Exam 13: Short-Run Decision Making: Relevant Costing

Target costing is a method of determining the price of a product or service based on the cost that the business has to pay.

What kind of decision involves a choice between internal and external production?

The markup includes desired profit and any costs NOT included in the base cost.

Test A Test B Test C Test D Charging rate \ 50 \ 20 \ 80 \ 70 Variable cost 10 10 60 30 Machine hours 2 1 0.5 0.25 -Refer to the Figure.What is the contribution margin per hour of machine time for Test A?

Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Direct materials \ 2,400 Direct labour 960 Factory overhead ( 30\% variable) 1,800 Selling expenses (50\% variable) 900 Administrative expenses (10\% variable) 840 Total per unit \ 6.900 Recently,a company approached Reggie Corporation about buying 100 units for $5,100 each.Currently,the models are sold to dealers for $7,800.Reggie Corporation's capacity is sufficient to produce the extra 100 units.No additional selling expenses would be incurred on the special order. Suppose the special order is accepted.How much will income change?

Flexible resources may have unused capacity.

Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit.

Atlantic Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows: Direct materials \ 75,000 Direct labour 120,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 60,000 Total \ 300,000 An outside supplier has offered to sell the component for $12.75. What is the effect on income if Atlantic Industries purchases the component from the outside supplier?

Polar Company produces two types of gears,Simple Gears and Deluxe Gears,with unit contribution margins of $2 and $5,respectively.Each gear must spend time on a special machine.The firm owns 10 machines that together provide 25,000 hours of machine time per year.Each Simple Gear requires 0.10 hours of machine time; each Deluxe Gear requires 0.4 hours of machine time. A. What is the contribution margin per hour of machine time for each Simple Gear? And for each Deluxe Gear? If Polar faces only the production constraint (25,000 hours of machine time), how many B. units of Simple Gears should be produced? And how many units of Deluxe Gears? What is the total contribution margin from this product mix? Now suppose that Polar cannot sell more than 200,000 units of each type of gear. How C. many units of Simple Gears should be produced? And how many units of Deluxe Gears? What is the total contribution margin from this product mix?

Typically in a special-order decision,a customer wants to pay less than the usual price.

The benefit sacrificed when one alternative is chosen over another is called opportunity cost.

Resources that are acquired in advance of usage are flexible resources.

A segment margin is always greater than or equal to zero.

What kind of decision focuses on whether a one-off order should be accepted or rejected?

The operations of Smits Corporation are divided into the Childs Division and the Jackson Division.Projections for the next year are as follows: $\begin{array}{lrrr}&\text { Childs } & \text { Jackson } & \\&\text { Division } & \text { Division } & \text { Total }\\\text { Sales } & \$ 250,000 & \$ 180,000 & \$ 430,000 \\\text { Variable costs } & 90.000 & 100.000 & 190.000\\\text { Contribution margin } & \$ 160,000 & \$ 80,000 & \$ 240,000 \\\text { Direct fixed costs } & 75,000 & 62,500 & 137,500\\\text { Segment margin } & \$ 85,000 & \$ 17,500 & \$ 102,500 \\\text { Allocated common costs } & 35,000 & 27,500 & 62,500 \\\text { Operating income (loss) } & \$ 50,000 & \$(10,000) & \$ 40,000\end{array}$ Suppose the Jackson Division were dropped.What would be the operating income for Smits Corporation?

Andrews Industries manufactures 10,000 components per year.The manufacturing cost of the components was determined as follows: Direct materials \ 140,000 Direct labour 230,000 Inspecting products 50,000 Providing power 20,000 Providing supervision 30,000 Setting up equipment 50,000 Moving materials 10,000 Total \ 530,000 If the component is not produced by Andrews,inspection of products and provision of power costs will be only 10% of the production costs,moving materials costs and setting up equipment costs will be only 50% of the production costs,and supervision costs will amount to only 40% of the production amount.An outside supplier has offered to sell the component for $45. Suppose Andrews Industries purchases the component from the outside supplier.What will be the effect on Andrew's income?

In making a short-run decision,all alternatives need to be considered,not only feasible ones.

Refer to the Figure.Assume Victor's Detailing uses target costing.The company requires a 40% profit on each job.Which of the following should Victor's Detailing do?

Which of the following is the greatest concern when managers are considering the optimal product mix?

Houser Corporation manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: Direct materials \ 32 Direct labour 40 Variable overhead 16 Fixed overhead 32 Total \ 120 Kingston Company has offered to sell Houser Corporation 5,000 units of the part for $112 per unit.If Houser Corporation accepts Kingston Company's offer,total fixed costs will be reduced to $60,000.Which alternative is more desirable,and by what amount is it more desirable? Alternative Amount