Exam 13: Short-Run Decision Making: Relevant Costing

The operations of Grant Corporation are divided into the Fix Division and the Roach Division. Projections for the next year are as follows: Required:

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 costs of the special order relate to flexible resources?

Limited resources or a limited demand for a product are examples of ______________.

Future costs that differ across alternatives are relevant costs.

Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is $30,000. Information about the three products follows: Required:

Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product cost of the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which of the following is true?

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 -Sunk costs

Sherpa Company manufactures tents and sleeping bags. Tents are priced at $80, have variable cost of $55, and direct fixed costs of $120,000. Sleeping bags are priced at $60, have variable cost of $35, and direct fixed costs of $66,000. Common fixed costs equal $200,000. Last year, the division sold 5,000 tents and 10,000 sleeping bags.

Resources that can be purchased in the amount needed and at the time of use are

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 hour of machine time for Test A?

Island Princess Pineapples purchases pineapples from area farmers and processes them into rings, juice, and skins. The cost of the pineapples is a joint cost, as is the initial processing in which the fruits are skinned, cored, and sliced into rings. At the split-off point, Island Princess sells the skins (for fertilizer). Juice and rings are processed further (further processing costs occurs for cooking and canning). Data for the three products follows:

Moss Company charges cost plus 35%. What is the price of an item with cost equal to $65?

A major advantage of markup pricing is that standard markups are easy to apply.

Figure 13-6. Autry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte) into two chemicals - dac and tyl. One batch of 5,000 gallons of dactylyte can be converted to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of $12,000. At the split-off point, dac can be sold for $3 per gallon and tyl can be sold for $4 per gallon. Autry has just learned of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac. Prodac sells for $5 per gallon. -Refer to Figure 13-6. What is Autry's profit from refining one batch of dactylyte if both dac and tyl are sold at the split-off point?

In short-run decision making, the alternative with the lowest overall cost is always chosen.

Curtis Company sets price equal to cost plus 50%. Recently, Curtis charged a customer a price of $150 for an item. What was the cost of the item to Curtis?

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 -Split-off point

Super Pet Supplies sets prices at cost plus 70% of cost. The cost of an aquarium start-up kit is $110. What price does Super Pet Supplies charge for the aquarium start-up kit?

A decision in which a manager needs to determine whether a product line (or segment) should continue or be eliminated is what kind of decision?

Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30. The defective units were discovered before leaving the plant. Walloon can sell them as is for $20 or can rework them at a cost of $15 and sell them at the regular price of $50. The total relevant cost of reworking the defective units is