Exam 13: Short-Run Decision Making: Relevant Costing

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 Island Princess, showing results for rings, juice, fertilizer, and the total. Do not allocate joint costs individually. B. Now suppose that Island Princess is considering the option of processing the skins further into pet food that would sell for $1,000. Additional costs would be $450. Should this be done?

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? 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? What is 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? What is the total contribution margin from this product mix?

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?

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

A major disadvantage of markup pricing is that standard markups are easy to apply.

Edison Company produces two types of piano legs, plain and fancy, which have unit contribution margins of $8 and $12, respectively. Each piano leg must spend time on a special machine. The firm owns four machines that together provide 10,000 hours of machine time per year. The plain leg requires 0.25 hours of machine time, and the fancy leg requires 0.5 hours of machine time. -Refer to the Figure.How many of each type of leg must be sold to optimize total contribution margin?

Miller Company produces speakers for home stereo units.The speakers are sold to retail stores for $30.Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail stores.The current production and sales volume is 20,000 per year.Capacity is 25,000 units per year. A manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $17.00 per unit.If Miller Company accepts the offer,it will be able to rent unused space to an outside firm for $18,000 per year.All other information remains the same as the original data.What is the effect on profits if Miller Company buys from the firm? Variable costs per unit: Fixed costs per month: Direct materials \ 9.00 Factory overhead \ 120,000 Direct labour 4.50 Selling and administrative 60,000 Factory overhead 3.00 Total \ 180,000 Distribution 1.50 Total \ 18.00

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: If the tennis shoe line is dropped,the $50,000 fixed cost is totally avoidable. Basketball Running Golf Airtennies Price \ 90 \ 65 \ 40 \ 60 \ 70 Variable cost/unit \ 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 A. Calculate the impact on operating income, using relevant amounts only, for keeping the tennis shoe line. 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?

Tine Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the company logo woven in the middle, to be priced at $30 each. Normally, Tine would charge $60 per carpet for this type of order. Tine figures that yarn and backing will cost $12 per carpet, variable overhead (machining, electricity) is $5 per carpet, direct labour is $10 per carpet, and one setup will be required at $800 per setup. The setup charge costs are 100% labour. Currently, the workers needed to set up and make the carpets are working at Tine. Their wages will be paid whether or not the special order is accepted. Tine's policy is to avoid layoffs to the extent possible. -Refer to the Figure.Which of the following is NOT relevant to the special-order decision?

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

Joseph Giovine owns a successful hole-in-the-wall bagel shop called Peach Tree Bagels.Joseph wants to expand the shop by leasing the space next door for $1,000 per month and adding tables and chairs so that customers can dine in.He figures that the tables and chairs will cost $5,000 and that the bagel machine,which cost $4,500 five years ago,will have to be scrapped in favour of a larger machine costing $7,400.He thinks sales will increase by $5,500 per month.Variable costs are 55% of sales. A. What are the relevant costs and benefits of expanding into the new space? B. What are the irrelevant costs and benefits of expanding into the new space?

ProPrinters uses part 87A in the production of colour printers. Unit manufacturing costs of part 87A are as follows: 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. Direct materials \ 8 Direct labour 2 Variable overhead 1 Fixed overhead 4 -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?

Needle is a private laboratory that performs more than 100 different tests and analyses. Four tests require the use of a radiological counting machine that can supply 6,000 hours per year. Information on the four lab tests are as follows: 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?

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

Sunk costs are always irrelevant.

Acron Construction charges each customer a price equal to the cost of direct materials and direct labour plus 40%.Job 126 included the following costs: What price does Acron charge for Job 126? Direct materials \ 60,000 Direct labour \ 46,000

The second step in making a short-run decision is to define the problem.

Match each statement with the correct item below. -Differential cost

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