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Exam 6: Relevant Information for Special Decisions

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Question 31

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Easton Company makes and sells scooters.Easton incurred the following costs in its most recent fiscal year: $\begin{array}{|l|l|}\hline{\text { Cost Items Appearing }} & \text { on the Income Statement } \\\hline \text { Materials cost (\$10 per unit) } & \text { Depreciation on manufacturing equipment } \\\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \\\hline \text { Labor cost (\$4 per unit) } & \text { Research and development costs } \\\hline \text { Advertising costs }(150,000 \text { per vear) } & \text { Real estate taxes on factory } \\\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \\\hline\end{array}$ Easton can currently purchase the scooters it makes from another company.If the company purchases the scooters,Easton would still continue to use its own logo,sales staff,and advertising programs.Which of the following costs would be classified as a unit-level cost?

A) Company president's salary
B) Depreciation on manufacturing equipment
C) Materials cost
D) Real estate taxes on factory

E) None of the above
F) C) and D)

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Question 32

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Select the correct statement regarding relevant costs and revenues.

A) Relevant costs are also known as unavoidable costs.
B) Relevant costs are only those that are based on past experience.
C) Relevant revenues must differ between the alternatives.
D) All of the above.

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

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Question 33

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The practice of buying goods and services from other companies is commonly known as vertical integration.

Variable costs are always relevant in decision making.

Natalie purchased a concert ticket recently for $50.She is trying to decide whether to drive,take a taxi,or ride the public transit bus.The cost of driving to the concert is a sunk cost because Natalie purchased her car several years ago.

A constraint is a factor that restricts sales of a company's products or services.

Eastern Company currently produces a component that it uses in making some of its products.The company has calculated the following costs for making the part: $\begin{array}{|l|r|}\hline \text { Unit-level costs } & \\\hline \text { Materials } & \$ 20 \\\hline \text { Labor } & 28 \\\hline \text { Overhead } & 2 \\\hline \text { Allocated facility-level costs } & 10 \\\hline \text { Total cost } & \$ 60 \\\hline\end{array}$ Eastern is considering outsourcing the component.A supplier has offered to sell the component to Eastern for $55 each.Eastern needs 10,000 units each year.If Eastern does outsource the component,it can use the facilities to make another product that would yield contribution margin of $60,000 per year. Required: 1)Should Eastern outsource the component? Support your answer with appropriate computations. 2)What qualitative factors should be considered in this decision?

Qualitative information is relevant when:

Gibbs Corporation makes indoor gas fireplaces.A standard fireplace includes unit-level materials,labor,and overhead costs.In addition,the company incurs product-level engineering and advertising costs.The sales staff is paid a 5% commission on each fireplace sold.A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs' selling price.Which of the following costs would be relevant to this special order decision?

Talladega Company manufactures an electric clock radio.The company expects production of 5,000 units this year.Currently,Talladega produces the clock used in the product.Talladega has received an offer from Daytona,Inc. ,to supply the clock.If Talladega discontinues production of the clock,the company will be able to eliminate its product-level costs because no other products along the same line are produced by the company.However,due to its concern for quality,the company will have to inspect each clock.Various costs and items are described below: Required: For each item in the table,place a check mark or X in the column that best describes the item in the context of the described outsourcing decision.A cost varies if the amount of the cost or the incurrence of the cost differs between the two alternatives: continuing to make the clocks or purchasing the clocks from Daytona.

Special order decisions involve:

Western Classics Publishing Company produces updated versions of literary classics targeted for children.Its book binding machines are capable of producing 50 books per hour.The unit-related cost of producing books is $2.50,and Western Classics sells its books for $9.50 each.Reading Ready Publishing has asked the company to produce 10,000 copies of a book for $7.50.Western Classics estimates that unit-level costs for the new book will be $3.00,and due to the size of the book,its binding machines will only be able to produce 20 books per hour.Western Classics has a total of 5,000 machine hours of capacity.In addition,to complete the special order,Western Classics will have to purchase an additional special-purpose machine that will cost $8,000. Required: Assume that existing demand for Western Classics' children's classics is 230,000 units and that the special order has to be either taken in full or rejected.Prepare an analysis that indicates whether or not the special order should be accepted.

