Exam 4: Fundamentals of Cost Analysis for Decision Making

Bacon Company makes four products in a single facility.These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are the constraint in the production facility.A total of 53,600 minutes are available per month on these machines.Direct labor is a variable cost in this company.How many minutes of grinding machine time would be required to satisfy demand for all four products?

The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.

Varix Company makes three products in a single facility.These products have the following unit product costs: Additional data concerning these products are listed below. The mixing machines are potentially the constraint in the production facility.A total of 24,200 minutes are available per month on these machines.Direct labor is a variable cost in this company.Required: a.How many minutes of mixing machine time would be required to satisfy demand for all three products? b.How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit. ) c.Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent. )

Which of the following costs would continue to be incurred even if a segment is eliminated?

Carter Industries has two divisions: the West Division and the East Division.Information relating to the divisions for the year just ended is as follows: West East Units produced and sold 30,000 40,000 Selling price per unit \ 8 \ 15 Variable costs per unit 3 5 Direct fixed cost 48,000 110,000 Common fued cost 40,000 40,000 Common fixed expenses have been allocated equally to each of the two divisions.Carter's segment margin for the West Division is:

Damon Industries manufactures 20,000 components per year.The manufacturing cost of the components was determined as follows: Direct materials \ 100,000 Direct labor 160,000 Variable manufacturing overhead 60,000 Fixed manufacturing overhead 80,000 An outside supplier has offered to sell the component for $17.If Damon purchases the component from the outside supplier,the manufacturing facilities would be unused and could be rented out for $10,000.If Damon purchases the component from the supplier instead of manufacturing it,the effect on income would be:

The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000. Direct materials \ 20,000 Direct labor 55,000 Variable overhead 45,000 Fixed overhead 70,000 Total \ 190,000 The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit.If Camel accepts the offer,$4 per unit of the fixed overhead would be saved.In addition,some of Camel's facilities could be rented to a third party for $15,000 per year.What are the relevant costs for the "make" alternative?

The alternative courses of action in a make-or-buy decision are (a)manufacture needed items internally or (b)purchase needed items externally.

Price discrimination is the practice of selling identical goods or services to different customers at different prices.

The Lamar Company manufactures wiring tools.The company is currently producing well below its full capacity.The Boston Company has approached Lamar with an offer to buy 10,000 tools at $1.75 each.Lamar sells its tools wholesale for $1.85 each;the average cost per unit is $1.83,of which $0.27 is fixed costs.If Lamar were to accept Boston's offer,what would be the increase in Lamar's operating profits?

Item N29 is used by Tyner Corporation to make one of its products.A total of 11,000 units of this Item are produced and used every year.The company's Accounting Department reports the following costs of producing the Item at this level of activity: Per Unit Direct materials \ 5.90 Direct labor 1.70 Variable manufacturing overhead 5.40 Supervisor's salary 2.60 Depreciation of special equipment 3.20 Allocated general overhead 3.30 An outside supplier has offered to make the Item and sell it to the company for $21.20 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including the 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,none of which would be avoided if the Item were purchased instead of produced internally.In addition,the space used to make Item N29 could be used to make more of one of the company's other products,generating an additional segment margin of $29,000 per year for that product.What would be the impact on the company's overall net operating income of buying Item N29 from the outside supplier?

The relevance of a particular cost to a decision is determined by the: (CMA adapted)

Explain the differences between life-cycle product costing and target costing.

When there is a production constraint,a company should emphasize the products with:

Barry Inc.makes a range of products.The company's predetermined overhead rate is $14 per direct labor-hour,which was calculated using the following budgeted data: Variable manufacturing overhead \ 100,000 Fixed manufacturing overhead \ 250,000 Direct labor-hours 25,000 Component ZZ9 is used in one of the company's products.The unit cost of the component according to the company's cost accounting system is determined as follows: Direct materials \ 28.00 Direct labor 56.00 Manufacturing overhead applied Unit product cost \ 123.20 An outside supplier has offered to supply component ZZ9 for $108 each.The outside supplier is known for quality and reliability.Assume that direct labor is a variable cost,variable manufacturing overhead is really driven by direct labor-hours,and total fixed manufacturing overhead would not be affected by this decision.Barry chronically has idle capacity.(CIMA adapted) Required: Is the offer from the outside supplier financially attractive? Why?

With constrained resources,the important measure of profitability is the contribution margin per unit of scarce resource.

Dickson Industries has two divisions: the North Division and the South Division.Information relating to the divisions for the year just ended is as follows: North South Units produced and sold 40,000 50,000 Selling price per unit \ 9 \ 16 Variable costs per unit 4 6 Direct fixed cost 148,000 220,000 Common fued cost 140,000 140,000 Common fixed expenses have been allocated equally to each of the two divisions.Required: Prepare a segmented income statement for Dickson.

Tori Inc.has some material that originally cost $68,400.The material has a scrap value of $30,100 as is,but if reworked at a cost of $1,400,it could be sold for $30,800.What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap? (CIMA adapted)

Ortega Industries manufactures 15,000 components per year.The manufacturing cost of the components was determined to be as follows: Direct materials \ 150,000 Direct labor 240,000 Variable manufacturing overhead 90,000 Fixed manufacturing overhead 120,000 Total \ 600,000 Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier.An outside supplier has offered to sell the component for $34.If Ortega purchases the component from the supplier instead of manufacturing it,the effect on income would be a:

The Young Company has gathered the following information for a unit of its most popular product: Direct materials \ 12 Direct labor 6 Overhead (40\% variable) 10 Cost to manufacture 28 Desired markup (60\%) 14 Target selling price \ 42 The above cost information is based on 10,000 units.A distributor has offered to buy 2,000 units at a price of $32 per unit.The distributor claims this special order would not disturb regular sales at $42.Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.How many units of regular sales could be lost before this contract is not profitable?