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Exam 10: Relevant Costing for Managerial Decisions

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Question 1

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Relevant costs are also known as ________.

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Question 2

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If the cost to buy a part is less than the direct material, direct labor, and incremental overhead cost of making the part, the company should buy the part.

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Question 3

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Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,000. The division sales for the year were $960,000 and the variable costs were $475,000. The fixed costs of the division were $527,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's operating income for eliminating this business segment would be:

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

Opportunity costs are the additional or incremental revenues generated by selecting a certain course of action.

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

In a make or buy decision, management should focus on costs that are the same under the two alternatives.

The Mad Hatter Company owns a machine that manufactures two types of chimney caps. Production time is .20 hours for cap A and .40 hours for cap B. The machine's capacity is 2,000 hours per year. Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 1,000 units of cap A and 6,000 units of cap B. Selling prices and variable costs per unit are shown below. Based on this information, what is the Mad Hatter's most profitable sales mix? $\begin{array} { | l | c | c | } \hline & \text { Cap A } & \text { Cap B } \\\hline \text { Selling price per unit } & \$ 80 & \$ 60 \\\hline \text { Variable costsper unit } & 53 & 42 \\\hline\end{array}$

A company is planning to introduce a new portable computer to its existing product line. Management must decide whether to make the computer case or buy it from an outside supplier. The lowest outside price is $90. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following: Per Case Direct materials $ 40.00 Direct labor 32.00 Variable overhead 10.00 Equipment depreciation 6.50 Building rental 10.00 Allocated fixed overhead 7.50 Total cost $106.00 Required: (1) Determine whether the company should make the cases or buy them from the outside supplier. (2) What other factors, besides cost, should the company consider?

An opportunity cost:

A(n) ________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

To maximize profit when a constrained resource exists, management should produce the sales mix that has the highest contribution margin per unit of scarce resource.

Another name for relevant cost is unavoidable cost.

Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs.

Significant sunk costs are relevant to decisions about the future.

Elliot Company can sell all of its products A and Z that it can produce, but it has limited production capacity. It can produce 8 units of A per hour or 10 units of Z per hour, and it has 20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for Elliot Company?

A sunk cost arises from a past decision and cannot be avoided or changed.

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n) :

Ahngram Corp. has 1,000 defective units of a product that cost $3 per unit in direct costs and $6.50 per unit in indirect cost when produced last year. The units can be sold as scrap for $4 per unit or reworked at an additional cost of $2.50 and sold at full price of $12. The incremental net income (loss) from the choice of reworking the units would be: