Exam 12: Relevant Costs for Decision Making

Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores, or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows: Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans. -If Austin chooses to produce 4,000 afghans each month,what will be the change in the monthly net operating income as compared to selling 4,000 spindles of yarn?

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200. -What is the net advantage or disadvantage to the company from upgrading the calculators?

Madison Optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago.Selected information on the two machines is given below: Original cost when new Accumulated depreciation to date Current salvage value Annual operating cost Remaining useful life OId New Machine Machine \ 80,000 \ 85,000 32,000 --- 26,000 --- 4,000 3,000 4 years 4 years Ignore income taxes and the time value of money in this problem. Required: Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years.

An avoidable cost is a cost that can be eliminated (in whole or in part)by choosing one alternative over another.

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. -At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer?

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold for a total of $30,000. As an alternative, the calculators can be sold in their present condition for $11,200. -Assume that Tolar decides to upgrade the calculators.At what selling price per unit would the company be as well off as if it just sold the calculators in their present condition?

Two or more different products that are manufactured in the same production period are known as joint products.

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

(Appendix 12A)Which of the following statements is NOT consistent with target costing?

The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per-unit costs to produce and sell one Hom at that activity level follow: 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 and the special order is accepted at 15% off the regular selling price,what would be the effect on operating income next year due to accepting this order?

Mercer Company is planning the introduction of a new product. The following information relating to the product has been assembled: The company uses the absorption costing approach to pricing. -(Appendix 12A)The markup percentage that would be needed on the new product is closest to which of the following?

Cardinal Company needs 20,000 units of a certain part to use in one of its products.The following information is available: Cost to Cardinal to make the part: Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Cost to buy the part from the Oriole Company: \ 4 \ 16 \ 8 \ 10 \ 38 \ 36 Oriole Company has offered to sell this part to Cardinal Company for $36 each.If Cardinal were to buy the part from Oriole instead of making it,Cardinal would not have any use for the released capacity.In addition,60% of the fixed manufacturing overhead costs would continue regardless of what decision is made.Assume that direct labour is an avoidable cost in this decision.In deciding whether to make or buy the part,what would be the total relevant costs to make the part?

(Appendix 12A)Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y: Number of Units Sold Annually 20,000 Required Investment \ 400,000 Unit Product Cost \ 25 Selling, General, and Administrative \ 130,000 Expenses If the company uses the absorption costing approach to cost-plus pricing and desires a 15% rate of return on investment (ROI),what would be the required markup on absorption cost for product Y?

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 maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

Which of the following best describes a plant operating at capacity?

(Appendix 12A)Which of the following items are included in the cost base under the absorption costing approach to cost-plus pricing? Variable Cost Fixed Cost Production Selling Production Selling A) Yes Yes Yes No B) No Yes No Yes C) Yes Yes No No D) Yes No Yes No

All other things equal,it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.

Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is: Variable Manufacturing Cost \ 12 Fixed Manufacturing Cost \ 9 Unit Product Cost \ 21 The part can be purchased from an outside supplier for $20 per unit.If the part is purchased from the outside supplier,two-thirds of the fixed manufacturing costs can be eliminated.What will be the annual impact on the company's operating income of buying the part from the outside supplier?

(Appendix 12A)Watkins Company uses time and material pricing.The time rate is $25 per hour.The material loading charge is 30% for ordering,handling,and storing parts and 10% for the desired profit on materials.Given these data,what would be the total charge for a job that requires 8 hours of labour time and $150 in parts?

When Mr.Ding L.Berry,president and chief executive of Berry,Inc.,first saw the segmented income statement below,he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" $\begin{array}{lcccc}\begin{array}{l}\\\text { Sales }\\\text { Variable expenses }\\\text { Contribution margin } \\\text { Traceable fixed expenses* } \\\text { Common expenses, allocated } \\\text { Operating income (loss) } \end{array}\begin{array}{l}\underline { \text { Total } }\\\$ 250,000\\119,000\\131,000\\=98,000\\32,900\\\$ 100\end{array}\begin{array}{c}\underline { \mathrm { U } } \\\$ 100,000 \\37,500\\63,000\\31,000 \\\$ 18,000 \\\$ 14,000\end{array}\begin{array}{c}\underline { \mathrm { V } }\\\$ 75,000 \\35,000 \\ 40,000 \\37,000 \\10,500 \\\$(7,500)\end{array}\begin{array}{c} \underline { \mathrm { W } } \\\$ 75,000 \\47,000\\28,000 \\30,000 \\\$ 4,400 \\\$(6,400)\end{array}\end{array}$ *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued. Required: Recommend which segments, if any, should be eliminated. Prepare a report in good form to support your answer.