Exam 4: Fundamentals of Cost Analysis for Decision Making

The King Company has two divisions-North and South.The divisions have the following revenues and expenses: North South Sales \ 900,000 \ 800,000 Variable expenses 450,000 300,000 Traceable fixed expenses 260,000 210,000 Allocated common corporate expenses 240,000 190,000 Net operating income (loss) (\ 50,000 \ 100,000 Management at King is pondering the elimination of North Division.If North Division were eliminated,its traceable fixed expenses could be avoided.The total common corporate expenses would be unaffected.Given these data,the elimination of North Division would result in an overall company net operating income of:

Flower Co.manufactures and sells medals for winners of athletic and other events.Its manufacturing plant has the capacity to produce 18,000 medals each month;current monthly production is 17,100 medals.The company normally charges $88 per medal.Cost data for the current level of production are shown below: Variable costs: Direct materials \ 495,900 Direct labor \ 324,900 Selling and administrative \ 30,780 Fixed costs: Manufacturing \ 345,420 Selling and administrative \ 164,160 The company has just received a special one-time order for 600 medals at $73 each.For this particular order,no variable selling and administrative costs would be incurred.This order would also have no effect on fixed costs.Required: Should the company accept this special order? Why? (CMA adapted)

Darren Company produces three products with the following costs and selling prices: If Darren has a limit of 20,000 direct labor hours but no limit on units sold or machine hours,then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000. Direct materials \ 60,000 Direct labor 165,000 Manufacturing overhead Total \ 600,000 Manufacturing overhead is 36% variable.The Xu Company has offered to supply all 15,000 units of Part QT34 per year for $35 per unit.If Fortune accepts the offer,$8 per unit of the fixed overhead would be avoided.In addition,some of Fortune's leased facilities could be vacated,reducing lease payments by $90,000 per year.Required: a.By how much would Fortune's profits change if 15,000 of Part QT34 are purchased from Xu? b.At what price would Fortune be indifferent to Xu's offer?

Short Inc has 5,200 machine hours available each month.The following information on the company's three products is available: Product Product Product Contribution margin per unit 345.00 \ 54.00 \ 22.50 Machine hours per unit Sales demand in units 900 1,000 3,000 Required: a.What production schedule will maximize the company's profits? b.What will be the maximum possible contribution margin?

Rainier Inc has 6,400 machine hours available each month.The following information on the company's three products is available: Product Product Product \times Y Z Contribution margin per \ 20.00 \ 21.00 \ 17.50 unit Machine hours per unit 2 3 2 Sales demand in units 1,000 1,500 1,500 Required: a.What production schedule will maximize the company's profits? b.What will be the maximum possible contribution margin?

The Sands Company manufactures and sells several products,one of which is called a slip differential.The company normally sells 30,000 units of the slip differential each month.At this activity level,unit costs are: Direct materials \ 4 Direct labor \ 3 Variable manufacturing overhead \ 4 Fixed manufacturing overhead \ 5 Variable selling \ 3 Fixed selling \ 1 An outside supplier has offered to produce the slip differentials for the Sands Company,and to ship them directly to the Sands Company's customers.This arrangement would permit the Sands Company to reduce its variable selling expenses by one third (due to elimination of freight costs).The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level.The total fixed selling expenses of the company would be unaffected by this decision.Required: What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner.The costs and revenues are as follows: Oxy Cleaner Sonic Cleaner Sales Price \ 75 \ 44 Variable cost per unit 40 21 Total demand for Oxy is 10,000 units and for Sonic is 6,000 units.Machine hours is a scarce resource.During the year,50,000 machine hours are available.Oxy requires 4 machine hours per unit,while Sonic requires 2.5 machine hours per unit.How many units of Oxy and Sonic should Garrison produce? oxy Cleaner Sonic Cleaner A. 10,000 0 B. 0 6,000 C. 8,750 6,000 D. 10,000 6,000

