Exam 11: Decision Making and Relevant Information

Variable cost per unit is the best product cost to use for one-time-only special order decisions.

Direct materials are $20, direct labor is $5, variable overhead costs are $15, and fixed overhead costs are $10. In the short term, the incremental cost of one unit is:

If a manufacturer chooses to continue purchasing direct materials from a supplier because of the ongoing relationship that has developed over the years, the decision is based partially on qualitative factors.

Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below: Required: a. What costs are sunk? b. What costs are relevant? c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven? d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?

Answer the following questions using the information below: Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows: It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Donald's Engine Company has the option of purchasing the part from an outside supplier at $42.50 per unit. -If Donald's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred)total:

A supplier offers to make Part A for $35. Altec Company has relevant costs of $40 a unit to manufacture 1,000 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is:

For a particular decision, differential revenues and differential costs are always relevant.

A cost may be relevant for one decision, but NOT relevant for a different decision.

A car purchased last year is an example of a(n):

Opportunity costs never appear in a company's accounting records since they are foregone costs and NOT actual costs.

Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are: Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?

Relevant costs in a make-or-buy decision of a part include:

Answer the following questions using the information below: Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply: -If there are 600 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?

One-time-only special orders should only be accepted if:

When replacing an old machine with a new machine, the book value of the old machine is a relevant cost.

Answer the following questions using the information below: Black Forrest manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $180 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's policy to add a 50% markup to full costs. -Black Forrest is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the lowest price Black Forrest should bid on this special order?

Opportunity costs:

Sunk costs:

What should John do? What are his savings in the first year?

Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced each year with production costs as follows: Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23 is outsourced, 40% of the fixed costs cannot be immediately converted to other uses. a. Describe avoidable costs. What amount of the WB23 production costs is avoidable? b. Should Quiett Truck outsource WB23? Why or why not? c. What other items should Quiett Truck consider before outsourcing any of the parts it currently manufactures?