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Exam 23: Relevant Costing for Managerial Decisions

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Question 71

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Soar Incorporated is considering eliminating its mountain bike division,which reported an operating loss for the recent year of $3,000.The division sales for the year were $1,050,000 and the variable costs were $860,000.The fixed costs of the division were $193,000.If the mountain bike division is dropped,30% of the fixed costs allocated to that division could be eliminated.The impact on operating income for eliminating this business segment would be:

A) $57,900 decrease
B) $132,100 decrease
C) $54,900 decrease
D) $190,000 increase
E) $190,000 decrease

F) A) and B)
G) A) and C)

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Question 72

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

A) True
B) False

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Question 73

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Valdez Company is considering eliminating its kitchen division,which reported an operating loss of $53,000 for the past year.Kitchen division sales for the year were $1,040,000,and its variable costs were $775,000.The fixed costs of the division were $318,000.If the kitchen division is dropped,60% of the fixed costs allocated to it could be eliminated.The impact on Valdez's operating income from eliminating this business segment would be:

Another name for relevant cost is unavoidable cost.

Product A requires 5 machine hours per unit to be produced,Product B requires only 3 machine hours per unit,and the company's productive capacity is limited to 240,000 machine hours.Product A sells for $16 per unit and has variable costs of $6 per unit.Product B sells for $12 per unit and has variable costs of $5 per unit.Assuming the company can sell as many units of either product it produces,the company should:

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) :

Sunk costs are irrelevant to future decisions.

Dragoo Building Inc.has a crane with a book value of $240,000 and a four-year remaining life.A new crane is available at a cost of $615,000.Dragoo can also receive $48,000 for trading in the old pump.The new crane will reduce variable costs by $145,000 per year over its four-year life.The total impact to Dragoo over the crane's four-year life is:

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

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 Mad Hatter's most profitable sales mix? $\begin{array}{lcc} & \text { Cap A } & \text { Cab B } \\\text { Selling price per unit }& \$ 80 & \$ 60 \\\text { Variable costs per unit } & 53 & 42\end{array}$

________ revenues are the additional revenue generated by selecting a certain course of action over another..

The process of buying goods or services from an external supplier is called ________.

Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units per year.A customer has offered to buy an additional 20,000 units at $32 each and sell them outside the country so as not to compete with Wade.The following data are available: $\begin{array}{lrr}\text { Costs at 75\% capacity: } & \text { Per Unit } & \text { Total } \\\text { Direct materials } & \$ 12.00 & \$ 1,260,000 \\\text { Direct labor } & 9.00 & 945,000 \\\text { Overhead (fixed and variable) } & 15.00 & 1,575,000 \\\text { Totals } & \$ 36.00 & \$ 3,780,000 \\\hline \hline\end{array}$ In producing 20,000 additional units,fixed overhead costs would remain at their current level but incremental variable overhead costs of $6 per unit would be incurred.What is the effect on income if Wade accepts this order?

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.

Lattimer Company had the following results of operations for the past year: $\begin{array} { l r r r } \text { Sales } ( 15,000 \text { units at } \$ 12 ) & & \$ 180,000 \\\text { Variable manufacturing costs } & \$ 97,500 & \\\text { Fixed manufacturing costs } & 21,000 & \\\text { Selling and administrative expenses (all fixed) } & 36,000 & ( 154,500 ) \\\hline \text { Operating income } & & \$ 25,500 \\\hline \hline\end{array}$ A foreign company offers to buy 5,000 units at $7.50 per unit.In addition to existing costs,selling these units would add a $0.25 selling cost for export fees.Lattimer's annual production capacity is 25,000 units.If Lattimer accepts this additional business,the special order will yield a:

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) :

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 incremental revenue will be:

Chang Industries has 2,000 defective units of product that already cost $14 each to produce.A salvage company will purchase the defective units as is for $5 each.Chang's production manager reports that the defects can be corrected for $6 per unit,enabling them to be sold at their regular market price of $21.The $14 per unit is a:

In this chapter,you examined several short-term managerial decision tasks.Identify (list)any three of these types of decision tasks: ________; ________; ________