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Exam 10: Relevant Costing for Managerial Decisions

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Question 31

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If Special Export is processed further into Prime Cat Food and Feline Surprise, the total gross profit would be: A.$68,000 B.$78,000 C.$96,000 D.$98,000 E.$100,000

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Question 32

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A cost-plus method of determining a product's selling price adds a _________________________ to total product cost to reach a target price.

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Question 33

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Bath Company has a limited amount of direct material available for products 111 and 222.Each unit of 111 has a contribution margin of $5 and each unit of 222 has a contribution margin of $25.A unit of 222 uses four times as much direct material as a unit of 111.What is Bath's most profitable sales mix, assuming there is unlimited demand for either product?

A company expects its three departments to yield the following income for next year: $\begin{array}{lrrr} & \text { Dept. O } & \text { Dept. K } & \text { Dept. W } \\\text { Sales }& \$ 92,000 & \$ 15,000 & \$ 87,000 \\\text { Expenses } \\\text { Avoidable } & 73,000 & 1,000 & 36,000 \\\text { Unavoidable } & 2,000 & 8,000 & 37,000 \\\hline \text { Total expenses } & 75,000 & 9,000 & 73,000 \\\hline \text { Net income(loss) } & \underline {\$ 17,000} & \underline {\$ 6,000} & \underline {\$ 14,000}\end{array}$ Required: Compute the following independent calculations: a.The effect on total company income if Dept.O is eliminated. b.The effect on total company income if Dept.K is eliminated. c.The effect on total company income if Dept.W is eliminated.

Wave-Zone Company has 10,000 units of its sole product that it produced last year at a cost of $50 each.This year's model is superior to last year's and the 10,000 units cannot be sold for their regular selling price of $75 each.Wave-Zone has two alternatives for these items: (1) they can be sold to a wholesaler for $5 each, or (2) they can be reworked at a total cost of $190,000 and then sold for $22.50 each.The company has enough idle capacity to rework these items without affecting any new production.Which choice would increase the company's profits the most?

A _____________________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

What is the difference between an opportunity cost and a sunk cost?

Incremental costs should be considered in a make or buy decision.

A company has 33,000 units of its sole product that it produced last year at a cost of $71 each.This year's model is superior to last year's and the 33,000 units cannot be sold for their regular selling price of $127 each.The company has two alternatives for these items: (1)they can be sold to a wholesaler for $45 each, or (2)they can be reworked at a total cost of $700,000 and then sold for $53 each.The company has enough idle capacity to rework these items without affecting any new production.Which choice would increase the company's profits the most?

Thompson Company had the following results of operations for the past year: $\begin{array} { l r r } \text { Sales } ( 16,000 \text { units at } \$ 10 ) && \$ 160,000 \\\text { Direct materials and direct labor } & \$ 96,000 & \\\text { Overhead (20\% variable) } & 16,000 \\\text { Selling and administrative expenses (all fixed) } &\underline { 3 2 , 0 0 0 } & \underline { ( 144,000 ) }\\\text { Operating income } && \underline { \$ 16,000}\end{array}$ A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit.In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.If Thompson accepts the offer, its profits will:

Wilder Inc.manufactures a product that contains a small computer chip.The company has always purchased this computer chip from a supplier for $110 each.Wilder recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the computer chip instead of buying it.The company prepared the following per unit cost projections of making the computer chip, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $\begin{array} { l r } \text { Direct materials } & \$ 32 \\\text { Direct labor } & 40 \\\text { Overhead (fixed and } & \underline { 60} \\\text { variable) } & \\\text { Total } & \underline { \$ 132}\end{array}$ The volume of output to produce the computer chip will not require any incremental fixed overhead.Incremental variable overhead cost is $42 per computer chip.What is the effect on income if Wilder decides to make the computer chips?

Textel is thinking about having one of its products manufactured by a subcontractor.Currently, the cost of manufacturing 1,000 units follows: $\begin{array}{lr}\text { Direct material } & \$ 45,000 \\\text { Direct labor } & 30,000 \\\text { Factory overhead (1/3 is variable) } & 98,000\end{array}$ If Textel can buy 1,000 units from a subcontractor for $100,000, it should:

The concept of incremental cost is the same as the concept of differential cost.

Another name for relevant cost is unavoidable cost.

Costs already incurred in manufacturing the units of a product that do not meet quality standards are relevant costs in a scrap or rework decision.

An ______________________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Beta Inc.can produce a unit of Zed for the following costs: $\begin{array}{l}\text { Direct material } & \$10 \\\text { Direct labor } & 20 \\\text { Overhead } &\underline { 50} \\\text { Total costs per unit } & \underline { \$80}\end{array}$ An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit.If Beta buys from the supplier, it will still incur 40% of its overhead.Beta should:

Kimball Enterprises manufactures a product that contains a part that they have always purchased from a supplier for $60 each.Kimball recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the part instead of buying it.The company prepared the following per unit cost projections of making the part, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 75% of direct labor cost. $\begin{array}{ll}\text { Direct materials } &\$ 38.00 \\\text {Direct labor } &15.00 \\\text { Overhead (fixed and variable) } &\underline{11.25} \\\text { Total } &\underline{\$ 64.25}\end{array}$ The required volume of output to produce the parts will not require any incremental fixed overhead.Incremental variable overhead cost is $2 per unit.Should Kimball make or buy the parts?

Presented below are terms preceded by letters (a)through (f)and followed by a list of definitions 1 through 6.Match the letter of the terms with the definitions.Use the space provided preceding each definition.

Doggy Day Park Inc.currently has a special tank used to provide exercise hydro therapy for the dogs.The current book value of the tank is $25,000 and they could sell it for $12,000 if they wanted to do so.Doggy is evaluating a new tank system that will provide additional therapy capability.The new tank will cost $55,000 and will save $7,500 per year in operating costs.The new tank system is expected to last six years. Required: A)Using incremental analysis, should they buy the new tank? Show calculations to support your answer. B)Will the answer to (a)change if they can only sell the old tank for $5,000? Why or why not?