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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:

Alternative M Alternative N
Supplies costs ........ $43,000 $53,000
Assembly costs ...... $43,000 $56,000
Power costs ........... $26,000 $26,000
Inspection costs ..... $19,000 $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?
129. Costs associated with two alternatives, code-named Q and R, being considered by
Albiston Corporation are listed below:

Alternative Q Alternative R
Supplies costs........ $65,000 $65,000
Power costs ........... $30,000 $29,000
Inspection costs ..... $18,000 $29,000
Assembly costs...... $33,000 $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?

130. The most recent monthly income statement for Benner Stores is given below:
Total Store A Store B
Sales .................................. $1,000,000 $400,000 $600,000
Variable expenses .............. 580,000 160,000 420,000
Contribution margin .......... 420,000 240,000 180,000
Traceable fixed expenses ... 300,000 100,000 200,000
Store segment margin ........ 120,000 140,000 (20,000)
Common fixed expenses .... 50,000 20,000 30,000
Net operating income ........ $ 70,000 $120,000 ($ 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.
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?

132. The management of Schmader Corporation is considering dropping product M12C.


Data from the company's accounting system appear below:

Sales .............................................................. $550,000


Variable expenses .......................................... $242,000
Fixed manufacturing expenses........................ $215,000
Fixed selling and administrative expenses ...... $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!

133. Suire Corporation is considering dropping product D14E. Data from the company's
accounting system appear below:

Sales ............................................................... $340,000


Variable expenses ........................................... $156,000
Fixed manufacturing expenses ........................ $116,000
Fixed selling and administrative expenses ...... $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!
Chapter 13 Relevant Costs for Decision Making

134. The management of Wengel Corporation is considering dropping product B90D. Data
from the company's accounting system appear below:

Sales .............................................................. $720,000


Variable expenses .......................................... $374,000
Fixed manufacturing expenses........................ $245,000
Fixed selling and administrative expenses ...... $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!

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 .................................. $13.80


Direct labor ........................................ 18.10
Variable manufacturing overhead ....... 4.30
Fixed manufacturing overhead ........... 24.60
Unit product cost ................................ $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?
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 .................................. $0.15


Direct labor ........................................ 0.10
Variable manufacturing overhead ....... 0.13
Fixed manufacturing overhead ........... 0.24
Total manufacturing cost per unit ....... $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?

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 .................................. $ 15,000


Direct labor ........................................ 30,000
Variable manufacturing overhead ....... 10,000
Fixed manufacturing overhead ........... 45,000
Total costs .......................................... $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.
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 ....... $225,000


Fixed manufacturing overhead............ $630,000
Direct labor-hours .............................. 45,000

Component P0 is used in one of the companys products. The unit cost of the
component according to the companys cost accounting system is determined as
follows:

Direct materials ........................................ $21.00


Direct labor .............................................. 40.80
Manufacturing overhead applied ............... 32.30
Unit product cost ...................................... $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?

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
Supervisors 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.
Chapter 13 Relevant Costs for Decision Making

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?

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
Supervisors 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?
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 .................................................... $53.60


Direct labor .......................................................... $5.30
Variable manufacturing overhead ......................... $1.40
Fixed manufacturing overhead ............................. $13.20
Variable selling and administrative expense ......... $1.60
Fixed selling and administrative expense .............. $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?
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 ................................................ $12 per unit
Fixed (annual cost) ................................ $90,000
Selling and administrative costs:
Variable (sales commissions) ................ $3 per unit
Fixed (annual cost) ................................ $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.

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 ........................................ $ 67.00


Direct labor .............................................. 32.00
Manufacturing overhead applied ............... 44.80
Unit product cost ...................................... $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?
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 ......................... $480,000
Direct labor ............................... $153,600
Selling and administrative ......... $24,960
Fixed costs:
Manufacturing ........................... $144,000
Selling and administrative ......... $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?

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 ......................... $460,800
Direct labor ............................... $316,800
Selling and administrative ......... $15,840
Fixed costs:
Manufacturing ........................... $404,640
Selling and administrative ......... $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?


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 ........................................ $15.00


Direct labor .............................................. 3.80
Variable manufacturing overhead ............. 1.40
Fixed manufacturing overhead.................. 2.10
Unit product cost ...................................... $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!

147. A customer has asked Lalka Corporation to supply 3,000 units of product H60, with
some modifications, for $34.70 each. The normal selling price of this product is
$46.35 each. The normal unit product cost of product H60 is computed as follows:

Direct materials ........................................ $14.70


Direct labor .............................................. 1.30
Variable manufacturing overhead ............. 7.00
Fixed manufacturing overhead ................. 7.90
Unit product cost ...................................... $30.90

Direct labor is a variable cost. The special order would have no effect on the
company's total fixed manufacturing overhead costs. The customer would like some
modifications made to product H60 that would increase the variable costs by $3.80 per
unit and that would require a one-time investment of $24,000 in special molds that
would have no salvage value. This special order would have no effect on the
company's other sales. The company has ample spare capacity for producing the
special order.
Required:
Determine the effect on the company's total net operating income of accepting the
special order. Show your work!
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:

Product A Product B Product C


Direct materials ............................... $24.90 $25.70 $26.60
Direct labor ..................................... 13.30 17.10 15.70
Variable manufacturing overhead .... 2.50 2.80 3.10
Fixed manufacturing overhead......... 19.80 27.70 21.00
Unit product cost ............................. $60.50 $73.30 $66.40

Additional data concerning these products are listed below.

Product A Product B Product C


Mixing minutes per unit .................. 2.50 1.70 1.60
Selling price per unit ....................... $71.50 $87.90 $83.00
Variable selling cost per unit ........... $2.30 $1.90 $3.80
Monthly demand in units ................. 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.)
Chapter 13 Relevant Costs for Decision Making

149. Holzmeyer Company makes three products in a single facility. Data concerning these
products follow:
Product A Product B Product C
Selling price per unit ....................... $64.50 $64.80 $63.30
Direct materials ............................... $20.90 $14.50 $18.30
Direct labor ..................................... $30.80 $33.40 $26.00
Variable manufacturing overhead .... $1.60 $1.90 $2.10
Variable selling cost per unit ........... $1.00 $3.40 $1.50
Mixing minutes per unit .................. 3.50 3.10 3.50
Monthly demand in units ................. 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.)

150. Garson, Inc. produces three products. Data concerning the selling prices and unit costs
of the three products appear below:
Product F Product G Product H
Selling price .................................. $50 $80 $70
Variable costs ............................... $40 $50 $55
Fixed costs .................................... $15 $20 $12
Milling machine time (minutes) .... 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?
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:

GK LQ XK
Selling price per unit .................... $119.51 $226.07 $228.96
Variable cost per unit ................... $89.87 $176.86 $178.92
Time on the constraint (minutes) .. 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?

152. The constraint at Dreyfus Inc. is an expensive milling machine. The three products
listed below use this constrained resource.

VY QX AM
Selling price per unit ....................... $78.65 $421.59 $145.92
Variable cost per unit....................... $62.40 $331.20 $113.28
Time on the constraint (minutes) ..... 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?

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:

Product X Product Y
Allocated joint processing costs.......... $19,600 $14,000
Sales value at split-off point ............... $28,000 $20,000
Costs of further processing ................. $22,400 $15,700
Sales value after further processing .... $53,500 $33,500
Chapter 13 Relevant Costs for Decision Making

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?

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.

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!
Chapter 13 Relevant Costs for Decision Making

b. Should each of the intermediate products, peels and depeeled spuds, be sold as is
or processed further into an end product? Explain.

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.