Exam 21: Incremental Analysis

A decision to discontinue a given product on the basis of contribution margin data should include consideration of the probable impact of the discontinuance on the sales of other products.

A sunk cost is the benefit that could have been obtained by pursuing an alternate course of action.

In addition to quantitative information,many nonfinancial factors must be taken into consideration when making a decision.

[The following information applies to the questions displayed below.] Fancy Furniture produced a batch of 2,000 coffee tables at a cost of $355,000.It was discovered that the entire batch was finished improperly.Fancy can sell the tables as seconds for $305,000 or spend an additional $315,000 to refinish them and sell them for $605,000. -In deciding whether to rework the tables or sell them as is,management should:

Links,Inc.produces golf gloves.The gloves sell for $16 each.Variable costs are $8.50 and fixed costs are $1.50 each.An Australian company has offered to pay $12 each for 2,000 gloves.The manufacturing capacity will not be affected by this special order and it will not affect regular sales.Fixed assets will not change but variable selling costs will increase by $1.75 a glove due to delivery costs. (a)What is the relevant cost per unit on this special order? (b)How will company profits be affected? (c)Should the company accept this special order?

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair,the repaired units can be sold for $425,000.The company receives an offer to purchase these motors for $325,000 before repairing them.The company's decision should be to sell the motors at the offered price.

In determining whether to scrap or to rebuild defective units of product,the cost already incurred in producing the defective units is not relevant.

[The following information applies to the questions displayed below.] General Chemical Company (GCC)manufactures two products as part of a joint process: A1 and B1.Joint costs up to the split-off point total $22,000.The joint costs are allocated to A1 and B1 in proportion to their relative sales values.At the split-off point,product A1 can be sold for $42,000,whereas product B1 can be sold for $63,000.Product A1 can be processed further to make product A2,at an incremental cost of $38,000.A2 can be sold for $85,000.Product B1 can be processed further to make product B2,at an incremental cost of $48,000.B2 can be sold for $95,000. -Joint costs allocated to product B1 total:

Sunk costs have already been incurred and cannot be changed by future actions.

Relevant costs in business decisions (a)Explain what is meant by each of the following terms: opportunity cost,sunk cost,and out-of-pocket cost. (b)Identify which,if any,of the above three types of cost would be considered relevant in making a business decision.

Incremental revenues:

Incremental analysis rarely requires the decision maker to exercise judgment.

Limited resources Portable Enterprises produces two lines of mobile homes: Doublewide and singlewide.Unit cost and revenue data pertaining to each product are shown below: Each doublewide home requires 350 different labor hours and 125 machine hours.Each singlewide home requires 175 direct labor hours and 150 machine hours.Demand for each line of homes far exceeds the company's total production capacity. (a)If Portable's production capacity is constrained by limited direct labor hours,which line of homes should it produce? ________ (b)If Portable's total production capacity is constrained by machine hours,which line of homes should it produce? ________ Computations

Mell Co.manufactured 100 personal computers at a cost of $30,000.It can sell them as is for $65,000,or install hard disks in them for $25,000 and sell them for $105,000.The $30,000 original manufacturing cost is:

Joint products are similar products that serve the same exact function.

Products that emerge from a shared manufacturing process are referred to as:

In order to be consistent with IASB Standards,U.S.GAAP now requires that borrowing costs on assets that require a substantial period to bring them to a marketable condition be expensed immediately.