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Exam 23: Relevant Costing for Managerial Decisions

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Question 61

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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. What should the company do?

A) Sell the units as scrap.
B) Rebuild the units.
C) It does not matter because both alternatives have the same result.
D) Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.
E) Throw the units away.

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

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Question 62

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The decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

A) True
B) False

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Question 63

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In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks: _________________________ _________________________ _________________________

Teague Plumbing has received a special one-time order for 1,500 toilets (units) at $75 per unit. Teague currently produces and sells 7,500 units at $100.00 each. This level represents 75% of its capacity. Production costs for these units are $75.00 per unit, which includes $70 variable cost and $5 fixed cost. To produce the special order, shipping costs of $10,000 will be incurred. Management expects no other changes in costs as a result of the additional production. -If Teague wishes to earn $1,250 on the special order, the size of the order would need to be:

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: (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?

A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a total cost of $2,000. Normal cost data, excluding stamping, follows: $\begin{array} { l r } \text { Direct materials } & \$ 10 \text { per unit } \\\text { Direct labor } & 16 \text { per unit } \\\text { Variable overhead } & 4 \text { per unit } \\\text { Allocated fixed overhead } & 12 \text { per unit } \\\text { Allocated fixed selling expense } & 8 \text { per unit }\end{array}$ What selling price per unit will this company require to earn $3,000 on the order?

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

Kimball Enterprises manufactures a product which contains a part that they have always purchased from a supplier for $60 each. Kimball recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the part instead of buying it. The company prepared the following per unit cost projections of making the part, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 75% of direct labor cost. $\begin{array}{lr}\text { Direct materials } & \$ 38.00 \\\text { Direct labor } & 15.00 \\\text { Overhead (fixed and } & \underline{11.25} \\\text { variable) } & \\\text { Total } & \$ 64.25\end{array}$ The required volume of output to produce the parts will not require any incremental fixed overhead. Incremental variable overhead cost is $2.00 per unit. Should Kimball make or buy the parts?

Hondo Company 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 $108,000 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?

Incremental costs should be considered in a make or buy decision.

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?

Thompson Company had the following results of operations for the past year: $\begin{array}{l}\text { Sales }(16,000 \text { units at } \$ 10) &&\$160,000\\\text { Direct materials and direct labor } & \$ 96,000 \\\text { Overhead (20\% variable) } & 16,000 \\\text { Selling and administrative expenses (all fixed) } & 32,000&(144,000) \\\text { Operating income }&&\$16,000\end{array}$ A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the offer, its profits will:

A company is planning to introduce a new portable TV to its existing product line. Management must decide whether to make the TV case or buy it from an outside supplier. The lowest outside price is $100. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following: $\begin{array}{lr}&\text { Per Case }\\\text { Direct materials } & \$ 40.00 \\\text { Direct labor } & 32.00 \\\text { Variable overhead } & 10.00 \\\text { Equipment depreciation } & 6.50 \\\text { Building rental } & 10.00 \\\text { Allocated fixed overhead } & 7.50 \\\text { Total cost } & \$ 106.00 \\\end{array}$ Required: (1) Determine whether the company should make the cases or buy them from the outside supplier. (2) What decision should be made if only 15,000 cases are needed? (3) What other factors, besides cost, should the company consider?

Wages from a job a student gives up to attend summer school would be a sunk cost.

Costs already incurred in manufacturing the units of a product that do not meet quality standards are relevant costs in a scrap or rework decision.

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

Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. -Should the company accept the special order?

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 $8.00 per unit. Alternatively, it could rebuild them with incremental costs of $3.00 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?

Altertech Inc. manufactures a product which contains a circuit board. The company has always purchased this circuit board from a supplier for $32 each. Altertech recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the circuit board instead of buying it. The company prepared the following per unit cost projections of making the circuit board, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 110% of direct labor cost. $\begin{array}{ll}\text { Direct materials } & \$ 2 \\\text { Direct labor } & 20 \\\text { Overhead (fixed and } & 22 \\\text { variable) } & \\\text { Total } & \$ 44\end{array}$ The required volume of output to produce the circuit boards will not require any incremental fixed overhead. Incremental variable overhead cost is $3 per circuit board. What is the effect on income if Altertech decides to make the circuit boards?

What is the overall decision rule management should apply when considering a segment for elimination?