Exam 6: Relevant Information for Decision Making With a Focus on Operational Decisions

Jeff Company produces a part that is used in the manufacture of one of its products.The annual costs associated with the production of 11,000 units of this part are as follows: Direct materials \2 5,000 Direct labor 34,000 Variable indirect production costs 65,000 Fixed indirect production costs 40,000 Total cost \1 64,000 A supplier is willing to sell 11,000 units of the part to Jeff Company for $12.50 per unit.When examining the fixed indirect production costs,Jeff Company determines $10,000 is avoidable. Required: A) If there are no alternative uses for the facilities, should Jeff Company take advantage of the supplier's offer? B) If Jeff Company decides to buy the part from the supplier, Jeff Company can rent out the idle facilities for $50,000 per year. Should Jeff Company take advantage of the supplier's offer?

DesPlaines Corporation has a joint process that produces three products: P,G and A.Each product may be sold at split-off or processed further and then sold.Joint-processing costs for a year amount to $25,000.The production level for each product is 10,000 units.Other data follows: Sales Value Separable Processing Sales Value Product at Split-Off Costs after Split-Off at Completion P \ 12 \ 8 \ 20 G 10 4 17 A 15 6 19 If Product P is processed beyond the split-off point,profits will ________.

The gain or loss on the disposal of equipment is determined by ________.

In make-or-buy decisions for a part for a product,relevant costs include ________.

Watson Corporation manufactures two products,Simple and Complex.The following annual information was gathered: Simple Complex Selling price per unit \ 47.00 \ 26.00 Variable cost per unit 42.00 22.00 Total annual fixed costs are $18,000.Assume demand for either product exceeds the factory's capacity.It takes one hour to make one unit of Complex.However,Simple takes 50% longer to manufacture when compared to Complex.Only 120,000 hours of plant capacity are available.How many units of Simple and Complex should Watson Corporation produce and sell in a year to maximize profits?

The relevant information for a sell or process further decision for joint products includes the costs incurred before the split-off point.

Downers Grove Corporation has a joint process that produces three products: P,G and A.Each product may be sold at split-off or processed further and then sold.Joint-processing costs for a year amount to $25,000.The production level for each product is 10,000 units.Other data follows: Sales Value Separable Processing Sales Value Product at Split-Off Costs after Split-Off at Completion P \ 12 \ 10 \ 21 G 12 4 17 A 10 6 19 To maximize profits,Downers Grove Corporation should process ________ further.

Freedom Company has three departments.Data for the most recent year are presented below: Dept. X Dept. Y Dept. Z Sales \ 400 \ 200 \ 80 Variable expenses 128 52 34 Unavoidable fixed expenses 96 52 12 Avoidable fixed expenses 116 104 54 Required: A) Compute the operating income for Freedom Company. B) Compute the contribution margin for each department. C) Compute the operating income for each department. D) Which department(s) should be eliminated? Why?

Qualitative factors do not affect a make-or-buy decision.

Jeffrey Company wants to double production of Product X from 1,000 units to 2,000 units.The variable manufacturing cost per unit is $10.The variable nonmanufacturing cost per unit is $20.There are no fixed costs.The selling price per unit is $50.What is the incremental revenue of the proposed change?

Central Industries has three product lines: A,B and C.The following information is available: $\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 44,000 \\\text { Variable costs } & 76,000 & 48,000 & 35,000 \\\text { Contribution margin } & 24,000 & 42,000 & 9,000 \\\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable fixed costs } & \underline{6,000} & \underline{9,000} & \underline{7,700}\\\text { Operating income(loss) }&\$9,000&\$15,000&\$(1,700)\end{array}$ Central Industries is thinking about dropping Product C because it is reporting a loss.Assume Central Industries drops Product C and does not replace it.What will happen to operating income?

Mary is considering leaving her current position to open an ice cream shop.Mary's current annual salary is $77,000.Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Mary's annual opportunity cost of starting the ice cream shop?

When adding or dropping a product line,variable costs are the only relevant costs.

Incremental benefits are the ________ generated by a proposed alternative.

If a department in a grocery store is under consideration to be eliminated,which of the following cost(s)is(are)NOT relevant to the decision?

Sahara Industries has three product lines: A,B and C.The following annual information is available: $\begin{array}{llll}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 88,000 \\\text { Variable costs } & 76,000 & 48,000 & 79,000\\\text { Contribution margin } & 24,000 & 42,000 & 9,000 \\\text { Avoidable fixed costs } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable fixed costs } & 6,000 & 9,000 & 9,400\\\text { Operating income(loss) }&\$9,000&\$15,000&\$(3,400)\end{array}$ Sahara Industries is thinking about dropping Product C because it is reporting a loss.Assume Sahara Industries drops Product C and the space formerly used to produce Product C is rented out for $15,000 per year.What will happen to operating income?

Sunbury Company is considering the replacement of a machine that is presently used in production.The following data are available: Old Machine NEW Machine Original cost \ 60,000 \ 35,000 Useful life in years 10 5 Current age in years 5 0 Book value \ 25,000 - Disposal value now \ 8,000 - Disposal value in 5 years 0 0 Annual cash operating costs \ 12,000 \ 4,000 Adding all five years together,the total relevant costs to consider if the old machine is kept are ________.

Variable expenses are divided into avoidable and unavoidable costs.

Johnston Company wants to double production of Product X from 1,000 units to 2,000 units.The variable manufacturing cost per unit is $10.The variable nonmanufacturing cost per unit is $20.There are no fixed costs.The selling price per unit is $50.What is the incremental cost of the proposed change?

When adding or dropping a product line,fixed avoidable costs may be relevant costs.