Chapter 13 Relevant Costs for Decision Making - GARRISON

Chapter 13 Relevant Costs for Decision Making True/False Questions 1. Sunk costs are costs that have proven to be unproductive. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium 2. All costs are avoidable in a decision except sunk costs and future costs that do not differ between the alternatives at hand. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 3. Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium 4. A cost may be relevant for one decision making situation but irrelevant for another situation. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 5. A future cost that does not vary among alternatives under consideration is irrelevant. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 6. Opportunity costs represent economic benefits that are forgone as a result of pursuing some course of action. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 7. An existing asset should not be replaced until its original cost has been fully recovered. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium

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Chapter 13 Relevant Costs for Decision Making 8. Fixed costs are irrelevant in decisions about whether a product line should be dropped. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy 9. In a special order situation, any fixed cost associated with the order would be irrelevant. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium 10. When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy 11. Eliminating nonproductive time is particularly important in a bottleneck operation. Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium 12. One way to increase the effective utilization of a bottleneck is to reduce the number of defective units. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy 13. As a general guide, it is profitable to continue processing joint products after the splitoff point if their total revenues exceed the joint costs. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium 14. Joint costs are irrelevant in the decision of whether to sell a joint product at the splitoff point or process it further and then sell it. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 15. A key advantage of using activity-based costing is that any cost that is assigned to a product is also a relevant cost in any decision involving that product. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

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. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 17. Consider the following statements: I. Assemble all costs associated with each alternative being considered. II. Eliminate those costs that are sunk. III. 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 Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 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. Ans: D AACSB: Reflective Thinking AICPA FN: Decision Making; Reporting

AICPA BB: Critical Thinking LO: 1 Level: Medium

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. Ans: A AACSB: Reflective Thinking AICPA FN: Decision Making; Reporting Source: CPA, adapted

AICPA BB: Critical Thinking LO: 1 Level: Medium

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 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 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

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium 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. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium 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. Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium

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Chapter 13 Relevant Costs for Decision Making 24. In a sell or process further decision, consider the following costs: I. A variable production cost incurred prior to split-off. II. A variable production cost incurred after split-off. III. 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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy 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 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy Source: CPA, adapted

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Chapter 13 Relevant Costs for Decision Making 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 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium Source: CIMA, adapted Solution: Incremental revenue from reworking ($54,400 − $1,500) Less incremental revenue from selling as scrap ................ Net loss from reworking ....................................................

$52,900 57,400 ($ 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 2 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, 4 kilograms of material R is required for every unit of product S88Y that is produced. Milford Corporation has now received a 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 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Hard Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making Solution: Product S88Y: Current cost (2 kg @ $7.60): $15.20 If material R were used, 4 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 ÷ 4 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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Hard Source: CIMA, adapted Solution: Opportunity cost of sales foregone if special project is undertaken ($8.35 × 240) .............................................. Less: delivery cost ............................................................. Relevant cost of 240 kilograms of raw material ...............

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$2,004 71 $1,933

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Chapter 13 Relevant Costs for Decision Making 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? A) $6,481 B) $6,376 C) $6,513 D) $5,928 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Hard Source: CIMA, adapted 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: 1 Level: Hard Source: CIMA, adapted Solution: Relevant cost = $6.45 per liter × 760 liters = $4,902

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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 1 unit of material I57 and 5 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: 1 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

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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 5 units of material F85 and 5 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: 1 Level: Hard Source: CIMA, adapted Solution:

Total needed (3,000 × 5) = F85 ............. 15,000 (3,000 × 5) = E71 ............. 15,000

Inventory

# of units to purchase on market

Relevant price

15,000 (15,000 − 13,680) = 1,320

13,680 Minimum acceptable price for 3,000 units of QEA...........

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Total cost

$4.75

$ 71,250

$4.70 $3.60

6,204 49,248 $126,702

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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: 2 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.

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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: 2 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: 2 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

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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: 2 Level: Hard Source: CMA, adapted Solution: Total rental income = $1,000 + $1,210 + $2,347 + $1,878 + $1,065 = $7,500 U $1,000 800

V $1,210 1,300

Rental income .......... Less expenses ........... 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.

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Chapter 13 Relevant Costs for Decision Making 37. The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation: Contribution margin .......... Fixed expenses .................. Net operating loss ..............

$200,000 500,000 ($300,000)

If Children's Division is dropped, half of the fixed costs above can be eliminated. What will be the effect on Grunge's profit next year if Children's Division is dropped instead of being kept? A) $50,000 increase B) $250,000 increase C) $250,000 decrease D) $550,000 increase Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium Solution:

Contribution margin ...................... Fixed expenses .............................. Net operating income (loss) ..........

Keep the Division $200,000 500,000 ($300,000)

Drop the Division Difference $ 0 ($200,000) 250,000 250,000 ($250,000) ($ 50,000)

Net operating income would increase by $50,000 if the Children’s Division were dropped. Therefore, the division should be dropped.

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Chapter 13 Relevant Costs for Decision Making 38. The management of Furrow Corporation is considering dropping product L07E. Data from the company's accounting system appear below: Sales ...................................................................... Variable expenses ................................................. Fixed manufacturing expenses .............................. Fixed selling and administrative expenses ............

$830,000 $365,000 $291,000 $166,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. What would be the effect on the company's overall net operating income if product L07E were dropped? A) Overall net operating income would increase by $8,000. B) Overall net operating income would decrease by $173,000. C) Overall net operating income would decrease by $8,000. D) Overall net operating income would increase by $173,000. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy Solution:

Sales .............................................. Variable expenses ......................... Contribution margin ...................... Fixed expenses: Fixed manufacturing expenses ... Fixed selling and administrative expenses.................................. Total fixed expenses...................... Net operating income (loss) ..........

Keep the Product $830,000 365,000 465,000

Drop the Product $ 0 0 0

Difference ($830,000) 365,000 (465,000)

291,000

*105,000

186,000

166,000 457,000 $ 8,000

**60,000 106,000 165,000 292,000 ($165,000) ($173,000)

Net operating income would decline by $173,000 if product L07E were dropped. Therefore, the product should not be dropped. *$291,000 − $186,000 = $105,000 **$166,000 − $106,000 = $60,000

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Chapter 13 Relevant Costs for Decision Making 39. Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below: Sales....................................................................... Variable expenses .................................................. Fixed manufacturing expenses .............................. Fixed selling and administrative expenses ............

$730,000 $350,000 $234,000 $161,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued. What would be the effect on the company's overall net operating income if product U23N were dropped? A) Overall net operating income would increase by $15,000. B) Overall net operating income would increase by $143,000. C) Overall net operating income would decrease by $143,000. D) Overall net operating income would decrease by $15,000. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy Solution:

Sales............................................... Variable expenses .......................... Contribution margin ...................... Fixed expenses: Fixed manufacturing expenses ... Fixed selling and administrative expenses .................................. Total fixed expenses ...................... Net operating income (loss) ..........

Keep the Product $730,000 350,000 380,000

Drop the Product $ 0 0 0

234,000

*90,000

Difference ($730,000) 350,000 ( 380,000) 144,000

161,000 **68,000 93,000 395,000 158,000 237,000 ($ 15,000) ($ 158,000) ($143,000)

Net operating income would decline by $143,000 if product U23N were dropped. Therefore, the product should not be dropped. *$234,000 − $144,000 = $90,000 **$161,000 − $93,000 = $68,000

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Chapter 13 Relevant Costs for Decision Making 40. Supler Company produces a part used in the manufacture of one of its products. The unit product cost is $18, computed as follows: Direct materials ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Unit product cost .......................................

$8 4 1 5 $18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each. It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be: A) $1 disadvantage B) $1 advantage C) $2 advantage D) $4 disadvantage Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Relevant cost per unit: Direct materials ............................................... Direct labor ..................................................... Variable manufacturing overhead ................... Fixed manufacturing overhead ($5 × 0.60) ..... Relevant manufacturing cost ........................... Net advantage (disadvantage): Relevant manufacturing cost savings ........ Less: cost from outside supplier................ Net advantage ............................................

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$ 8 4 1 3 $16

$16 14 $ 2

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Chapter 13 Relevant Costs for Decision Making 41. Sharp Company produces 8,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows: Variable production costs ........ Fixed production costs............. Unit product cost .....................

$16 20 $36

The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth. If the parts are purchased from the outside supplier, the annual impact on the company's operating income will be: A) $24,000 increase B) $24,000 decrease C) $56,000 increase D) $56,000 decrease Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Relevant cost per unit: Variable production costs ................................ Fixed manufacturing overhead ($20 × 0.25) ... Relevant manufacturing cost ...........................

$16 5 $21

Relevant manufacturing cost savings ($21 × 8,000) ............ Less: cost to purchase from outside supplier ($28 × 8,000) . Net disadvantage of purchasing from outside supplier ........

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$168,000 224,000 ($ 56,000)

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Chapter 13 Relevant Costs for Decision Making 42. Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year: Direct materials ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Total manufacturing cost ..........................

$ 20,000 55,000 45,000 70,000 $190,000

Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why? A) No, because it would be $5,000 cheaper to make the part. B) Yes, because it would be $10,000 cheaper to buy the part. C) No, because it would be $15,000 cheaper to make the part. D) Yes, because it would be $25,000 cheaper to buy the part. Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CPA, adapted Solution: Relevant cost of manufacturing: Direct materials ..................................................... Direct labor ........................................................... Variable manufacturing overhead ......................... Fixed manufacturing overhead ($4 × 10,000) ....... Relevant manufacturing cost ................................. Net advantage (disadvantage): Relevant manufacturing cost savings ........... Annual rental of manufacturing facilities given up if manufacture Part M-1 ............ Cost of purchasing the part ($18 × 10,000) . Net disadvantage of purchasing part M-1 ....

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$ 20,000 55,000 45,000 40,000 $160,000

$160,000 15,000 ( 180,000) ($ 5,000)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 43. Kingston Company needs 10,000 units of a certain part to be used in its production cycle. The following information is available concerning Kingston's unit product cost: Direct materials ......................................... Direct labor ................................................ Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Unit product cost .......................................

$6 24 12 15 $57

Utica Company has offered to supply Kingston's entire annual requirements of the part for $53 each. If Kingston buys the part from Utica instead of making it, Kingston would have no other use for the facilities and 60 percent of the fixed manufacturing overhead would continue. In deciding whether to make or buy the part, the total relevant costs to make the part internally are: A) $342,000 B) $480,000 C) $530,000 D) $570,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Source: CPA, adapted Solution: Relevant cost per unit: Direct materials ............................................... Direct labor ...................................................... Variable manufacturing overhead ................... Fixed manufacturing overhead ($15 × 0.40) ... Relevant manufacturing cost ...........................

$ 6 24 12 6 $48

Total relevant costs to make the part internally ($48 × 10,000) = $480,000

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13-25

Chapter 13 Relevant Costs for Decision Making 44. The following standard costs pertain to a component part manufactured by Bor Company: Direct materials ....................... Direct labor ............................. Manufacturing overhead ......... Standard cost per unit ..............

$4 10 40 $54

An outside supplier has offered to supply all of the parts needed by Bor Company for $50 each. The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision. In the decision to “make or buy,” what is the relevant unit cost to make the part internally? A) $54 B) $38 C) $30 D) $5 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Source: CPA, adapted Solution: Relevant cost per unit: Direct materials ......................................... Direct labor ............................................... Manufacturing overhead ($40 × 0.40) ...... Relevant manufacturing cost .....................

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$ 4 10 16 $30

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 45. Gordon Company produces 1,000 units of a part per year which are used in the assembly of one of its products. The unit cost of producing these parts is: Variable manufacturing cost ......... Fixed manufacturing cost .............. Total manufacturing cost ...............

$15 12 $27

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 total fixed costs incurred in producing the part can be eliminated. The annual increase or decrease on the company's operating incomes as a result of buying the part from the outside supplier would be: A) $3,000 increase B) $1,000 decrease C) $7,000 increase D) $5,000 decrease Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Relevant cost per unit: Variable production costs ................................ Fixed manufacturing overhead ($12 × 2/3) ..... Relevant manufacturing cost ........................... Net advantage (disadvantage) per unit: Manufacturing cost savings ....................... Cost of purchasing the part ........................ Net advantage (disadvantage) ...................

$15 8 $23

$23 20 $ 3

Total = $3 × 1,000 units = $3000 increase

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-27

Chapter 13 Relevant Costs for Decision Making 46. Quikcook Microwave Company currently manufactures the doors that it uses for its microwave ovens. The annual costs to manufacture the 40,000 doors needed each year are as follows:

Direct material.................................. Direct labor ...................................... Variable manufacturing overhead .... Fixed manufacturing overhead ......... Total .................................................

Total Cost $200,000 40,000 80,000 320,000 $640,000

Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for $14 per door. If Quikcook accepts this offer, only 40% of the fixed overhead above could be totally eliminated. Also, Quikcook has no alternative use for the idle facilities if the decision was made to go with Delilah's offer. Based on this information, would Quikcook be better off to make the doors or buy the doors and by how much? A) $48,000 better to buy B) $48,000 better to make C) $112,000 better to buy D) $112,000 better to make Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution:

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Relevant cost: Direct materials ....................................................... Direct labor ............................................................. Variable manufacturing overhead ........................... Fixed manufacturing overhead ($320,000 × 0.40) .. Relevant manufacturing cost ...................................

$200,000 40,000 80,000 128,000 $448,000

Net advantage (disadvantage): Manufacturing cost savings .................................... Cost of purchasing the part ($14 × 40,000) ............ Net advantage (disadvantage) of buying .................

$448,000 ( 560,000) ($112,000)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 47. Sardi Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 17,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows: Direct materials ......................................... Direct labor ................................................ Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Unit product cost .......................................

$ 8.20 8.30 1.20 4.30 $22.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 4 minutes on the constraining machine and that has a contribution margin of $7.00 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? A) $24.21 B) $25.50 C) $20.71 D) $22.00 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CIMA, adapted Solution: Relevant cost per unit: Direct materials .................................................. $ 8.20 Direct labor ......................................................... 8.30 Variable manufacturing overhead ...................... 1.20 Fixed manufacturing overhead ($4.30 × 0.70) ... 3.01 Relevant manufacturing cost .............................. $20.71 Add contribution margin lost* ........................... 3.50 $24.21 *$7.00 ÷ 4 minutes = $1.75 per minute; $1.75 per minute × 2 minutes = $3.50

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Chapter 13 Relevant Costs for Decision Making 48. Part S51 is used in one of Haberkorn Corporation's products. The company makes 12,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct materials ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Supervisor’s salary .................................... Depreciation of special equipment ............ Allocated general overhead .......................

Per Unit $6.30 $5.70 $4.80 $7.00 $8.60 $7.20

An outside supplier has offered to produce this part and sell it to the company for $37.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $17,000 of these allocated general overhead costs would be avoided. If management decides to buy part S51 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $5,800 per year. B) Net operating income would decline by $22,800 per year. C) Net operating income would decline by $149,800 per year. D) Net operating income would decline by $39,800 per year. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making Solution:

Direct materials (12,000 units @ $6.30 per unit) ..... Direct labor (12,000 units @ $5.70 per unit) ........... Variable overhead (12,000 units @ $4.80 per unit) . Supervisor’s salary (12,000 units @ $7.00 per unit) Depreciation of special equipment (not relevant) .... Allocated general overhead (avoidable only) ........... Outside purchase price (12,000 units @ $37.70 per unit) ....................................................................... Total cost ..................................................................

Make $ 75,600 68,400 57,600 84,000 0 17,000

$302,600

Buy

$452,400 $452,400

The total cost of the make alternative is lower by $149,800 ($302,600 − $452,400). Thus, net operating income would decline by $149,800 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 13 Relevant Costs for Decision Making 49. Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in one of the company's products. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct materials.......................................... Direct labor ................................................ Variable manufacturing overhead ............. Supervisor’s salary .................................... Depreciation of special equipment ............ Allocated general overhead .......................

Per Unit $6.70 $8.10 $1.10 $2.00 $4.20 $2.10

An outside supplier has offered to make and sell the part to the company for $21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $2,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G25 would be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. What would be the impact on the company's overall net operating income of buying part G25 from the outside supplier? A) Net operating income would decline by $8,400 per year. B) Net operating income would increase by $16,000 per year. C) Net operating income would decline by $8,000 per year. D) Net operating income would decline by $40,000 per year. Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making Solution:

Direct materials (8,000 units @ $6.70 per unit) ....... Direct labor (8,000 units @ $8.10 per unit) ............. Variable overhead (8,000 units @ $1.10 per unit) ... Supervisor’s salary (8,000 units @ $2.00 per unit) .. Depreciation of special equipment (not relevant) .... Allocated general overhead (avoidable only) ........... Outside purchase price (8,000 units @ $21.20 per unit) ....................................................................... Opportunity cost ....................................................... Total cost ..................................................................

Make $ 53,600 64,800 8,800 16,000 0 2,000

$145,200

Buy

$169,600 ( 16,000) $153,600

The total cost of the make alternative is lower by $8,400 ($145,200 − $153,600). Thus, net operating income would decline by $8,400 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 13 Relevant Costs for Decision Making 50. Rebelo Corporation is presently making part E07 that is used in one of its products. A total of 17,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct materials ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Supervisor’s salary .................................... Depreciation of special equipment ............ Allocated general overhead .......................

Per Unit $3.80 $3.80 $1.10 $2.50 $1.40 $8.60

An outside supplier has offered to make and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part E07 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $6,800 per year. B) Net operating income would decline by $163,200 per year. C) Net operating income would increase by $163,200 per year. D) Net operating income would increase by $6,800 per year. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making Solution:

Direct materials (17,000 units @ $3.80 per unit) ....... Direct labor (17,000 units @ $3.80 per unit) ............. Variable overhead (17,000 units @ $1.10 per unit) ... Supervisor’s salary (17,000 units @ $2.50 per unit) .. Depreciation of special equipment (not relevant) ...... Allocated general overhead (not relevant) ................. Outside purchase price (17,000 units @ $20.80 per unit) ......................................................................... Total cost ....................................................................

Make $ 64,600 64,600 18,700 42,500 0 0

$190,400

Buy

$353,600 $353,600

The total cost of the make alternative is lower by $163,200 ($353,600 − $190,400). Thus, net operating income would decline by $163,200 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 13 Relevant Costs for Decision Making 51. Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct materials ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Supervisor’s salary .................................... Depreciation of special equipment ............ Allocated general overhead .......................

Per Unit $2.90 $7.50 $8.00 $3.40 $1.80 $7.00

An outside supplier has offered to make the part and sell it to the company for $29.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. What would be the impact on the company's overall net operating income of buying part U16 from the outside supplier? A) Net operating income would increase by $25,000 per year. B) Net operating income would decline by $79,000 per year. C) Net operating income would decline by $35,400 per year. D) Net operating income would increase by $14,600 per year. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making Solution:

Direct materials (13,000 units @ $2.90 per unit) ..... Direct labor (13,000 units @ $7.50 per unit) ........... Variable overhead (13,000 units @ $8.00 per unit) . Supervisor’s salary (13,000 units @ $3.40 per unit) Depreciation of special equipment (not relevant) .... Allocated general overhead (not relevant) ............... Outside purchase price (13,000 units @ $29.80 per unit) ....................................................................... Opportunity cost (segment margin) .......................... Total cost ..................................................................

Make $ 37,700 97,500 104,000 44,200 0 0

$283,400

Buy

$387,400 ( 25,000) $362,400

The total cost of the make alternative is lower by $79,000 ($283,400 − $362,400). Thus, net operating income would decline by $79,000 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself. 52. Landor Appliance Company makes and sells electric fans. Each fan regularly sells for $42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period. Direct materials .............................................................. Direct labor ..................................................................... Manufacturing overhead (70% variable and 30% unavoidable fixed) ................

$8 $9 $10

A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. What should Landor use as a minimum selling price per fan in negotiating a price for this special order? A) $28 B) $27 C) $31 D) $24 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium

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Chapter 13 Relevant Costs for Decision Making Solution: Direct materials ................................................. Direct labor ....................................................... Variable manufacturing overhead ($10 × 0.70) Variable selling cost .......................................... Minimum selling price ......................................

$ 8 9 7 4 $28

53. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the capacity to manufacture and sell 20,000 watches each year but is currently only manufacturing and selling 15,000. The following costs relate to annual operations at 15,000 watches:

Variable manufacturing cost ..................... Fixed manufacturing cost .......................... Variable selling and administrative cost ... Fixed selling and administrative cost ........

Total Cost $150,000 $120,000 $90,000 $180,000

Ignace normally sells its watches for $42 each. A discount chain is interesting in purchasing Ignace's excess capacity of 5,000 watches. This special order would not affect regular sales or the cost structure above. Ignace's profits for the year will increase as long as the price on this special order exceeds: A) $12.00 B) $13.50 C) $16.00 D) $31.00 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Solution: Total relevant costs: Variable manufacturing cost .............................. Variable selling and administrative cost ............ Total relevant costs ............................................... Divided by 15,000 watches ................................... Minimum selling price for special order ...............

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$150,000 90,000 $240,000 ÷ 15,000 $16

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 54. Gallerani Corporation has received a request for a special order of 6,000 units of product A90 for $21.20 each. Product A90's unit product cost is $16.20, determined as follows: Direct materials ......................................... Direct labor ................................................ Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Unit product cost .......................................

$ 6.10 4.20 2.30 3.60 $16.20

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 modifications made to product A90 that would increase the variable costs by $4.20 per unit and that would require an investment of $21,000 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. If the special order is accepted, the company's overall net operating income would increase (decrease) by: A) ($18,600) B) ($16,200) C) $30,000 D) $5,400 Answer: D Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Easy Solution: Incremental revenue (6,000 units @ $21.20 per unit) ...................... Less incremental costs: Direct materials (6,000 units @ $6.10 per unit) ............................ Direct labor (6,000 units @ $4.20 per unit) .................................. Variable manufacturing overhead (6,000 units @ $2.30 per unit) Modifications (6,000 units @ $4.20 per unit) ............................... Special molds ................................................................................ Total incremental cost ...................................................................... Incremental net operating income ....................................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$127,200 36,600 25,200 13,800 25,200 21,000 121,800 $ 5,400

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Chapter 13 Relevant Costs for Decision Making 55. A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for $20.50 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $14.40: Direct materials ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Unit product cost .......................................

$ 3.10 1.50 6.40 3.40 $14.40

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 modifications made to product S47 that would increase the variable costs by $5.00 per unit and that would require an investment of $36,000 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. If the special order is accepted, the company's overall net operating income would increase (decrease) by: A) ($9,900) B) $4,500 C) $54,900 D) ($26,100) Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Easy Solution: Incremental revenue (9,000 units @ $20.50 per unit) ..................... Less incremental costs: Direct materials (9,000 units @ $3.10 per unit) ........................... Direct labor (9,000 units @ $1.50 per unit) .................................. Variable manufacturing overhead (9,000 units @ $6.40 per unit) Modifications (9,000 units @ $5.00 per unit) ............................... Special molds ................................................................................ Total incremental cost ...................................................................... Incremental net operating income ....................................................

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$184,500 27,900 13,500 57,600 45,000 36,000 180,000 $ 4,500

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 56. Holden Company produces three products, with costs and selling prices as follows:

Selling price per unit ............... Variable costs per unit ............. Contribution margin per unit ...

Product A $30 100% 18 60% $12 40%

Product B $20 100% 15 75% $ 5 25%

Product C $15 100% 6 40% $ 9 60%

A particular machine is a bottleneck. On that machine, 3 machine hours are required to produce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C. In which order should it produce its products? A) C, A, B B) A, C, B C) B, C, A D) The order of production doesn't matter. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium Solution: Product A Contribution margin per unit ............... $12 Machine-hours per unit ........................ 3 Contribution margin per hour .............. $4.00 Rank in terms of profitability ..............

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3

Product B $5 1 $5.00

Product C $9 2 $4.50

1

2

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Chapter 13 Relevant Costs for Decision Making 57. Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation:

Sales price ................... Variable costs .............. Labor hours required ...

Letter Openers Elvis Statues Candle Holders $30 $80 $42 $20 $40 $20 1 6 2

Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage? A) $12,000 B) $19,000 C) $19,600 D) $19,800 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Hard

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making Solution: Demand for wood carvers: Labor-hours per unit .......... Monthly demand in units ... Total hours required...........

Letter Openers Elvis Statues Candle Holders 1 6 2 800 800 800 800 4,800 1,600

Total time required for all products: 7,200 Optimal production plan: Selling price per unit............................ Variable cost per unit ........................... Contribution margin per unit ............... Labor-hours per unit ............................ Contribution margin per hour ..............

