Exam 10: Relevant Information for Decision Making

Engel Company has 3 divisions: A,B,and C.Division A's income statement shows the following for the year ended December 31:

Sales		$1,500,000
Cost of goods sold		(1,125,000)
Gross profit		$ 375,000
Selling expenses	$125,000
Administrative expenses	350,000	(475,000)
Net loss		$ (100,000)

Cost of goods sold is 80 percent variable and 20 percent fixed.Of the fixed costs,50 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division A were eliminated.Of the administrative expenses,85 percent are applied from corporate costs.If Division A were eliminated,Engel's income would

In a special order decision,unavoidable current fixed costs are taken into consideration in setting a sales price.

Buxton Company is currently operating at a loss of $15,000.The sales manager has received a special order for 5,000 units of product,which normally sells for $35 per unit.Costs associated with the product are: direct material,$6;direct labor,$10;variable overhead,$3;applied fixed overhead,$4;and variable selling expenses,$2.The special order would allow the use of a slightly lower grade of direct material,thereby lowering the price per unit by $1.50 and selling expenses would be decreased by $1.If Buxton wants this special order to increase the total net income for the firm to $10,000,what sales price must be quoted for each of the 5,000 units?

Which of the following are relevant in a make or buy decision? Variable              Avoidable fixed            Unavoidable fixed $\text {\underline{ costs} }$                     $\text {\underline{ costs} }$                            $\text {\underline{ costs} }$

Wholesome Wheat Corporation Wholesome Wheat Corporation grows grain in rural areas of the South.The corporation's costs per bushel of grain (based on an average yield of 130 bushels per acre)follow: Direct material                        $\$1.10$ Direct1abor                              0.40 Variable overhead                   0.30 Fixed overhead                       0.60 Variable selling costs              0.10 Fixed selling cost                       0 Wholesome Wheat Corporation defines direct material costs as seed,fertilizer,water,and other chemicals.The variable overhead costs represent maintenance and repair costs of machinery.The fixed overhead costs are completely comprised of depreciation expense on machinery and real estate taxes. Refer to Wholesome Wheat Corporation.Assume that the current date is March 15.On this date,Wholesome Wheat Corporation must make a decision as to whether it is financially better off to plant a certain farm to grain,leave the land idle (no income is derived from idle land),or rent the land to another farmer for $50 per acre.Grain prices have been severely depressed in recent years and Wholesome Wheat Corporation's best guess is that grain prices will be around $2.00 per bushel at the time the crop is ready for harvest.What should the company do? Show calculations.

The Robinson-Patman Act prohibits companies from pricing products at different levels when there are no significant differences in production costs.

Contracting with vendors outside the organization to obtain or acquire goods and/or services is called

Brazosport Pipe Corporation The capital budgeting committee of the Brazosport Pipe Corporation is evaluating the possibility of replacing its old pipe-bending machine with a more advanced model.Information on the existing machine and the new model follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 200,000 \ 400,000 Market value now 8,000 Market value in year 5 0 20,000 Anmual cash operating costs 40,000 10,000 Remaininglife 5 yrs 5yrs Refer to Brazosport Pipe Corporation.The $80,000 market value of the existing machine is

Savannah Motors Savannah Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 9,000 \ 20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value of old machine 2,000 Salvage value in 10 years 500 1,000 Remaininglife 10 yrs 10yrs Refer to Savannah Motors.The estimated $500 salvage value of the existing machine in 10 years represents a(n)

When a company has work performed by an external supplier,it is engaging in _________.

The amount of cost that differs across decision choices is referred to as _______.

Seminole Corporation has been manufacturing 5,000 units of Part 10541,which is used in the manufacture of one of its products.At this level of production,the cost per unit of manufacturing Part 10541 is as follows: Direct material                        $\$2$ Direct1abor                              8 Variable overhead                   4 Fixed overhe ad applied            $\underline{6}$ Total                                       $\underline{\$20}$ Luther Company has offered to sell Seminole 5,000 units of Part 10541 for $19 a unit.Seminole has determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part RAC and generate an operating profit of $4,000.Seminole has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from Luther.To determine whether to accept Luther's offer,the net relevant costs to make are

Boston Bakers Boston Bakers is trying to decide whether it should keep its existing bread-making machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 10,000 \ 25,000 Accumulated depreciation 6,000 0 Annual cash operating costs 9,500 5,000 Current salvage value of old machine 2,500 Salvage value in 10 years 650 1,200 Remaininglife 12 yrs 12yrs Refer to Boston Bakers.The incremental cost to purchase the new machine is

The term incremental cost refers to

Athmer Corporation Athmer Corporation sells a product for $18 per unit,and the standard cost card for the product shows the following costs: Direct material                                $\$ 1$ Directlabor                                        2 $\text { Overhe ad (80\% fixed) }$                         $\underline{7}$ Total                                                $\underline{\$10}$ Refer to Athmer Corporation.Athmer received a special order for 1,000 units of the product.The only additional cost to Athmer would be foreign import taxes of $1 per unit.If Athmer is able to sell all of the current production domestically,what would be the minimum sales price that Athmer would consider for this special order?

Kelly Company has 20,000 units in inventory that had a production cost of $4 per unit.These units cannot be sold through normal channels due to a significant technology change.These units could be reworked at a total cost of $30,000 and sold for $35,000.Another alternative is to sell the units to a junk dealer for $10,500.The relevant cost for Kelly to consider in making its decision is

A fixed cost is relevant if it is

In an outsourcing decision,avoidable fixed costs are irrelevant.

Fixed costs are ignored in allocating scarce resources because

Assume a company produces three products: A,B,and C.It can only sell up to 3,000 units of each product.Production capacity is unlimited.The company should produce the product (or products)that has (have)the highest