Exam 13: Short-Run Decision Making: Relevant Costing

Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not achieving the expected results. The following information is available: Which of these items is irrelevant?

A segment margin is always greater than or equal to zero.

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 -Make-or-buy decisions

Sherrell Washington owns a successful hole-in-the-wall bagel shop called Big Apple Bagels. Sherrell wants to expand the shop by leasing the space next door for $500 per month, and adding tables and chairs so that customers can dine in. She figures that the tables and chairs will cost $4,000 and that the bagel machine, that cost $3,500 five years ago, would have to be scrapped in favor of a larger machine costing $6,400. She thinks sales would increase by $4,000 per month. Variable costs are 50% of sales.

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. If Fuller accepts the special order, by how much will operating income increase or decrease?

A manager will make a __________________ when determining if a specially priced order should be accepted or rejected.

Wilson Custom Cabinetry makes cabinets to order and prices the completed jobs at product cost plus 40%. Recently, Wilson finished a job and billed the customer $560. If direct materials for the job cost $130, and direct labor cost $180, what was the applied overhead for the job?

Depreciation of equipment is an example of a(n)

Classy Carry manufactures two types of handbags, the Clutch and the Tote, with unit contribution margins of $9 and $15, respectively. Regardless of the type, each handbag must go through a stitching machine. The company owns 4 stitching machines and each provides 3,000 hours of machine time per year. Each Clutch handbag requires 12 minutes of machine time and each Tote handbag requires 30 minutes of machine time. There are no other constraints.

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. Now suppose that ColorPro discovers that other costs will increase by $7,000 per year if the component is purchased rather than made internally. Should ColorPro make or buy the part?

In making a short-run decision, all alternatives need to be considered.

Figure 13-9. Sabor Inc. is a medical testing laboratory that performs several tests and analyses for hospitals in the area. Four of the tests that they perform require the use of a specialized machine that can supply 14,000 hours per year. Information on the four lab tests follows: -Refer to Figure 13-9. What is the contribution margin per unit of machine time for Test D?

Figure 13-10. Goutam Company prints a variety of publications and colored inserts for newspapers. Currently, Goutam produces its own ink, including a special metallic color. India Inks has offered to supply Goutam with the 25,000 ounces of metallic ink that it needs each year for $1.24 per ounce. Goutam is interested because this is a particularly difficult ink to make. The purchasing department must make special efforts to locate suppliers, the metallic component requires special handling, and, since the metallic ink uses machinery that is also used to make other colors of ink, the machinery must be cleaned very well before every batch of metallic. The accounting department supplied the following unit costs: *Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours. -Refer to Figure 13-10. Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier, Jim Webb, the production supervisor said "That's nuts! This ink is a real pain to make and $1.24 per ounce sounds like a bargain to me!" Based on Jim's feelings, Anna Ruiz (a new CMA in the accounting office) did an ABC analysis of ink production. She came up with the same direct materials, direct labor and variable overhead, as well as the following information on activities required by metallic ink production. The metallic ink requires 300 purchase orders per year and 80 setups.

Figure 13-7. Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: -Refer to Figure 13-7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier?

An important qualitative factor to consider regarding a special order is the

Piersall Company makes a variety of paper products. One product is 20 lb copier paper, packaged 5,000 sheets to a box. One box normally sells for $18. A large bank offered to purchase 3,000 boxes at $14 per box. Costs per box are as follows: No variable marketing costs would be incurred on the order. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. Should Piersall accept the order?

In the presence of multiple constraints the solution is considerably more complex than for one constraint and requires a technique known as ____________________.

The benefit sacrificed when one alternative is chosen over another is called sunk cost.

Auden makes three types of vitamin supplements, all of which require the use of encapsulating machines that have capacity of 10,000 hours. Information on the three types (per case) follows:

Most short-run decisions require extensive consideration of ___________.