Exam 13: Short-Run Decision Making: Relevant Costing

Elco Oil Products manufactures three joint products: Phase 1,Phase 2,and Phase 3.The cost of the joint process is $30,000.Information about the three products follows: Phase 1 Phase 2 Phase 3 Anticip ated production 5,600 10,000 2,500 Selling price/kg at split-off \ 2.00 \ 1.00 \ 3.00 Additional processing costs/kg after split-off (all variable) \ 1.50 \ 1.25 \ .75 Selling price/kg after further processing \ 2.50 \ 3.75 \ 6.25 Allocated joint costs \ 12,000 \ 10,500 \ 7,500 Required: A. Determine whether each product should be sold at split-off or processed further. B. Determine the firm's income if the firm processed all three products beyond split-off.

Match each statement with the correct item below. -Keep-or-drop decision

Meco Company produces a product that has a regular selling price of $360 per unit.At a typical monthly production volume of 2,000 units,the product's average unit cost of goods sold amounts to $270.Included in this average is $120,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit.The buyer will pay transportation,and the regular selling price will not be affected if Meco accepts the order. Assume that Meco Company has excess capacity.Suppose Meco accepts the order.What would be the effect on profits?

Irrelevant costs are costs that vary across alternatives.

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.Suppose that ProPrinters discovers that other costs will increase by $7,000 per year if the component is purchased rather than made internally.What is the financial effect of this make-or-buy decision?

Which of the following costs is NOT relevant to a decision to sell a product at split-off or process the product further and then sell the product?

Target costing involves much more up-front work than cost-based pricing.

The operations of Plastics Inc.are divided into the Blow Moulding Division and the Injection Moulding Division.Projections for the next year are as follows: $\begin{array}{lrrr}&\text { Blow Moulding } & \text { Injection } \\&\text { Division } & \text { Moulding } \\&&\text { Division }&\text { Total }\\\text { Sales } & \$ 60,000 & \$ 40,000 & \$ 100,000 \\\text { Variable costs } & 20,000 & 15,000 & 35,000 \\\text { Contribution margin } & \$ 40,000 & \$ 25,000 & \$ 65,000 \\\text { Direct fixed costs } & 12,500 & 30,000 & 42,500 \\\text { Segment margin } & \$ 27,500 & \$(5,000) & \$ 22,500 \\\text { Allocated common costs } & 10,000 & 7,500 & 17,500 \\\text { Operating income (loss) } & \$ 17,500 & \$(12,500) & \$ \$ 5,000\end{array}$ Required: A. Determine operating income for Plastics Inc. as a whole if the Injection Moulding Division is dropped. B. Should the Injection Moulding Division be eliminated?

"The accounting decision-making model is not useful in real life because it only looks at the numbers." Critique this statement,and give an example for which it does not hold true.

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 amount of machine time for model K-3 in terms of percentage of a machine hour?

Match each statement with the correct item below. -Special-order decision

What are the six steps of the decision-making model?

Rose Manufacturing Company had the following unit costs: Direct materials \ 24 Direct labour 8 Variable factory overhead 10 Fixed factory overhead (allocated) 18 A one-time customer has offered to buy 2,000 units at a special price of $48 per unit.Assume that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order.How much additional profit (loss)will be generated by accepting the special order?

Jester Company was making a product for $70 and selling it for $90.A competitor began selling the same product for $78.Suppose Jester wants to meet the competition's price and maintain the same amount of profit per unit.What would be the target cost?

Which of the following is NOT a step in the decision-making model?

What is the term for the act of choosing among alternatives with an immediate or limited end in view?

Refer to the Figure.Assume Victor's Detailing uses markup to set the price on each job.The company requires an 80% markup on each job.What price should Victor's Detailing quote to a new customer?

Match each statement with the correct item below. -Sell-or-process-further decision

In deciding the optimal mix of products that use a constrained resource,it is important to determine the contribution margin per unit of scarce resource.

Enzo Company manufactures a variety of athletic shoes: basketball,running,and tennis.Sales of the tennis shoes have fallen off.Enzo is considering several options: (1)drop the tennis shoe line; (2)replace the tennis shoe line with golf shoes; or (3)retool the tennis shoe line to make "Airtennies." Price and cost data are as follows: Basketball Running Golf Airtennies Price \ 90 \ 65 \ 40 \ 60 \ 70 Variable costiunit \ 45 \ 40 \ 35 \ 43 \ 50 Fixed costs \ 200,000 \ 210,000 \ 50,000 \ 50,000 \ 90,000 Number of units 10,000 15,000 2,500 25,000 6,000 If the tennis shoe line is dropped,the $50,000 fixed cost is totally avoidable. A. Calculate the impact on operating income, using relevant amounts only, for keeping the tennis shoeline. B. Calculate the impact on operating income, using relevant amounts only, for option 1 . C. Calculate the impact on operating income, using relevant amounts only, for option 2. D. Calculate the impact on operating income, using relevant amounts only, for option 3. E. Which option is best?