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Exam 10: Relevant Costing for Managerial Decisions

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Question 21

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

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Question 22

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Highbank Company is operating at 80% of its manufacturing capacity of 62,000 product units per year.A customer has offered to buy an additional 10,000 units at $17 each and sell them outside the country so as not to compete with Highbank.The following data are available: $\begin{array} { l c r } \text { Costs at 80\%/ capacity: } & { \text { Per } } & \text { Total } \\& \text { Unit } & \\\text { Direct materials } & \$ 4.00 & \$ 198,400 \\\text { Direct labor } & 2.00 & 99,200 \\\text { Overhead (fixed and variable) } & \underline { 5 . 0 0 } & \underline { 248,000 } \\\text { Totals } & \underline { \$ 1 1 . 0 0 } & \underline{ \$ 545,600}\end{array}$ In producing 10,000 additional units fixed overhead costs would remain at their current level but incremental variable overhead costs of $0.75 per unit would be incurred.What is the effect on total income if Highbank accepts this order?

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Capacity: 62,000 units - .80(62,000)unit...

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Question 23

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A company paid $200,000 10 years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year.The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000.In analyzing the new project, the $10,000 depreciation on the machine is an example of a(n) :

Contribution margin lost from a decline in sales is an opportunity cost.

Additional costs incurred if a company pursues a certain course of action are sunk costs.

Sandlewood Company has 15,000 units of its sole product that it produced last year at a cost of $43 each.This year's model is superior to last year's and the 15,000 units cannot be sold for their regular selling price of $80 each.Sandlewood has two alternatives for these items: (1) they can be sold to a wholesaler for $30 each, or (2) they can be reworked at a total cost of $400,000 and then sold for $60 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?

A cost that requires a current and/or future outlay of cash, and is usually an incremental cost, is a(n) :

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

Impact on relationships with customers, company image, and employee morale are all examples of _________________________ decision factors.

Stone Company manufactures a product that contains a small lens.The company has always purchased this lens from a supplier for $17 each.Stone recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the lens instead of buying it.The company prepared the following per unit cost projections of making the lens, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 75% of direct labor cost: $\begin{array}{ll}\text { Direct materials } &\$ 7.82 \\\text {Direct labor } &7.00 \\\text { Overhead (fixed and variable) } &\underline{5.25} \\\text { Total } &\underline{\$ 20.07}\end{array}$ The required volume of output to produce the lenses will not require any incremental fixed overhead.Incremental variable overhead cost is $0.68 per lens.Should Stone Company make or buy the lenses?

A company processes chemicals through a common production process.This process costs $200,000 each year.The four chemicals can be sold when they emerge from this process at the "split-off point," or processed further and then sold.Data about the four products for the coming period are: $\begin{array}{lrrrr}&&\text { Unit Sales } & \text { Unit Sales } & \\&&\text { Price per } & \text { Price per } & \\&&\text { Gallon } & \text { Gallon after } & \text { Additional } \\&&\text { at Split-Off } & \text { Further } & \text { Processing } \\\underline { \text { Product } }&\underline { \text { Volume } }&\underline {\text { Point } }&\underline { \text { Processing }} & \underline {\text { Costs} }\\\mathrm{A} & 25,000 \mathrm{~g} & \$ 35.00 & \$ 54.00 & \$ 500,000 \\\mathrm{~B} & 12,000 \mathrm{~g} & 12.00 & 36.00 & 124,000 \\\\\mathrm{C} & 8,000 \mathrm{~g} & 36.00 & 54.00 & 120,000 \\\mathrm{D} & 2,000 \mathrm{~g} & 12.00 & 21.00 & 25,000\end{array}$ a.Calculate the incremental profit or loss that would be generated by processing these chemicals further. b.Which chemicals should be sold as is and which should be processed further and why?

Explain and give several examples of qualitative decision factors.

A company expects its three departments to yield the following income for next year: $\begin{array}{lrrr}&\text { Dept. Q }&\text { Dept. R } &\text { Dept. S } \\\text { Sales } &\$ 6,000&\$ 7,000&\$ 8,000\\\text { Expenses }\\\text { Avoidable } & 2,000 & 3,000 & 4,000 \\\text { Unavoidable } & 1,500 & 2,500 & 4,500 \\\hline \text { Total expenses } & 3,500 & 5,500 & 8,500 \\\hline \text { Net income(loss) } & \underline {\$ 2,500} & \underline { \$ 1,500} & \underline {\$(500) }\end{array}$ Compute the change to the company's total net income if Dept.S is eliminated.

Paz Inc.manufactures a product that contains a small motor.The company has always purchased this motor from a supplier for $55 each.Paz recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it.The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $\begin{array}{lr}\text { Direct materials } & \$ 16 \\\text { Direct labor } & 20 \\\text { Overhead (fixed and } & \underline { 30 }\\\text { variable) } & \\\text { Total } & \underline { \$ 66}\end{array}$ The required volume of output to produce the motors will not require any incremental fixed overhead.Incremental variable overhead cost is $21 per motor.What is the effect on income if Paz decides to make the motors?

When a constrained resource exists, how does a company determine the sales mix that will maximize profits? Would sales demand affect this calculation?

Identify the five steps involved in managerial decision making.

Roxie Company has 17,500 units of its sole product that it produced last year at a cost of $45 each.This year's model is superior to last year's and the 17,500 units cannot be sold for their regular selling price of $80 each.Roxie has two alternatives for these items: (1) they can be sold to a wholesaler for $35 each, or (2) they can be reworked at a total cost of $450,000 and then sold for $60 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?

A company expects to produce and sell a single product.Management desires a 14% return on assets of $725,000.The following additional company information is available: $\begin{array}{lr}\text { Variable costs (per unit) }\\\text { Production costs } & \$ 58 \\\text { Nonproduction costs } & \$ 11 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 179,872 \\\text { Nonproduction } & \$ 49,984\end{array}$ Required: Compute selling price per unit given that markup percentage equals desired profit divided by total costs under the following independent assumptions. a.The company produced and sold 17,600 units b.The company produced and sold 28,732 units

If accepting additional business would cause existing sales to decline, the offer should always be declined.

A company has the choice of either selling 750 defective units as scrap or rebuilding them.They have already spent $14 per unit making these items.The company could sell the defective units as they are for $8 per unit.Alternatively, it could rebuild them with incremental costs of $3 per unit for materials, $3per unit for labor, and $1per unit for overhead, and then sell the rebuilt units for $15.00 each.What should the company do?