Exam 12: Relevant Costs for Decision Making

Relay Corporation manufactures batons.Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Relay's predictions for next year,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price.Total fixed costs would be unaffected by this order.By what amount would the company's operating income be increased or decreased as a result of the special order?

A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what action is chosen.

A study has been conducted to determine if Product A should be dropped.Total sales of the product are $200,000 per year; total variable expenses are $140,000 per year.Total fixed expenses charged to the product are $90,000 per year.The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped.These data indicate that if Product A is dropped,the company's overall operating income per year would change by how much?

The Anaconda Mining Company currently is operating at less than 50% of practical capacity. The management of the company expects sales to drop below the present level of 15,000 tonnes of ore per month very soon. The selling price per tonne of ore is $2, and the variable cost per tonne is $1. Fixed costs per month total $15,000. Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals markets returns to normal levels and prices rebound. Management has implemented a cost reduction program over the past year that has been successful in reducing costs. Nevertheless, suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $15,000 to $5,000 per month. Required: a) Why does management estimate that fixed costs will persist at $5,000 per month although the mine is temporarily closed? b) At what sales volume should management suspend operations at the mine?

Consider the following statements: I.A vertically integrated firm is more dependent on its suppliers than a firm that is NOT vertically integrated. II)Many firms feel they can control quality better by making their own parts. III)A vertically integrated firm realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations. Which of the above statements represent advantages to a firm that is vertically integrated?

Brown Company makes four products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are potentially a constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labour is a variable cost in this company. -What maximum amount (rounded to the nearest whole cent)should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity?

(Appendix 12A)The following information is available on Bruder Inc.'s Product A: Number of Units Sold Each Year 10,000 Selling Price per Unit \ 80 Unit Product Cost \ 50 Investment in Product A \ 400,000 Required Return on Investment 15\% The company uses the absorption costing approach to cost-plus pricing.Based on these data,what are the total selling,general,and administrative expenses each year?

Bingham Company manufactures and sells Product J. Results for last year for the manufacture and sale of Product J are as follows: Bingham Company anticipates no change in the operating result for Product J in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether or not to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision. -Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines.How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products?

The Wyeth Company produces three products-A,B,and C-from a single raw material input.Product A can be sold at the split-off point for $40,000,or it can be processed further at a total cost of $15,000 and then sold for $58,000.Joint product costs total $60,000 annually.What is the correct course of action regarding Product A?

(Appendix 12A)Holding all other things constant,if the unit sales increase,what will happen to the markup under absorption costing?

(Appendix 12A)The following information is available on Browning Inc.'s Product A: Number of Units Sold Each Year 20,000 Selling Price per Unit \ 96 Unit Product Cost \ 60 Investment in Product A \ 500,000 Required Return on Investment 16\% The company uses the absorption costing approach to cost-plus pricing.Based on these data,what are the total selling,general,and administrative expenses each year?

Harris Corp.manufactures three products from a common input in a joint processing operation.Joint processing costs up to the split-off point total $200,000 per year.The company allocates these costs to the joint products on the basis of their total sales value at the split-off point.Each product may be sold at the split-off point or processed further.The additional processing costs and sales value after further processing for each product (on an annual basis)are: Sales Value Sales Value Further After Further Product at Split-Off Processine Costs Processing J \ 180,000 \ 60,000 \ 230,000 \ 135,000 \ 105,000 \ 280,000 \ 95,000 \ 85,000 \ 160,000 The "Further Processing Costs" consist of variable and avoidable fixed costs. Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.

The Cook Company has two divisions: Eastern and Western.The divisions have the following revenues and expenses: Sales \ 550,000 \ 500,000 Variable Costs \ 275,000 \ 200,000 Direct Fixed Costs \ 180,000 \ 150,000 Allocated Corporate Costs \ 170,000 \ 135,000 Operating Income (Loss) (\ 75,000) \ 15,000 The management of Cook is considering the elimination of the Eastern Division.If the Eastern Division were eliminated,the direct fixed costs associated with this division could be avoided.However,corporate costs would still be $305,000 in total.Given these data,what would be the overall company's operating income (loss)if the Eastern Division were eliminated?

The cost of resources that has no alternative use in a make or buy decision has an opportunity cost of zero.

WP Company produces products X,Y,and Z from a single raw material input in a joint production process.Budgeted data for the next month is as follows: Units Produced Per Unit Sales Value at Split-Off Added Processing Costs per Unit Per Unit Sales Value if Processed Further 1,500 2,000 3,000 \ 19 \ 21 \ 24 \ 7 \ 7.50 \ 7 \ 29 \ 29 \ 30 The cost of the joint raw material input is $149,000.Which of the products should be processed beyond the split-off point? A) Yes Yes No B) No Yes No C) Yes No Yes D) No Yes Yes

Eckert Company uses the absorption costing approach to cost-plus pricing to set prices for its products. Based on budgeted sales of 18,000 units next year, the unit product cost of a particular product is $60.40. The company's selling, general, and administrative expenses for this product are budgeted to be $370,800 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 11%. -(Appendix 12A)The target selling price based on the absorption costing approach for this product would be closest to which of the following?

What is a joint product?

Which of the following costs are always relevant in decision making?

(Appendix 12A)Timax Company,a manufacturer of moderately priced time pieces,would like to introduce a new electronic watch into the market.To compete effectively,the watch could not be priced at more than $50.The company requires a return on investment of 25% on all new products.The plan is to produce and sell 20,000 watches each year.This would require a $500,000 investment.What would be the target cost per watch?

Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: The normal selling price of the product is $86.10 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company. -Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer?