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

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. Quality Testing Labor-hours Contribution Margin Starter 0.80 \ 200 Advanced 0.50 150 -Refer to Exhibit 7-6.What is the contribution margin per quality testing labor-hour for the Starter product?

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

When managers are making resource utilization decisions,the general rule is to:

One of the factors to consider when evaluating special orders is the impact that special pricing will have on long-run pricing with existing customers.

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.

Exhibit 7-4 The following segmented annual income statement is for Paper Products,Inc. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$ Plain Lined Color Total Sales revenue \ 25,000 \ 100,000 \ 125,000 \ 250,000 Variable costs 15,000 50,000 85,000 150,000 Contribution margin \ 10,000 \ 50,000 \ 40,000 \ 100,000 Direct fixed costs 4,000 6,000 9,000 19,000 Allocated fixed costs Profit (loss) -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?

Exhibit 7-1 Talmont Products has dropped the price per unit of its smart phone product from $1,060 to $500.There are some units in work-in-process inventory that have costs of $600 per unit associated with them.Talmont could sell these units in their current state for $400.It will cost Talmont $40 to complete these units so that they can be sold for $500 each. -Refer to Exhibit 7-1.Which of the following amounts is a sunk cost in this problem?

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 are the differential costs associated with the special order?

Allocated fixed costs are easily traceable to individual products.

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?

Exhibit 7-1 Talmont Products has dropped the price per unit of its smart phone product from $1,060 to $500.There are some units in work-in-process inventory that have costs of $600 per unit associated with them.Talmont could sell these units in their current state for $400.It will cost Talmont $40 to complete these units so that they can be sold for $500 each. -Refer to Exhibit 7-1.Which of the following is not a relevant revenue or cost in this problem?

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: Quality Testing Labor-hours Price Variable Cost Light 2 \ 300 \ 170 Mediurn 3 500 200 Heavy 5 1,200 380 -Refer to Exhibit 7-7.What is the contribution margin per unit of constrained resource for the Heavy product?

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?

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 Premium doughnuts?

Exhibit 7-4 The following segmented annual income statement is for Paper Products,Inc. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$ Plain Lined Color Total Sales revenue \ 25,000 \ 100,000 \ 125,000 \ 250,000 Variable costs 15,000 50,000 85,000 150,000 Contribution margin \ 10,000 \ 50,000 \ 40,000 \ 100,000 Direct fixed costs 4,000 6,000 9,000 19,000 Allocated fixed costs Profit (loss) -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 profit or (loss)for Lined?

Avoidable costs are as also called differential costs.

Differential revenues and costs are also called incremental revenues and costs.

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 are the differential revenues associated with the special order?

Exhibit 7-4 The following segmented annual income statement is for Paper Products,Inc. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Product Lines }$ Plain Lined Color Total Sales revenue \ 25,000 \ 100,000 \ 125,000 \ 250,000 Variable costs 15,000 50,000 85,000 150,000 Contribution margin \ 10,000 \ 50,000 \ 40,000 \ 100,000 Direct fixed costs 4,000 6,000 9,000 19,000 Allocated fixed costs Profit (loss) -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 total profit or (loss)for all product lines?

Davis Company has $20 per unit in variable costs and $800,000 per year in fixed costs.Demand is estimated to be 400,000 units per year.What is the desired price per unit if a markup of 30% on total cost is used to determine the price?