Exam 12: Relevant Costs for Decision Making

Crane Company makes four products in a single facility. Data concerning these products appear below: The milling machines are potentially a constraint in the production facility. A total of 22,600 minutes are available per month on these machines. -How many minutes of milling machine time would be required to satisfy demand for all four products?

The Clemson Company reported the following results last year for the manufacture and sale of one of its products, known as a Tam: Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were discontinued, there would be no change in the fixed manufacturing costs of the company. -Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines.If the company discontinues the Tam product line,what will be the change in the annual operating income (loss)?

(Appendix 12A)Ritchie Corporation manufactures a product that has the following costs: Per unit Per year Direct materials \2 0.70 Direct labour 11.80 Variable manufacturing overhead 3.20 Fixed manufacturing overhead \ 817,700 Variable SG\&A expenses 4.10 Fixed SG\&A expenses 691,900 The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 37,000 units per year. The company has invested $160,000 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.

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 there is not enough idle capacity to produce all of the units for the overseas customer,and accepting the special order would require cutting back on production of 700 units for regular customers.The minimum acceptable price per unit for the special order is closest to which of the following?

Iaci Company makes two products from a common input.Joint processing costs up to the split-off point total $42,000 a year.The company allocates these costs to the joint products on the basis of their total sales values at the split-off point.Each product may be sold at the split-off point or processed further.Data concerning these products appear below: Product X Product Y Total Allocated joint processing costs \ 22,400 \ 19,600 \ 42,000 Sales value at split-off point \ 32,000 \ 28,000 \ 60,000 Costs of further processing \ 11,600 \ 25,300 \ 36,900 Sales value after further processing \ 40,800 \ 54,200 \ 95,000 Required: a) What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? b) What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? c) What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d) What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

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 there is ample idle capacity to produce the units required by the overseas customer,and the special discounted price on the special order is $76.40 per unit.By how much would this special order increase (decrease)the company's operating income for the month?

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. -How many minutes of grinding machine time would be required to satisfy demand for all four products?

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs.Of the fixed costs,$21,000 cannot be eliminated.What would be the effect on the operating income of Manor Company of discontinuing this department?

(Appendix 12A)Magner,Inc.uses the absorption costing approach to cost-plus pricing to set prices for its products.Based on budgeted sales of 34,000 units next year,the unit product cost of a particular product is $61.80.The company's selling,general,and administrative expenses for this product are budgeted to be $809,200 in total for the year.The company has invested $400,000 in this product and expects a return on investment of 9%.The target selling price for this product based on the absorption costing approach would be closest to which of the following?

Which of the following is NOT an effective way of dealing with a production constraint (i.e.,bottleneck)?

Holt Company makes three products in a single facility.Data concerning these products follow:

Consider the following production and cost data for two products,L and C: Contribution Margin per Unit \ 130 \ 120 Machine Setups Needed per Unit 10 setups 8 setups The company can only perform 65,000 machine setups each period due to limited skilled labour,and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

Juett 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 70,000 units per month is as follows: Direct Materials \ 29.60 Direct Labour \ 5.80 Variable Manufacturing Overhead \ 2.50 Fixed Manufacturing Overhead \ 17.20 Variable Selling \& Administrative Expense \ 1.80 Fixed Selling \& Administrative Expense \ 6.70 The normal selling price of the product is $72.90 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 $1.10 less per unit on this order than on normal sales. Direct labour is a variable cost in this company. Required: a) Suppose there is ample idle capacity to produce the units required by the overseas customer, and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's operating income for the month? b) 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? c) Suppose there is not enough idle capacity to produce all of the units for the overseas customer, and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order?

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 produced and sold 4,000 afghans and zero spindles of yarn the total contribution margin would be closed to:

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 target selling price based on the absorption costing approach?

Wagner Company sells Product A for $21 per unit.Wagner's unit product cost based on the full capacity of 200,000 units is as follows: Direct Materials \ 4 Direct Labour \ 5 Manufacturing Overhead \ 6 Unit Produot Cost \ 15 A special order offering to buy 20,000 units has been received from a foreign distributor.The only selling costs that would be incurred on this order would be $3 per unit for shipping.Wagner has sufficient idle capacity to manufacture the additional units.Two-thirds of the manufacturing overhead is fixed and would not be affected by this order.Assume that direct labour is an avoidable cost in this decision.In negotiating a price for the special order,what should be the minimum acceptable selling price per unit?

(Appendix 12A)Under time and material pricing,what is(are)included in the time component?

Juanita earns $68,000 annually as a marketing specialist in Mexico City,Mexico.She has applied for admission to the M.B.A program at Dalhousie University.If accepted,she will resign and move to Halifax,Nova Scotia.Juanita has assembled the following data to make the decision: Juanita's annual salary \ 68,000 Annual tuition and fees 14,000 Annual book and supply expense 3,000 Monthly living expenses in Mexico City 800 Monthly living expenses in Halifax 1,600 Monthly auto expenses in Mexico City 350 Monthly auto expenses in Halifax 350 Cost of two business suits purchased just prior to resigning 600 Moving expenses 5,500 Required: a) Calculate the following in the context of Juanita's decision: (i) Total sunk costs (if any) (ii) Total differential or incremental costs (if any) (iii) Total opportunity costs (if any) b) What is your best estimate of the total cost to Juanita of earning an M.B.A. degree if it will take her 12 months to complete the program? c). Suppose you are Juanita. What specific additional information would you need in order to make a rational decision to pursue and successfully complete the MBA program at Dalhousie? Explain.

(Appendix 12A)In target costing,the anticipated competitive market price of a product determines its maximum allowable product cost.