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Chapter 13 Relevant Costs for Decision-Making True/False T Medium One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is T Medium Future costs that do not differ among the alternatives are not relevant in a decision F Medium Variable costs are always relevant costs T Easy An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another T Easy A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen T Easy The book value of old equipment is not a relevant cost in an equipment replacement decision problem F Medium Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product T Easy If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped T Easy The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero 10 F Hard Managers should pay little attention to bottleneck operations since they have limited capacity for producing output Managerial Accounting, 9/e 216 11 F Easy Opportunity costs are recorded in the accounts of an organization 12 T Easy All other things equal, it is profitable to continue processing a joint product after the splitoff point so long as the incremental revenue from further processing exceeds the incremental costs of further processing 13 F Medium Joint production costs are relevant costs in decisions about what to do with a product from the splitoff point onward in the production process 14 F Medium Two or more different products that are manufactured in the same production period are known as joint products 15 F Easy A merchandising firm which buys all of its inventory from outside suppliers is an example of a firm that is vertically integrated Multiple Choice 16 B Easy Costs which are always relevant in decision making are those costs which are: a. variable b. avoidable c. sunk d. fixed 17 D Easy Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is: a. direct materials b. variable overhead c. fixed overhead that will be avoided if the special offer is accepted d. common fixed overhead that will continue if the special offer is not accepted 18 C Easy To maximize total contribution margin, a firm faced with a production constraint should: a. promote those products having the highest unit contribution margins b. promote those products having the highest contribution margin ratios c. promote those products having the highest contribution margin per unit of constrained resource d. promote those products have the highest contribution margins and contribution margin ratios 217Managerial Accounting, 9/e 19 B Hard A plant operating at capacity would suggest that: a. every machine and person in the plant is working at the maximum possible rate b. only some specific machines or processes are operating at the maximum rate possible c. fixed costs will need to change to accommodate increased demand d. managers should produce those products with the highest contribution margin in order to deal with the constrained resource 20 C Medium Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck)? a. Reduce the number of defective units produced at the bottleneck b. Pay overtime to workers assigned to the bottleneck c. Pay overtime to workers assigned to work stations located after the bottleneck in the production process d. Subcontract work that would otherwise required use of the bottleneck 21 D Medium The opportunity cost of making a component part in a factory with no excess capacity is the: a. variable manufacturing cost of the component b. fixed manufacturing cost of the component c. cost of the production given up in order to manufacture the component d. net benefit foregone from the best alternative use of the capacity required 22 D Easy A joint product is: a. any product which consists of several parts b. any product produced by a firm with more than one product line c. any product involved in a make or buy decision d. one of several products produced from a common input Managerial Accounting, 9/e 218 23 D Medium Consider the following statements: I. A vertically integrated firm is more dependent on its suppliers than a firm that is not vertically integrated II. Many firms feel they can control quality better by making their own parts III. A vertically integrated firm realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations Which of the above statements represent advantages to a firm that is vertically integrated? a. Only I b. Only III c. Only I and II d. Only II and III 24 A Easy CPA adapted The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000. If the lanterns are remachined 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. remachine and $5,000 b. remachine and $25,000 c. scrap and $20,000 d. scrap and $19,000 25 B Medium CPA adapted Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay's predictions for next year, 240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased or decreased as a result of the special order? a. $60,000 decrease b. $30,000 increase c. $36,000 increase d. $180,000 increase 219Managerial Accounting, 9/e 26 B Medium CPA adapted The manufacturing capacity of Jordan Company's facilities is 30,000 units a year. A summary of operating results for last year follows: Sales (18,000 units @ $100) $1,800,000 Variable costs . 990,000 Contribution margin 810,000 Fixed costs 495,000 Net operating income $ 315,000 A foreign distributor has offered to buy 15,000 units at $90 per unit next year. Jordan expects its regular sales next year to be 18,000 units. If Jordan accepts this offer and rejects some business from regular customers so as not to exceed capacity, what would be the total net operating income next year? (Assume that the total fixed costs would be the same no matter how many units are produced and sold.) a. $390,000 b. $705,000 c. $840,000 d. $855,000 27 A Easy CPA adapted Wagner Company sells product A for $21 per unit. Wagner's unit product cost based on the full capacity of 200,000 units is as follows: Direct materials $ 4 Direct labor . 5 Manufacturing overhead . 6 Unit product cost $15 A special order offering to buy 20,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $3 per unit for shipping. Wagner has sufficient idle capacity to manufacture the additional units Twothirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price for the special order, the minimum acceptable selling price per unit should be: a. $14 b. $15 c. $16 d. $18 Managerial Accounting, 9/e 220 28 C Easy 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 is discontinued, the company's overall net operating income would: a. decrease by $25,000 per year b. increase by $25,000 per year c. decrease by $10,000 per year d. increase by $10,000 per year 29 C Easy A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would: a. decrease by $20,000 per year b. increase by $20,000 per year c. decrease by $10,000 per year d. increase by $30,000 per year 30 A Easy Lusk Company produces and sells 15,000 units of Product A each month. The selling price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product A should be discontinued. The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product was discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would: a. decrease by $60,000 per month b. increase by $10,000 per month c. increase by $20,000 per month d. decrease by $20,000 per month 31 B Easy CPA adapted Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs. Of the fixed costs, $21,000 cannot be avoided. The effect of this discontinuance on Manor's overall net operating income would be a(an): a. decrease of $3,000 b. increase of $3,000 c. decrease of $24,000 d. increase of $24,000 221Managerial Accounting, 9/e 32 C Easy CPA adapted Gata Co. plans to discontinue a department that has a $48,000 contribution margin and $96,000 of fixed costs. Of these fixed costs, $42,000 cannot be avoided. What would be the effect of this discontinuance on Gata's overall net operating income? a. Increase of $48,000 b. Decrease of $48,000 c. Increase of $6,000 d. Decrease of $6,000 33 B Medium The Cook Company has two divisionsEastern and Western. The divisions have the following revenues and expenses: Eastern Western Sales . $550,000 $500,000 Variable costs 275,000 200,000 Direct fixed costs 180,000 150,000 Allocated corporate costs 170,000 135,000 Net income (loss) (75,000) 15,000 The management of Cook is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, the direct fixed costs associated with this division could be avoided. However, corporate costs would still be $305,000 in total. Given these data, the elimination of the Eastern Division would result in an overall company net income (loss) of: a. $15,000 b. ($155,000) c. ($75,000) d. ($60,000) 34 B Medium 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. The effect on the profit of Manor Company of discontinuing this department would be: a. a decrease of $4,000 b. an increase of $4,000 c. a decrease of $25,000 d. an increase of $25,000 35 D Easy 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: Variable manufacturing cost $12 Fixed manufacturing cost 9 Unit product cost $21 The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be: a. $1,000 increase Managerial Accounting, 9/e 222 b. $1,000 decrease c. $5,000 increase d. $2,000 decrease 36 A Easy 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: Direct materials $12 Direct labor . 8 Variable manufacturing overhead 3 Fixed manufacturing overhead . 10 Unit product cost $33 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 labor is an avoidable cost in this decision. Based on these data, the per unit dollar advantage or disadvantage of purchasing the parts from the outside supplier would be: a. $3 advantage b. $1 advantage c. $1 disadvantage d. $4 disadvantage 223Managerial Accounting, 9/e 37 B Easy CPA adapted Cardinal Company needs 20,000 units of a certain part to use in one of its products. The following information is available: Cost to Cardinal to make the part: Direct materials . $ 4 Direct labor 16 Variable manufacturing overhead 8 Fixed manufacturing overhead 10 $38 Cost to buy the part from the Oriole Company $36 Oriole Company has offered to sell this part to Cardinal company for $36 each. If Cardinal buys the part from Oriole instead of making it, Cardinal would not have any use for the released capacity. In addition, 60% of the fixed manufacturing overhead costs will continue regardless of what decision is made. Assume that direct labor is an avoidable cost in this decision. In deciding whether to make or buy the part, the total relevant costs to make the part are: a. $560,000 b. $640,000 c. $720,000 d. $760,000 38 B Easy CPA adapted Golden, Inc., has been manufacturing 5,000 units of Part 10541 which is used in one of its products. At this level of production, the unit product cost of Part 10541 is as follows: Direct materials $ 2 Direct labor . 8 Variable manufacturing overhead 4 Fixed manufacturing overhead . 6 Unit product cost $20 Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit. Golden has determined that two thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown. Assume that direct labor is an avoidable cost in this decision. To determine whether to accept Brown's offer, the relevant costs to Golden of manufacturing the parts internally are: a. $70,000 b. $80,000 c. $90,000 d. $95,000 Managerial Accounting, 9/e 224 39 B Easy CPA adapted The following standard costs pertain to a component part manufactured by Ashby Company: Direct materials . $ 2 Direct labor 5 Manufacturing overhead 20 Standard cost per unit $27 The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed and this fixed portion would not be affected by this decision. Assume that direct labor is an avoidable cost in this decision. What is the relevant amount of the standard cost per unit to be considered in a decision of whether to make the part internally or buy it from the external supplier? a. $2 b. $15 c. $19 d. $27 40 B Medium The SP Company makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $5.50 Direct labor $5.60 Variable factory overhead $4.75 Fixed factory overhead $4.45 An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Company for this motor is $18. If SP Company decides not to make the motors, there would be no other use for the production facilities and total fixed factory overhead costs would not change. If SP Company decides to continue making the motor, how much higher or lower would net income be than if the motors are purchased from the outside suppler? Assume that direct labor is a variable cost in this company a. $276,000 higher b. $86,000 higher c. $92,000 lower d. $178,000 higher 225Managerial Accounting, 9/e Answer: The $2.00 per unit general overhead cost is not relevant to the decision. This cost will continue regardless of which alternative the company should select. The depreciation of $0.90 per unit is not a relevant cost since its represents a sunk cost (in addition to the fact that the old equipment is worn out and must be replaced). The cost of the new equipment is relevant since the new equipment will not be purchased if the company decides to accept the outside supplier's offer. The cost of supervision is relevant since this cost can be avoided by purchasing the subassemblies Cost Per Unit Make Buy o Outside supplier's price $9.00 Direct materials $3.00 Direct labor ($4.20 x 0.75) 3.15 Variable overhead ($0.60 x 0.75) 0.45 Supervision 0.80 Depreciation . 1.75 o Total $9.15 $9.00 Difference in favor of buying $0.15 Depreciation: ($400,000 $50,000)/5 years = $70,000 per year $70,000 per year/40,000 units = $1.75 per unit At the level of 40,000 subassemblies per year, the company should purchase the subassemblies from the outside supplier 93 Medium Benjamin Signal Company produces products R, J, and C from a joint production process. Each product may be sold at the split off point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin's operations for the current year are as follows: Units Allocated Joint Sales Value Product Produced Production Cost at Splitoff R 8,000 $32,000 $76,000 J 10,000 40,000 71,000 C 5,000 20,000 48,000 Product R can be processed beyond the splitoff point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the splitoff point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the splitoff point for an additional cost of $12,000 and can then be sold for $57,000 Managerial Accounting, 9/e 244 Required: Which products should be processed beyond the splitoff point? Answer: R J C o Sales value after further processing $105,000 $117,000 $57,000 Sales value at splitoff . 76,000 71,000 48,000 Added sales value from processing 29,000 46,000 9,000 Added processing costs 26,000 38,000 12,000 Net gain (loss) from further processing $ 3,000 $ 8,000 $(3,000) Products R and J should be processed beyond the splitoff point. Product C should be sold at splitoff. Joint production costs are not relevant to the decision to sell at splitoff or to process further 94 Medium Bowen Company produces products P, Q, and R from a joint production process. Each product may be sold at the splitoff 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: Allocated Joint Sales Value Product Units Produced Production Cost at Splitoff P 4,000 $28,000 $38,000 Q 7,000 49,000 47,000 R 2,000 14,000 16,000 Product P can be processed beyond the splitoff point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the splitoff point for an additional cost of $35,000 and can then be sold for $65,000. Product R can be processed beyond the splitoff point for an additional cost of $6,000 and can then be sold for $25,000 Required: Which products should be processed beyond the splitoff point? Answer: P Q R o Sales value after further processing $ 50,000 $ 65,000 $ 25,000 Sales value at splitoff . 38,000 47,000 16,000 Added sales value from processing 12,000 18,000 9,000 Added processing costs 10,000 35,000 6,000 Net gain (loss) from further processing $ 2,000 $(17,000) $ 3,000 Products P and R should be processed beyond the splitoff point. Product Q should be sold at splitoff. Joint production costs are not relevant to the decision to sell at splitoff or to process 245Managerial Accounting, 9/e further 95 (Ignore income taxes and the time value of money in this problem.) Madison optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago. Selected information on the two machines is given below: Old New Machine Machine Original cost when new $80,000 $85,000 Accumulated depreciation to date 32,000 Current salvage value 26,000 Annual operating cost 4,000 3,000 Remaining useful life 4 years 4 years Required: Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years Answer: The analysis of the alternatives appears below: Old New Machine Machine Purchase cost $(85,000) Salvage value of old machine 26,000 Operating cost for 4 years . $(16,000) (12,000) Total cost . $(16,000) $(71,000) Therefore, the net disadvantage to purchasing and using the new machine would be $55,000 since its total cost is $55,000 higher than the total cost of using the old machine Managerial Accounting, 9/e 246 96 Hard Juett Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows: Direct materials $29.60 Direct labor 5.80 Variable manufacturing overhead . 2.50 Fixed manufacturing overhead 17.20 Variable selling & administrative expense 1.80 Fixed selling & administrative expense 6.70 The normal selling price of the product is $72.90 per unit An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales Direct labor is a variable cost in this company Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order? Answer: a Variable cost per unit on normal sales: Direct materials $29.60 Direct labor 5.80 Variable manufacturing overhead . 2.50 Variable selling & administrative expense 1.80 Variable cost per unit on normal sales $39.70 Variable cost per unit on special order: Normal variable cost per unit $39.70 Reduction in variable selling & admin. 1.10 Variable cost per unit on special order $38.60 247Managerial Accounting, 9/e Selling price for special order $66.10 Variable cost per unit on special order 38.60 Unit contribution margin on special order 27.50 Number of units in special order 2,000 Increase (decrease) in net operating income $55,000 b. The opportunity cost is just the contribution margin on normal sales: Normal selling price per unit $72.90 Variable cost per unit on normal sales 39.70 Unit contribution margin on normal sales $33.20 c. Minimum acceptable price: Unit contribution margin on normal sales $33.20 Displaced normal sales 1,300 Lost contribution margin displaced sales $43,160 Total variable cost on special order $77,200 $120,360 Number of units in special order 2,000 Minimum acceptable price on special order $60.18 97 Medium When Mr. Ding L. Berry, president and chief executive of Berry, Inc., first saw the segmented income statement below, he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" Product Lines o Total U V W Sales . $250,000 $100,000 $75,000 $75,000 Variable expenses 119,000 37,500 35,000 47,000 Contribution margin 131,000 63,000 40,000 28,000 Traceable fixed expenses* 98,000 31,000 37,000 30,000 Common expenses, allocated 32,900 18,000 10,500 4,400 Operating income (loss) $ 100 $ 14,000 $(7,500) $(6,400) *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued Required: Recommend which segments, if any, should be eliminated. Prepare a report in good form to support your answer Managerial Accounting, 9/e 248 Answer: A segmented income report, without the allocation of common fixed expenses, will provide the basis for deciding which segments to drop Product Lines o Total U V W Sales . $250,000 $100,000 $75,000 $75,000 Variable expenses 119,000 37,500 35,000 47,000 Contribution margin 131,000 63,000 40,000 28,000 Traceable fixed expenses* 98,000 31,000 37,000 30,000 Segment margin 33,000 $ 32,000 $ 3,000 $(2,000) Common expenses, allocated 32,900 Operating income (loss) $ 100 The only segment that possibly should be eliminated is segment W, which shows a negative segment margin of $2,000 98 Medium Northern Stores is a retailer in the upper midwest. The most recent monthly income statement for Northern Stores is given below: Total Store I Store II o Sales $2,100,000 $1,300,000 $ 800,000 Less variable expenses 1,260,000 882,000 378,000 Contribution margin 840,000 418,000 422,000 Less traceable fixed expenses 420,000 231,000 189,000 Segment margin 420,000 187,000 233,000 Less common fixed expenses 350,000 210,000 140,000 Net income . $ 70,000 $ (23,000) $ 93,000 Northern is considering closing Store I. If Store I is closed, onefourth of its traceable fixed expenses would continue to be incurred. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down Required: Compute the overall increase or decrease in the net income of Northern Stores if Store I is closed Answer: Loss in contribution is Store I is closed: Store I contribution margin lost . $(418,000) Store II contribution margin lost (20% x 422,000) (84,400) Total lost contribution (502,400) Fixed costs avoided if Store I is closed (0.75 x 231,000) 173,250_ 249Managerial Accounting, 9/e Net decrease in income of closing Store I $(329,150) Managerial Accounting, 9/e 250 99 Medium The Anaconda Mining Company currently is operating at less than 50 percent of practical capacity. The management of the company expects sales to drop below the present level of 15,000 tons of ore per month very soon. The selling price per ton of ore is $2 and the variable cost per ton is $1. Fixed costs per month total $15,000 Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals markets returns to normal levels and prices rebound. Management has implemented a cost reduction program over the past year that has been successful in reducing costs. Nevertheless, suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $15,000 to $5,000 per month Required: a. Why does management estimate that fixed costs will persist at $5,000 per month even though the mine is temporarily closed? b. At what sales volume should management suspend operations at the mine? Answer: a. Some fixed costs will continue to incurred despite the temporary closing of the mine. Key employees cannot be discharged since these employees will seek employment elsewhere and replacing them could prove to be quite costly A skeleton staff would be needed to perform some administrative functions. Additionally, the maintenance of building and equipment would need to continue to prevent damage that would be costly to repair. Taxes and insurance would continue to be paid during the shutdown period b. Suspension of operations would be desirable when sales volume drops below 10,000 tons as shown below: Fixed costs if mine continues to operate $15,000 Fixed costs if mine is shut down 5,000 Fixed costs to be recovered if mine is operated $10,000 Each ton extracted contributes $1.00 per ton towards fixed costs: Selling price per ton $2.00 Variable cost per ton 1.00 Contribution margin $1.00 Sales volume necessary to recover $10,000 of fixed costs: $10,000 $1.00 = 10,000 tons 251Managerial Accounting, 9/e 100 Hard Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow: Direct materials $35 Direct labor 10 Variable manufacturing overhead . 8 Fixed manufacturing overhead 20 Total manufacturing cost per unit $73 An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If Kramer Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost Required: a. Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, should Kramer Company accept the offer? Fully support your answer with appropriate calculations b. Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps? Answer: a. The analysis of the alternatives follows below: Make Buy Purchase cost $65 Direct materials . $35 Direct labor 10 Variable manufacturing overhead 8 Fixed manufacturing overhead 8* Total cost . $61 $65 * 40% x $20 The company should make the part rather than buy it from the outside supplier since it costs $4 less under that alternative b. The maximum acceptable price is $81 since that is the cost to the company of making the part itself when the opportunity cost is included: Total cost of making the part internally $61 Opportunity cost per unit ($80,000 ÷ 4,000) 20 Total $81 Managerial Accounting, 9/e 252 101 Medium Glocker Company makes three products in a single facility. These products have the following unit product costs: Products o A B C Direct materials . $10.90 $15.80 $ 8.00 Direct labor 12.50 12.60 9.90 Variable manufacturing overhead 2.40 1.20 1.40 Fixed manufacturing overhead 11.60 7.20 7.80 Unit product cost $37.40 $36.80 $27.10 Additional data concerning these products are listed below Products o A B C Mixing minutes per unit 2.00 1.00 0.50 Selling price per unit $55.80 $54.60 $43.10 Variable selling cost per unit $2.10 $1.40 $1.90 Monthly demand in units 2,000 1,000 3,000 The mixing machines are potentially the constraint in the production facility. A total of 5,900 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.) 253Managerial Accounting, 9/e Answer: a. Demand on the mixing machine: Products o A B C Mixing minutes per unit 2.00 1.00 0.50 Monthly demand in units 2,000 1,000 3,000 Total minutes required . 4,000 1,000 1,500 Total time required for all products: 6,500 b. Optimal production plan: Products o A B C Selling price per unit $55.80 $54.60 $43.10 Direct materials . $10.90 $15.80 $8.00 Direct labor 12.50 12.60 9.90 Variable manufacturing overhead 2.40 1.20 1.40 Variable selling cost per unit 2.10 1.40 1.90 Total variable cost per unit $27.90 $31.00 $21.20 Contribution margin per unit $27.90 $23.60 $21.90 Mixing minutes per unit 2.00 1.00 0.50 Contribution margin per minute $13.95 $23.60 $43.80 Rank in terms of profitability 3 2 1 Optimal production . 1,700 1,000 3,000 c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $13.95 Managerial Accounting, 9/e 254 102 Medium Holt Company makes three products in a single facility. Data concerning these products follow: Products o A B C Selling price per unit $67.90 $57.70 $43.90 Direct materials . $12.10 $10.30 $8.60 Direct labor $14.10 $8.00 $6.80 Variable manufacturing overhead $2.60 $2.20 $1.80 Variable selling cost per unit $2.50 $2.20 $2.50 Mixing minutes per unit 2.70 3.30 4.70 Monthly demand in units 1,000 3,000 3,000 The mixing machines are potentially the constraint in the production facility. A total of 25,800 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.) Answer: a. Demand on the mixing machine: Products o A B C Mixing minutes per unit 2.70 3.30 4.70 Monthly demand in units 1,000 3,000 3,000 Total minutes required . 2,700 9,900 14,100 Total time required for all products: 26,700 255Managerial Accounting, 9/e b. Optimal production plan: Products o A B C Selling price per unit $67.90 $57.70 $43.90 Direct materials . $12.10 $10.30 $ 8.60 Direct labor 14.10 8.00 6.80 Variable manufacturing overhead 2.60 2.20 1.80 Variable selling cost per unit 2.50 2.20 2.50 Total variable cost per unit $31.30 $22.70 $19.70 Contribution margin per unit $36.60 $35.00 $24.20 Mixing minutes per unit 2.70 3.30 4.70 Contribution margin per minute $13.56 $10.61 $ 5.15 Rank in terms of profitability 1 2 3 Optimal production . 1,000 3,000 2,809 c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $5.15 103 Hard Redner, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below: Product J K L Selling price $80 $60 $90 Variable costs . 50 40 55 Fixed costs 25 8 22 Grinding machine time 10 min. 5 min. 7 min 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 grinding machine is the constraint, with only 2,400 minutes of grinding machine time available this week Required: a. Given the grinding 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 grinding machine time? Managerial Accounting, 9/e 256 Answer: a. The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is grinding machine time Product J K L Selling price $80 $60 $90 Variable costs . 50 40 55 Contribution margin $30 $20 $35 Grinding machine time 10 min. 5 min. 7 min Contribution margin per minute $3.00 $4.00 $5.00 Product L should be emphasized because it has the greatest contribution margin per unit of the scarce resource b. If additional grinding machine time would be used to produce more of Product L, the time would be worth 60 x $5 = $300 per hour 104 hard Iaci Company makes two products from a common input. Joint processing costs up to the splitoff point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the splitoff point. Each product may be sold at the splitoff point or processed further. Data concerning these products appear below: Product X Product Y Total Allocated joint processing costs $22,400 $19,600 $42,000 Sales value at splitoff point $32,000 $28,000 $60,000 Costs of further processing . $11,600 $25,300 $36,900 Sales value after further processing $40,800 $54,200 $95,000 Required: a. What is the net monetary advantage (disadvantage) of processing Product X beyond the splitoff point? b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the splitoff point? c. What is the minimum amount the company should accept for Product X if it is to be sold at the splitoff point? d. What is the minimum amount the company should accept for Product Y if it is to be sold at the splitoff point? 257Managerial Accounting, 9/e Answer: a. & b Product X Product Y Sales value after further processing $40,800 $54,200 Costs of further processing 11,600 25,300 Benefit of further processing 29,200 28,900 Less: Sales value at splitoff point 32,000 28,000 Net advantage (disadvantage) . ($ 2,800) $ 900 c. & d Minimum selling price at splitoff $29,200 $28,900 105 Medium Harris Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the splitoff point total $200,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the splitoff point Each product may be sold at the splitoff point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are: Sales Value Sales Value Further After Further Product at SplitOff Processing Costs Processing J $180,000 $ 60,000 $230,000 K $135,000 $105,000 $280,000 L $ 95,000 $ 85,000 $160,000 The "Further Processing Costs" consist of variable and avoidable fixed costs Required: Which product or products should be sold at the splitoff point, and which product or products should be processed further? Show computations Answer: Product J K L Sales value after further processing $230,000 $280,000 $160,000 Sales value at splitoff 180,000 135,000 95,000 Incremental revenue 50,000 145,000 65,000 Further processing costs 60,000 105,000 85,000 Incremental income (loss) $(10,000) $ 40,000 $(20,000) Product K should be sold after further processing beyond the splitoff point. Products J and L should be sold at the split off point without any further processing Managerial Accounting, 9/e 258
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