Exam 13: Short-Run Decision Making: Relevant Costing

A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would be $11.50). The order would require specialized materials costing $4.00 per unit. Direct labor and variable factory overhead would cost $2.15 per unit. Fixed factory overhead is $1.20 per unit. However, the company has excess capacity and acceptance of the order would not raise total fixed factory overhead. The warehouse, however, would have to add capacity costing $1,300. Which of the following is relevant to the special order?

A sunk cost is always relevant.

Future costs that differ across alternatives are

An important qualitative factor to consider regarding a special order is the

Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30. The defective units were discovered before leaving the plant. Walloon can sell them as is for $20 or can rework them at a cost of $15 and sell them at the regular price of $50. The total relevant cost of reworking the defective units is

Teller Company has designed a caller ID machine with a large screen that can be seen easily from across the room. The Sales Department believes that this product can be sold for $30 each. Teller requires that all new products yield 15% profit. What is the target cost of the new product?

Figure 13-8. Kerrigan Lumber Yard receives 12,000 large trees each year that they process into rough logs. Currently, Kerrigan sells the rough logs for $75 each. Kerrigan is considering processing the logs further into refined lumber. Each log can be processed into 200 feet of refined lumber at an additional cost of $0.40 per foot. The refined lumber can be sold for $0.95 per foot. -Refer to Figure 13-8. Assume that the cost of getting the 12,000 large trees falls by half. Should Kerrigan sell the rough logs at split-off or process it further?

Match each statement with the correct item below. -Make-or-buy decisions

Demand is one side of the pricing equation; supply is the other side.

_______________________ focuses on whether a product should be processed beyond the split-off point.

The following information relates to a product produced by Creamer Company: Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. If the firm produces the special order, the effect on income would be a

Kara Ring owns a successful flower shower called Always Blooming. Kara wants to expand the shop by leasing the space next door for $1,200 per month, and adding refrigerators to keep the flowers fresh and two checkout counters so the customers do not have to wait in long lines. She currently pays $1,000 per month for her current store space and has two refrigerators that cost her $6,000 each two years ago. She figures that the new refrigerators and counters will cost $25,000. She also has determined that the current cash register that initially cost her $1,000 two years ago and has been depreciated $250 each year would have to be replaced with two new cash registers costing $1,500 each. She thinks sales would increase by $10,000 per month. Variable costs are 40% of sales. Required:

Sherrell Washington owns a successful hole-in-the-wall bagel shop called Big Apple Bagels. Sherrell wants to expand the shop by leasing the space next door for $500 per month, and adding tables and chairs so that customers can dine in. She figures that the tables and chairs will cost $4,000 and that the bagel machine, that cost $3,500 five years ago, would have to be scrapped in favor of a larger machine costing $6,400. She thinks sales would increase by $4,000 per month. Variable costs are 50% of sales.

Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product cost of the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which of the following is true?

The method of determining the cost of a product or service based on the price that customers are willing to pay is called

Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time) for Model P-4?

The Exchange Company is in the process of developing a new product called LS500. The company requires a 35% profit. The LS500 current design carries with it a total cost of $125. Required: A. What is the sales price of the LS500 using markup costing? B. Assume that the Exchange Company's marketing department has determined that consumers are willing to pay $140 for the LS500. What is the target cost for this product?

Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible. -Which of the following is irrelevant to the special order decision?

Limited resources or a limited demand for a product are examples of ______________.

Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials \ 5,000 Direct labor 120,000 Variable overhead 45,000 Fixed overhead 60,000 Total \ 300,000 An outside supplier has offered to sell the component for $12.75. Fixed costs will remain the same if the component is purchased from an outside supplier. What is the effect on income if Vest Industries purchases the component from the outside supplier?