QRC Company is trying to decide which one of two alternatives it will accept.The costs and revenues associated with each alternative are listed below: $\begin{array} { | l | r | r | r | } \hline & { \text { Alterrative A } } & \text { Alternative B } \\\hline \text { Projected reverue } & \$ 62,500 & \$ 75,000 \\\hline \text { Unit-level costs } & 12,500 & 18,000 \\\hline \text { Batch-level costs } & 6,250 & 12,000 \\\hline \text { Product-level costs } & 7,500 & 8,500 \\\hline \text { Facility-level costs } & 5,000 & 6,250 \\\hline\end{array}$ What is the differential revenue for this decision?

Sunk costs are sometimes relevant for decision-making purposes.

In the short run,asset replacement decisions often result in lower reported profits in the period of replacement.Which of the following does not contribute to this?

To be relevant in decision making,cost or revenue information must be future-oriented and must not differ between the alternatives.

Mary must decide between two alternatives for the weekend: babysitting or yard work.If she babysits,she will receive $40 and will incur $15 in transportation costs.If she does yard work,she will receive $40 and will incur $3 in lawn mower gas and oil costs and $5 in transportation costs.The payment she would receive for the jobs is relevant in deciding which alternative to select.

The Mansfield Company manufactures and sells two lines of fishing rods.During the most recent accounting period,the Pro line and the Novice line sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below: $\begin{array}{c}\begin{array}{|l}\hline\\\hline \text {Sales}\\\hline \text {Less cost of goods sold:}\\\hline \text {Unit-level production cost}\\\hline \text {Depreciation, production equipment}\\\hline \text {Gross margin}\\\hline \text {Less operating expenses:}\\\hline \text {Unit-level selling and admin. Costs}\\\hline \text {Corporate-level facility expenses (fixe d) }\\\hline \text {Net income (loss) }\\\hline\end{array}\begin{array}{|l}\hline \text {Pro}\\\hline\$ 900,000\\\hline\\\hline600,000 \\ \hline125,000 \\ \hline \$ 175,000\\\hline\\\hline40,000 \\\hline 36,000 \\ \hline \$ \quad 99,000 \\ \hline\end{array}\begin{array}{|l|}\hline\text { Novice } \\\hline\$ \quad 240,000 \\\hline\\\hline135,000 \\\hline 50,000 \\\hline \$55,000 \\\hline\\\hline 65,000 \\\hline 36,000 \\\hline \$ \quad(46,000) \\\hline \end{array}\end{array}$ Based on this information,the company should: The word "Costs" should not be capitalized mid-way down.Also,change "admin." to: Administrative The cell should read: Unit-level selling and administrative costs

Classifying costs into one of four hierarchical levels can facilitate the identification of relevant costs.Place an "X" in the appropriate column to classify the following costs as Unit-level,Batch-level,Product-level,and Facility level. $\begin{array}{|l|l|l|l|c|}\hline {\text { Description of Cost }} & \text { Unit- } & \text { Batch- } & \text { Product- } & \text { Facility- } \\\hline & \text { Level } & \text { Level } & \text { Level } & \text { Level } \\\hline \text { Administrative costs } & & & & \\\hline \text { Assembly labor } & & & & \\\hline \text { Equapment setup costs } & & & & \\\hline \text { Engineering design } & & & & \\\hline \text { Inspection costs } & & & & \\\hline \text { Direct materials cost } & & & & \\\hline \text { Materials handling cost } & & & & \\\hline \text { Personnel administration and training } & & & & \\\hline \text { Plant manager's salary } & & & & \\\hline \text { Product manager's salary } & & & & \\\hline\end{array}$

A manager refuses to replace an existing asset even though an extensive analysis indicates that replacement is desirable.One possible explanation for the manager's action is that: