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Exam 10: Relevant Costing for Managerial Decisions

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Question 41

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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: $\begin{array} { | l | r | r | r | } \hline &\underline { \mathrm { A } } & \underline { \mathrm { B } } & \underline{\mathrm{c}}\\ \hline \text { Sales price per unit } & \$ 20.00 & \$ 38.00 & \$ 35.00 \\\hline \text { Variable costsper unit } & \$ 12.00 & \$ 26.00 & \$ 17.00 \\\hline \text { Machine hours necessary to produce one unit } & 2.5 & 4.0 & 4.50 \\\hline\end{array}$ Required: (1) Determine the preferred sales mix if there are no market constraints on any of the products. (2) Determine the preferred sales mix if the demand is limited to 5,000 units for each product. (3) Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

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In general, the company should produce ...

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Question 42

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A company inadvertently produced 6,000 defective portable radios. The radios cost $10 each to be manufactured. A salvage company will purchase the defective units as they are for $8 each. The production manager reports that the defects can be corrected for $4.50 per unit, enabling the company to sell them at the regular price of $15.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

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Sale of repaired units (6,000 * $15) $90...

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Question 43

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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.

Wages from a job a student gives up to attend summer school would be a sunk cost.

Incremental costs should be considered in a make or buy decision.

A sunk cost will change with a future course of action.

Assume markup percentage equals desired profit divided by total costs. What is the correct calculation to determine the dollar amount of the markup per unit?

Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What should the company do?

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An outside supplier has offered to sell the product to Paxton for $32. Compute the net incremental cost or savings of buying the component.

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) :

The decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Benjamin Company had the following results of operations for the past year: $\begin{array} { | l | r | r | } \hline \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \\\hline \text { Direct materials and direct labor } & \$ 96,000 & \\\hline \text { Overhead ( } 20 \% \text { variable) } & 16,000 & \\\hline \text { Selling and administrative expenses (all fixed) } & \underline { 32,000 } & \underline { ( 144,000 ) } \\\hline \text { Operating income } & & \underline { \$ 16,000 }\\\hline\end{array}$ A foreign company (whose sales will not affect Benjamin'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. Assuming Benjamin has excess capacity and accepts the offer, its profits will:

Sales mix refers to the combination of products sold by a company.

A company's best sales mix is determined using contribution margin per unit of scarce resource.

Bandy Corporation owns a machine that manufactures lawn games. Production time for the croquet set is 10 units per hour and for the volley ball game is 8 units per hour. The machine's capacity is 1,500 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 4,000 croquet sets and 10,000 volleyball games. Selling prices and variable costs per unit are shown below. Based on this information, what is Bandy Corporation's most profitable sales mix? $\begin{array} { | l | c | c | } \hline & \text { Croquet Set } & \text { Volleyball Game } \\\hline \text { Selling price per unit } & \$ 75 & \$ 62 \\\hline \text { Variable costs per unit } & 42 & 25 \\\hline\end{array}$

________ costs are amounts that will continue even if a segment is eliminated.

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

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

Variations Company had the following results of operations for the past year: $\begin{array} { | l | r | } \hline \text { Sales } ( 8,000 \text { units at } \$ 7.00 ) & \$ 56,000 \\\hline \text { Variable manufacturing cost: } & ( 30,000 ) \\\hline \text { Fixed manufacturing costs } & ( 6,000 ) \\\hline \text { Fixed selling and administrative expenses } & \underline{( 4,500 )} \\\hline \text { Operating income } &\underline{ \$ 15,500} \\\hline\end{array}$ A foreign company (whose sales will not affect Variations' regular sales) offers to buy 700 units at $4.00 per unit. In addition to variable manufacturing costs, there would be an export cost of $0.30 per unit. Prepare an analysis of this additional business to show whether Variations should take this order.