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Exam 10: Relevant Costing for Managerial Decisions

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Question 61

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Gion Company is considering eliminating its windows division, which reported an operating loss for the recent year of $105,000. Division sales for the year were $1,110,000 and its variable costs were $975,000. The fixed costs of the division were $220,000. If the windows division is dropped, 65% of the fixed costs allocated to it could be eliminated. The impact on Gion's operating income from eliminating this business segment would be:

A) $7,200 decrease
B) $8,000 increase
C) $143,000 decrease
D) $143,000 increase
E) $8,000 decrease

F) None of the above
G) B) and E)

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Question 62

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A cost that requires a future outlay of cash, and is relevant for current and future decision making, is a(n) :

A) Out-of-pocket cost.
B) Sunk cost.
C) Opportunity cost.
D) Operating cost.
E) Uncontrollable cost.

F) D) and E)
G) B) and D)

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Question 63

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Shale Remodeling uses time and materials pricing. It is setting prices for next year using the following information: What is the total price for a project requiring 160 direct labor hours and $150,000 of materials?

Galla Inc. operates in a highly competitive market where the market price for its product is $170 per unit. Galla desires a $15 profit per unit. Galla expects to sell 5,000 units. Additional information is as follows: Using target costing, what is the target cost?

A company has the choice of either selling 600 apples or processing them into applesauce. The company could sell the apples as they are for $2.00 per unit. Alternatively, each apple could be made into one unit of applesauce with incremental costs of $0.60 per unit for direct materials, $1.00 per unit for direct labor, and $0.80 per unit for overhead, and then sold for $5.00 each. What is the amount of incremental income (loss) from processing the apples into applesauce?

Valber Company is considering eliminating its phone division. The company allocates fixed costs based on sales. If the phone division is dropped, $150,000 of the fixed costs allocated to that division could be eliminated. The impact on Valber's operating income from eliminating the phone division would be:

Mays Company can sell all of product A that it produces but only 160,000 units of product Z. The company has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 30,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?

Rocko Inc. has a machine with a book value of $50,000 and a five-year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life. Should the machine be replaced?

A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n) :

A company has the choice of either selling 1,000 unfinished units as is or completing them. The company could sell the unfinished units as is for $4.00 per unit. Alternatively, it could complete the units with incremental costs of $1.00 per unit for direct materials, $2.00 per unit for direct labor, and $1.50 per unit for overhead, and then sell the completed units for $8.00 each. If the company completes the units, what is the impact on income?

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?

A special order of goods or services should be accepted when the incremental revenue exceeds the normal revenue.

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

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

Incremental revenues refer to the additional revenue generated by selecting a particular course or action over another.

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. Assuming Maxim further processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of a(n) :

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.

Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units is: If Bannister can buy 1,000 units from an outside supplier for $100,000, it should: