FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 12: Relevant Costs for Decision Making

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

Multiple Choice

Review LaterAdd Note

Review Later

Manor Company plans to discontinue a department that has a contribution margin of $25,000 and $50,000 in fixed costs.Of the fixed costs,$21,000 cannot be eliminated.What would be the effect on the operating income of Manor Company of discontinuing this department?

A) An increase of $4,000.
B) A decrease of $4,000.
C) An increase of $25,000.
D) A decrease of $25,000.

E) None of the above
F) B) and C)

Correct Answer

verified

Show Answer

Question 32

True/False

Review LaterAdd Note

Review Later

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

A) True
B) False

Correct Answer

verified

Show Answer

Question 33

Multiple Choice

Review LaterAdd Note

Watkins Company uses time and material pricing.The time rate is $25 per hour.The material loading charge is 30% for ordering,handling,and storing parts and 10% for the desired profit on materials.Given these data,what would be the total charge for a job that requires 8 hours of labour time and $150 in parts?

Bingham Company manufactures and sells Product J. Results for last year for the manufacture and sale of Product J are as follows: $\begin{array}{|l|r|}\hline \text { Sales }(10,000 \text { units at } \$ 160 \text { each) } & \$ 1,600,000 \\\hline \text { Less: Costs; } & \$ 960,000 \\\hline \text { Variable Production Costs } & \$ 240,000 \\\hline \text { Sales Commisions }-15 \% \text { of Sales } & \$ 195,000 \\\hline \text { Salaries of Line Supervisors } & \$ 180,000 \\\hline \text { Traceable Fixed Factory Overhead (Allocated to } & \$ 170,000 \\\text { product on the Basis of Square Meters Occupied) } & \\\hline \text { Total Cost } & \$ 1,745,000 \\\hline \text { Operating Income (Loss) } & \$ 145,000 \\\hline\end{array}$ Bingham Company anticipates no change in the operating result for Product $\mathrm{J}$ in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether or not to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision. -Assume that discontinuing the manufacture and sale of Product J will not affect the sale of other products.If the company discontinues Product J,what will be the change in annual operating income due to this decision?

Pitkin Company produces a part used in the manufacture of one of its products.The unit product cost of the part is $33,computed as follows: $\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 12 \\\hline \text { Direct Labour } & \$ 8 \\\hline \text { Variable Manufacturing Overhead } & \$ 3 \\\hline \text { Fixed Manufacturing Overhead } & \$ 10 \\\hline \text { Unit Product Cost } & \$ 33 \\\hline\end{array}$ An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each.The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier.Assume that direct labour is an avoidable cost in this decision.Based on these data,what will be the per-unit dollar advantage or disadvantage of purchasing the parts from the outside supplier?

The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000.If the lanterns are re-machined for $5,000,they could be sold for $9,000.Alternatively,the lanterns could be sold for scrap for $1,000.Which alternative is more desirable,and what are the total relevant costs for that alternative?

A study has been conducted to determine if one of the departments in Parry Company should be discontinued.The contribution margin in the department is $50,000 per year.Fixed expenses charged to the department are $65,000 per year.It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department were discontinued,the company's overall operating income per year would change by how much?

Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs, which would be allocated to this part, amount to $300,000 per year. -What would the annual cost of additional supervision have to be in order for Hadley to be economically indifferent to making or buying the component? (Assume all other conditions stay the same.)

Bowen Company produces products P,Q,and R from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced.Data for Bowen's operations for the current year are as follows: $\begin{array}{|l|r|r|r|}\hline & & \text { Allocated Joint } &{\text { Sales Value }} \\\hline \text { Product } & \text { Units Produced } & \text { Production Cost } & \text { At Split-off } \\\hline \mathrm{P} & 4,000 & \$ 28,000 & \$ 38,000 \\\hline \mathrm{Q} & 7,000 & 49,000 & 47,000 \\\hline \mathrm{R} & 2,000 & 14,000 & 16,000 \\\hline\end{array}$ Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000.Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $65,000.Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $25,000. Required: Which products should be processed beyond the split-off point? $\begin{array}{|l|r|r|r|}\hline& \mathrm{P} & \mathrm{Q} & \mathrm{R} \\\hline \text { Sales value after further processing } & \$ 50,000 & \$ 65,000 & \$ 25,000 \\\hline \text { Sales value at split-off } & 38,000 & 47,000 & 16,000 \\\hline \text { Added sales value from processing } & \$ 12,000 & \$ 18,000 & \$ 9,000 \\\hline \text { Added processing costs } & 10,000 & 35,000 & \underline{6,000} \\\hline \text { Net gain (loss) from further processing } & \$ 2,000 & \$(17,000) & \$ 3,000 \\\hline\end{array}$

Eckert Company uses the absorption costing approach to cost-plus pricing to set prices for its products. Based on budgeted sales of 18,000 units next year, the unit product cost of a particular product is $60.40. The company's selling, general, and administrative expenses for this product are budgeted to be $370,800 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 11%. - The markup on absorption cost for this product would be closest to which of the following?

Which of the following best describes a plant operating at capacity?

The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month, which represents the company's capacity: $\begin{array} { | l | r | } \hline \text { Manufacturing: } & \\\hline \text { Direct Materials } & \$ 1.00 \\\hline \text { Direct Labour } & \$ 2.00 \\\hline \text { Variable Overhead } & \$ 0.50 \\\hline \text { Fixed Overhead } & \$ 0.90 \\\hline \text { Selling and Administrative: } & \\\hline \text { Variable } & \$ 1.50 \\\hline \text { Fixed } & \$ 0.60 \\\hline\end{array}$ Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labour is a variable cost. -How much will the company's operating income be increased or (decreased) if it prices the 1,000 units in the special order at $6 each?

Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is: $\begin{array}{|l|r|}\hline \text { Variable Manufacturing Cost } & \$ 12 \\\hline \text { Fixed Manufacturing Cost } & \$ 9 \\\hline \text { Unit Product Cost } & \$ 21 \\\hline\end{array}$ The part can be purchased from an outside supplier for $20 per unit.If the part is purchased from the outside supplier,two-thirds of the fixed manufacturing costs can be eliminated.What will be the annual impact on the company's operating income of buying the part from the outside supplier? (Do not round intermediate calculations.)

In target costing,the anticipated competitive market price of a product determines its maximum allowable product cost.

Bingham Company manufactures and sells Product J. Results for last year for the manufacture and sale of Product J are as follows: $\begin{array}{|l|r|}\hline \text { Sales }(10,000 \text { units at } \$ 160 \text { each) } & \$ 1,600,000 \\\hline \text { Less: Costs; } & \$ 960,000 \\\hline \text { Variable Production Costs } & \$ 240,000 \\\hline \text { Sales Commisions }-15 \% \text { of Sales } & \$ 195,000 \\\hline \text { Salaries of Line Supervisors } & \$ 180,000 \\\hline \text { Traceable Fixed Factory Overhead (Allocated to } & \$ 170,000 \\\text { product on the Basis of Square Meters Occupied) } & \\\hline \text { Total Cost } & \$ 1,745,000 \\\hline \text { Operating Income (Loss) } & \$ 145,000 \\\hline\end{array}$ Bingham Company anticipates no change in the operating result for Product $\mathrm{J}$ in the foreseeable future if the product is produced. Bingham is re-examining all of its products and is trying to decide whether or not to discontinue the manufacture and sale of Product J. The company's total fixed factory overhead cost would not be affected by this decision. -Assume that discontinuing Product J would result in a $100,000 increase in the contribution margin of other product lines.How many units of Product J would have to be sold next year for the company to be as well off as if it just dropped Product J and enjoyed the increase in contribution margin from other products?

Trevor Company is contemplating the introduction of a new product.The company has gathered the following information concerning the product: $\begin{array}{|l|r|}\hline \text { Number of Units to Be produced and Sold Each Year } & 12,000 \\\hline \text { Investment Required by the Company } & \$ 200,000 \\\hline \text { Projected Unit Product Cost } & \$ 25 \\\hline \text { Projected Annual Selling, General, and Administrative Expenses } & \$ 90,000 \\\hline \text { Desired Rate of Return on Investment } & 15 \% \\\hline\end{array}$ The company uses the absorption costing approach to cost-plus pricing. Required: a)Compute the markup on absorption cost. b)Compute the target selling price. c)If the price computed in part b)above is charged,and costs turn out as projected,can the company be assured that no loss will be sustained on the new product? Explain.

Green Hornet Company is contemplating the introduction of a new product.The company has gathered the following information concerning the product: $\begin{array}{|l|r|}\hline \text { Number of Units to Be Produced and Sold Each Year } & 16,000 \\\hline \text { Investment Required by the Company } & 400,000 \\\hline \text { Expected Unit Product cost } & \$ 30 \\\hline \text { Expected Annual Selling, General, and Administrative Expenses } & \$ 100,000 \\\hline \text { Desired Rate of Return on Investment } & 20 \% \\\hline\end{array}$ The company uses the absorption costing approach to cost-plus pricing. Required: a)Compute the markup on absorption cost. b)Compute the target selling price.

The book value of old equipment is NOT a relevant cost in an equipment replacement decision.

Using the profitability index,it is easy to decide which product is less profitable and should be de-emphasized.

Holt Company makes three products in a single facility.Data concerning these products follow: $\begin{array}{|l|r|r|r|}\hline &&{\text { Products }} \\\hline & \text { A } & \text { B } & \text { C } \\\hline \text { Selling price per unit } & \$ 67.90 & \$ 57.70 & \$ 43.90 \\\hline \text { Direct materials } & \$ 12.10 & \$ 10.30 & \$ 8.60 \\\hline \text { Direct labour } & \$ 14.10 & \$ 8.00 & \$ 6.80 \\\hline \text { Variable manufacturing overhead } & \$ 2.60 & \$ 2.20 & \$ 1.80 \\\hline \text { Variable selling cost per unit } & \$ 2.50 & \$ 2.20 & \$ 2.50 \\\hline \text { Mixing minutes per unit } & 2.70 & 3.30& 4.70 \\\hline \text { Monthly demand in units } & 1,000& 3,000 & 3,000 \\\hline\end{array}$ The mixing machines are potentially a constraint in the production facility.A total of 25,800 minutes are available per month on these machines. Direct labour is a variable cost in this company. Required: a)How many minutes of mixing machine time would be required to satisfy demand for all four products? b)How much of each product should be produced,rounded to the nearest whole unit,to maximize operating income? c)Up to how much should the company be willing to pay,rounded to the nearest whole cent,for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?