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Exam 10: Relevant Costing for Managerial Decisions

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Question 51

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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. -If Teague wishes to earn $1,250 on the special order, the size of the order would need to be: A.4,500 units B.2,250 units C.1,125 units D.625 units E.300 units

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Question 52

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A company expects its three departments to yield the following income for next year: $\begin{array}{lrrr}& \text { Dept. X } & \text { Dept. Y } & \text { Dept. Z } \\\text { Sales } & \$ 94,000 & \$ 15,000 & \$ 70,000 \\\text { Expenses } \\\text { Avoidable } & 71,000 & 2,000 & 52,000 \\\text { Unavoidable } & 4,000 & 7,000 & 20,000 \\\hline \text { Total expenses } & 75,000 & 9,000 & 72,000 \\\hline\text { Net income(loss) } & \underline {\$ 19,000} & \underline {\$ 6,000} &\underline { \$(2,000)}\end{array}$ Required: Compute the following independent calculations: a.The effect on total company income if Dept.X is eliminated. b.The effect on total company income if Dept.Y is eliminated. c.The effect on total company income if Dept.Z is eliminated. d.Should any of these departments be eliminated? Why of why not?

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Question 53

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A company puts four products through a common production process.This process costs $100,000 each year.The four products can be sold when they emerge from this process at the "split-off point", or processed further and then sold.Data about the four products for the coming period are: $\begin{array} { l r r r r } && \text { Unit Sales }& \text {Unit Sales}\\&& \text {Price per}& \text { Price per}\\&& \text {Pound}& \text { Pound}& \text { Additional}\\&& \text {at Split-Off }& \text {after Further }& \text {Processing}\\\underline {\text { Product } }& \underline {\text { Volume } }& \underline {\text { Point } }&\underline { \text { Processing }} & \underline {\text { Costs }} \\ \text { Singer } & 20,0001 \mathrm { l } & \$ 28.00 & \$ 42.00 & \$ 400,000 \\ \text { Talker } & 10,0001 \mathrm {~b} & 7.00 & 28.00 & 144,000 \\ \text { Walker } & 5,0001 \mathrm { lb } & 36.00 & 58.00 & 120,000 \\ \text { Sayer } & 5,0001 \mathrm { lb } & 18.00 & 22.00 & 40,000 \end{array}$ Determine which products should be sold at the split-off point and which should be processed further.

Assume that Charlie's Brownies expects to produce and sell 5,000 units of a single product, a gift box containing an assortment of brownies that showcases the company's many flavors.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 30 \\ \text { Nonproduction costs } &\$ 2 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 100,000 \\ \text { Nonproduction } &\$ 5,000\end{array}$ Compute Charlie's Brownies total cost per unit.

A company has already incurred a $600 cost in partially producing its two products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, the company should process both products further. $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 425 & \$ 500 & \$ 70 \\\hline \text { B } & 375 & 400 & 20 \\\hline\end{array}$

The cost of equipment purchased by a company last year would be an avoidable cost.

Hondo Company 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 $108,000 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?

Fleming Company had the following results of operations for the past year: $\begin{array}{lr}\text { Sales (10,000 units at } \$ 6.80) & \$ 68,000 \\\text { Materials and direct labor } & (20,000) \\\text { Overhead (40\% variable) } & (10,000) \\\text { Selling and administrative expenses (all } & \underline {(6,000)} \\\text { fixed) } & \\ \text { Operating income } & \underline { \$ 32,000}\end{array}$ A foreign company (whose sales will not affect Fleming's regular sales)offers to buy 2,000 units at $5 per unit.In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units.Should Fleming take this order? Explain.

A company has already incurred a $15,000 cost in partially producing its three products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 750 & \$ 875 & \$ 130 \\\hline \text { B } & 850 & 1,000 & 155 \\\hline \text { C } & 950 & 1,200 & 255 \\\hline\end{array}$

To determine a product selling price based on the total cost method, management should include:

The total cost method determines a selling price equal to a product's total costs plus a desired profit on the product.

A company produces three different products that all require processing on the same machines.There are only 27,000 machine hours available in each year.Production information for each product is: $\begin{array}{lrrr}& \underline { A }& \underline { B }& \underline { C }\\\text { Sales price per unit } & \$ 20.00 & \$ 38.00 & \$ 35.00 \\\text { Variable costs per unit } & \$ 12.00 & \$ 26.00 & \$ 17.00 \\\text { Machine hours necessary to produce one } & 2.5 & 4.0 & 4.50\end{array}$ 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 5,000 units for each product. c.Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

Wear Company is operating at 70% of its manufacturing capacity of 78,000 product units per year.A customer has offered to buy an additional 18,000 units at $41 each and sell them outside the country so as not to compete with Wear Company.The following data are available: $\begin{array}{lrr}\text { Costs at 70\%/ capacity: } & { \text { Per } } & \text { Total } \\& \text { Unit } & \\\text { Direct materials } & \$ 28.00 & \$ 1,528,800 \\\text { Direct labor } & 3.00 & 163,800 \\\text { Overhead (fixed and variable) } & \underline{7.00} & \underline{\$ 382,200} \\{\text { Totals }} & \underline{\$ 38.00}& \underline{\$ 2.074 .800} \end{array}$ In producing 18,000 additional units fixed overhead costs would remain at their current level but incremental variable overhead costs of $1.28 per unit would be incurred.What is the effect on total income if Wear Company accepts this order?

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

Product X requires 10 machine hours per unit to be produced, Product Y requires only 6 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours.Product A sells for $32 per unit and has variable costs of $12 per unit.Product B sells for $24 per unit and has variable costs of $7 per unit.Assuming the company can sell as many units of either product as it produces, the company should:

A company has already incurred a $93,000 cost in partially producing its three products.Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing.Based on this information, should any products be processed further? $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 31.27 & \$ 62.37 & \$ 33.76 \\\hline \text { B } & 42.56 & 96.11 & 49.82 \\\hline \text { C } & 89.01 & 102.72 & 17.29 \\\hline\end{array}$

Alpha Co.can produce a unit of Beta for the following costs: $\begin{array}{l}\text { Direct material } & \$8 \\\text { Direct labor } & 24 \\\text { Overhead } &\underline { 40} \\\text { Total costs per unit } & \underline { \$72}\end{array}$ 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 company manufactures three products.Each unit of product X requires 10 machine hours, each unit of product Y requires 4 machine hours, and each unit of product Z requires 6 machine hours.The company's productive capacity is limited to 180,000 machine hours.Each unit of product X sells for $15 and has variable costs of $7.Each unit of product Y sells for $8 and has variable costs of $3.Each unit of Z sells for $12 and has variable costs of $4. Required: a.Calculate the contribution margin per hour of each of the products. b.Determine the preferred sales mix if there are no market constraints on any of the products. c.Determine the preferred sales mix if the demand is limited to 20,000 units of each.

Marcus processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: $\begin{array}{lrrr}&\text { Sales Value } & & \text { Sales } \\&\text { with No } & \text { Additional } & \text { Value after } \\&\text { Further } & \text { Processing } & \text { Further } \\\underline { \text { Product } }&\underline { \text { Processing }} & \underline { \text { Costs }} & \underline { \text { Processing }}\\\text { Acta } & \$ 1,350 & \$ 900 & \$ 2,700 \\\text { Corda } & 450 & 225 & 630 \\\text { Fando } & 900 & 450 & 1,800\\\text { Limo } & 90 & 45 & 180\end{array}$ Which product(s) should not be processed further?

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) :