Tara Inc.is considering using stocks of an old raw material in a special project.The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136 in total.If the company were to buy new supplies of this raw material on the open market,it would cost $7.25 per kilogram.However,the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project.The sale of the raw material would involve delivery to the purchaser at a total cost of $75.00 for all 160 kilograms.What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project? (CIMA adapted)

Horton Corporation makes a range of products.The company's predetermined overhead rate is $16 per direct labor-hour,which was calculated using the following budgeted data: Variable manufacturing overhead \ 75,000 Fixed manufacturing overhead \ 325,000 Direct labor-hours 25,000 Management is considering a special order for 700 units of product Item 48 at $64 each.The normal selling price of product Item 48 is $75 and the unit product cost is determined as follows: Direct materials \ 37.00 Direct labor 18.00 Manufacturing overhead applied 16.00 Unit product cost \ 71.00 If the special order were accepted,normal sales of this and other products would not be affected.The company has ample excess capacity to produce the additional units.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 the special order.Required: If the special order were accepted,what would be the impact on the company's overall profit? (CIMA adapted)

The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of the following except:

The Ramos Company manufactures two products: Treadmills and Elliptical Trainers.The costs and revenues are as follows: Treadmll Eliptical Trainer Sales price per unit \ 300 \ 175 Variable cost per unit 160 85 Total demand for the Treadmill product is 7,000 units and for the Elliptical Trainer product is 5,000 units.Machine time is a scarce resource.During the year,48,000 machine hours are available.A Treadmill requires 6 machine hours per unit,while an Elliptical Trainer requires 2.5 machine hours per unit.Required: a.How many units of Treadmills and Elliptical Trainers should Ramos produce? b.What will be the maximum possible contribution margin?

The Crispy Baking Company is considering the expansion of its business into door-to-door delivery service.This would require an additional $12,500 in labor costs per month.Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries.However,it is estimated that an additional $5,000 would be required per month for gas,oil,and maintenance.It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs.What is the differential delivery cost per month for expanding into the home delivery market?

Halfway Industries produces two products.Information about the products is as follows: Clocks Headphones Units produced and sold 8,000 20,000 Selling price per unit \ 16 \ 14 Variable costs per unit 10 9 The company's fixed costs totaled $140,000,of which $30,000 can be directly traced to Clocks and $90,000 can be directly traced to Headphones.Required: The effect on the firm's profits if the Headphone product is dropped would be:

The following information relates to a product produced by Faulkland Company: Direct materials \ 10 Direct labor 7 Variable overhead 6 Fixed overhead 8 Unit cost \ 31 Fixed selling costs are $1,000,000 per year.Variable selling costs of $4 per unit sold are added to cover the transportation cost.Although production capacity is 500,000 units per year,Faulkland expects to produce only 400,000 units next year.The product normally sells for $40 each.A customer has offered to buy 60,000 units for $30 each.The customer will pay the transportation charge on the units purchased.If Faulkland accepts the special order,the effect on income would be a:

A student in your cost accounting class says,"This whole subject of differential costing is easy;variable costs are the only costs that are relevant." Using an example,what would you tell that student?

AirStep Shoe Company has two retail stores,one in Gainesville and the other in Orlando.The Gainesville store had sales of $100,000,a contribution margin of 35 percent,and a segment margin of $14,000.The company's two stores have total sales of $250,000,contribution margin of 32 percent,and a total segment margin of $31,000.The contribution margin for the Orlando store must have been:

Only variable costs can be differential costs.

Lafferty Corporation is a specialty component manufacturer with idle capacity.Management would like to use its unused capacity to generate additional profits.A potential customer has offered to buy 6,200 units of component Rocket.Each unit of Rocket requires 8 units of material CES4 and 6 units of material XES7.Data concerning these two materials follow: Material CES4 is in use in many of the company's products and is routinely replenished. Material XES7 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials,in total,for purposes of determining a minimum acceptable price for the order for product Rocket? (CIMA adapted)

If there is excess capacity,the minimum acceptable price for a special order must cover: