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Exam 10: Relevant Costing for Managerial Decisions

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Question 21

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A company inadvertently produced 3,000 defective products. The product cost $15 each to be manufactured and normally sells for $35 each. A salvage company will purchase the defective units as they are for $13 each. The production manager reports that the defects can be corrected for $5 per unit, enabling the company to sell them at a discounted price of $22.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

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Because there is an...

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Question 22

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To determine a product selling price based on the total cost method, management should include:

A) Total production and nonproduction costs plus a markup.
B) Total production and nonproduction costs only.
C) Total production costs plus a markup.
D) Total nonproduction costs plus a markup.
E) Only a markup.

F) All of the above
G) B) and E)

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Question 23

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

Costs already incurred in manufacturing the units of a product that do not meet quality standards are ________ costs.

Assuming a company has excess operating capacity, a special order should be accepted if its incremental revenues exceed the incremental costs, and the special order does not negatively impact existing business.

Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

A company must decide between scrapping or rebuilding units that do not pass inspection. The company has 15,000 such units that cost $6 per unit to manufacture. The units were built to satisfy a special order, which must still be satisfied if the defective units are scrapped. The units can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full price of $9.00 each. If the units are sold as scrap, the company will have to build 15,000 replacement units and sell them at the full price. Required: (1) What is the net return from selling the units as scrap? (2) What is the net return from reworking and selling the units? (3) Should the company sell the units as scrap or rework them?

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental revenue will be:

Luxury Linens has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below: $\begin{array} { | l | r | r | r | r | } \hline &\underline{ { \text { Total } }} & \underline{{ \text { Bath } }} &\underline{{ \text { Kitchen }} } &\underline{ { \text { Bedding } } }\\ \hline \text { Sales } & \$ 2,100,000 & \$ 1,000,000 & \$ 500,000 & \$ 600,000 \\\hline \text { Cost of goods sold } &\underline{ ( 1,260,000 ) }&\underline{ ( 500,000 ) }&\underline{ ( 360,000 ) }& \underline{( 400,000 )} \\\hline \text { Gross profit } & 840,000 & 500,000 & 140,000 & 200,000 \\\hline \text { Direct expenses } & ( 420,000 ) & ( 200,000 ) & ( 120,000 ) & ( 100,000 ) \\\hline \text { Allocated expenses } & \underline{( 325,000 )} &\underline{ ( 100,000 ) }&\underline{( 150,000 )} &\underline{ ( 75,000 ) }\\\hline \text { Net income (loss) } &\underline{ \$ 95,000} &\underline{ \$ 200,000 }& \underline{\$ ( 130,000 )} &\underline{ \$ 25,000} \\\hline\end{array}$ Based on this income statement, management is considering eliminating the Kitchen department. If the Kitchen department is eliminated, the other departments will expand to fill the space but sales are not expected to change. Twenty percent of Kitchen's allocated expenses will be avoided due to restructuring and the remainder reallocated equally to Bath and Bedding. Show an analysis indicating whether the Kitchen department should be eliminated.

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

Generalware, Inc. sells a single product and reports the following results from sales of 100,000 units: Sales ($45 unit) …………..…………….… $4,500,000 Less costs and expenses: Direct materials ($16/unit)………….… $1,600,000 Direct labor ($9/unit)…………….….… 900,000 Variable overhead ($3/unit)…….…….. 300,000 Fixed overhead ($8.10/unit)…….......... 810,000 Variable administrative ($4.50/unit)…. 450,000 Fixed administrative ($4/unit)………... 400,000 Total costs and expenses……………... $(4,460,000) Operating income………………………… $ 40,000 A foreign company wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Generalware will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order. Required: (1) Should Generalware accept the order if it does not affect regular sales? Explain. (2) Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales. Should the company accept the special order under these circumstances?

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What is the amount of incremental revenue from rebuilding?

Most financial measures of revenues and costs from accounting systems are based on historical costs.

Walters manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand. Alternatively, it can be further processed at a cost of $12,000 and converted into 12,000 units of Deluxe and 6,000 units of Super. The selling price of Deluxe and Super are $30 and $20, respectively. The incremental net income of processing further would be:

The total cost method determines a selling price equal to a product's total costs plus a desired profit on the product.

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. If the company rebuilds the units, what is the impact on income?

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

A(n) ________ requires a future outlay of cash and is relevant for current and future decision making.

Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should: