Exam 13: Short-Run Decision Making: Relevant Costing

Why does a special order decision frequently ignore fixed overhead?

Stadium Company charges cost plus 60%. If the price of an item is $260, what is the item's cost?

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

In deciding the optimal mix of products that use a constrained resource, it is important to determine the contribution margin per unit of scarce resource.

A decision that involves potential further processing of joint products is which kind of decision?

When managers are considering the optimal product mix, they are most concerned with

Figure 13-3. Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs of $80. The tubs sell for $600 and have variable costs of $450. The glass and ceramic sinks and tubs require the use of specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year. A sink uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of specialized molding equipment time. -Refer to Figure 13-3. What is the contribution margin per hour of specialized molding time for tubs?

Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for $25.50. What is the effect on income if Foster Industries purchases the component from the outside supplier?

Flexible resources may have unused capacity.

Rose Manufacturing Company had the following unit costs: A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit or loss will be generated by accepting the special order?

Which of the following costs is not relevant to a decision to sell a product at split-off or process the product further and then sell the product?

Teller Company has designed a caller ID machine with a large screen that can be seen easily from across the room. The Sales Department believes that this product can be sold for $30 each. Teller requires that all new products yield 15% profit. What is the target cost of the new product?

Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit.

Figure 13-5. Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time. -Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for Model K-3?

The method of determining the cost of a product or service based on the price that customers are willing to pay is called

A _________________ can be used to structure the decision maker's thinking and to organize the information to make a good decision.

The following information pertains to Dodge Company's three products: Assume that product C is discontinued and the extra space is rented for $300 per year. All other information remains the same as the original data. Annual profits will

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 classic lamp?

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 B?

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.