to have a profit of 20%. What is the target price for the new product?

The first step in making a short-run decision is to identify alternatives as possible solutions to the problem.

__________________ have common processes and costs of production up to a split-off point.

Bellair Company produces a product that has manufacturing cost of $30 per unit. Bellair's policy is to charge a price equal to cost plus 30%. The 30% is pure profit to Bellair.

MATCHING Match each statement with the correct item below. a. the difference in total cost between the alternatives in a decision b. determine whether or not a segment should be kept or dropped c. limited resources and limited demand for each product d. a specific set of procedures that produces a decision e. the point that products that have common processes and costs of production become distinguishable f. method of determining the cost of a product based on the price that customers are willing to pay g. decisions involving a choice between internal and external production h. products that have common processes and costs of production up to a point i. past costs that cannot be affected by future decisions j. a percentage applied to the base cost to cover other costs plus profit k. determine whether a specially priced order should be accepted or rejected l. determine whether it is more profitable to process a joint product further -Differential cost

Boone Products had the following unit costs: A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit or loss will be generated by accepting the special order?

Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the tennis shoes have fallen off. Veblen is considering several options: 1) drop the tennis shoe line; 2) replace the tennis shoe line with golf shoes; 3) retool the tennis shoe line to make "Airtennies." Price and cost data are as follows: If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.

The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division. Projections for the next year are as follows: Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be

Fixed costs are never relevant.