Exam 12: Relevant Costs for Decision Making

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. -Which lowest selling price per unit could be charged for the new product that would still make it economically desirable to add the new product?

Opportunity costs are recorded in the accounts of an organization.

The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order is accepted, the variable selling expense will be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000, and Varone would have no use for it after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labour is a variable cost. -If Varone can expect to sell 32,000 Homs next year through regular channels,at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?

A study has been conducted to determine if one of the departments in Parry Company should be discontinued.The contribution margin in the department is $50,000 per year.Fixed expenses charged to the department are $65,000 per year.It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department were discontinued,the company's overall operating income per year would change by how much?

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. -What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it?

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. -Given the current capacity what is the greatest total contribution margin Brown Company can earn?

Golden,Inc.has been manufacturing 5,000 units of Part 10541,which is used in one of its products.At this level of production,the unit product cost of Part 10541 is as follows: Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Unit Product Cost \ 2 \ 8 \ 4 \ 6 \ 20 Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.Golden has determined that two-thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown.Assume that direct labour is an avoidable cost in this decision.To determine whether to accept Brown's offer,what are the relevant costs to Golden of manufacturing the parts internally?

Raymond Company estimates that an investment of $800,000 would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be: The company requires a 20% return on the investment in all products. The company uses the absorption costing approach to pricing. -(Appendix 12A)What is the markup percentage needed on Product S in order to achieve the company's required return on investment?

The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month, which represents the company's capacity: Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labour is a variable cost. -How much will the company's operating income be increased or (decreased)if it prices the 1,000 units in the special order at $6 each?

Bowen Company produces products P,Q,and R from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced.Data for Bowen's operations for the current year are as follows: Allo cated Joint Sales Value Product Units Produced Production Cost at Split-off 4,000 \ 28,000 \ 38,000 7,000 49,000 47,000 2,000 14,000 16,000 Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $65,000. Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $25,000. Required: Which products should be processed beyond the split-off point?

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin,then the firm is better off economically if the product is dropped.

Dickson Company makes a product with the following costs: The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 60,000 units per year. The company has invested $320,000 in this product and expects a return on investment of 15%. Direct labour is a variable cost in this company. -(Appendix 12A)The markup on absorption cost is closest to which of the following?

(Appendix 12A)If a company sells a product for less than its budgeted unit product cost under absorption costing,then the company will lose money.

Glocker Company makes three products in a single facility.These products have the following unit product costs: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Products }$ A B C Direct materials \ 10.90 \ 15.80 \ 8.00 Direct labour 12.50 12.60 9.90 Variable manufacturing overhead 2.40 1.20 1.40 Fixed manufacturing overhead 11.60 7.20 Unit product cost \ 37.40 \ 36.80 \ 27.10 Additional data concerning these products are listed below. Products A B C Mixing minutes per unit 2.00 1.00 0.50 Selling price per unit \ 55.80 \ 54.60 \ 43.10 Variable selling cost per unit \ 2.10 \ 1.40 \ 1.90 Monthly demand in units 2,000 1,000 3,000 The mixing machines are potentially a constraint in the production facility. A total of 5,900 minutes are available per month on these machines. Direct labour is a variable cost in this company. Required: a) How many minutes of mixing machine time would be required to satisfy demand for all four products? b) How much of each product should be produced, rounded to the nearest whole unit, to maximize operating income c) Up to how much should the company be willing to pay, rounded to the nearest whole cent, for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Lusk Company produces and sells 15,000 units of Product A each month.The selling price of Product A is $20 per unit,and variable expenses are $14 per unit.A study has been conducted concerning whether Product A should be discontinued.The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product were discontinued.These data indicate that if Product A were discontinued,the company's overall monthly operating income would change by how much?

(Appendix 12A)The markup over cost under the absorption costing approach would increase if the required rate of return increases,holding everything else constant.

(Appendix 12A)Dresser Company uses time and material pricing.The time rate is $30 per hour.The material loading charge is 15% for ordering,handling,and storing materials and 25% for the desired profit on these materials.Given these data,what would be the total charge for a job that requires 3 hours of labour time and $80 in materials?

(Appendix 12A)Cost data relating to the single product produced by the Jones Company are given below: Direct materials \ 10 Direct labour 6 Variable manufacturing overhead 3 Fixed manufacturing overhead. \ 140,000 Variable selling, general, and administrative expense 1 Fixed selling, general, and administrative expense - \ 180,000 The Jones Company uses the absorption costing approach with a desired markup of 60%.If the company plans to produce and sell 20,000 units each year,what would be the target selling price per unit?

The book value of old equipment is NOT a relevant cost in an equipment replacement decision.

(Appendix 12A)Trevor 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 Year 12,000 Investment Required by the Company \ 200,000 Projected Unit Product Cost \ 25 Projected Annual Selling, General, and Administrative Expenses \ 90,000 Desired Rate of Return on Investment 15\% 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. c) If the price computed in part b) above is charged, and costs turn out as projected, can the company be assured that no loss will be sustained on the new product? Explain.