Exam 13: Short-Run Decision Making: Relevant Costing

Fester Company was making a product for $60 and selling it for $80. A competitor began selling the same product for $68. If Fester is to meet the competition's price, and maintain the same amount of profit per unit, what is target cost?

Target costing involves much more up-front work than cost-based pricing.

Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm?

Houston Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If Houston Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000. What alternative is more desirable and by what amount is it more desirable? Alternative Amount

Mattson Construction charges each customer a price equal to the cost of direct materials, direct labor, and overhead plus 40%. Job #1845 included the following costs: What is price charged for Job 1845?

The following information relates to a product produced by Creamer Company: Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. If the firm produces the special order, the effect on income would be a

_______________________ focuses on whether a product should be processed beyond the split-off point.

The percentage that is applied to the base cost is known as the _____________.

In determining the target price of a good, the company must first determine the target cost and the desired profit.

Demand is one side of the pricing equation; supply is the other side.

Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: The company has the capacity to produce 30,000 units. The product regularly sells for $40. A wholesaler has offered to pay $32 per unit for 2,000 units. If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be

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 amount of machine time for model P-4 in terms of percent of a machine hour?

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 -Sell-or-process-further decision

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 P-4?

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 equipment time for sinks?

The act of choosing among alternatives with an immediate or limited end in view is termed

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 -Target costing

Shear-it, Inc., produces paper shredders. Shear-it is considering a new shredder design for home offices. The marketing vice president believes that a basic unit in a variety of attractive colors could be sold for $70. Shear-it requires that all new products yield 30% profit. What is the target cost of the new shredder?

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. Should Autry process dac further?

Kara Ring owns a successful flower shower called Always Blooming. Kara wants to expand the shop by leasing the space next door for $1,200 per month, and adding refrigerators to keep the flowers fresh and two checkout counters so the customers do not have to wait in long lines. She currently pays $1,000 per month for her current store space and has two refrigerators that cost her $6,000 each two years ago. She figures that the new refrigerators and counters will cost $25,000. She also has determined that the current cash register that initially cost her $1,000 two years ago and has been depreciated $250 each year would have to be replaced with two new cash registers costing $1,500 each. She thinks sales would increase by $10,000 per month. Variable costs are 40% of sales. Required: