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Chapter 13 Relevant Costs for Decision Making Multiple Choice Questions 16 Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called: A) sunk costs B) opportunity costs C) avoidable costs D) irrelevant costs 17 Consider the following statements: I II III Assemble all costs associated with each alternative being considered Eliminate those costs that are sunk Eliminate those costs that differ between alternatives Which of the above statements does not represent a step in identifying the relevant costs in a decision problem? A) Only I B) Only II C) Only III D) Only I and III 18 Which of the following cash flows is relevant in a decision about accepting Alternative X or Alternative Y? A) a cash inflow for Alternative X that is not a cash inflow for Alternative Y B) a cash inflow that is lost if Alternative X is accepted and is not lost if Alternative Y is accepted C) a cash outflow that is avoided if Alternative X is accepted and is not avoided if Alternative Y is accepted D) all of the above 19 Which of the following best describes an opportunity cost: A) it is a relevant cost in decision making, but is not part of the traditional accounting records B) it is not a relevant cost in decision making, but is part of the traditional accounting records C) it is a relevant cost in decision making, and is part of the traditional accounting records D) it is not a relevant cost in decision making, and is not part of the traditional accounting records Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-5 Chapter 13 Relevant Costs for Decision Making 20 Consider the following statements: I A division's net operating income, after deducting both traceable and allocated common corporate costs, is negative II The division's avoidable fixed costs exceed its contribution margin III The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin Which of the above statements give an economic reason for eliminating the division? A) Only I B) Only II C) Only III D) Only I and II 21 The Jabba Company manufactures the “Snack Buster” which consists of a wooden snack chip bowl with an attached porcelain dip bowl Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier? A) B) C) D) Fixed overhead cost The variable that can be eliminated if selling the bowls are purchased cost of the from the outside supplier Snack Buster Yes Yes Yes No No Yes No No 22 The acceptance of a special order will improve overall net operating income so long as the revenue from the special order exceeds: A) the contribution margin on the order B) the incremental costs associated with the order C) the variable costs associated with the order D) the sunk costs associated with the order 23 Kinsi Corporation manufactures five different products All five of these products must pass through a stamping machine in its fabrication department This machine is Kinsi's constrained resource Kinsi would make the most profit if it produces the product that: A) uses the lowest number of stamping machine hours B) generates the highest contribution margin per unit C) generates the highest contribution margin ratio D) generates the highest contribution margin per stamping machine hour 13-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 24 In a sell or process further decision, consider the following costs: I II III A variable production cost incurred prior to split-off A variable production cost incurred after split-off An avoidable fixed production cost incurred after split-off Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further? A) Only I B) Only III C) Only I and II D) Only I and III 25 Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $50,000 If the lamps are reworked for $20,000, they could be sold for $35,000 Alternatively, the lamps could be sold for $8,000 for scrap In a decision model analyzing these alternatives, the sunk cost would be: A) $8,000 B) $15,000 C) $20,000 D) $50,000 26 Hodge Inc has some material that originally cost $74,600 The material has a scrap value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for $54,400 What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap? A) -$79,100 B) -$21,700 C) -$4,500 D) $52,900 Solution: Incremental revenue from reworking ($54,400 − $1,500) $52,900 Less incremental revenue from selling as scrap 57,400 Net loss from reworking ($ 4,500) 27 Milford Corporation has in stock 16,100 kilograms of material R that it bought five years ago for $5.75 per kilogram This raw material was purchased to use in a product line that has been discontinued Material R can be sold as is for scrap for $3.91 per kilogram An alternative would be to use material R in one of the company's current products, S88Y, which currently requires kilograms of a raw material that is available for $7.60 per kilogram Material R can be modified at a cost of $0.77 per kilogram so that it can be used as a substitute for this material in the production of product S88Y However, after modification, kilograms of material R is required for every unit of product S88Y that is produced Milford Corporation has now received a Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-7 Chapter 13 Relevant Costs for Decision Making request from a company that could use material R in its production process Assuming that Milford Corporation could use all of its stock of material R to make product S88Y or the company could sell all of its stock of the material at the current scrap price of $3.91 per kilogram, what is the minimum acceptable selling price of material R to the company that could use material R in its own production process? A) $0.88 B) $3.03 C) $4.57 D) $3.91 Solution: Product S88Y: Current cost (2 kg @ $7.60): $15.20 If material R were used, kilograms would be needed It currently costs $15.20 for Product S88Y; to maintain this same cost, material R would need to cost $3.03 per kilogram [($15.20 ÷ kg) − $0.77] The company should sell material R for $3.91 per kilogram 28 Otool Inc is considering using stocks of an old raw material in a special project The special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company $2,112 in total If the company were to buy new supplies of this raw material on the open market, it would cost $9.25 per kilogram However, the company has no other use for this raw material and would sell it at the discounted price of $8.35 per kilogram if it were not used in the special project The sale of the raw material would involve delivery to the purchaser at a total cost of $71.00 for all 240 kilograms What is the relevant cost of the 240 kilograms of the raw material when deciding whether to proceed with the special project? A) $1,933 B) $2,004 C) $2,220 D) $2,112 Solution: Opportunity cost of sales foregone if special project is undertaken ($8.35 × 240) $2,004 Less: delivery cost 71 Relevant cost of 240 kilograms of raw material $1,933 29 Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter Material W34C is used in the company's main product and is replenished on a periodic basis The resale value of the existing stock of the material is $7.60 per liter New stocks of the material can be readily purchased for $8.35 per liter What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order? 13-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making A) $6,481 B) $6,376 C) $6,513 D) $5,928 Solution: Relevant cost = $8.35 per liter × 780 liters = $6,513 30 Schickel Inc regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3,128 several weeks ago If this were to be sold as is on the open market as surplus material, it would fetch $5.95 per liter New stocks of the material can be purchased on the open market for $6.45 per liter, but it must be purchased in lots of 1,000 liters You have been asked to determine the relevant cost of 760 liters of the material to be used in a job for a customer The relevant cost of the 760 liters of material B39U is: A) $4,902 B) $4,672 C) $4,522 D) $6,450 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Hard Source: CIMA, adapted Solution: Relevant cost = $6.45 per liter × 760 liters = $4,902 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-9 Chapter 13 Relevant Costs for Decision Making 31 Munafo Corporation is a specialty component manufacturer with idle capacity Management would like to use its extra capacity to generate additional profits A potential customer has offered to buy 6,500 units of component VGI Each unit of VGI requires unit of material I57 and units of material M97 Data concerning these two materials follow: Current Original Market Disposal Units in Cost Per Price Value Material Stock Unit Per Unit Per Unit I57 2,400 $9.10 $9.40 $8.95 M97 33,960 $4.70 $4.70 $3.50 Material I57 is in use in many of the company's products and is routinely replenished Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VGI? A) $174,850 B) $213,130 C) $213,850 D) $171,925 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Hard Source: CIMA, adapted Solution: # Required Relevant Material per unit price I57 1× $9.40 = M97 5× $3.50 = Total per unit relevant cost Total $ 9.40 17.50 $26.90 Minimum acceptable price for 6,500 units of VGI = $26.90 per unit × 6,500 units = $174,850 13-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 32 Winder Corporation is a specialty component manufacturer with idle capacity Management would like to use its extra capacity to generate additional profits A potential customer has offered to buy 3,000 units of component QEA Each unit of QEA requires units of material F85 and units of material E71 Data concerning these two materials follow: Original Current Disposal Units in Cost Per Market Price Value Per Material Stock Unit Per Unit Unit F85 740 $4.90 $4.75 $4.20 E71 13,680 $5.00 $4.70 $3.60 Material F85 is in use in many of the company's products and is routinely replenished Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product QEA? A) $126,702 B) $141,750 C) $126,295 D) $145,965 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Hard Source: CIMA, adapted Solution: Total needed (3,000 × 5) = F85 15,000 Inventory # of units to purchase on market Total cost $4.75 $ 71,250 $4.70 13,680 $3.60 Minimum acceptable price for 3,000 units of QEA 6,204 49,248 $126,702 (3,000 × 5) = E71 15,000 15,000 Relevant price (15,000 − 13,680) = 1,320 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-11 Chapter 13 Relevant Costs for Decision Making 33 Rice Corporation currently operates two divisions which had operating results last year as follows: Sales Variable costs Contribution margin Traceable fixed costs Allocated common corporate costs Net operating income (loss) West Division $600,000 310,000 290,000 110,000 90,000 $ 90,000 Troy Division $300,000 200,000 100,000 70,000 45,000 ($ 15,000) Since the Troy Division also sustained an operating loss in the prior year, Rice's president is considering the elimination of this division Troy Division's traceable fixed costs could be avoided if the division were eliminated The total common corporate costs would be unaffected by the decision If the Troy Division had been eliminated at the beginning of last year, Rice Corporation's operating income for last year would have been: A) $15,000 higher B) $30,000 lower C) $45,000 lower D) $60,000 higher Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Medium Source: CPA, adapted Solution: Troy Division: Contribution margin Less: traceable fixed costs Segment margin of Troy Division $100,000 70,000 $ 30,000 Rice Corporation’s operating income would have been $30,000 less without the segment margin contributed by the Troy Division 13-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 34 Beaver Company (a multi-product firm) produces 5,000 units of Product X each year Each unit of Product X sells for $8 and has a contribution margin of $5 If Product X is discontinued, $18,000 of fixed overhead would be eliminated As a result of discontinuing Product X, the company's overall operating income would: A) decrease by $25,000 B) increase by $43,000 C) decrease by $7,000 D) increase by $7,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Medium Solution: Fixed overhead savings if Product X is eliminated Less: contribution margin lost if Product X is discontinued ($5 × 5,000) Decrease in overall operating income if Product X is eliminated $18,000 25,000 ($ 7,000) 35 Milli Company plans to discontinue a division that generates a total contribution margin of $20,000 per year Fixed overhead associated with this division is $50,000, of which $5,000 cannot be eliminated The effect of this discontinuance on Milli's operating income would be an increase of: A) $5,000 B) $20,000 C) $25,000 D) $30,000 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Medium Source: CPA, adapted Solution: Fixed overhead savings if division is discontinued Less: contribution margin lost if division is eliminated Increase in operating income if division is eliminated Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition $45,000 20,000 $25,000 13-13 Chapter 13 Relevant Costs for Decision Making 36 ABD Realty manages five apartment complexes in its region Shown below are summary income statements for each apartment complex: Rental income Expenses Operating income U $1,000 800 $ 200 V W X Y $1,210 $2,347 $1,878 $1,065 1,300 2,600 2,400 1,300 ($ 90) ($ 253) ($ 522) ($ 235) Included in the expenses is $1,200 of common corporate expenses that have been allocated to the apartment complexes based on rental income These common corporate expenses would have to be incurred regardless of how many apartment complexes ABD Realty manages The apartment complex(es) that ABD Realty should consider dropping is (are): A) V, W, X, Y B) W, X, Y C) X, Y D) X Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Hard Source: CMA, adapted Solution: Total rental income = $1,000 + $1,210 + $2,347 + $1,878 + $1,065 = $7,500 U V Rental income $1,000 $1,210 Less expenses 800 1,300 Add back proportional share of common expenses [(Rental income in each column ÷ Total rental income of $7,500) × $1,200]* 160 194 Apartment complex margin $ 360 $ 104 *expenses rounded to nearest whole dollar W $2,347 2,600 X $1,878 2,400 Y $1,065 1,300 376 300 170 $ 123 ($222) ($ 65) Since complexes X and Y have negative margins, ABD Realty should consider dropping those two divisions 13-14 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 145 Anglen Co manufactures and sells trophies for winners of athletic and other events Its manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly production is 14,400 trophies The company normally charges $103 per trophy Cost data for the current level of production are shown below: Variable costs: Direct materials Direct labor Selling and administrative Fixed costs: Manufacturing Selling and administrative $460,800 $316,800 $15,840 $404,640 $74,880 The company has just received a special one-time order for 900 trophies at $48 each For this particular order, no variable selling and administrative costs would be incurred This order would also have no effect on fixed costs Required: Should the company accept this special order? Why? Ans: Only the direct materials and direct labor costs are relevant in this decision To make the decision, we must compute the average direct materials and direct labor cost per unit Direct materials Direct labor Total Current monthly production Average direct materials and direct labor cost per unit $460,800 316,800 $777,600 14,400 $54 Because price on the special order is $48 per trophy and the relevant cost is $54, the company would suffer a loss of $6 per trophy Therefore, the special order should not be accepted AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Medium Source: CMA, adapted 13-126 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 146 Wehrs Corporation has received a request for a special order of 6,000 units of product K19 for $32.30 each The normal selling price of this product is $33.45 each, but the units would need to be modified slightly for the customer The normal unit product cost of product K19 is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $15.00 3.80 1.40 2.10 $22.30 Direct labor is a variable cost The special order would have no effect on the company's total fixed manufacturing overhead costs The customer would like some modifications made to product K19 that would increase the variable costs by $4.90 per unit and that would require a one-time investment of $23,000 in special molds that would have no salvage value This special order would have no effect on the company's other sales The company has ample spare capacity for producing the special order Required: Determine the effect on the company's total net operating income of accepting the special order Show your work! Ans: Incremental revenue (6,000 units @ $32.30 per unit) Less incremental costs: Direct materials (6,000 units @ $15.00 per unit) Direct labor (6,000 units @ $3.80 per unit) Variable manufacturing overhead (6,000 units @ $1.40 per unit) Modifications (6,000 units @ $4.90 per unit) Special molds Total incremental cost Incremental net operating income $193,800 90,000 22,800 8,400 29,400 23,000 173,600 $ 20,200 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-127 Chapter 13 Relevant Costs for Decision Making 147 A customer has asked Lalka Corporation to supply 3,000 units of product H60, with some modifications, for $34.70 each The normal selling price of this product is $46.35 each The normal unit product cost of product H60 is computed as follows: Direct materials $14.70 Direct labor 1.30 Variable manufacturing overhead 7.00 Fixed manufacturing overhead 7.90 Unit product cost $30.90 Direct labor is a variable cost The special order would have no effect on the company's total fixed manufacturing overhead costs The customer would like some modifications made to product H60 that would increase the variable costs by $3.80 per unit and that would require a one-time investment of $24,000 in special molds that would have no salvage value This special order would have no effect on the company's other sales The company has ample spare capacity for producing the special order Required: Determine the effect on the company's total net operating income of accepting the special order Show your work! Ans: Incremental revenue (3,000 units @ $34.70 per unit) Less incremental costs: Direct materials (3,000 units @ $14.70 per unit) Direct labor (3,000 units @ $1.30 per unit) Variable manufacturing overhead (3,000 units @ $7.00 per unit) Modifications (3,000 units @ $3.80 per unit) Special molds Total incremental cost Incremental net operating income $104,100 44,100 3,900 21,000 11,400 24,000 104,400 ($ 300) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Easy 13-128 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 148 Gloddy Company makes three products in a single facility These products have the following unit product costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost Product A Product B Product C $24.90 $25.70 $26.60 13.30 17.10 15.70 2.50 2.80 3.10 19.80 27.70 21.00 $60.50 $73.30 $66.40 Additional data concerning these products are listed below Mixing minutes per unit Selling price per unit Variable selling cost per unit Monthly demand in units Product A Product B Product C 2.50 1.70 1.60 $71.50 $87.90 $83.00 $2.30 $1.90 $3.80 1,000 3,000 3,000 The mixing machines are potentially the constraint in the production facility A total of 10,800 minutes are available per month on these machines Direct labor 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 to maximize net operating income? (Round off to the nearest whole unit.) c Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.) Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-129 Chapter 13 Relevant Costs for Decision Making Ans: a Demand on the mixing machine: Mixing minutes per unit Monthly demand in units Total minutes required Product A Product B Product C 2.50 1.70 1.60 1,000 3,000 3,000 2,500 5,100 4,800 Total time required for all products: 12,400 b Optimal production plan: Selling price per unit Product A Product B Product C $71.50 $87.90 $83.00 Direct materials Direct labor Variable manufacturing overhead Variable selling cost per unit Total variable cost per unit $24.90 13.30 2.50 2.30 $43.00 $25.70 17.10 2.80 1.90 $47.50 $26.60 15.70 3.10 3.80 $49.20 Contribution margin per unit Mixing minutes per unit Contribution margin per minute $28.50 2.50 $11.40 $40.40 1.70 $23.76 $33.80 1.60 $21.13 Rank in terms of profitability Optimal production 360 3,000 3,000 c The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $11.40 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Hard 13-130 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 149 Holzmeyer Company makes three products in a single facility Data concerning these products follow: Selling price per unit Direct materials Direct labor Variable manufacturing overhead Variable selling cost per unit Mixing minutes per unit Monthly demand in units Product A Product B Product C $64.50 $64.80 $63.30 $20.90 $14.50 $18.30 $30.80 $33.40 $26.00 $1.60 $1.90 $2.10 $1.00 $3.40 $1.50 3.50 3.10 3.50 4,000 2,000 4,000 The mixing machines are potentially the constraint in the production facility A total of 32,400 minutes are available per month on these machines Direct labor 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 to maximize net operating income? (Round off to the nearest whole unit.) c Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.) Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-131 Chapter 13 Relevant Costs for Decision Making Ans: a Demand on the mixing machine: Mixing minutes per unit Monthly demand in units Total minutes required Product A Product B Product C Total 3.50 3.10 3.50 4,000 2,000 4,000 14,000 6,200 14,000 34,200 b Optimal production plan: Selling price per unit Product A Product B Product C $ 64.50 $ 64.80 $ 63.30 Direct materials Direct labor Variable manufacturing overhead Variable selling cost per unit Total variable cost per unit $20.90 30.80 1.60 1.00 $54.30 $14.50 33.40 1.90 3.40 $53.20 $18.30 26.00 2.10 1.50 $47.90 Contribution margin per unit Mixing minutes per unit Contribution margin per minute $10.20 3.50 $2.91 $11.60 3.10 $3.74 $15.40 3.50 $4.40 Rank in terms of profitability Optimal production 3,486 2,000 4,000 c The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $2.91 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Medium 13-132 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 150 Garson, Inc produces three products Data concerning the selling prices and unit costs of the three products appear below: Selling price Variable costs Fixed costs Milling machine time (minutes) Product F Product G Product H $50 $80 $70 $40 $50 $55 $15 $20 $12 Fixed costs are applied to the products on the basis of direct labor hours Demand for the three products exceeds the company's productive capacity The milling machine is the constraint, with only 2,400 minutes of milling machine time available this week Required: a Given the milling machine constraint, which product should be emphasized? Support your answer with appropriate calculations b Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of milling machine time? Ans: a The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is milling machine time Selling price Variable costs Contribution margin Milling machine time (minutes) Contribution margin per minute Product F Product G Product H $50 $80 $70 40 50 55 $10 $30 $15 $2.50 $15.00 $3.00 Product G should be emphasized because it has the greatest contribution margin per unit of the scarce resource b If additional milling machine time would be used to produce more of Product G, the time would be worth 60 minutes per hour × $15 per minute = $900 per hour AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Hard Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-133 Chapter 13 Relevant Costs for Decision Making 151 Brissett Corporation makes three products that use the current constraint, which is a particular type of machine Data concerning those products appear below: Selling price per unit Variable cost per unit Time on the constraint (minutes) GK LQ XK $119.51 $226.07 $228.96 $89.87 $176.86 $178.92 1.90 3.70 3.60 Required: a Rank the products in order of their current profitability from the most profitable to the least profitable In other words, rank the products in the order in which they should be emphasized Show your work! b Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product Up to how much should the company be willing to pay to acquire more of the constrained resource? Ans: a Selling price per unit Variable cost per unit Contribution margin per unit Time on the constraint (minutes) Contribution margin per unit of the constrained resource Ranking GK LQ XK $119.51 $226.07 $228.96 89.87 176.86 178.92 $ 29.64 $ 49.21 $ 50.04 1.90 3.70 3.60 $15.60 $13.30 $13.90 Resulting ranking of products: GK, XK, LQ b The company should be willing to pay up to $13.30 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product LQ By assumption, the other products will already have been produced up to demand AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Easy 13-134 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 152 The constraint at Dreyfus Inc is an expensive milling machine The three products listed below use this constrained resource Selling price per unit Variable cost per unit Time on the constraint (minutes) VY QX AM $78.65 $421.59 $145.92 $62.40 $331.20 $113.28 1.30 6.90 2.40 Required: a Rank the products in order of their current profitability from the most profitable to the least profitable In other words, rank the products in the order in which they should be emphasized Show your work! b Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product Up to how much should the company be willing to pay to acquire more of the constrained resource? Ans: a Selling price per unit Variable cost per unit Contribution margin per unit Time on the constraint (minutes) Contribution margin per unit of the constrained resource Ranking VY QX AM $78.65 $421.59 $145.92 62.40 331.20 113.28 $16.25 $ 90.39 $ 32.64 1.30 6.90 2.40 $12.50 $13.10 $13.60 Resulting ranking of products: AM, QX, VY b The company should be willing to pay up to $12.50 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product VY By assumption, enough of the other two products will already have been produced to fully satisfy demand AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-135 Chapter 13 Relevant Costs for Decision Making 153 Iaria Corporation makes two products from a common input Joint processing costs up to the split-off point total $33,600 a year The company allocates these costs to the joint products on the basis of their total sales values at the split-off point Each product may be sold at the split-off point or processed further Data concerning these products appear below: Allocated joint processing costs Sales value at split-off point Costs of further processing Sales value after further processing Product X Product Y $19,600 $14,000 $28,000 $20,000 $22,400 $15,700 $53,500 $33,500 Required: a What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? b What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? c What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? d What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point? Ans: a & b Sales value after further processing Costs of further processing Benefit of further processing Less: Sales value at split-off point Net advantage (disadvantage) Product X $53,500 22,400 31,100 28,000 $ 3,100 Product Y $33,500 15,700 17,800 20,000 ($ 2,200) Product X $31,100 Product Y $17,800 c & d Minimum selling price at split-off AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Hard 13-136 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 154 Prosner Corp manufactures three products from a common input in a joint processing operation Joint processing costs up to the split-off point total $500,000 per year The company allocates these costs to the joint products on the basis of their total sales value at the split-off point Each product may be sold at the split-off point or processed further The additional processing costs and sales value after further processing for each product (on an annual basis) are: Further Sales Value Sales Value Processing After Further at Split-Off Costs Processing Product D $300,000 $125,000 $534,000 Product F $275,000 $210,000 $450,000 Product G $195,000 $135,000 $360,000 The “Further Processing Costs” consist of variable and avoidable fixed costs Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations Ans: Sales value after further processing Sales value at split-off Incremental revenue Further processing costs Incremental income (loss) Product D $534,000 300,000 234,000 125,000 $109,000 Product F Product G $450,000 $360,000 275,000 195,000 175,000 165,000 210,000 135,000 ($ 35,000) $ 30,000 Products D and G should be sold after further processing beyond the split-off point Product F should be sold at the split-off point without any further processing AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-137 Chapter 13 Relevant Costs for Decision Making 155 Swagger Corporation purchases potatoes from farmers The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds The peels can then be processed further to make a cocktail of organic nutrients And the depeeled spuds can be processed further to make frozen french fries A batch of potatoes costs $63 to buy from farmers and $12 to peel in the company's plant The peels produced from a batch can be sold as is for animal feed for $29 or processed further for $15 to make the cocktail of nutrients that are sold for $41 The depeeled spuds can be sold as is for $40 or processed further for $22 to make frozen french fries that are sold for $77 Required: a Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? Show your work! b Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product? Explain Ans: a b Analysis of the profitability of the overall operation: Combined final sales value ($41 + $77) $118 Less costs of producing the end products: Cost of potatoes $63 Cost of peeling 12 Cost of further processing peels 15 Cost of further processing depeeled spuds 22 112 Profit (loss) $ Analysis of sell or process further: Final sales value after further processing Less sales value at split-off point Incremental revenue from further processing Less cost of further processing Profit (loss) from further processing Cocktail of Organic Nutrients $41 29 12 15 ($ 3) Don’t process further Frozen French Fries $77 40 37 22 $15 Process further AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Easy 13-138 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 13 Relevant Costs for Decision Making 156 Farrugia Corporation produces two intermediate products, A and B, from a common input Intermediate product A can be further processed into end product X Intermediate product B can be further processed into end product Y The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15 Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32 Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64 Required: a Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work! b Should each of the intermediate products, A and B, be sold as is or processed further into an end product? Explain Ans: a b Analysis of the profitability of the overall operation: Combined final sales value ($32 + $64) $96 Less costs of producing the end products: Cost of common input $36 Cost of processing common input 15 Cost of further processing product A 14 Cost of further processing product B 28 93 Profit (loss) $3 Analysis of sell or process further: Final sales value after further processing Less sales value at split-off point Incremental revenue from further processing Less cost of further processing Profit (loss) from further processing Product X $32 21 11 14 ($ 3) Don’t process further Product Y $64 44 20 28 ($ 8) Don’t process further AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 13-139 Chapter 13 Relevant Costs for Decision Making 13-140 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition