Exam 4: Fundamentals of Cost Analysis for Decision Making

Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it.

Fixed costs are always classified as sunk costs in differential cost analysis.

The Parton Company has gathered the following information for a unit of its most popular product: Direct materials \ 20 Direct labor 15 Overhead (60\% variable) 20 Cost to manufacture \ 55 The above cost information is based on 10,000 units.Parton currently sells 8,500 units for $62 per unit.A distributor has offered to buy 1,000 units at a price of $50 per unit.This special order would not disturb regular sales.Required: a.Calculate Parton's change in operating profits if the special order is accepted.b.How many units of regular sales could be lost before this contract is not profitable?

The operations of Bridgeton Corporation are divided into the Adams Division and the Carter Division.Projections for the next year are as follows: Acams Division Cater Division Total Sales \ 560,000 \ 336,000 \ 896,000 Variable costs 196,000 154,000 Contribution margin \ 364,000 \ 182,000 \ 546,000 Direct fixed costs 168,000 140,000 308,000 Segment margin \ 196,000 \ 42,000 \ 238,000 Allocated common costs 84,000 63,000 147,000 Operating income (loss) \ 112,000 \ 91,000 Operating income for Bridgeton Corporation as a whole if the Carter Division were dropped would be:

The following information relates to the Magna Company for the upcoming year. Amount Per Unit Sales \ 4,000,000 \ 10.00 Cost of goods sold 3,200,000 8.00 Gross margin 800,000 2.00 Operating expenses .75 Operating profits \ 500,000 \ 1.25 The cost of goods sold includes $1,200,000 of fixed manufacturing overhead;the operating expenses include $100,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $7.50 per unit has been made to Magna.Fortunately,there will be no additional operating expenses associated with the order and Magna has sufficient capacity to handle the order.How much will operate profits be increased if Magna accepts the special order?

If there is only one alternative course of action and the status quo is unacceptable,then there really is no decision to make.

Carlson Company makes 4,000 units per year of a part called an axial tap for use in one of its products.Data concerning the unit production costs of the axial tap follow: Direct materials \ 35 Direct labor 10 Variable manufacturing overhead 8 Fixed manufacturing overhead 20 Total manutacturing cost per unit \ 73 An outside supplier has offered to sell Carlson Company all of the axial taps it requires.If Carlson Company decided to discontinue making the axial taps,40% of the above fixed manufacturing overhead costs could be avoided.Assume that direct labor is a variable cost.Required: a.Assume Carlson Company has no alternative use for the facilities presently devoted to production of the axial taps.If the outside supplier offers to sell the axial taps for $65 each,should Carlson Company accept the offer? Fully support your answer with appropriate calculations.b.Assume that Carlson Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually.What is the maximum price Carlson Company should be willing to pay the outside supplier for axial taps?

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

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 time 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.What is the maximum contribution margin Garrison can achieve during a year?

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 that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility.This facility cannot be used for any other purpose.An outside supplier has offered to sell the component to Ortega for $34.If Ortega Industries purchases the component from the outside supplier,the effect on income would be a:

Talent Industries manufactures 30,000 components per year.The manufacturing cost of the components was determined to be as follows: Direct materials \ 300,000 Direct labor 480,000 Variable manufacturing overhead 180,000 Fixed manufacturing overhead 240,000 Total \ 1,200,000 Required: a.Assume that the fixed manufacturing overhead reflects the cost of Talent's manufacturing facility.This facility cannot be used for any other purpose.An outside supplier has offered to sell the component to Talent for $34.If Talent Industries purchases the component from the outside supplier,the effect on income would be a b.Assume Talent Industries could avoid $80,000 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 Talent purchases the component from the supplier instead of manufacturing it,the effect on income would be a

Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price.

Zantaq Inc has 5,400 machine hours available each month.The following information on the company's three products is available: Bookcases Chairs Side Tables Contribution margin per unit \ 15.00 \ 18.00 \ 7.50 Machine hours per unit 3 2 1 The market demand is limited to 2,000 units of each of the three products.How many units of each should Zantaq produce and sell? Bookcases Chairs Siode Tables A. 2,000 2,000 2,000 B. 0 2,000 2,000 C. 0 2,000 1,400 D. 1,800 0 0

Florence Corporation makes three products that use the current constraint,which is a particular type of machine.Data concerning those products appear below: \times1 2 23 Selling price per unit \ 325.89 \ 543.15 \ 508.00 Variable cost per unit \ 251.94 \ 420.75 \ 397.60 Time on the constraint (minutes) 5.10 8.50 8.00 Required: a.Rank the products in order of their current profitability from the most profitable to the least profitable.In other words,rank the products in the order in which they should be emphasized.Show your work! b.Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product.Up to how much should the company be willing to pay to acquire more of the constrained resource?

Moxy Inc has 9,600 machine hours available each month.The following information on the company's three products is available: Product Procuct Product \times Y Z Contribution margin per unit \ 20.00 \ 21.00 \ 17.50 Machine hours per unit 8 12 6 Sales demand in units 500 750 1,000 Required: a.What production schedule will maximize the company's profits? b.What will be the maximum possible contribution margin?

Parton Company,a manufacturer of snowmobiles,is operating at 70% of plant capacity.Parton's plant manager is considering making the headlights now being purchased from an outside supplier for $11.00 each.The Parton plant has idle equipment that could be used to manufacture the headlights.The design engineer estimates that each headlight requires $4.00 of direct materials,$3.00 of direct labor,and $6.00 of manufacturing overhead.Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision.A decision by Parton Company to manufacture the headlights should result in a net gain (loss)for each headlight of: (CMA adapted)

The operations of Jorge Corporation are divided into the Northern Division and the Eastern Division.Projections for the next year are as follows: Northem Division Eastem Division Total Sales \ 750,000 \ 540,000 \ 1,290,000 Less: Variable costs 270,000 300,000 570,000 Contribution margin \ 480,000 \ 240,000 \ 720,000 Less: Direct fixed costs 225,000 190,000 415,000 Segment margin \ 255,000 \ 50,000 \ 305,000 Less: Allocated common costs 130,000 95,000 225,000 Operating inc ome (loss) \ 125,000 \ 45,000) \ 80,000 Required: a.Operating income for Jorge Corporation,as a whole,if the Eastern Division were dropped would be: b.If Eastern Division is dropped,Northern's sales will increase by 20%.What will Jorge Corporation's operating income be?

The operations of Winston Corporation are divided into the Blink Division and the Blur Division.Projections for the next year are as follows: Blink Division Blur Division Total Sales \ 280,000 \ 168,000 \ 448,000 Variable costs 98,000 77,000 175,000 Contribution margin \ 182,000 \ 91,000 \ 273,000 Direct fixed costs 84,000 70,000 154,000 Segment margin \ 98,000 \ 21,000 \ 119,000 Allocated common costs 42,000 31,500 73,500 Operating income (loss) \ 56,000 (\ 10,500) \ 45,500 Operating income for Winston Corporation as a whole if the Blur Division were dropped would be:

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

Brothers Corp.is considering dropping its talking dog product line due to continuing losses.Revenue and cost data for the talking dog line for the past year follow: Sales (20,000 units) \ 300,000 Variable costs 180,000 Contribution margin 120,000 Fixed costs 140,000 If the talking dog is discontinued,then Brothers could avoid $110,000 per year in fixed costs.Required: (1. )What is the change in annual operating income from discontinuing the talking dog product line? (2. )Assuming all other conditions stay the same,at what level of annual sales of the talking dog (in units)should Brothers be indifferent to discontinuing or continuing the product line? (3. )Suppose that if the talking dog is dropped,the production and sale of other products would increase so as to generate a $15,000 increase in the contribution margin received from the other products.If all other conditions are the same,what is the change in annual operating income from dropping the talking dog?