Letter Openers Elvis Statues Candle Holders $30.00 $80.00 $42.00 $20.00 $40.00 $20.00 $10.00 $40.00 $22.00 1 6 2 $10.00 $6.67 $11.00

Rank in terms of profitability ..............

2

3

1

Optimal production ..............................

200

0

800

Total hours available ........................................................................ Less: hours required for 800 Candle Holders (800 × 2) ................... Hours remaining ............................................................................... Divided by hours required per Letter Opener .................................. Number of Letter Openers to produce ..............................................

1,800 1,600 200 ÷ 1 200

Maximum contribution margin: Candle Holders (800 × $22).......................................................... Letter Openers (200 × $10) ........................................................... Maximum contribution margin ........................................................

$17,600 2,000 $19,600

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Chapter 13 Relevant Costs for Decision Making 58. Banfield Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

Selling price per unit ..................... Variable cost per unit .................... Centiliters of compound W ...........

VP YI WX $248.04 $230.66 $505.44 $190.71 $172.14 $388.80 3.90 3.80 8.10

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A) WX, VP, YI B) YI, VP, WX C) WX, YI, VP D) VP, WX, YI Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy Solution: Optimal production plan:

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Selling price per unit ........................... Variable cost per unit .......................... Contribution margin per unit............... Centiliters per unit ............................... Contribution margin per centiliter.......

VP $248.04 190.71 $57.33 3.90 $14.70

YI $230.66 172.14 $58.52 3.80 $15.40

WX $505.44 388.80 $116.64 8.10 $14.40

Rank in terms of profitability ..............

2

1

3

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 59. An automated turning machine is the current constraint at Jordison Corporation. Three products use this constrained resource. Data concerning those products appear below:

Selling price per unit ..................... Variable cost per unit .................... Minutes on the constraint ..............

LN JQ RQ $165.88 $313.11 $494.52 $118.30 $239.61 $381.42 2.60 4.90 7.80

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A) LN, JQ, RQ B) RQ, LN, JQ C) RQ, JQ, LN D) JQ, RQ, LN Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy Solution: Optimal production plan: Selling price per unit ........................... Variable selling cost per unit ............... Contribution margin per unit ............... Machine minutes per unit .................... Contribution margin per minute ..........

LN $165.88 118.30 $47.58 2.60 $18.30

JQ $313.11 239.61 $73.50 4.90 $15.00

RQ $494.52 381.42 $113.10 7.80 $14.50

Rank in terms of profitability ..............

1

2

3

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Chapter 13 Relevant Costs for Decision Making 60. The constraint at Rauchwerger Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

Selling price per unit ..................... Variable cost per unit .................... Minutes on the constraint ..............

WX KD FS $192.00 $542.66 $222.84 $158.72 $420.54 $167.76 3.20 8.60 3.60

Assume that sufficient time is available on the constrained machine 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? A) $33.28 per unit B) $10.40 per minute C) $122.12 per unit D) $15.30 per minute Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium Solution:

Selling price per unit ........................... Variable cost per unit .......................... Contribution margin per unit............... Machine minutes per unit .................... Contribution margin per minute ..........

WX $192.00 158.72 $33.28 3.20 $10.40

KD $542.66 420.54 $122.12 8.60 $14.20

FS $222.84 167.76 $55.08 3.60 $15.30

Rank in terms of profitability ..............

3

2

1

The company should be willing to pay up to the contribution margin per minute for the least profitable job, which is $10.40.

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Chapter 13 Relevant Costs for Decision Making 61. The Freed Company produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the splitoff point for total revenues of $50,000, or it can be processed further at a total cost of $16,000 and then sold for $68,000. Product Y: A) should be sold at the split-off point, rather than processed further. B) would increase the company's overall net operating income by $18,000 if processed further and then sold. C) would increase the company's overall net operating income by $68,000 if processed further and then sold. D) would increase the company's overall net operating income by $2,000 if processed further and then sold. Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution:

Sales value after further processing .......... Costs of further processing ........................ Benefit of further processing ..................... Less: Sales value at split-off point ............ Net advantage ............................................

Product Y $68,000 16,000 52,000 50,000 $ 2,000

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Chapter 13 Relevant Costs for Decision Making 62. Pendall Company manufactures products Dee and Eff from a joint process. Product Dee has been allocated $2,500 of the $20,000 in total joint costs associated with the production of 1,000 units each of Dee and Eff each year. Dee can be sold at the splitoff point for $3 per unit, or it can be processed further with additional costs of $1,000 and sold for $5 per unit. If Dee is processed further and sold, the result would be: A) A break-even situation. B) An additional gain of $1,000 from further processing. C) A loss of $1,000 from further processing. D) An additional gain of $2,000 from further processing. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Source: CPA, adapted Solution:

Sales value after further processing ($5 × 1,000) . Costs of further processing ................................... Benefit of further processing................................. Less: Sales value at split-off point ($3 × 1,000) ... Net advantage ........................................................

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Dee $5,000 1,000 4,000 3,000 $1,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 63. Faustina Chemical Company manufactures three chemicals (TX14, NJ35, and KS63) from a joint process. The three chemicals are in industrial grade form at the split-off point. They can either be sold at that point or processed further into premium grade. Costs related to each batch of this chemical process is as follows:

Sales value at split-off point ...................... Allocated joint costs .................................. Sales value after further processing........... Cost of further processing .........................

TX14 NJ35 KS63 $16,000 $12,000 $5,000 $6,000 $6,000 $6,000 $20,000 $18,000 $9,000 $5,000 $3,000 $2,000

For which product(s) above would it be more profitable for Faustina to sell at the splitoff point rather than process further? A) TX14 only B) KS63 only C) TX14 and KS63 only D) NJ35 and KS63 only Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Hard Solution:

Sales value after further processing .... Sales value at split-off ......................... Incremental revenue ............................ Further processing costs ...................... Incremental income (loss) ...................

TX14 $20,000 16,000 4,000 5,000 ($1,000)

NJ35 $18,000 12,000 6,000 3,000 $ 3,000

KS63 $9,000 5,000 4,000 2,000 $2,000

Product TX14 should be sold at the split-off point without any further processing. Products NJ35 and KS63 should be sold after further processing beyond the split-off point.

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Chapter 13 Relevant Costs for Decision Making 64. Khiem, Inc. manufactures baseball gloves that normally sell for $55 each. Khiem currently has 400 defective gloves in inventory that have $35 of materials, labor, and overhead assigned to each glove. The defective gloves can either be completely repaired at a cost of $25 per glove or sold as is at a reduced price of $18 per glove. Khiem would be better off by: A) $2,000 to sell the gloves at the reduced price. B) $2,800 to sell the gloves at the reduced price. C) $4,800 to repair the gloves and sell them at the normal price. D) $5,200 to sell the gloves at the reduced price. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Solution: Sales value after repairing ($55 × 400) ................. Sales value at split-off ($18 × 400) ....................... Incremental revenue .............................................. Repair costs ($25 × 400) ....................................... Incremental income from further processing ........

$22,000 7,200 14,800 10,000 $ 4,800

65. Two products, QI and VH, emerge from a joint process. Product QI has been allocated $9,600 of the total joint costs of $12,000. A total of 9,000 units of product QI are produced from the joint process. Product QI can be sold at the split-off point for $13 per unit, or it can be processed further for an additional total cost of $54,000 and then sold for $18 per unit. If product QI is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point? A) $18,600 less profit B) $108,000 more profit C) $600 more profit D) $9,000 less profit Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making Solution:

Sales value after further processing ($18 × 9,000).... Costs of further processing ........................................ Benefit of further processing ..................................... Less: Sales value at split-off point ($13 × 9,000) ..... Net advantage (disadvantage) ...................................

Product QI $162,000 54,000 108,000 117,000 ($ 9,000)

66. Two products, UG and BC, emerge from a joint process. Product UG has been allocated $29,400 of the total joint costs of $42,000. A total of 9,000 units of product UG are produced from the joint process. Product UG can be sold at the split-off point for $15 per unit, or it can be processed further for an additional total cost of $63,000 and then sold for $17 per unit. If product UG is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point? A) $74,400 less profit B) $15,600 less profit C) $45,000 less profit D) $90,000 more profit Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Source: CIMA, adapted Solution:

Sales value after further processing ($17 × 9,000)... Costs of further processing ....................................... Benefit of further processing .................................... Less: Sales value at split-off point ($15 × 9,000) .... Net advantage (disadvantage) ..................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Product HG $153,000 63,000 90,000 135,000 ($ 45,000)

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Chapter 13 Relevant Costs for Decision Making 67. Priddy Corporation processes sugar cane in batches. The company purchases a batch of sugar cane for $62 from farmers and then crushes the cane in the company's plant at the cost of $18. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $28 or processed further for $13 to make the end product industrial fiber that is sold for $36. The cane juice can be sold as is for $43 or processed further for $23 to make the end product molasses that is sold for $85. Which of the intermediate products should be processed further? A) Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses B) Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed into molasses C) Cane fiber should be processed into industrial fiber; Cane juice should be processed into molasses D) Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution:

Sales value after further processing .......... Costs of further processing ....................... Benefit of further processing..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

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Cane Fiber $36 13 23 28 ($ 5)

Cane Juice $85 23 62 43 $19

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Chapter 13 Relevant Costs for Decision Making 68. Vannorman Corporation processes sugar beets in batches. A batch of sugar beets costs $78 to buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $25 or processed further for $16 to make the end product industrial fiber that is sold for $57. The beet juice can be sold as is for $39 or processed further for $22 to make the end product refined sugar that is sold for $84. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A) ($134) B) ($32) C) $7 D) $39 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution:

Sales value after further processing .......... Costs of further processing ........................ Benefit of further processing ..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

Beet Fiber $57 16 41 25 $16

Beet Juice $84 22 62 39 $23

Revenue: Industrial fiber ................................................ $57 Refined sugar .................................................. 84 Total revenue ...................................................... $141 Less expenses: Purchase from farmers .................................... 78 Crushing costs ................................................. 18 Processing fiber further................................... 16 Processing juice further .................................. 22 Total expenses .................................................... 134 Net profit from one batch ................................... $ 7

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Chapter 13 Relevant Costs for Decision Making 69. Stinehelfer Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets costs $56 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $24 or processed further for $12 to make the end product industrial fiber that is sold for $31. The beet juice can be sold as is for $43 or processed further for $29 to make the end product refined sugar that is sold for $91. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A) $19 B) $6 C) ($50) D) ($16) Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution:

Sales value after further processing .......... Costs of further processing ....................... Benefit of further processing..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

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Beet Juice $91 29 62 43 $19

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 70. Paine Corporation processes sugar beets in batches that it purchases from farmers for $72 a batch. A batch of sugar beets costs $11 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $27 or processed further for $16 to make the end product industrial fiber that is sold for $40. The beet juice can be sold as is for $43 or processed further for $28 to make the end product refined sugar that is sold for $100. Which of the intermediate products should be processed further? A) beet fiber should NOT be processed into industrial fiber; beet juice should be processed into refined sugar B) beet fiber should NOT be processed into industrial fiber; beet juice should NOT be processed into refined sugar C) beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar D) beet fiber should be processed into industrial fiber; beet juice should be processed into refined sugar Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution:

Sales value after further processing .......... Costs of further processing ........................ Benefit of further processing ..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

Beet Fiber $40 16 24 27 ($ 3)

Beet Juice $100 28 72 43 $ 29

Use the following to answer questions 71-72: Ouzts Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:

Materials costs ................... Processing costs ................ Equipment rental ............... Occupancy costs ................

Alternative A $40,000 $37,000 $13,000 $15,000

Alternative B $56,000 $37,000 $13,000 $22,000

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Chapter 13 Relevant Costs for Decision Making 71. Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.) A) Both materials costs and processing costs are relevant B) Neither materials costs nor processing costs are relevant C) Only processing costs are relevant D) Only materials costs are relevant Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 72. What is the differential cost of Alternative B over Alternative A, including all of the relevant costs? A) $105,000 B) $23,000 C) $128,000 D) $116,500 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy Solution:

Materials costs ................... Occupancy costs ................ Differential cost .............

Alternative A Alternative B $40,000 $56,000 $15,000 $22,000

Differential Costs $16,000 7,000 $23,000

Use the following to answer questions 73-74: Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below.

