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

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 Plain?

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

Joint products are two or more products produced from a single input.

Exhibit 7-3 Cap Incorporated currently manufactures hats.Management is interested in outsourcing production to a reputable manufacturing company that can supply the hats for $5 per unit.Cap produces 20,000 hats each year.Variable production costs are $2 and annual fixed costs are $75,000.If production is outsourced,all variable costs and 60 percent of annual fixed costs will be eliminated. -Refer to Exhibit 7-3.If the hats are made internally,what are the total production costs?

Production capacity is the only consideration when evaluating special orders.

All of the following are steps of target costing except:

The following annual income statement is for Outboard Motors Inc. ,a maker of outboard motors for boats. $\begin{array}{c}\text { Product Lines }\\\begin{array}{lr}&2 \mathrm{HP} &\\\text { Sales revenue } & \$ 400,000 \\\text { Variable costs } & 190,000 \\\text { Contribution margin } & \$ 210,000 \\\text { Direct fixed costs } & 196,000 \\\text { Allocated fixed costs } & 24,000 \\ \text { Profit (loss) } & \$(10,000)\\\end{array} \begin{array}{rrr} 5 \mathrm{HP} & 10 \mathrm{HP} & \text { Total }\\\$ 600,000 & \$ 250,000 & \$ 1,250,000 \\370,000 & 150,000 &710,000\\230,000 & \$ 100,000 & \$ 540,000 \\162,500 & 50,000 & 408,500 \\\quad 36,000 & 15,000 & 75,000 \\ 31,500 & \$ 35,000 & \$ 56,500\end{array}\end{array}$ Outboard Motors is concerned about the losses associated with the 2HP product line and is considering dropping this product line.Allocated fixed costs are assigned to product lines based on sales.If the company eliminates a product line,total allocated fixed costs are assigned to the remaining product lines.All variable costs and direct fixed costs are differential costs. (1)Using differential analysis,determine whether the company would be better off dropping the 2HP product line or keeping the product line.Clearly state your conclusion. (2)Assume the company can lease the warehouse space currently being used by the 2HP product line for $11,000 per year.Using a differential analysis,explain how this would affect the company's decision to keep or drop the 2HP product line.

A "make-or-buy" decision means a company is deciding whether to build the product or outsource the product.

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)?

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. Beginner Intermediate Advanced Unit Selling price \ 40 \ 200 \ 400 Unit variable cost \ 35 \ 80 \ 120 Total fixed cost \ 60,000 \ 200,000 \ 245,000 Annual volume 7,000 4,000 3,000 (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?

Which of the following is not considered relevant when considering a make-or-buy decision?

Exhibit 7-3 Cap Incorporated currently manufactures hats.Management is interested in outsourcing production to a reputable manufacturing company that can supply the hats for $5 per unit.Cap produces 20,000 hats each year.Variable production costs are $2 and annual fixed costs are $75,000.If production is outsourced,all variable costs and 60 percent of annual fixed costs will be eliminated. -Refer to Exhibit 7-3.What are the total production costs if the hats are outsourced?

In which of the following cases is a customer most likely to be dropped?

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 Lined?

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 Advanced product?

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 Color?

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?

Sunk costs are costs incurred in the past that cannot be changed by future decisions.

Sandwiches Galore is a small shop looking to expand its product offerings.The company is evaluating two alternatives: tacos and soups.Annual projections for sales of tacos are as follows: Sales $144,000;variable costs $80,000;fixed costs $16,000.Annual projections for sales of soups are as follows: Sales $60,000;variable costs $20,000;no additional fixed costs. Perform differential analysis to determine which alternative is more profitable,and by how much.Assume that adding tacos is alternative 1 and adding soups is alternative 2.