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Exam 23: Relevant Costing for Managerial Decisions

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Question 31

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Bath Company has a limited amount of direct material available for products 111 and 222.Each unit of 111 has a contribution margin of $5 and each unit of 222 has a contribution margin of $25.A unit of 222 uses four times as much direct material as a unit of 111.What is Bath's most profitable sales mix,assuming there is unlimited demand for either product?

A) Make all 222.
B) Make all 111.
C) Make equal number of units of 111 and 222.
D) Make four times as many 111 as 222.
E) Make four times as many 222 as 111.

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Question 32

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A company expects its three departments to yield the following income for next year: $\begin{array} { l r r r } & \text { Dept. X } & \text { Dept. Y } & \text { Dept. Z } \\\text { Sales } & \$ 94,000 & \$ 15,000 & \$ 70,000 \\\text { Expenses } & & & \\\text { Avoidable } & 71,000 & 2,000 & 52,000 \\ \text { Unavoidable } & \underline{4,000} & \underline{7,000} & \underline{20,000} \\\text { Total expenses }& \underline{75,000} & \underline{9,000} & \underline{72,000} \\\text {Net income (loss)}& \underline{\underline{\$ 19,000}} & \underline{\underline{\$ 6,000}} & \underline{\underline{\$ ( 2,000 )}}\end{array}$ 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 33

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When deciding whether to sell partially completed products now or to process them further,what is the correct treatment of the manufacturing costs which have been incurred to date?

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

What is the overall decision rule management should apply when considering a segment for elimination?

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. -Should the company accept the special order?

Beta Inc.can produce a unit of Zed for the following costs: $\begin{array} {lr} \text{Direct material}&&\$10\\\text{Direct labor}&&20\\\text{Overhead}&&\underline{50}\\\text{Total costs per unit}&&\underline{\$80}\end{array}$ An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit.If Beta buys from the supplier,it will still incur 40% of its overhead.Beta should:

When a constrained resource exists,how does a company determine the sales mix that will maximize profits? Would sales demand affect this calculation?

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

A company has already incurred a $12,000 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,should any products be processed further? $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 700 & \$ 775 & \$ 65 \\\hline \text { B } & 8 0 0 & 8 8 8 & 8 9 \\\hline\end{array}$

A company expects to produce and sell a single product.Management desires a 13% return on assets of $2,100,000.The following additional company information is available: $\begin{array}{lr}\text { Variable costs (per unit) } & \\\text { Production costs } & \$ 62 \\\text { Nonproduction costs } & \$ 8 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 521,280 \\\text { Nonproduction } & \$ 397,824\end{array}$ 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 19,200 units b.The company produced and sold 114,888 units

A company expects its three departments to yield the following income for next year: $\begin{array}{lrrr} & \text { Dept.A } & \text { Dept. B } & \text { Dept. C } \\ \text { Sales } & \$ 6,000 & \$ 5,000 & 6,800 \\\text { Expenses } & & & \\\text { Avoidable } & 2,000 & 1,000 & 4,000 \\\text { Unavoidable } & 1,500 & 3,000 & 2,500 \\ \text { Total expenses } & 3,500 & 4,000 & 6,500 \\\text { Net income(loss) } & \$ 2,500 & \$ 1,000 & \$ 300\end{array}$ Compute the change to the company's total net income if Dept.C is eliminated.

A company processes chemicals through a common production process.This process costs $200,000 each year.The four chemicals 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: $\begin{array}{lrrrr}&&\text { Unit Sales } & \text { Unit Sales } & \\&&\text { Price per } & \text { Price per } & \\&&\text { Pound } & \text { Pound } & \text { Additional } \\&&\text { at Split-Off } & \text { after Further } & \text { Processing }\\ \text { Product}&\text { Volume }&\text {Point}&\text { Processing }&\text {Costs }\\ \text { A } & 25,000 \mathrm{~g} & \$ 35.00 & \$ 54.00 & \$ 500,000 \\\text { B } & 12,000 \mathrm{~g} & 12.00 & 36.00 & 124,000 \\& & & & \\\text { C } & 8,000 \mathrm{~g} & 36.00 & 54.00 & 120,000 \\\text { D } & 2,000 \mathrm{~g} & 12.00 & 21.00 & 25,000\end{array}$ a.Calculate the incremental profit or loss that would be generated by processing these chemicals further. b.Which chemicals should be sold as is and which should be processed further and why?

A company has the choice of either selling 750 defective units as scrap or rebuilding them.They have already spent $14 per unit making these items.The company could sell the defective units as they are for $8 per unit.Alternatively,it could rebuild them with incremental costs of $3 per unit for materials,$3per unit for labor,and $1per unit for overhead,and then sell the rebuilt units for $15.00 each.What should the company do?

Sandlewood Company has 15,000 units of its sole product that it produced last year at a cost of $43 each.This year's model is superior to last year's and the 15,000 units cannot be sold for their regular selling price of $80 each.Sandlewood has two alternatives for these items: (1) they can be sold to a wholesaler for $30 each,or (2) they can be reworked at a total cost of $400,000 and then sold for $60 each.The company has enough idle capacity to rework these items without affecting any new production.Which choice would increase the company's profits the most?

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

Roxie Company has 17,500 units of its sole product that it produced last year at a cost of $45 each.This year's model is superior to last year's and the 17,500 units cannot be sold for their regular selling price of $80 each.Roxie has two alternatives for these items: (1) they can be sold to a wholesaler for $35 each,or (2) they can be reworked at a total cost of $450,000 and then sold for $60 each.The company has enough idle capacity to rework these items without affecting any new production.Which choice would increase the company's profits the most?

In a constrained resource situation,a company should maximize contribution margin per _______________________________.

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.

If accepting additional business would cause existing sales to decline,the offer should always be declined.