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Exam 23: Relevant Costing for Managerial Decisions

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Question 1

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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. $\begin{array} { l r } \text { Direct materials } & \$ 32 \\\text { Direct labor } & 40 \\\text { Overhead (fixed and } & 60 \\\text { variable) } & \\\text { Total } & \$ 132\end{array}$ 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?

A) Income will decrease by $4 per unit.
B) Income will increase by $4 per unit.
C) Income will increase by $38 per unit.
D) Income will decrease by $38 per unit.
E) Income will increase by $44 per unit.

F) B) and E)
G) All of the above

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Question 2

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Alpha Co.can produce a unit of Beta for the following costs: $\begin{array} {lr} \text{Direct material}&&\$8\\\text{Direct labor}&&24\\\text{Overhead}&&\underline{40}\\\text{Total costs per unit}&&\underline{\$72}\end{array}$ An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit.If Alpha buys from the supplier,Alpha will still incur 40% of its overhead.Alpha should:

A) Buy Beta since the relevant cost to make it is $72.
B) Make Beta since the relevant cost to make it is $56.
C) Buy Beta since the relevant cost to make it is $48.
D) Make Beta since the relevant cost to make it is $48.
E) Buy Beta since the relevant cost to make it is $56.

F) None of the above
G) A) and D)

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Question 3

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A company expects its three departments to yield the following income for next year: $\begin{array} { l r r r } & \text { Dept. O } & \text { Dept. K } & \text { Dept. W } \\\text { Sales } & \$ 92,000 & \$ 15,000 & \$ 87,000 \\\text { Expenses } & & & \\\text { Avoidable } & 73,000 & 1,000 & 3 6 , 0 0 0 \\\text { Unavoidable } &\underline{ 2,000 }& \underline{ 8 , 0 0 0 } & \underline{3 7 , 0 0 0 } \\\text { Total expenses } & \underline{75,000} & \underline{9,000 }& \underline{73,000} \\\text {Net income (loss)}& \mathbf { \underline{\$ 1 7 , 0 0 0 }} & \mathbf { \underline{\$ 6 , 0 0 0} } & \mathbf { \underline{\$ 1 4 , 0 0 0} }\end{array}$ 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.

A company produces three different products that all require processing on the same machines.There are only 17,000 machine hours available in each year.Production information for each product is: $\begin{array}{lrrr}&\text { A}&\text { B}&\text { C}\\\text { Sales price per unit } & \$ 22.00 & \$ 34.00 & \$ 46.00 \\\text { Variable costs per unit } & \$ 10.00 & \$ 19.00 & \$ 25.30 \\\text { Machine hours necessary to produce one unit } & .75 & 1.2 & 2.3\end{array}$ Required: a.Determine the preferred sales mix if there are no market constraints on any of the products. b.Determine the preferred sales mix if the demand is limited to 7,000 units for each product. c.Determine the preferred sales mix if the demand is limited to 8,000 units for each product.

What are the four steps of the total cost method of determining a product selling price?

Contribution margin lost from a decline in sales is an opportunity cost.

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

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

Reference: 23_02 Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker 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 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. -If Parker wishes to earn $1,250 on the special order,the size of the order would need to be:

A company has the choice of either selling 500 defective units as scrap or rebuilding them.The company could sell the defective units as they are for $7.00 per unit.Alternatively,it could rebuild them with incremental costs of $2.00 per unit for materials,$3per unit for labor,and $1 per unit for overhead,and then sell the rebuilt units for $15 each.What should the company do?

A company expects to produce and sell a single product.Management desires a 14% return on assets of $725,000.The following additional company information is available: $\begin{array}{lr}\text { Variable costs (per unit) } & \\\text { Production costs } & \$ 58 \\\text { Nonproduction costs } & \$ 11\\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 179,872 \\\text { Nonproduction } & \$ 49,984\end{array}$ Required: Compute selling price per unit given that markup percentage equals desired profit divided by total costs under the following independent assumptions. a.The company produced and sold 17,600 units b.The company produced and sold 28,732 units

Costs already incurred in manufacturing the units of a product that do not meet quality standards are _________________________ costs.

A company expects to produce and sell 20,000 units of a single product.Management desires a 22% return on assets of $3,000,000.The following additional company information is available: $\begin{array}{lr}\text { Variable costs (per unit) } & \\\text { Production costs } & \$ 105 \\\text { Nonproduction costs } & \$ 9 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 350,000 \\\text { Nonproduction } & \$ 120,000\end{array}$ Compute selling price per unit given that markup percentage equals desired profit divided by total costs.

An additional cost that is incurred only if a particular action is taken is a(n) :

Reference: 23_03 Teague Plumbing has received a special one-time order for 1,500 toilets (units) at $75 per unit. Teague currently produces and sells 7,500 units at $100 each. This level represents 75% of its capacity. Production costs for these units are $75 per unit, which includes $70 variable cost and $5 fixed cost. To produce the special order, shipping costs of $10,000 will be incurred. Management expects no other changes in costs as a result of the additional production. -Should the company accept the special order?

Peters,Inc.sells a single product and reports the following results from sales of 100,000 units: $\begin{array}{lr}\text { Sales (\$45/unit)}&\$4,500,000\\\text { Less costs and expenses:}\\\text { Direct materials (\$16/unit) } & \$ 1,600,000 \\\text { Direct labor (\$9/unit) } & 900,000 \\\text { Variable overhead (\$3/unit) } & 300,000 \\\text { Fixed overhead (\$8.10/unit) } & 810,000 \\\text { Variable administrative }(\$ 4.50 / \text { unit) } & 450,000 \\\text { Fixed administrative (\$4/unit) } & 400,000 \\\text { Total costs and expenses } & \underline{\$(4,460,000} )\\\text { Operating income } & \$ 40,000\end{array}$ A foreign company wants to purchase 15,000 units.However,they are willing to pay only $36 per unit for this one-time order.They also agree to pay all freight costs.To fill the order,Peters will incur normal production costs.Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance.No additional administrative costs (variable or fixed)will be incurred in association with this special order. Required: a.Should Peters accept the order if it does not affect regular sales? Explain. b.Assume that Peters can accept the special order only by giving up 5,000 units of its normal sales.Should Peters accept the special order under these circumstances?

Thompson Company had the following results of operations for the past year: $\begin{array} { l r r } \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \\\text { Direct materials and direct labor } & \$ 96,000 & \\\text { Overhead (20\% variable) } & 16,000 \\\text { Selling and administrative expenses (all fixed) } & \underline { 3 2 , 0 0 0 } &\underline { ( 144,000 ) } \\\text { Operating income } && \underline { \underline { \$ 16,000}}\end{array}$ 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:

Incremental costs are also called out-of-pocket costs.

A markup percentage equals total costs divided by desired profit.

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