Exam 13: Short-Run Decision Making: Relevant Costing

Mason Company makes portable charges for cell phones.Currently,Mason purchases 10,000 plastic housings a year from an outside company for $1 each.One of Mason engineers suggested that the company make its plastic housings in-house.Estimated unit costs are as follows: Direct materials \ 0.30 Direct labour 0.20 Variable overhead 0.15 Fixed overhead* 0.40 * Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per year in general overhead costs to be allocated to this line. A. If Mason makes the housing in-house, will net income be higher or lower, and by how much? B. What is the highest price per unit that Mason would pay an outside company for the housings? Now assume that all of the fixed overhead is allocated fixed overhead and will not be C. affected by making the product in-house or purchasing it. If Mason makes the housing inhouse, will net income be higher or lower, and by how much?

A situation in which management tells divisions that they must reduce costs by 10% is called target costing.

Direct materials \ 0.40 Direct labour 0.15 Variable overhead 0.06 Fixed overhead* 0.50 -Refer to the Figure.Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier,Joseph Michaels,the production supervisor,said,"That's nuts! This ink is a real pain to make,and $1.24 per millilitre sounds like a bargain to me!" Based on Jim's feelings,Dominique Rudder (a new CPA in the accounting office)did an ABC analysis of ink production.She came up with the same direct materials,direct labour,and variable overhead,as well as the following information on activities required by metallic ink production: Setups \ 60,000600 setups per year Purchasing \ 270,0009,000 purchase orders per year The metallic ink requires 300 purchase orders per year and 80 setups. A. If Rudder purchases the ink from the outside supplier, would operating income be higher or lower, and by how much? B. What is the highest price per millilitre that Rudder would pay an outside company for the ink?

Direct materials \ 8 Direct labour 2 Variable overhead 1 Fixed overhead 4 ProPrinters uses 100,000 units of 87A per year.Printers R Us has offered to sell ProPrinters 100,000 units of 87A per year for $12.Fixed overhead is unavoidable. -Refer to the Figure.Should Butry process dac further or sell now,and what will be the effect on income?

Direct materials \ 8 Direct labour 2 Variable overhead 1 Fixed overhead 4 ProPrinters uses 100,000 units of 87A per year.Printers R Us has offered to sell ProPrinters 100,000 units of 87A per year for $12.Fixed overhead is unavoidable. -Refer to the Figure.What is the contribution margin per hour of machine time for a fancy leg?

Direct materials \ 4.00 Direct labour 2.00 Variable overhead 1.50 Fixed overhead 3.00 -Refer to the Figure.Suppose that 40% of the fixed overhead is avoidable if part B48 is NOT made by Tela.Should Tela purchase the part from the outside supplier,and what is the financial effect?

Match each statement with the correct item below. -Relevant costs

Island Princess Pineapples purchases pineapples from area farmers and processes them into rings,juice,and skins.The cost of the pineapples is a joint cost,as is the initial processing in which the fruits are skinned,cored,and sliced into rings.At the split-off point,Island Princess sells the skins for fertilizer.Juice and rings are processed further (further processing costs occurs for cooking and canning).Data for the three products follows: Sales Rings \ 2,000 Juice \ 1,500 Fertilizer \ 400 Further processing costs: Rings \ 500 Juice \ 300 Joint costs \ 1,600 A. Prepare a segmented income statement for Isl and Frincess, showing results for rings, juice, fertilizer, and the total. Do not allocate joint costs individually. Now suppose that Island Princess is considering the option of processing the skins further B. $\quad$ into pet food that would sell for $\$ 1,000$ . Additional costs would be $\$ 450$ . Should this be done?

Match each statement with the correct item below. -Make-or-buy decision

Direct materials \ 8 Direct labour 2 Variable overhead 1 Fixed overhead 4 ProPrinters uses 100,000 units of 87A per year.Printers R Us has offered to sell ProPrinters 100,000 units of 87A per year for $12.Fixed overhead is unavoidable. -Refer to the Figure.What is Butry's profit from refining one batch of dactylyte if both dac and tyl are sold at the split-off point?

Match each statement with the correct item below. -Joint products

Direct materials \ 8 Direct labour 2 Variable overhead 1 Fixed overhead 4 ProPrinters uses 100,000 units of 87A per year.Printers R Us has offered to sell ProPrinters 100,000 units of 87A per year for $12.Fixed overhead is unavoidable. -Refer to the Figure.Should ProPrinters make or buy the part,and what would be the financial consequence?

Which resources can be purchased in the amount needed and at the time of use?

One Kings Lane Corporation manufactures a single product with the following unit costs for 10,000 units: Direct materials \ 75 Direct labour 40 Factory overhead (40\% variable) 90 Selling expenses (60\% variable) 30 Administrative expenses (20\% variable) 15 Total per unit \ 225 Recently,a company approached One Kings Lane Corporation about buying 2,000 units for $250.Currently,the models are sold to dealers for $450.One Kings Lane's capacity is sufficient to produce the extra 3,000 units.No additional selling expenses would be incurred on the special order. Required: A. What is the profit earned by One Kings Lane on the original 10,000 units? B. Should One Kings Lane accept the special order if its goal is to maximize short-run profits? How much will income be affected? C. Determine the minimum price One Kings Lane would want to receive in order to increase profits by $\$ 7,500$ on the special order. D. When making a special order decision, what qualitative aspects of the decision should One Kings Lane Corporation consider?

Which of the following costs are future costs that differ across alternatives?

Boone Products had the following unit costs: Direct materials \ 24 Direct labour 10 Variable factory overhead 8 Fixed factory overhead (allocated) 18 A one-time customer has offered to buy 2,000 units at a special price of $48 per unit.Because of capacity constraints,1,000 units will need to be produced during overtime.Overtime premium is $8 per unit.Suppose the special order is accepted.How much additional profit (loss)will be generated?

Future costs that differ across alternatives are irrelevant.

At split-off,the joint costs of production for joint products are NOT relevant to the sell-or-process-further decision.

Direct materials \ 8 Direct labour 2 Variable overhead 1 Fixed overhead 4 ProPrinters uses 100,000 units of 87A per year.Printers R Us has offered to sell ProPrinters 100,000 units of 87A per year for $12.Fixed overhead is unavoidable. -Refer to the Figure.Which of the following is a qualitative factor that would NOT affect ProPrinters'decision?

Home Hardware sets prices at cost plus 90% of cost.The cost of a cordless drill kit is $45.What price is charged by Home Hardware for the cordless drill kit?