Exam 13: Short-Run Decision Making: Relevant Costing

Roberts Company produces two types of gears, Gear A and Gear B, with unit contribution margins of $6 and $8, respectively. Each gear must spend time on a special machine. The firm owns five machines that together provide 12,000 hours of machine time per year. Gear A requires 12 minutes of machine time; Gear B requires 24 minutes of machine time. Required: A. Calculate the contribution margin per hour of machine time for Gear a.Calcualte the contribution margin per hour of machine time for Gear B. B. If Roberts faces only the production constraint (12,000 hours of machine time), how many units of Gear A should be produced? And how many units of Gear B? Calculate the total contribution margin from this product mix. C. Now suppose that Robert cannot sell more than 45,000 units of each type of gear. How many units of Gear A should be produced? And how many units of Gear B? Calculate the total contribution margin from this product mix.

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

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all. -The point that products that have common processes and costs of production become distinguishable

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. Required: A. Calculate the contribution margin per hour of machine time for Simple Gears. Calculate the contribution margin per hour of machine time for Deluxe Gears. B. If Polar faces only the production constraint (25,000 hours of machine time), how many units of Simple Gears should be produced? And how many units of Deluxe Gears? Calculate the total contribution margin from this product mix. C. Now suppose that Polar cannot sell more than 200,000 units of each type of gear. How many units of Simple Gears should be produced? And how many units of Deluxe Gears? Caculate the total contribution margin from this product mix.

In short-run decision making, the alternative with the lowest overall cost should always be chosen.

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all. -Method of determining the cost of a product based on the price that customers are willing to pay

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: $\begin{array}{lrrr}&\text { Blow } & \text { Injection } & \\&\text { Moulding } & \text { Moulding } & \\&\text { Division } & \text { Division } & \text { Total }\\\hline\text { Sales } & \$ 60,000 & \$ 40,000 & \$ 100,000 \\\text { Variable costs } & 20,000 & 15,000 & 35,000\\\text { Contribution margin } & \$ 40,000 & \$ 25,000 & \$ 65,000 \\\text { Direct fixed costs } & 12,500 & 30,000 & 42,500\\\text { Segment margin } & \$ 27,500 & \$(5,000) & \$ 22,500 \\\text { Allocated common costs } & 10,000 & 7,500 & 17,500\\\text { Operating income (loss) }&\$17,500&\$(12,00)&\$5,000\end{array}$ 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?

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

Gibb, Inc. has just designed a new product with a target cost of $54. The company requires new products to have a profit of 25%. What is the target price for the new product?

Which term reflects future costs that differ across alternatives?

Short-run decision making only involves short-run decisions that have nothing to do with the firm's overall strategy.

Refer to Victor's Detailing. Assume the company uses target costing to set price on each job. The company requires a 40% profit on each job. What price would the company quote to a new customer?

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

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all. -Determines whether or not a segment should be kept or dropped

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all. -Determines whether a specially priced order should be accepted or rejected

Auden makes three types of vitamin supplements, all of which require the use of encapsulating machines that have a capacity of 10,000 hours. Information on the three types (per case) is as follows: Basic Vita-Stress Antioxidant+ Selling price \ 100 \ 125 \ 160 Variable cost 50 70 90 Machine hours 0.4 0.50 0.8 Required: A. Calculate the contribution margin per case for each type. B. Calculate the contribution margin per hour of machine time for each type. C. Based on your analysis in requirement B, if the company can sell all that it can make of all of the products, how many of each type should be sold to maximize total contribution margin?

All fixed costs are always relevant.

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

What determines the cost of a product or service on the basis of the price that customers are willing to pay?

Classify Company has a product that its sales department believes can be sold for $40 each. The company requires that all new products yield 20% profit. What is the target cost of the new product?