Materials costs ................... Processing costs ................ Equipment rental ............... Occupancy costs ................

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Alternative X $41,000 $45,000 $17,000 $16,000

Alternative Y $59,000 $45,000 $17,000 $24,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making 73. Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.) A) Neither materials costs nor processing costs are relevant B) Only processing costs are relevant C) Only materials costs are relevant D) Both materials costs and processing costs are relevant Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy 74. What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs? A) $132,000 B) $119,000 C) $145,000 D) $26,000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy Solution: Alternative X Alternative Y Materials costs ................... $41,000 $59,000 Occupancy costs ................ $16,000 $24,000 Differential cost..............

Differential Costs $18,000 8,000 $26,000

Use the following to answer questions 75-78: The Draper Company is considering dropping its Doombug toy due to continuing losses. Revenue and cost data on the toy for the past year follow: Sales of 15,000 units ......... Variable expenses .............. Contribution margin .......... Fixed expenses .................. Net operating loss ..............

$150,000 120,000 30,000 40,000 ($ 10,000)

If the toy were discontinued, then Draper could avoid $8,000 per year in fixed costs.

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Chapter 13 Relevant Costs for Decision Making 75. Under the given conditions, the change in annual operating income from discontinuing the production and sale of Doombugs would be: A) $30,000 decrease B) $10,000 increase C) $22,000 decrease D) $18,000 increase Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy Solution:

Sales .............................................. Variable expenses .......................... Contribution margin ...................... Avoidable fixed expenses .............. Product margin ..............................

Keep Doombugs Drop Doombugs $150,000 $ 0 120,000 0 30,000 0 40,000 32,000 ($ 10,000) ($32,000)

Difference ($150,000) 120,000 ( 30,000) 8,000 ($ 22,000)

Net operating income would decline by $22,000 if Doombugs were dropped. Therefore, Doombugs should not be dropped. 76. Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in units) should Draper be indifferent to discontinuing Doombugs or continuing the production and sale of Doombugs? A) 20,000 units B) 18,000 units C) 6,000 units D) 4,000 units Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium Solution: Total contribution margin............. $30,000 Divided by 15,000 units ............... ÷15,000 Contribution margin per unit ........ $2 Breakeven point in units = Avoidable fixed expenses ÷ Unit contribution margin = $8,000 ÷ $2 = 4,000 units

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Chapter 13 Relevant Costs for Decision Making 77. Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys. If all other conditions are the same, the change in annual operating income from discontinuing the production and sale of Doombugs would be: A) $6,000 decrease B) $14,000 increase C) $2,000 decrease D) $28,000 increase Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium Solution: Sales................................... Variable expenses .............. Contribution margin .......... Avoidable fixed expenses .. Doombug product margin .

$150,000 120,000 30,000 8,000 ($ 22,000)

Additional contribution margin ....... Less Doombug product margin ....... Decrease in net operating income ...

$16,000 ( 22,000) ($ 6,000)

78. Suppose again that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys. At what selling price per Doombug should Draper be indifferent (on economic grounds) between dropping the Doombug or continuing its production and sale? (All other conditions remain the same, including annual sales of 15,000 units of the Doombug toy.) A) $8.33 B) $9.25 C) $9.60 D) $10.70 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Hard

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Chapter 13 Relevant Costs for Decision Making Solution: Total variable expenses ................ Divided by 15,000 units ............... Variable expense per unit ............

$120,000 ÷ 15,000 $8

Total contribution margin = Fixed expenses plus increase in contribution margin from other toys Total contribution margin = 15,000 × (Selling price − Variable expense per unit) 15,000 × (Selling price − $8) = $8,000 + $16,000 15,000 × Selling price − $120,000 = $24,000 15,000 × Selling price = $144,000 Selling price = $9.60 Use the following to answer questions 79-80: The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system appear below: Sales ...................................................................... Variable expenses .................................................. Fixed manufacturing expenses .............................. Fixed selling and administrative expenses ............

$830,000 $390,000 $266,000 $232,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.

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Chapter 13 Relevant Costs for Decision Making 79. According to the company's accounting system, what is the net operating income earned by product D74F? A) ($58,000) B) ($440,000) C) $58,000 D) $440,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Sales................................................................... Variable expenses .............................................. Contribution margin .......................................... Fixed expenses: Fixed manufacturing expenses ....................... Fixed selling and administrative expenses ..... Total fixed expenses .......................................... Net operating income (loss) ..............................

$830,000 390,000 440,000 266,000 232,000 498,000 ($ 58,000)

80. What would be the effect on the company's overall net operating income if product D74F were dropped? A) Overall net operating income would increase by $226,000. B) Overall net operating income would increase by $58,000. C) Overall net operating income would decrease by $226,000. D) Overall net operating income would decrease by $58,000. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

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Chapter 13 Relevant Costs for Decision Making Solution:

Sales .................................................... Variable expenses ............................... Contribution margin ............................ Fixed expenses: Fixed manufacturing expenses ......... Fixed selling and administrative expenses........................................ Total fixed expenses............................ Net operating income (loss) ................

Keep the Product $830,000 390,000 440,000

Drop the Product $ 0 0 0

Difference ($830,000) 390,000 ( 440,000)

266,000

155,000

111,000

232,000 498,000 ($ 58,000)

129,000 103,000 284,000 214,000 ($284,000) ($226,000)

Net operating income would decline by $226,000 if product D74F were dropped. Therefore, the product should not be dropped. Use the following to answer questions 81-82: The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: Sales ................................................................ Variable expenses ............................................ Fixed manufacturing expenses ........................ Fixed selling and administrative expenses ......

$150,000 $72,000 $50,000 $33,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued.

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Chapter 13 Relevant Costs for Decision Making 81. According to the company's accounting system, what is the net operating income earned by product V86O? A) $78,000 B) ($5,000) C) ($78,000) D) $5,000 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Sales................................................................. Variable expenses ............................................ Contribution margin ........................................ Fixed expenses: Fixed manufacturing expenses ..................... Fixed selling and administrative expenses ... Total fixed expenses ........................................ Net operating income (loss) ............................

$150,000 72,000 78,000 50,000 33,000 83,000 ($ 5,000)

82. What would be the effect on the company's overall net operating income if product V86O were dropped? A) Overall net operating income would decrease by $35,000. B) Overall net operating income would decrease by $5,000. C) Overall net operating income would increase by $35,000. D) Overall net operating income would increase by $5,000. Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

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Chapter 13 Relevant Costs for Decision Making Solution:

Sales .............................................. Variable expenses ......................... Contribution margin ...................... Fixed expenses: Fixed manufacturing expenses ... Fixed selling and administrative expenses.................................. Total fixed expenses...................... Net operating income (loss) ..........

Keep the Product $150,000 72,000 78,000

Drop the Product $ 0 0 0

Difference ($150,000) 72,000 ( 78,000)

50,000

20,000

30,000

33,000 83,000 ($ 5,000)

20,000 13,000 40,000 43,000 ($ 40,000) ($ 35,000)

Net operating income would decline by $35,000 if product V86O were dropped. Therefore, the product should not be dropped. Use the following to answer questions 83-85: Smithtone Company uses 8,000 units of a certain part in production each year. Presently, this part is purchased from an outside supplier at $12 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this part. The following information has been assembled on the unit costs of making this part internally: Direct materials ......................................... Direct labor................................................ Variable manufacturing overhead ............. Fixed manufacturing overhead ..................

$3.25 $2.75 $2.00 $5.00

The fixed manufacturing overhead listed above represents an allocation of existing costs to this part. However, there would be an increase of $12,000 in fixed manufacturing overhead costs for the salary of a new supervisor.

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Chapter 13 Relevant Costs for Decision Making 83. If Smithtone chooses to make the part instead of buying it outside, the change in the company's operating income per year would be: A) $20,000 decrease. B) $20,000 increase. C) $8,000 decrease. D) $8,000 increase. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Relevant cost of manufacturing: Direct materials ($3.25 × 8,000) .............................. Direct labor ($2.75 × 8,000) ..................................... Variable manufacturing overhead ($2.00 × 8,000) .. Fixed manufacturing overhead ................................. Total cost to make .................................................... Net advantage (disadvantage): Cost of purchasing part ($12 × 8,000) ....... Total cost to make ..................................... Net savings from making part ..................

$26,000 22,000 16,000 12,000 $76,000

$96,000 76,000 $20,000

84. Assuming other things stay the same, at what price per unit from the outside supplier should Smithtone be indifferent (on economic grounds) to buying or making the part? A) $8.00 B) $8.50 C) $9.00 D) $9.50 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

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Chapter 13 Relevant Costs for Decision Making Solution: Relevant cost of manufacturing: Direct materials ($3.25 × 8,000) ................................ Direct labor ($2.75 × 8,000)....................................... Variable manufacturing overhead ($2.00 × 8,000) .... Fixed manufacturing overhead ................................... Total cost to make ......................................................

$26,000 22,000 16,000 12,000 $76,000

Total cost to make .............................. $76,000 Divided by 8,000 units ....................... ÷ 8,000 Price per unit from outside supplier ... $9.50 85. Suppose that the idle capacity (floor space and machinery) is presently being rented to another company for $32,000 per year. All the other conditions are still the same. If Smithtone chooses to make the part instead of buying it outside, the net advantage or disadvantage (per year) would be: A) $15,000 disadvantage. B) $4,000 advantage. C) $12,000 disadvantage. D) $10,000 advantage. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Relevant cost of manufacturing: Direct materials ($3.25 × 8,000) ............................. Direct labor ($2.75 × 8,000).................................... Variable manufacturing overhead ($2.00 × 8,000) . Fixed manufacturing overhead ................................ Total cost to make ................................................... Net advantage (disadvantage): Cost of purchasing part ($12 × 8,000) ...... Total cost to make ..................................... Opportunity cost of rental income ............ Net disadvantage of making part ..............

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$26,000 22,000 16,000 12,000 $76,000

$96,000 ( 76,000) ( 32,000) $12,000

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 86-87: Elly Industries is a multi-product company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit. 86. If Elly Industries continues to use 30,000 units of Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than: A) $14.00 B) $11.00 C) $16.00 D) $13.00 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CMA, adapted Solution: Avoidable fixed costs ($150,000 × 0.60) .. Divided by 30,000 units ............................ Relevant fixed cost per unit ....................... Add variable production costs per unit...... Outside supplier price ................................

$90,000 ÷30,000 $3 11 $14

87. If Elly industries is able to obtain Part MR24 from an outside supplier at a unit purchase price of $15, the monthly usage at which it will be indifferent between purchasing and making Part MR24 is: A) 30,000 units B) 32,000 units C) 35,000 units D) 22,500 units Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CMA, adapted

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Chapter 13 Relevant Costs for Decision Making Solution: A company will be indifferent between purchasing and making a part when the outside purchase price is equal to the total relevant cost per unit of making the part. The total relevant cost per unit of making the part is composed of the variable production cost per unit ($11) plus the fixed cost per unit. Since the total cost must be equal to $15, then the fixed cost per unit must be $4 ($15 − $11). The fixed cost per unit is calculated as: Fixed cost per unit = Total relevant fixed costs ÷ Units to be produced Substituting: $4 = $90,000 ÷ Units to be produced Units to be produced = 22,500 Use the following to answer questions 88-90: Ahron Company makes 80,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials ......................................... Direct labor................................................ Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Unit product cost .......................................

$14.90 17.50 1.90 21.10 $55.40

An outside supplier has offered to sell the company all of these parts it needs for $46.60 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $560,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $13.60 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

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Chapter 13 Relevant Costs for Decision Making 88. How much of the unit product cost of $55.40 is relevant in the decision of whether to make or buy the part? A) $34.30 B) $17.50 C) $55.40 D) $41.80 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy Solution: Relevant cost per unit: Direct materials ........................................................ $14.90 Direct labor ............................................................... 17.50 Variable manufacturing overhead ............................ 1.90 Fixed manufacturing overhead ($21.10 − $13.60) ... 7.50 Relevant manufacturing cost .................................... $41.80 89. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? A) $560,000 B) $704,000 C) $176,000 D) ($384,000) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

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Chapter 13 Relevant Costs for Decision Making Solution: Relevant cost per unit: Direct materials ..................................................... Direct labor ........................................................... Variable manufacturing overhead ......................... Fixed manufacturing overhead ($21.10 − $13.60) Relevant manufacturing cost ................................. Net advantage (disadvantage): Manufacturing cost savings ($41.80 × 80,000)........ Additional contribution margin ................................ Cost of purchasing the part ($46.60 × 80,000) ........ Net advantage (disadvantage) ..................................

$14.90 17.50 1.90 7.50 $41.80

$3,344,000 560,000 ( 3,728,000) $ 176,000

90. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 80,000 units required each year? A) $7.00 B) $62.40 C) $48.80 D) $55.40 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Solution: Relevant cost per unit: Direct materials ..................................................... Direct labor ........................................................... Variable manufacturing overhead ......................... Fixed manufacturing overhead ($21.10 − $13.60) Relevant manufacturing cost .................................

$14.90 17.50 1.90 7.50 $41.80

Maximum acceptable purchase price: Manufacturing cost savings ($41.80 × 80,000) ..... $3,344,000 Additional contribution margin ............................. 560,000 Total benefit ........................................................... $3,904,000 Number of units ..................................................... 80,000 Benefit per unit ...................................................... $48.80

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 91-92: Penagos Corporation is presently making part Z43 that is used in one of its products. A total of 5,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct materials ......................................... Direct labor................................................ Variable overhead ..................................... Supervisor’s salary .................................... Depreciation of special equipment ............ Allocated general overhead .......................

Per Unit $1.10 $3.10 $6.90 $5.80 $5.20 $5.60

An outside supplier has offered to produce and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of these allocated general overhead costs would be avoided.

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Chapter 13 Relevant Costs for Decision Making 91. If management decides to buy part Z43 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $34,500 per year. B) Net operating income would decline by $30,500 per year. C) Net operating income would decline by $15,500 per year. D) Net operating income would decline by $38,500 per year. Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy Solution: Direct materials (5,000 units @ $1.10 per unit).......... Direct labor (5,000 units @ $3.10 per unit) ................ Variable overhead (5,000 units @ $6.90 per unit) ...... Supervisor’s salary (5,000 units @ $5.80 per unit) .... Depreciation of special equipment (not relevant) ....... Allocated general overhead (avoidable only) ............. Outside purchase price (5,000 units @ $20.80 per unit).......................................................................... Total cost .....................................................................

Make $ 5,500 15,500 34,500 29,000 0 4,000

$88,500

Buy

$104,000 $104,000

The total cost of the make alternative is lower by $15,500. Thus, net operating income would decline by $15,500 if the offer from the supplier were accepted.

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Chapter 13 Relevant Costs for Decision Making 92. In addition to the facts given above, assume that the space used to produce part Z43 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the impact on the company's overall net operating income of buying part Z43 from the outside supplier and using the freed space to make more of the other product? A) Net operating income would decline by $10,500 per year. B) Net operating income would decline by $58,500 per year. C) Net operating income would increase by $24,000 per year. D) Net operating income would increase by $8,500 per year. Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Solution: Direct materials (5,000 units @ $1.10 per unit) .... Direct labor (5,000 units @ $3.10 per unit) .......... Variable overhead (5,000 units @ $6.90 per unit) Supervisor’s salary (5,000 units @ $5.80 per unit) ........................................................................... Depreciation of special equipment (not relevant) . Allocated general overhead (avoidable only) ........ Outside purchase price (5,000 units @ $20.80 per unit) .................................................................... Opportunity cost .................................................... Total cost ...............................................................

Make $ 5,500 15,500 34,500

Buy

29,000 0 4,000

$88,500

$104,000 ( 24,000) $ 80,000

The total cost of the make alternative is higher by $8,500. Thus, net operating income would increase by $8,500 if the offer from the supplier were accepted.

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 93-94: Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct materials ......................................... Direct labor................................................ Variable overhead ..................................... Supervisor’s salary .................................... Depreciation of special equipment ............ Allocated general overhead .......................

Per Unit $3.70 $3.60 $1.40 $4.00 $3.90 $4.10

An outside supplier has offered to produce and sell the part to the company for $17.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally.

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Chapter 13 Relevant Costs for Decision Making 93. If management decides to buy part U98 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A) Net operating income would decline by $30,800 per year. B) Net operating income would increase by $25,200 per year. C) Net operating income would increase by $30,800 per year. D) Net operating income would decline by $25,200 per year. Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy Solution: Direct materials (7,000 units @ $3.70 per unit) .... Direct labor (7,000 units @ $3.60 per unit) .......... Variable overhead (7,000 units @ $1.40 per unit) Supervisor’s salary (7,000 units @ $4.00 per unit) ........................................................................... Depreciation of special equipment (not relevant) . Allocated general overhead (not relevant) ............ Outside purchase price (7,000 units @ $17.10 per unit) .................................................................... Total cost ...............................................................

Make $ 25,900 25,200 9,800

Buy

28,000 0 0

$88,900

$119,700 $119,700

The total cost of the make alternative is lower by $30,800. Thus, net operating income would decline by $30,800 if the offer from the supplier were accepted. 94. In addition to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the impact on the company's overall net operating income of buying part U98 from the outside supplier and using the freed space to make more of the other product? A) Net operating income would decline by $6,800 per year. B) Net operating income would decline by $1,200 per year. C) Net operating income would increase by $24,000 per year. D) Net operating income would decline by $49,200 per year. Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

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Chapter 13 Relevant Costs for Decision Making Solution: Direct materials (7,000 units @ $3.70 per unit).... Direct labor (7,000 units @ $3.60 per unit) .......... Variable overhead (7,000 units @ $1.40 per unit) Supervisor’s salary (7,000 units @ $4.00 per unit) ........................................................................... Depreciation of special equipment (not relevant) . Allocated general overhead (not relevant) ............ Outside purchase price (7,000 units @ $17.10 per unit).................................................................... Opportunity cost .................................................... Total cost ...............................................................

Make $ 25,900 25,200 9,800

Buy

28,000 0 0

$88,900

$119,700 ( 24,000) $95,700

The total cost of the make alternative is less by $6,800. Thus, net operating income would decline by $6,800 if the offer from the supplier were accepted. Use the following to answer questions 95-97: Younes Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as P06. Data concerning this product are given below:

Selling price .................................................... Direct materials ............................................... Direct labor...................................................... Variable manufacturing overhead ................... Fixed manufacturing overhead ........................ Variable selling expense ................................. Fixed selling and administrative expense .......

Per Unit $220 $38 $1 $8 $16 $4 $16

The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost.

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Chapter 13 Relevant Costs for Decision Making 95. The company has received a special, one-time-only order for 400 units of component P06. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Younes has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go? A) $47 B) $83 C) $63 D) $220 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Source: CMA, adapted Solution: Variable cost per unit on normal sales: Direct materials ..................................................... Direct labor ............................................................ Variable manufacturing overhead ......................... Variable selling expense ........................................ Variable cost per unit on normal sales .................. Variable cost per unit on special order: Normal variable cost per unit ................................ Reduction in variable selling expense. .................. Variable cost per unit on special order ..................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$38 1 8 4 $51

$51 ( 4) $47

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Chapter 13 Relevant Costs for Decision Making 96. The company has received a special, one-time-only order for 500 units of component P06. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $10,000. What is the minimum price per unit on the special order below which the company should not go? A) $67 B) $103 C) $20 D) $83 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4,5 Level: Hard Source: CMA, adapted Solution: Variable cost per unit on normal sales: Direct materials ............................................................. Direct labor ................................................................... Variable manufacturing overhead ................................. Variable selling expense ............................................... Variable cost per unit on normal sales .......................... Variable cost per unit on special order: Normal variable cost per unit ........................................ Reduction in variable selling expense. .......................... Opportunity cost of sales given up $10,000 ÷ 500) ...... Variable cost per unit on special order..........................

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$38 1 8 4 $51

$51 ( 4) 20 $67

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Chapter 13 Relevant Costs for Decision Making 97. Refer to the original data in the problem. What is the current contribution margin per unit for component P06 based on its selling price of $220 and its annual production of 4,000 units? A) $51 B) $137 C) $169 D) $173 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy Source: CMA, adapted Solution: Variable cost per unit: Direct materials ..................................................... Direct labor ............................................................ Variable manufacturing overhead ......................... Variable selling expense ........................................ Variable cost per unit ............................................ Contribution margin per unit: Selling price ........................................................... Variable cost per unit ............................................ Contribution margin ..............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$38 1 8 4 $51

$220 51 $169

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 98-99: The following are Silver Company's unit costs of making and selling an item at a volume of 8,000 units per month (which represents the company's capacity): Manufacturing: Direct materials .......................... Direct labor ................................ Variable overhead ...................... Fixed overhead ........................... Selling and administrative: Variable ...................................... Fixed...........................................

$4 $5 $2 $8 $1 $6

Present sales amount to 7,000 units per month. An order has been received from a customer in a foreign market for 1,000 units at a price of $20 per unit. The order would not affect regular sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 6,000 and 8,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. 98. If the company accepts the special order, the effect on total operating income will be a: A) $1,000 increase B) $9,000 increase C) $6,000 decrease D) $8,000 increase Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium

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Chapter 13 Relevant Costs for Decision Making Solution: Variable cost per unit on normal sales: Direct materials ..................................................... Direct labor ............................................................ Variable manufacturing overhead ......................... Variable selling & administrative expense ............ Variable cost per unit on normal sales .................. Selling price for special order ............................... Variable cost per unit on special order .................. Unit contribution margin on special order ............ Number of units in special order ........................... Increase (decrease) in net operating income .........

$ 4 5 2 1 $12 $20 12 $ 8 1,000 $8,000

99. The company has 100 defective units of Product X left over from last year which will have to be sold as scrap at reduced prices. The sale of these units would have no effect on the company's other sales. The cost figure that is relevant as a guide for setting a minimum price on these units is: A) $7 B) $1 C) $19 D) $12 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard Solution: Except for variable selling and administrative expenses ($1), all other expenses associated with theses 100 defective units are sunk (already incurred) and therefore irrelevant.

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 100-102: Elfving 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 80,000 units per month is as follows: Direct materials ..................................................... Direct labor............................................................ Variable manufacturing overhead ......................... Fixed manufacturing overhead .............................. Variable selling & administrative expense ........... Fixed selling & administrative expense ................

$37.50 $6.00 $1.00 $11.50 $1.80 $8.00

The normal selling price of the product is $71.10 per unit. An order has been received from an overseas customer for 1,000 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 $1.50 less per unit on this order than on normal sales. Direct labor is a variable cost in this company.

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Chapter 13 Relevant Costs for Decision Making 100. 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 $63.70 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? A) $7,400 B) ($5,900) C) $18,900 D) ($2,100) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Solution: Variable cost per unit on normal sales: Direct materials ..................................................... Direct labor ............................................................ Variable manufacturing overhead ......................... Variable selling & administrative expense ............ Variable cost per unit on normal sales .................. Variable cost per unit on special order: Normal variable cost per unit ................................ Reduction in variable selling and administrative expense............................................................... Variable cost per unit on special order .................. Selling price for special order ............................... Variable cost per unit on special order .................. Unit contribution margin on special order ............ Number of units in special order ........................... Increase (decrease) in net operating income .........

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$37.50 6.00 1.00 1.80 $46.30

$46.30 ( 1.50) $44.80 $63.70 44.80 $18.90 1,000 $18,900

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Chapter 13 Relevant Costs for Decision Making 101. 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? A) $24.80 B) $6.80 C) $7.40 D) $5.30 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard Solution: Variable cost per unit on normal sales: Direct materials ..................................................... Direct labor ........................................................... Variable manufacturing overhead ......................... Variable selling & administrative expense ........... Variable cost per unit on normal sales ..................

$37.50 6.00 1.00 1.80 $46.30

Selling price for normal sales................................ Variable cost per unit ............................................ Unit contribution margin .......................................

$71.10 46.30 $24.80

102. 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 400 units for regular customers. The minimum acceptable price per unit for the special order is closest to: A) $56.00 B) $65.80 C) $71.10 D) $54.72 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard

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Chapter 13 Relevant Costs for Decision Making Solution: Variable cost per unit on normal sales: Direct materials ..................................................... Direct labor ............................................................ Variable manufacturing overhead ......................... Variable selling & administrative expense ............ Variable cost per unit on normal sales ..................

$37.50 6.00 1.00 1.80 $46.30

Lost contribution margin: Selling price for normal sales ............................ Variable cost per unit on normal sales ............... Contribution margin per unit ............................. Number of units cut back in production ............ Total lost contribution margin ........................... Number of units in special order........................ Lost contribution margin per unit ..........................

$71.10 46.30 $24.80 400 $9,920 1,000 $9.92

Variable cost per unit on special order: Normal variable cost per unit ............................................... Add opportunity cost for lost contribution margin ............... Reduction in variable selling and administrative expense. .. Variable cost per unit on special order .................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$46.30 9.92 (1.50) $54.72

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 103-104: The Bharu Violin Company has the capacity to manufacture and sell 5,000 violins each year but is currently only manufacturing and selling 4,800. The following per unit numbers relate to annual operations at 4,800 units:

Selling price .............................................. Manufacturing costs: Variable .................................................. Fixed....................................................... Selling and administrative costs: Variable .................................................. Fixed.......................................................

Per Violin $600 $130 $270 $20 $40

Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each. This special order would not affect regular sales or the cost structure above. 103. If the special order from Woolgar Symphony Orchestra is accepted, Bharu's profits for the year will: A) increase by $40,000 B) decrease by $10,000 C) decrease by $22,000 D) decrease by $28,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Solution: Incremental revenues (200 units @ $350) ............ Less incremental costs: Variable manufacturing (200 units @ $130) ..... Variable selling (200 units @ $20) .................... Net advantage of accepting the order ....................

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$70,000 ( 26,000) ( 4,000) $ 40,000

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Chapter 13 Relevant Costs for Decision Making 104. Assume that Bharu is manufacturing and selling at capacity (5,000 units). Any special order will mean a loss of regular sales. Under these conditions if the special order from Woolgar Symphony Orchestra is accepted, Bharu's profits for the year will decrease by: A) $20,000 B) $22,000 C) $28,000 D) $50,000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Solution: Contribution margin per unit of regular sales: Selling price ....................................................... $600 Variable manufacturing costs ............................ 130 Variable selling costs ......................................... 20 Contribution margin per unit ............................. $450 Number of units of lost sales ............................. 200 Total lost contribution margin ............................... $90,000 Incremental revenues (200 units @ $350)............. Less incremental costs: Variable manufacturing (200 units @ $130)...... Variable selling (200 units @ $20) .................... Less lost contribution margin ................................ Net disadvantage of accepting special order .........

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$70,000 ( 26,000) ( 4,000) ( 90,000) ($50,000)

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 105-108: Browning Company makes four products in a single facility. These products have the following unit product costs: Product Product Product Product A B C D Direct materials ................................ $10.60 $7.90 $6.10 $3.80 Direct labor....................................... 11.40 16.80 8.70 11.40 Variable manufacturing overhead .... 3.70 4.10 5.40 6.10 Fixed manufacturing overhead ......... 24.60 34.40 21.50 19.30 Unit product cost .............................. $50.30 $63.20 $41.70 $40.60 Additional data concerning these products are listed below.

Grinding minutes per unit ................ Selling price per unit ........................ Variable selling cost per unit............ Monthly demand in units .................

Product Product Product A B C 2.60 1.80 2.50 $69.50 $74.80 $59.50 $1.60 $1.50 $2.60 4,000 2,000 3,000

Product D 1.40 $59.60 $3.40 4,000

The grinding machines are potentially the constraint in the production facility. A total of 24,500 minutes are available per month on these machines. Direct labor is a variable cost in this company. 105. How many minutes of grinding machine time would be required to satisfy demand for all four products? A) 21,500 B) 27,100 C) 13,000 D) 24,500 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy

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Chapter 13 Relevant Costs for Decision Making Solution: Demand on the grinding machine:

Grinding minutes per unit................. Monthly demand in units .................. Total minutes required......................

Product Product Product A B C 2.60 1.80 2.50 4,000 2,000 3,000 10,400 3,600 7,500

Product D 1.40 4,000 5,600

Total time required for all products = 10,400 + 3,600 + 7,500 + 5,600 = 27,100 106. Which product makes the LEAST profitable use of the grinding machines? A) Product A B) Product B C) Product C D) Product D Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Hard Solution: Optimal production plan:

Selling price per unit............................ Direct materials per unit ...................... Direct labor per unit ............................. Variable manufacturing overhead per unit .......................................................... Variable selling cost per unit ............... Contribution margin per unit ............... Grinding minutes per unit .................... Contribution margin per minute .......... Rank in terms of profitability ..............

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Product A $69.50 10.60 11.40

Product B $74.80 7.90 16.80

Product C $59.50 6.10 8.70

Product D $59.60 3.80 11.40

3.70 1.60 $42.20

4.10 1.50 $44.50

5.40 2.60 $36.70

6.10 3.40 $34.90

2.60 $16.23

1.80 $24.72

2.50 $14.68

1.40 $24.93

3

2

4

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1

Chapter 13 Relevant Costs for Decision Making 107. Which product makes the MOST profitable use of the grinding machines? A) Product A B) Product B C) Product C D) Product D Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Hard Solution: Optimal production plan:

Selling price per unit .................... Direct materials per unit ............... Direct labor per unit ..................... Variable manufacturing overhead per unit .................................................. Variable selling cost per unit ........ Contribution margin per unit ........ Grinding minutes per unit ............ Contribution margin per minute ... Rank in terms of profitability .......

13-90

Product A $69.50 10.60 11.40

Product B $74.80 7.90 16.80

Product C $59.50 6.10 8.70

Product D $59.60 3.80 11.40

3.70 1.60 $42.20

4.10 1.50 $44.50

5.40 2.60 $36.70

6.10 3.40 $34.90

2.60 $16.23

1.80 $24.72

2.50 $14.68

1.40 $24.93

3

2

4

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Chapter 13 Relevant Costs for Decision Making 108. Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.) A) $0.00 B) $14.68 C) $34.90 D) $11.60 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Hard Solution: Optimal production plan:

Selling price per unit............................ Direct materials per unit ...................... Direct labor per unit ............................. Variable manufacturing overhead per unit .......................................................... Variable selling cost per unit ............... Contribution margin per unit ............... Grinding minutes per unit .................... Contribution margin per minute .......... Rank in terms of profitability ..............

Product A $69.50 10.60 11.40

Product B $74.80 7.90 16.80

Product C $59.50 6.10 8.70

Product D $59.60 3.80 11.40

3.70 1.60 $42.20

4.10 1.50 $44.50

5.40 2.60 $36.70

6.10 3.40 $34.90

2.60 $16.23

1.80 $24.72

2.50 $14.68

1.40 $24.93

3

2

4

The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $14.68.

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 109-112: Crawshan Company makes four products in a single facility. Data concerning these products appear below: Product Product Product Product A B C D Selling price per unit ........................... $38.50 $33.80 $37.70 $38.60 Variable manufacturing cost per unit .. $22.10 $19.50 $23.20 $25.70 Variable selling cost per unit............... $3.00 $2.90 $3.50 $1.10 Milling machine minutes per unit ....... 3.20 3.00 2.50 3.00 Monthly demand in units .................... 2,000 1,000 3,000 1,000 The milling machines are potentially the constraint in the production facility. A total of 17,000 minutes are available per month on these machines. 109. How many minutes of milling machine time would be required to satisfy demand for all four products? A) 19,900 B) 17,000 C) 14,600 D) 7,000 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy Solution: Demand on the milling machine:

Milling machine minutes per unit ....... Monthly demand in units .................... Total minutes required

Product Product Product Product A B C D 3.20 3.00 2.50 3.00 2,000 1,000 3,000 1,000 6,400 3,000 7,500 3,000

Total time required for all products = 6,400 + 3,000 + 7,500 + 3,000 = 19,900

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Chapter 13 Relevant Costs for Decision Making 110. Which product makes the LEAST profitable use of the milling machines? A) Product A B) Product B C) Product C D) Product D Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium Solution: Optimal production plan:

Selling price per unit ........................... Variable manufacturing cost per unit .. Variable selling cost per unit ............... Contribution margin per unit ............... Milling machine minutes per unit ....... Contribution margin per minute ..........

Product Product Product Product A B C D $38.50 $33.80 $37.70 $38.60 22.10 19.50 23.20 25.70 3.00 2.90 3.50 1.10 $13.40 $11.40 $11.00 $11.80 3.20 3.00 2.50 3.00 $4.19 $3.80 $4.40 $3.93

Rank in terms of profitability ..............

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Chapter 13 Relevant Costs for Decision Making 111. Which product makes the MOST profitable use of the milling machines? A) Product A B) Product B C) Product C D) Product D Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium Solution: Optimal production plan:

Selling price per unit ........................... Variable manufacturing cost per unit .. Variable selling cost per unit .............. Contribution margin per unit............... Milling machine minutes per unit ....... Contribution margin per minute .......... Rank in terms of profitability ..............

Product Product Product Product A B C D $38.50 $33.80 $37.70 $38.60 22.10 19.50 23.20 25.70 3.00 2.90 3.50 1.10 $13.40 $11.40 $11.00 $11.80 3.20 3.00 2.50 3.00 $4.19 $3.80 $4.40 $3.93 2

4

1

3

112. Up to how much should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent.) A) $11.00 B) $0.00 C) $3.80 D) $13.40 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium

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Chapter 13 Relevant Costs for Decision Making Solution: Optimal production plan:

Selling price per unit ........................... Variable manufacturing cost per unit .. Variable selling cost per unit ............... Contribution margin per unit ............... Milling machine minutes per unit ....... Contribution margin per minute ..........

Product Product Product Product A B C D $38.50 $33.80 $37.70 $38.60 22.10 19.50 23.20 25.70 3.00 2.90 3.50 1.10 $13.40 $11.40 $11.00 $11.80 3.20 3.00 2.50 3.00 $4.19 $3.80 $4.40 $3.93

Rank in terms of profitability ..............

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4

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3

The company should be willing to pay up to the contribution margin per minute for the least profitable job, which is $3.80. Use the following to answer questions 113-114: Bertucci Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below:

Selling price per unit ............ Variable cost per unit ........... Minutes on the constraint .....

TC GL NG $494.40 $449.43 $469.68 $395.20 $320.21 $373.92 8.00 7.10 7.60

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Chapter 13 Relevant Costs for Decision Making 113. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A) TC, NG, GL B) GL, NG, TC C) GL, TC, NG D) TC, GL, NG Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy Solution:

Selling price per unit ................................. Variable cost per unit ................................ Contribution margin per unit..................... Minutes on the constraint .......................... Contribution margin per unit of the constrained resource .............................. Ranking .....................................................

TC GL NG $494.40 $449.43 $469.68 395.20 320.21 373.92 $ 99.20 $129.22 $ 95.76 8.00 7.10 7.60 $12.40

$18.20

$12.60

3

1

2

Resulting ranking of products: GL, NG, TC 114. 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? A) $12.40 per minute B) $18.20 per minute C) $129.22 per unit D) $95.76 per unit Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium

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Chapter 13 Relevant Costs for Decision Making Solution: Selling price per unit ............ Variable cost per unit ........... Contribution margin per unit Minutes on the constraint ..... Contribution margin per unit of the constrained resource Ranking ................................

TC GL NG $494.40 $449.43 $469.68 395.20 320.21 373.92 $ 99.20 $129.22 $ 95.76 8.00 7.10 7.60 $12.40

$18.20

$12.60

3

1

2

The company should be willing to pay up to $12.40 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 TC. By assumption, the other products will already have been produced up to demand. Use the following to answer questions 115-116: The constraint at Pickrel Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

Selling price per unit ............ Variable cost per unit ........... Minutes on the constraint .....

VD JT SM $344.85 $415.40 $119.32 $270.18 $310.88 $91.96 5.70 6.70 1.90

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Chapter 13 Relevant Costs for Decision Making 115. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A) JT, SM, VD B) JT, VD, SM C) VD, SM, JT D) SM, VD, JT Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Easy Solution: 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 .............................................

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VD JT SM $344.85 $415.40 $119.32 270.18 310.88 91.96 $ 74.67 $104.52 $ 27.36 5.70 6.70 1.90 $13.10 3

$15.60 1

$14.40 2

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Chapter 13 Relevant Costs for Decision Making 116. Assume that sufficient time is available on the constrained machine 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 this constrained resource? A) $15.60 per minute B) $13.10 per minute C) $104.52 per unit D) $27.36 per unit Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium Solution: 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 .............................................

VD JT SM $344.85 $415.40 $119.32 270.18 310.88 91.96 $ 74.67 $104.52 $ 27.36 5.70 6.70 1.90 $13.10 3

$15.60 1

$14.40 2

Resulting ranking of products: JT, SM, VD The company should be willing to pay up to $13.10 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 VD. By assumption, the other products will already have been produced up to demand. Use the following to answer questions 117-118: The Anthony Company makes two products, X and Y, in a joint process. At the split-off point, 60,000 units of product X and 70,000 units of product Y are available each month. Monthly joint production costs total $200,000. Product X can be sold at the split-off point for $3.20 per unit. Product Y can be either sold at the split-off point for $2.60 per unit or it can be processed further and sold for $5.80 per unit. If product Y is processed further, additional processing costs of $2.30 per unit will be incurred.

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Chapter 13 Relevant Costs for Decision Making 117. If product Y is processed further, rather than being sold at the split-off point, the impact on monthly operating income should be: A) $137,000 decrease B) $245,000 increase C) $63,000 increase D) $244,000 increase Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Solution: 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 Y $5.80 2.60 3.20 2.30 $ 0.90

Total increase in monthly operating income: 70,000 units × $0.90 = $63,000 118. What would the unit selling price of product Y need to be at the split-off point in order for Anthony to be economically indifferent between selling Y at split-off or processing Y further before sale? A) $3.80 B) $3.50 C) $3.20 D) $2.90 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Solution: For Anthony to be economically indifferent between selling Y at the split-off or processing Y further, the incremental revenue from further processing would need to be equal to the cost of further processing, or: $5.80 − Sales value at split-off point = $2.30 Sales value at split-off point = $3.50

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 119-121: Dodd Company makes two products from a common input. Joint processing costs up to the split-off point total $35,000 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 splitoff 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 $14,000 $21,000 $20,000 $30,000 $23,500 $16,900 $45,500 $47,500

Total $35,000 $50,000 $40,400 $93,000

119. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? A) $22,000 B) $8,000 C) $28,000 D) $2,000 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Solution: 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 $45,500 23,500 22,000 20,000 $ 2,000

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Chapter 13 Relevant Costs for Decision Making 120. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? A) $30,600 B) $9,600 C) $39,600 D) $600 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Solution: Sales value after further processing .......... Costs of further processing ....................... Benefit of further processing..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

Product Y $47,500 16,900 30,600 30,000 $ 600

121. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? A) $45,500 B) $14,000 C) $22,000 D) $37,500 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Hard Solution: Sales value after further processing .......... Costs of further processing ....................... Benefit of processing Product X further ...

Product X $45,500 23,500 $22,000

Since the company could earn $22,000 in incremental benefits from processing Product X further, the $22,000 represents the minimum that the company should accept for Product X if it is sold at the split-off point.

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 122-124: Mae Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $60 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $29 or processed further for $13 to make the end product industrial fiber that is sold for $61. The cane juice can be sold as is for $40 or processed further for $28 to make the end product molasses that is sold for $67. 122. How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses? A) ($4) B) ($114) C) $18 D) $14 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution: Sales value after further processing .......... Costs of further processing ........................ Benefit of further processing ..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ................... Revenue: Industrial fiber ................... Refined sugar ..................... Total revenue ......................... Less expenses: Purchase from farmers ....... Crushing costs .................... Processing fiber further...... Processing juice further ..... Total expenses ....................... Net profit from one batch ......

Cane Fiber $61 13 48 29 $19

Cane Juice $67 28 39 40 ($1)

$61 67 $128 60 13 13 28 114 $ 14

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Chapter 13 Relevant Costs for Decision Making 123. How much profit (loss) does the company make by processing the intermediate product cane juice into molasses rather than selling it as is? A) ($74) B) ($14) C) ($1) D) ($38) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution: Sales value after further processing .......... Costs of further processing ....................... Benefit of further processing..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

Cane Juice $67 28 39 40 ($1)

124. Which of the intermediate products should be processed further? A) Cane fiber should be processed into industrial fiber; Cane juice should be processed into molasses B) Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed into molasses C) Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses D) Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution: Sales value after further processing .......... Costs of further processing ....................... Benefit of further processing..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

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Cane Fiber $61 13 48 29 $19

Cane Juice $67 28 39 40 ($1)

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Chapter 13 Relevant Costs for Decision Making Use the following to answer questions 125-127: Boney Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $53 to buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $25 or processed further for $18 to make the end product industrial fiber that is sold for $39. The beet juice can be sold as is for $32 or processed further for $28 to make the end product refined sugar that is sold for $79. 125. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A) $15 B) ($14) C) ($117) D) $1 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution: Sales value after further processing .......... Costs of further processing ........................ Benefit of further processing ..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ................... Revenue: Industrial fiber ............................... Refined sugar ................................. Total revenue ..................................... Less expenses: Purchase from farmers ................... Crushing costs ................................ Processing fiber further.................. Processing juice further ................. Total expenses ................................... Net profit from one batch ..................

Beet Fiber $39 18 21 25 ($4)

Beet Juice $79 28 51 32 $19

$39 79 $118 53 18 18 28 117 1

$

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Chapter 13 Relevant Costs for Decision Making 126. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A) $1 B) ($17) C) $19 D) ($52) Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution: Sales value after further processing .......... Costs of further processing ....................... Benefit of further processing..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

Beet Juice $79 28 51 32 $19

127. Which of the intermediate products should be processed further? A) beet fiber should be processed into industrial fiber; beet juice should be processed into refined sugar B) beet fiber should NOT be processed into industrial fiber; beet juice should NOT be processed into refined sugar C) beet fiber should NOT be processed into industrial fiber; beet juice should be processed into refined sugar D) beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy Solution: Sales value after further processing .......... Costs of further processing ....................... Benefit of further processing..................... Less: Sales value at split-off point ............ Net advantage (disadvantage) ...................

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Beet Fiber $39 18 21 25 ($4)

Beet Juice $79 28 51 32 $19

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Chapter 13 Relevant Costs for Decision Making Essay Questions 128. Saalfrank Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below:

Supplies costs ........ Assembly costs ...... Power costs ............ Inspection costs .....

Alternative M $43,000 $43,000 $26,000 $19,000

Alternative N $53,000 $56,000 $26,000 $26,000

Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives? Ans: a. Supplies costs Assembly costs Power costs Inspection costs

Relevant, since costs differ between alternatives Relevant, since costs differ between alternatives Not relevant since the costs do not differ between alternatives Relevant, since costs differ between alternatives

b.

Supplies costs ........ Assembly costs ...... Power costs ............ Inspection costs ..... Total ......................

Alternative M $ 43,000 43,000 26,000 19,000 $131,000

Alternative N $ 53,000 56,000 26,000 26,000 $161,000

Differential $10,000 13,000 0 7,000 $30,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 129. Costs associated with two alternatives, code-named Q and R, being considered by Albiston Corporation are listed below:

Supplies costs ........ Power costs ........... Inspection costs ..... Assembly costs ......

Alternative Q $65,000 $30,000 $18,000 $33,000

Alternative R $65,000 $29,000 $29,000 $33,000

Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives? Ans: a. Supplies costs Power costs Inspection costs Assembly costs

Not relevant since the costs do not differ between alternatives Relevant, since costs differ between alternatives Relevant, since costs differ between alternatives Not relevant since the costs do not differ between alternatives

b. Supplies costs ........ Power costs ........... Inspection costs ..... Assembly costs ...... Total ......................

Alternative Q $ 65,000 30,000 18,000 33,000 $146,000

Alternative R Differential $ 65,000 $ 0 29,000 (1,000) 29,000 11,000 33,000 0 $156,000 $10,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 130. The most recent monthly income statement for Benner Stores is given below: Total Store A Sales................................... $1,000,000 $400,000 Variable expenses .............. 580,000 160,000 Contribution margin .......... 420,000 240,000 Traceable fixed expenses... 300,000 100,000 Store segment margin ........ 120,000 140,000 Common fixed expenses ... 50,000 20,000 Net operating income ........ $ 70,000 $120,000

Store B $600,000 420,000 180,000 200,000 (20,000) 30,000 ($ 50,000)

Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars. Required: Compute the overall increase or decrease in the company's operating income if Store B is closed. Ans: Loss in contribution margin if Store B is closed: Store B loss ........................................................................... Store A loss (10% × $240,000) ............................................ Total lost contribution margin .............................................. Fixed costs avoided if Store B is closed (75% × $200,000). Net disadvantage of closing Store B ....................................

($180,000) ( 24,000) ( 204,000) 150,000 ($ 54,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium

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Chapter 13 Relevant Costs for Decision Making 131. Companies often allocate common fixed costs among segments. For example, common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports. Required: What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division? Ans: A segment such as a product or a division may show a net loss only because of the allocated common fixed cost. However, if the segment is dropped, the common fixed expense will continue. A segment should be dropped only if its contribution margin does not cover its own avoidable fixed costs. And even in cases where a segment does not cover its own costs, it may be beneficial to retain the segment if it has positive effects on other segments. For example, a “losing” product may be important in luring customers into a store where they will buy other products. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium 132. The management of Schmader Corporation is considering dropping product M12C. Data from the company's accounting system appear below: Sales ................................................................ Variable expenses ........................................... Fixed manufacturing expenses ........................ Fixed selling and administrative expenses ......

$550,000 $242,000 $215,000 $132,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $137,000 of the fixed manufacturing expenses and $79,000 of the fixed selling and administrative expenses are avoidable if product M12C is discontinued. Required: a. What is the net operating income earned by product M12C according to the company's accounting system? Show your work! b. What would be the effect on the company's overall net operating income of dropping product M12C? Should the product be dropped? Show your work!

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Chapter 13 Relevant Costs for Decision Making Ans:

Sales............................................... Variable expenses .......................... Contribution margin ...................... Fixed expenses: Fixed manufacturing expenses ... Fixed selling and administrative expenses .................................. Total fixed expenses ...................... Net operating income (loss) ..........

Keep the Product $550,000 242,000 308,000

Drop the Product $ 0 0 0

Difference ($550,000) 242,000 ( 308,000)

215,000

78,000

137,000

132,000 347,000 ($ 39,000)

53,000 131,000 ($131,000)

79,000 216,000 ($92,000)

a. According to the company’s accounting system, the product’s net operating loss is $39,000. b. Net operating income would decline by $92,000 if product M12C were dropped. Therefore, the product should not be dropped. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy 133. Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below: Sales................................................................. Variable expenses ............................................ Fixed manufacturing expenses ........................ Fixed selling and administrative expenses ......

$340,000 $156,000 $116,000 $75,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $72,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued. Required: a. According to the company's accounting system, what is the net operating income earned by product D14E? Show your work! b. What would be the effect on the company's overall net operating income of dropping product D14E? Should the product be dropped? Show your work!

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Chapter 13 Relevant Costs for Decision Making Ans:

Sales ............................................... Variable expenses .......................... Contribution margin ....................... Fixed expenses: Fixed manufacturing expenses ....... Fixed selling and administrative expenses ...................................... Total fixed expenses....................... Net operating income (loss) ...........

Keep the Product $340,000 156,000 184,000

Drop the Product $ 0 0 0

Difference ($340,000) 156,000 ( 184,000)

116,000

44,000

72,000

75,000 191,000 ($ 7,000)

27,000 71,000 ($71,000)

48,000 120,000 ($ 64,000)

a. According to the company’s accounting system, the product’s net operating loss is $7,000. b. Net operating income would decline by $64,000 if product D14E were dropped. Therefore, the product should not be dropped. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy 134. The management of Wengel Corporation is considering dropping product B90D. Data from the company's accounting system appear below: Sales ................................................................ Variable expenses ........................................... Fixed manufacturing expenses ........................ Fixed selling and administrative expenses ......

$720,000 $374,000 $245,000 $209,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $173,000 of the fixed manufacturing expenses and $150,000 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued. Required: What would be the effect on the company's overall net operating income if product B90D were dropped? Should the product be dropped? Show your work!

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Chapter 13 Relevant Costs for Decision Making Ans:

Sales ............................................... Variable expenses ........................... Contribution margin ....................... Fixed expenses: Fixed manufacturing expenses ....... Fixed selling and administrative expenses ...................................... Total fixed expenses ....................... Net operating income (loss) ...........

Keep the Product $720,000 374,000 346,000

Drop the Product $ 0 0 0

Difference ($720,000) 374,000 ( 346,000)

245,000

72,000

173,000

209,000 454,000 ($108,000)

59,000 131,000 ($131,000)

150,000 323,000 ($ 23,000)

Net operating income would decline by $23,000 if product B90D were dropped. Therefore, the product should not be dropped. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 135. Foubert Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials ................................... Direct labor ......................................... Variable manufacturing overhead ....... Fixed manufacturing overhead ............ Unit product cost .................................

$13.80 18.10 4.30 24.60 $60.80

An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $268,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $17.00 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $60.80 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

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Chapter 13 Relevant Costs for Decision Making Ans: a. Relevant cost per unit: Direct materials .......................................... Direct labor ................................................ Variable manufacturing overhead .............. Fixed manufacturing overhead .................. Relevant manufacturing cost .....................

$13.80 18.10 4.30 7.60 $43.80

b. Net advantage (disadvantage): Manufacturing cost savings ....................... Additional contribution margin ................. Cost of purchasing the part ........................ Net advantage (disadvantage) ....................

$1,752,000 268,000 ( 2,072,000) ($ 52,000)

c. Maximum acceptable purchase price: Manufacturing cost savings ....................... Additional contribution margin ................. Total benefit ............................................... Number of units ......................................... Benefit per unit ..........................................

$1,752,000 268,000 $2,020,000 40,000 $50.50

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard

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Chapter 13 Relevant Costs for Decision Making 136. Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products. Data concerning the unit production costs of the B345 gasket follow: Direct materials ................................... Direct labor ......................................... Variable manufacturing overhead ....... Fixed manufacturing overhead ............ Total manufacturing cost per unit .......

$0.15 0.10 0.13 0.24 $0.62

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead costs could be avoided. Required: a. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets. If the outside supplier offers to sell the gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations. b. Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually. What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

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Chapter 13 Relevant Costs for Decision Making Ans: a. The analysis of the alternatives follows below: Make Buy Purchase cost..................................... $0.46 Direct materials ................................. $0.15 Direct labor ....................................... 0.10 Variable manufacturing overhead ..... 0.13 Fixed manufacturing overhead* ....... 0.06 Total cost........................................... $0.44 $0.46 *25% × $0.24 The company should make the part rather than buy it from the outside supplier since it costs $0.02 less under that alternative. b. The maximum acceptable price is $0.54 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 ................ Opportunity cost per unit ($10,000 ÷ 100,000) ..... Total.......................................................................

$0.44 0.10 $0.54

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard

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Chapter 13 Relevant Costs for Decision Making 137. McGraw Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $100,000, computed as follows: Direct materials ................................... Direct labor ......................................... Variable manufacturing overhead ....... Fixed manufacturing overhead ............ Total costs ...........................................

$ 15,000 30,000 10,000 45,000 $100,000

An outside supplier has offered to provide Part X at a price of $18 per unit. If McGraw Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated. Required: Prepare an analysis showing the annual dollar advantage or disadvantage of accepting the outside supplier's offer. Ans: Cost of Making Outside purchase ................................. Direct materials ................................... Direct labor ......................................... Variable manufacturing overhead ....... Fixed manufacturing overhead*.......... Total cost .............................................

Cost of Buying $90,000

$15,000 30,000 10,000 15,000 $70,000 $90,000

*1/3 × $45,000 = $15,000 Therefore, the annual advantage to make the parts is $20,000. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 138. Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead ....... Fixed manufacturing overhead ............ Direct labor-hours................................

$225,000 $630,000 45,000

Component P0 is used in one of the company’s products. The unit cost of the component according to the company’s cost accounting system is determined as follows: Direct materials ......................................... Direct labor ................................................ Manufacturing overhead applied ............... Unit product cost .......................................

$21.00 40.80 32.30 $94.10

An outside supplier has offered to supply component P0 for $78 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?

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Chapter 13 Relevant Costs for Decision Making Ans: Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows: Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷ Direct labor-hours = $225,000 ÷ 45,000 DLHs = $5.00 per DLH The direct-labor hours per unit for the special order can be determined as follows: Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate = $32.30 ÷ $19.00 per DLH = 1.70 DLHs Consequently, the variable manufacturing overhead for the special order would be: Variable manufacturing overhead = Variable portion of the predetermined overhead rate × Direct labor-hours = $5.00 per DLH × 1.70 DLHs = $8.50 Putting this all together: Direct materials ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Total variable cost .....................................

$21.00 40.80 8.50 $70.30

Since the outside supplier has offered to sell the component for $78.00 each, but it only costs the company $70.30 to make the component internally, this is not a financially attractive offer. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making 139. Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 8,000 units of the part that are needed every year. Per Unit Direct materials ......................................... $8.10 Direct labor ................................................ $4.40 Variable overhead...................................... $8.60 Supervisor’s salary .................................... $3.20 Depreciation of special equipment ............ $2.60 Allocated general overhead ....................... $1.30 An outside supplier has offered to make the part and sell it to the company for $27.60 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part Q89 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?

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Chapter 13 Relevant Costs for Decision Making Ans: a. Direct materials (8,000 units @ $8.10 per unit).... Direct labor (8,000 units @ $4.40 per unit) .......... Variable overhead (8,000 units @ $8.60 per unit) Supervisor’s salary (8,000 units @ $3.20 per unit) ........................................................................... Depreciation of special equipment (not relevant) . Allocated general overhead (avoidable only) ....... Outside purchase price (8,000 units @ $27.60 per unit).................................................................... Opportunity cost .................................................... Total cost ...............................................................

Make $ 64,800 35,200 68,800

Buy

25,600 0 3,000

$197,400

$220,800 ( 16,000) $204,800

b. The total cost of the make alternative is lower by $7,400. Thus, net operating income would decline by $7,400 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

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Chapter 13 Relevant Costs for Decision Making 140. Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year. Per Unit Direct materials .......................................... $8.70 Direct labor ................................................ $2.70 Variable overhead ...................................... $3.30 Supervisor’s salary ..................................... $1.90 Depreciation of special equipment ............ $1.80 Allocated general overhead........................ $5.50 An outside supplier has offered to make the part and sell it to the company for $21.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part U67 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose? Ans: a. Direct materials (7,000 units @ $8.70 per unit) ............. Direct labor (7,000 units @ $2.70 per unit) ................... Variable overhead (7,000 units @ $3.30 per unit) ......... Supervisor’s salary (7,000 units @ $1.90 per unit) ........ Depreciation of special equipment (not relevant) .......... Allocated general overhead (avoidable only) ................. Outside purchase price (7,000 units @ $21.40 per unit) Total cost ........................................................................

Make $ 60,900 18,900 23,100 13,300 0 6,000

Buy

$149,800 $122,200 $149,800

b. The total cost of the make alternative is lower by $27,600. Thus, net operating income would decline by $27,600 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Easy

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Chapter 13 Relevant Costs for Decision Making 141. Juline 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 40,000 units per month is as follows: Direct materials ..................................................... Direct labor ........................................................... Variable manufacturing overhead ......................... Fixed manufacturing overhead .............................. Variable selling and administrative expense ......... Fixed selling and administrative expense .............

$53.60 $5.30 $1.40 $13.20 $1.60 $9.10

The normal selling price of the product is $91.60 per unit. An order has been received from an overseas customer for 3,000 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 $1.00 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 $81.90 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 2,100 units for regular customers. What would be the minimum acceptable price per unit for the special order?

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Chapter 13 Relevant Costs for Decision Making Ans: b. Variable cost per unit on normal sales: Direct materials ..................................................... Direct labor ............................................................ Variable manufacturing overhead ......................... Variable selling & administrative expense ............ Variable cost per unit on normal sales .................. Variable cost per unit on special order: Normal variable cost per unit ................................ Reduction in variable selling and administrative expense............................................................... Variable cost per unit on special order .................. Selling price for special order ............................... Variable cost per unit on special order .................. Unit contribution margin on special order ............ Number of units in special order ........................... Increase (decrease) in net operating income .........

$53.60 5.30 1.40 1.60 $61.90

$61.90 1.00 $60.90 $81.90 60.90 21.00 3,000 $63,000

b. The opportunity cost is just the contribution margin on normal sales: Normal selling price per unit ................................. $91.60 Variable cost per unit on normal sales .................. 61.90 Unit contribution margin on normal sales ............. $29.70 c. Minimum acceptable price: Unit contribution margin on normal sales ............. Displaced normal sales .......................................... Lost contribution margin displaced sales .............. Total variable cost on special order ....................... Number of units in special order ........................... Minimum acceptable price on special order..........

$29.70 2,100 $ 62,370 182,700 $245,070 3,000 $81.69

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard

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Chapter 13 Relevant Costs for Decision Making 142. Marsdon Company has an annual production capacity of 15,000 units. The costs associated with production and sale of the company's product are given below: Manufacturing costs: Variable .................................................. Fixed (annual cost) ................................. Selling and administrative costs: Variable (sales commissions) ................ Fixed (annual cost) .................................

$12 per unit $90,000 $3 per unit $60,000

The company presently is selling 12,000 units annually at a selling price of $28 each. A special order has been received from a distributor who wants to purchase 3,000 units at a special price of $20 each. Regular sales would not be affected by this order and the order could be filled without any impact on total fixed costs. Sales commissions on the special order would be reduced by one-third. Required: Determine whether the company should accept the special order. Ans: Incremental revenues (3,000 units @ $20) ............ Less incremental costs: Variable manufacturing (3,000 units @ $12) ..... Variable selling (3,000 units @ $2).................... Net advantage of accepting the order ....................

$60,000 ( 36,000) ( 6,000) $ 18,000

Yes, the order should be accepted. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium

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Chapter 13 Relevant Costs for Decision Making 143. Mcniff Corporation makes a range of products. The company's predetermined overhead rate is $28 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead ............. $180,000 Fixed manufacturing overhead .................. $380,000 Direct labor-hours...................................... 20,000 Management is considering a special order for 200 units of product O96S at $122 each. The normal selling price of product O96S is $149 and the unit product cost is determined as follows: Direct materials ......................................... Direct labor ................................................ Manufacturing overhead applied ............... Unit product cost .......................................

$ 67.00 32.00 44.80 $143.80

If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order. Required: If the special order were accepted, what would be the impact on the company's overall profit? Ans: Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows: Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷ Direct labor-hours = $180,000 ÷ 20,000 direct labor-hours = $9.00 per direct labor-hour

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Chapter 13 Relevant Costs for Decision Making The direct-labor hours per unit for the special order can be determined as follows: Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate = $44.80 ÷ $28.00 per direct labor-hour = 1.60 direct labor-hours Consequently, the variable manufacturing overhead for the special order would be: Variable manufacturing overhead = Variable portion of the predetermined overhead rate × Direct labor-hours = $9.00 per direct labor-hour × 1.60 direct labor-hours = $14.40 Putting this all together: Special order price ......................................................... Variable costs: Direct materials ........................................................... Direct labor ................................................................. Variable manufacturing overhead ............................... Total variable cost .......................................................... Contribution margin ....................................................... × Units ordered............................................................... = Total increase in profit from the special order ............

$122.00 67.00 32.00 14.40 113.40 $ 8.60 200 $1,720

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making 144. Kneller Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 12,000 medals each month; current monthly production is 9,600 medals. The company normally charges $99 per medal. 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 ..........

$480,000 $153,600 $24,960 $144,000 $78,720

The company has just received a special one-time order for 500 medals at $89 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 ..

$480,000 153,600 $633,600 9,600 $66

Since price on the special order is $89 per medal and the relevant cost is only $66, the company would earn a profit of $23 per medal. Therefore, the special order should be accepted. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Source: CMA, adapted

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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: 4 Level: Medium Source: CMA, adapted

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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: 4 Level: Easy

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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 ......................................... Direct labor ............................................... Variable manufacturing overhead ............. Fixed manufacturing overhead .................. Unit product cost .......................................

$14.70 1.30 7.00 7.90 $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: 4 Level: Easy

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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.)

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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 ..............

3

1

2

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: 5 Level: Hard

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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.)

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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 ...........

3

2

1

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: 5 Level: Medium

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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 4 2 5

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 4 2 5 $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: 5 Level: Hard

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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 1

$13.30 3

$13.90 2

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: 5 Level: Easy

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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 3

$13.10 2

$13.60 1

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: 5 Level: Easy

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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: 6 Level: Hard

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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: 6 Level: Medium

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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. 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) ...................................................... $ 6 b. 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: 6 Level: Easy

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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. 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 b. 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: 6 Level: Easy

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