Exam 7: How Are Relevant Revenues and Costs Used to Make Decisions

What are some of the qualitative factors management might consider if they are trying to decide whether to outsource production rather than keep the production within their company?

The following data is for Archery Unlimited,a maker of bows used by archery enthusiasts.All fixed costs are unavoidable regardless of the products offered,and Archery sells all the products it produces each year. (1)Perform differential analysis to determine what will happen to total profits if the company drops the Beginner product. (2)Based on the analysis,what would be your recommendation to management regarding dropping of the Beginner product?

Exhibit 7-9 Doughnuts Company uses flour to produce two joint products,Premium and Deluxe.When processed,each pound of flour yields 8 units of Premium and 12 units of Deluxe.Premium doughnuts sell for $1.00 per unit and Deluxe sell for $2.00 per unit.The total cost to process a 10-pound batch of flour is $12.00. -Refer to Exhibit 7-9.If the sales value method is used to allocate the $12 in joint costs,how much will be allocated to Deluxe doughnuts?

The theory of constraints starts with subordinating all nonbottleneck resources to the bottleneck.

Exhibit 7-2 Jake Company is considering a special order for 5,000 units at a price of $60 per unit.Jake's product normally sells for $84 per unit and has variable manufacturing costs of $45 per unit and variable selling costs of $9 per unit.Fixed manufacturing costs are $150,000 and fixed selling and administrative costs are $300,000.Jake has capacity to produce 30,000 units and is currently producing 20,000 units.If the order is accepted,,Jake will incur legal fees of $7,500 in connection with the order,but there will be no variable selling costs on the special order. -Refer to Exhibit 7-2.What amount of additional profit or loss will be incurred if the order is accepted?

Barkley Company currently makes a product internally,but is considering outsourcing production.Barkley rents a special machine used to make the product,and would no longer need this machine if the part is outsourced.The rent on the machine is what type of cost for this make-or-buy decision?

Differential analysis can be used to decide whether to outsource production,but it is not used for product line decisions.

Exhibit 7-7 Fishing Products Company produces three types of fishing poles: Light,Medium,and Heavy.The poles are produced in separate departments and sent to the quality testing department before being shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Fishing Products would like to optimize its use of labor hours by producing the two most profitable fishing poles.Information for each pole follows: -Refer to Exhibit 7-7.What is the contribution margin per unit of constrained resource for the Medium product?

Fruit Products Company purchased 60,000 pounds of fresh apples from a local grower for $24,000.The apples were separated into high quality grade A apples (18,000 pounds),and lower quality grade B apples (42,000 pounds).Fruit Products sells Grade A apples for $2.40 per pound,and grade B apples for $1.50 per pound. (1)Allocate joint costs to each product using the physical quantities method (pounds),and calculate the profit or loss for each product and in total. (2)Allocate joint costs to each product using the sales value method,and calculate the profit or loss for each product and in total. (3)Assume grade B apples can be processed further into dried apples for an additional $0.40 per pound.Customers are willing to pay $1.80 per pound for the dried apples.Should Fruit Products process the grade B apples further? Explain.

Cost-plus pricing starts with considering the price of products at competing firms.

Individual product profitability will vary depending on which allocation method is chosen to allocate joint costs.

Exhibit 7-4 The following segmented annual income statement is for Paper Products,Inc. -Refer to Exhibit 7-4.If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue,what is the amount of allocated fixed costs for Color?

All of the following are qualitative factors that a company should consider in a make-or-buy decision except:

Exhibit 7-6 Roseville,Inc.produces two types of gaming systems: Starter and Advanced.The gaming products are produced in separate departments and sent to the quality testing department before being packaged and shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Roseville,Inc.has compiled the following data in order to optimize its use of labor hours for producing the most profitable product. -Refer to Exhibit 7-6.What is the contribution margin per quality testing labor-hour for the Starter product?

Allocated fixed costs are eliminated when a product line is eliminated.

Exhibit 7-9 Doughnuts Company uses flour to produce two joint products,Premium and Deluxe.When processed,each pound of flour yields 8 units of Premium and 12 units of Deluxe.Premium doughnuts sell for $1.00 per unit and Deluxe sell for $2.00 per unit.The total cost to process a 10-pound batch of flour is $12.00. -Refer to Exhibit 7-9.If the physical quantities method is used to allocate the $12 in joint costs,how much will be allocated to Deluxe doughnuts?

Branford Company is bidding on a custom yacht.The company typically charges 30 percent above cost and estimates the yacht will cost $900,000 to build.What is the price bid that Branford should submit?

There are often qualitative advantages for keeping unprofitable customers.

Using activity-based costing information with differential analysis can lead to better decisions.

Exhibit 7-8 Petro Inc.produces two joint products,product A and B.Prior to the split-off point,the company incurred $600,000 in joint costs.Production totaled 72,000 pounds for product A and 48,000 pounds for product B. -Refer to Exhibit 7-8.What amount of joint costs is allocated to product B using the physical quantities method (pounds)?