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Exam 23: Relevant Costing for Managerial Decisions

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Question 41

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Which of the following should be classified as production costs?

A) Direct materials and selling costs.
B) Direct labor and administrative costs.
C) Manufacturing overhead and selling and administrative costs.
D) Direct materials, direct labor, and selling and administrative costs.
E) Direct materials, direct labor, and manufacturing overhead.

F) D) and E)
G) A) and B)

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Question 42

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

A) Buy Zed since the relevant cost to make it is $60.
B) Make Zed since the relevant cost to make it is $60.
C) Buy Zed since the relevant cost to make it is $80.
D) Make Zed since the relevant cost to make it is $30.
E) Buy Zed since the relevant cost to make it is $30.

F) C) and D)
G) A) and E)

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Question 43

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A _______________________________ is the combination of products sold by a company.

Relevant benefits refer to the additional revenue generated by selecting a particular course of action over another.

A company has already incurred a $15,000 cost in partially producing its three products. Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing. Based on this information, should any products be processed further? $\begin{array}{|c|c|c|c|}\hline \text { Product } & \begin{array}{c}\text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array}{c}\text { Finished } \\\text { Selling Price }\end{array} & \begin{array}{c}\text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \mathrm{A} & \$ 750 & \$ 875 & \$ 130 \\\hline \mathrm{B} & \$ 850 & \$ 1,000 & \$ 155 \\\hline \mathrm{C} & \$ 950 & \$ 1,200 & \$ 255 \\\hline\end{array}$

Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

The concept of incremental cost is the same as the concept of differential cost.

A company has the choice of either selling 500 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $7.00 per unit. Alternatively, it could rebuild them with incremental costs of $2.00 per unit for materials, $3.00 per unit for labor, and $1.00 per unit for overhead, and then sell the rebuilt units for $15.00 each. What should the company do?

A company expects to produce and sell 15,000 units of a single product. Management desires a 15% return on assets of $2,000,000. The following additional company information is available: $\begin{array}{cr}\text { Variable costs (per unit) }\\\text { Production costs } & \$ 65 \\\text { Nonproduction costs } & \$ 7 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 97,000 \\\text { Nonproduction } & \$ 23,000\end{array}$ Compute selling price per unit given that markup percentage equals desired profit divided by total costs.

A company manufactures three products. Each unit of product X requires 10 machine hours, each unit of product Y requires 4 machine hours, and each unit of product Z requires 6 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. Each unit of Z sells for $12 and has variable costs of $4. (a) Calculate the contribution margin per hour of each of the products. (b) Determine the preferred sales mix if there are no market constraints on any of the products. (c) Determine the preferred sales mix if the demand is limited to 20,000 units of each.

Wave-Zone Company has 10,000 units of its sole product that it produced last year at a cost of $50 each. This year's model is superior to last year's and the 10,000 units cannot be sold for their regular selling price of $75 each. Wave-Zone has two alternatives for these items: (1) they can be sold to a wholesaler for $5 each, or (2) they can be reworked at a total cost of $190,000 and then sold for $22.50 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the company's profits the most?

What is a sunk cost? When would it be relevant to a short-term managerial decision?

A company manufactures two products. Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. If the company can sell all that it produces of both products, what should the sales mix be?

Doggy Day Park Inc. currently has a special tank used to provide exercise hydro therapy for the dogs. The current book value of the tank is $25,000 and they could sell it for $12,000 if they wanted to do so. Doggy is evaluating a new tank system that will provide additional therapy capability. The new tank will cost $55,000 and will save $7,500 per year in operating costs. The new tank system is expected to last 6 years. (a) Using incremental analysis, should they buy the new tank? Show calculations to support your answer. (b) Will the answer to (a) change if they can only sell the old tank for $5,000? Why or why not?

__________________________ expenses are amounts the company would not incur if a segment was eliminated.

A company expects to produce and sell 8,000 units of a single product. Management desires a 20% return on assets of $1,520,000. The following additional company information is available: $\begin{array}{cr}\text { Variable costs (per unit) }\\\text { Production costs } & \$ 78 \\\text { Nonproduction costs } & \$ 22 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 110,000 \\\text { Nonproduction } & \$ 40,000\end{array}$ Compute markup per unit. Assume that markup percentage equals desired profit divided by total costs.

Incremental costs are also called out-of-pocket costs.

Rocko Inc. has a machine with a book value of $50,000 and a five year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five year life. Should the machine be replaced?

Fleming Company had the following results of operations for the past year: $\begin{array}{l}\text { Sales }(10,000 \text { units at } \$ 6.80) & \$ 68,000 \\\text { Materials and direct labor } & (20,000) \\\text { Overhead }(40 \% \text { variable) } & (10,000) \\\text { Selling and administrative expenses (all } & (6,000)\text { fixed) }\\\text { Operating income }&\$32,000\end{array}$ A foreign company (whose sales will not affect Fleming's regular sales) offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Should Fleming take this order? Explain.

A company inadvertently produced 5,000 defective portable MP3 players. The players cost $22 each to be manufactured. A salvage company will purchase the defective units as they are for $18 each. The production manager reports that the defects can be corrected for $10 per unit, enabling the company to sell them at the regular price of $33.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.