Exam 12: Relevant Costs for Decision Making

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost. -Assume that if the components were to be purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided,and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,what would be the impact on annual operating income due to accepting the offer?

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year. If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. -How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

Foster Company makes 20,000 units per year of a part that it uses in the products it manufactures.The unit product cost of this part is computed as follows: Direct Materials \ 24.70 Direct Labour \ 16.30 Variable Manufacturing Overhead \ 2.30 Fixed Manufacturing Overhead \ 13.40 Unit Product Cost \ 56.70 An outside supplier has offered to sell the company all the parts that Foster needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year. If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? b) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year?

Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products.Which of the following costs is NOT relevant?

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 $30,000 increase in the contribution margin of other product lines.If Bingham chooses to discontinue Product J,what will be the change in operating income next year due to this action?

(Appendix 12A)Qualls Company makes a product that has the following costs: Direct materials \ 17.30 Direct labour 12.90 Variable manufacturing overhead 4.20 Fixed manufacturing overhead \ 916,800 Variable SG\&A expenses 2.00 Fixed SG\&A expenses 907,200 The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 48,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 15%. Required: a) Compute the markup on absorption cost. b) Compute the target selling price of the product using the absorption costing approach.

(Appendix 12A)Straus Company,a manufacturer of electronic products,wants to introduce a new calculator.To compete effectively,the calculator could not be priced at more than $40.The company requires a 20% rate of return on investment on all new products.In order to produce and sell 30,000 calculators each year,the company would have to make an investment of $850,000.What would be the target cost per calculator?

Manico Company produces three products-X,Y,& Z-with the following characteristics: Selling price per unit Variable cost per unit Contribution margin per unit Machine hours per unit X \ 20 100\% 12 60 \ 8 40\% -- -- 5 Y \ 16 100\% 12 75 \ 4 25\% -- -- 3 Z \ 15 100\% 6 40 \ 9 60\% -- -- 6 The company has only 2,000 machine hours available each month.If demand exceeds the company's capacity,in what sequence should orders be filled if the company wants to maximize its total contribution margin?

(Appendix 12A)Green Hornet Company is contemplating the introduction of a new product.The company has gathered the following information concerning the product: Number of Units to Be Produced and Sold Each 16,000 Year Investment Required by the Company \ 400,000 Expected Unit Product Cost \ 30 Expected Annual Selling, General, and Administrative Expenses \ 100,000 Desired Rate of Return on Investment 20\% The company uses the absorption costing approach to cost-plus pricing. Required: a)Compute the markup on absorption cost. b)Compute the target selling price.

Variable costs are always relevant costs.

One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.

Pitkin Company produces a part used in the manufacture of one of its products.The unit product cost of the part is $33,computed as follows: Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Unit Product Cost \ 12 \ 8 \ 3 \ 10 \ 33 An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each.The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier.Assume that direct labour is an avoidable cost in this decision.Based on these data,what will be the per-unit dollar advantage or disadvantage of purchasing the parts from the outside supplier?

Condensed monthly operating income data for Cosmo Inc.for November is presented below.Additional information regarding Cosmo's operations follows the statement: Sales Less: Variable Costs Contribution Margin Less: Traceable Fixed Expenses Store Segment Margin Less: Common Fixed Expenses Operating Income (Loss) Total \ 200,000 \ \ 116,000 \ 84,000 \ 60,000 \ 24,000 \ 10,000 \ 14,000 Mall Store \ 80,000 \ 32,000 \ 48,000 \ 20,000 \ 28,000 \ 44,000 \ 24,000 Town Store \ 120,000 \ 84,000 \ 36,000 \ 40,000 (\ 4,000) \ 66,000 (\ 10,000) Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars. Management estimates that closing the Town Store would result in a 10% decrease in Mall Store sales,while closing the Mall Store would not affect Town Store sales. The operating results for November are representative of all months. A decision by Cosmo Inc.to close the Town Store would result in what monthly increase (decrease)in Cosmo's operating income?

What is the opportunity cost of making a component part in a factory with no excess capacity?

Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs.Of the fixed costs,$21,000 cannot be avoided.What would be the effect of discontinuing the department on Manor's overall operating income?

The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year. -If the new product is added next year,what will be the increase in operating income resulting from this decision?

(Appendix 12A)The absorption costing approach to cost-plus pricing will result in attaining the company's required rate of return only if forecasted unit sales are realized,holding all other things constant.

Products A,B,and C are produced from a single raw material input.The raw material costs are $90,000,from which 5,000 units of A,10,000 units of B,and 15,000 units of C can be produced each period.Product A can be sold at the split-off point for $2 per unit,or it can be processed further at a cost of $12,500 and then sold for $5 per unit.What is the correct course of action regarding Product A?

(Appendix 12A)Riley Company makes a product that has the following costs: Per year Direct materials \2 7.00 Direct labour 22.00 Variable manufacturing overhead 14.00 Fixed manufacturing overhead \ 1,080,000 Variable SG\&A expenses 12.00 Fixed SG\&A expenses 960,000 The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 48,000 units per year. The company has invested $500,000 in this product and expects a return on investment of 15%. Required: a) Compute the markup on absorption cost. b) Compute the target selling price of the product using the absorption costing approach.

(Appendix 12A)iBurst Technology is developing a high-speed modem to connect notebook computers with iSun's satellite-based data network.The cross-functional team in charge of the project has assembled the following information: Expected market price \ 150 Required return on sales 20\% Product life 3 years Currently feasible cost \ 50,000,000 Expeoted average annual sales 100,000 Required: a) Given the above information calculate the cost reduction target. b) If the cross-functional team believes the cost of the modem cannot be reduced by any more than 18%, is this a feasible product for iBurst Technology? Why or why not? c) Whether the cost reduction target is feasible or not, what can the cross-functional team do to further reduce cost?