Exam 4: Fundamentals of Cost Analysis for Decision Making

The reason opportunity costs are not included in the accounting system is because they involve estimates.

Warrior Inc has 12,000 machine hours available each month.The following information on the company's four products is available: Product Product Product Product x Y Z Selling price per unit \ 20.00 \ 21.00 \ 17.50 \ 15.00 Variable cost per unit 10.00 \ 9.00 \ 7.50 \ 10.00 Machine hours per unit 2 3 4 15 If market demand exceeds the available capacity,in what sequence should orders be filled to maximize the company's profits?

The time from initial research and development to the time that support to the customer ends is the:

Item I51 is used in one of Policy Corporation's products.The company makes 18,000 units of this Item each year.The company's Accounting Department reports the following costs of producing the Item at this level of activity: Per Unit Direct materials \ 1.20 Direct labor \ 2.20 Variable manufacturing overhead \ 3.30 Supervisor's salary \ 1.00 Depreciation of special equipment \ 2.70 Allocated general overhead \ 8.50 An outside supplier has offered to produce this Item and sell it to the company for $15.80 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the Item was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $26,000 of these allocated general overhead costs would be avoided.If management decides to buy Item I51 from the outside supplier rather than to continue making the Item,what would be the annual impact on the company's overall net operating income?

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e. ,the time-value of money).

The opportunity cost of making a component part in a factory with no excess capacity is the: (CMA adapted)

You just got your first job after graduation.Your immediate supervisor received a special order at a price that is "below cost" during your first week at the company.The supervisor points to the proposal and says,"These are the kinds of orders that will get you in trouble.Every sale must bear its share of the full costs of running the business.If we sell below our full cost,we'll be out of business in no time." You remember from your course in cost accounting that this may not be as much trouble as the supervisor anticipates.How would you respond and not lose your first job?

The following information relates to the Jasmine Company for the upcoming year. Amount Per Unit Sales \ 8,000,000 \ 20.00 Cost of goods sold 6,400,000 16.00 Gross margin 1,600,000 4.00 Operating expenses 600,000 1.50 Operating profits \ 1,000,000 \ 2.50 The cost of goods sold includes $2,400,000 of fixed manufacturing overhead;the operating expenses include $200,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $15.00 per unit has been made to Jasmine.Fortunately,there will be no additional operating expenses associated with the order;however,Jasmine is operating at full capacity.How much will operating profits increase if Jasmine accepts the special order?

Alpha Inc.regularly uses material FLAV4 and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago.If this were to be sold as is on the open market as surplus material,it would fetch $5.25 per liter.New stocks of the material can be purchased on the open market for $5.85 per liter,but it must be purchased in lots of 1,000 liters.You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer.The relevant cost of the 800 liters of material FLAV4 is: (CIMA adapted)

Explain the difference between full costs and differential costs.

Juran Company produces a single product.The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: Direct materials \ 26.60 Direct labor \ 4.30 Variable manufacturing overhead \ 1.90 Fixed manufacturing overhead \ 11.10 Variable selling \& administrative expense \ 1.50 Fixed selling \& administrative expense \ 9.10 The normal selling price of the product is $56.70 per unit.An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price.This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs.The variable selling and administrative expense would be $0.70 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.Required: a.Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $51.20 per unit.By how much would this special order increase (decrease)the company's net operating income for the month? b.Suppose the company is already operating at capacity when the special order is received from the overseas customer.What would be the opportunity cost of each unit delivered to the overseas customer? c.Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers.What would be the minimum acceptable price per unit for the special order?

In a decision analysis situation,which one of the following costs is not likely to contain a variable cost component? (CMA adapted)

The following information relates to the Klear Company for the upcoming year. Amount Per Unit Sales \ 9,000,000 \ 30.00 Cost of goods sold 7,200,000 Gross margin 1,800,000 6.00 Operating expenses 675,000 Operating profits \ 1,125,000 \ 3.75 The cost of goods sold includes $3,000,000 of fixed manufacturing overhead;the operating expenses include $450,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $25.00 per unit has been made to Klear.Fortunately,there will be no additional operating expenses associated with the order and Klear has sufficient capacity to handle the order.Required: a.How much will operating profits increase if Klear accepts the special order? b.Assume that Klear is operating at full capacity.How much will operating profits change if Klear accepts the special order?

Differential costs are: (CMA adapted)

The price based on customers' perceived value for the product and the price that competitors charge:

The Arthur Company manufactures kitchen utensils.The company is currently producing well below its full capacity.The Benton Company has approached Arthur with an offer to buy 20,000 utensils at $0.75 each.Arthur sells its utensils wholesale for $0.85 each;the average cost per unit is $0.83,of which $0.12 is fixed costs.If Arthur were to accept Benton's offer,what would be the increase in Arthur's operating profits?

Florida Enterprises produces high quality blankets sold to hotels and resorts.Blankets must be well made because of frequent washings.Currently,Florida sells 10,000 blankets at $60 each with the capacity to produce 12,000 blankets.Florida is considering a special order from a hotel chain in Mexico for 1,000 blankets at a price of $45.Currently,Florida has the following costs: Unit Costs \ 250,000 Product Level Costs \ 40,000 Facility Costs \ 125,000 If Florida accepts the special order,it will incur an additional $2 per blanket in foreign currency transaction costs.No other product or facility costs will change.Required: 1. )Determine the impact of the special order on Florida.Prepare your analysis in good form. 2. )What other factors should Florida consider in taking the special order?

The Tire Division of Traker Company produces tires for off-road sport vehicles.One-third of Tire's output is sold to an internal division of Traker;the remainder is sold to outside customers.Tire's estimated operating profit for the year is: Intemal Outside Sales \ 150,000 \ 400,000 Variable costs 100,000 200,000 Fixed costs 30,000 60,000 Operating profits \ 20,000 \ 140,000 Unit sales 10,000 20,000 The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis.The Tire Division cannot sell any additional products to outside customers.Should the Traker Company allow its internal division to purchase the tires from the outside supplier at $13.00 per unit?

The Tire Division of Traker Company produces tires for off-road sport vehicles.One-third of Tire's output is sold to an internal division of Traker;the remainder is sold to outside customers.Tire's estimated operating profit for the year is: Intemal Outside Sales \ 150,000 \ 400,000 Variable costs 100,000 200,000 Fixed costs 30,000 60,000 Operating profits \ 20,000 \ 140,000 Unit sales 10,000 20,000 The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis.The Tire Division cannot sell any additional products to outside customers.What is the minimum selling price that Tire should accept from the internal division?

Frank Industries manufactures 200,000 components per year.The manufacturing cost of the components was determined as follows: Direct materials \ 200,000 Direct labor 320,000 Variable manufacturing overhead 120,000 Fixed manufacturing overhead 160,000 An outside supplier has offered to sell the component for $3.40.If Frank purchases the component from the outside supplier,the manufacturing facilities would be unused and could be rented out for $20,000.Required: a.If Frank purchases the component from the supplier instead of manufacturing it,the effect on income would be: b.What is the maximum price Frank would be willing to pay the outside supplier?