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Exam 23: Relevant Costing for Managerial Decisions

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Question 41

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

A) True
B) False

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Question 42

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The decision to sell or process a product further is analyzed by identifying the incremental costs and benefits of further processing.

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B) False

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Question 43

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Markup percentage equals total costs divided by desired profit.

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

iSooky has a spotter truck with a book value of $40,000 and a remaining useful life of five years.At the end of the five years the spotter truck will have a zero salvage value.The market value of the spotter truck is currently $32,000.iSooky can purchase a new spotter truck for $120,000 and receive $31,000 in return for trading in its old spotter truck.The new spotter truck will reduce variable manufacturing costs by $25,000 per year over the five-year life of the new spotter truck.The costs not relevant to the decision of whether or not to replace the spotter truck are:

Incremental costs are the additional costs incurred if a company pursues a certain course of action.

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:

Significant sunk costs are relevant to decisions about the future.

J&H Company has a router platform with a book value of $65,000 and a three-year remaining life.A new router platform is available at a cost of $125,000,and J&H can also receive $16,000 for trading in the old router platform.The new router platform will reduce variable manufacturing costs by $31,000 per year over its three-year life.Should the router platform be replaced?

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.

A company's best sales mix is determined using contribution margin per unit of scarce resource.

A company has the choice of either selling 600 apples or processing them into applesauce.The company could sell the apples as is for $2.00 per unit.Alternatively,each apple could be made into one unit of applesauce with incremental costs of $0.60 per unit for direct materials,$1.00 per unit for direct labor,and $0.80 per unit for overhead,and then sold for $5.00 each. -What is the amount of incremental revenue from processing the apples into applesauce?

Benjamin Company had the following results of operations for the past year: $\begin{array} { l r l r } \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \\\text { Direct materials and direct labor } & \$ 96,000 & \\\text { Overhead (20\% variable) } & 16,000 & \\\text { Selling and administrative expenses (all fixed) } & 32,000 & ( 144,000 ) \\\hline \text { Operating income } & & \$ 16,000 \\\hline \end{array}$ A foreign company (whose sales will not affect Benjamin'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.Assuming Benjamin has excess capacity and accepts the offer,its profits will:

Frederick Co.is thinking about having one of its products manufactured by an outside supplier. Currently,the cost of manufacturing 5,000 units is: $\begin{array}{l}\begin{array} { l l r } \text {Direct material }&\$62,000\\\text {Direct labor }&47,000\\\text {Variable Factory overhead }&38,000\\\text {Factory overhead }&52,000\end{array}\end{array}$ If Frederick can buy 5,000 units from an outside supplier for $130,000,it should:

A(n)________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

A company produces three different products that all require processing on the same machines.The company has only 27,000 machine hours available in each year.Production information for each product is: Required: (1)Determine the preferred sales mix if there are no market constraints on any of the products. (2)Determine the preferred sales mix if the demand is limited to 5,000 units for each product. (3)Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

A sunk cost arises from a past decision and cannot be avoided or changed.

Yelk Garage uses time and materials pricing.It is setting prices for next year using the following information: $\begin{array}{l}\begin{array} { l l r } \text {Labor rate, including fringe benefits}&\$ 50 \text { per hour } \\\text {Annual labor hours}&3,350 \text { hours } \\\text {Annual materials purchases}&\$ 825,000 \\\text {Materials purchasing, handling, and storage}&\$ 46,000 \\\text {Overhead for depreciation, taxes, insurance, etc.}&\$ 67,000 \\\text {Target profit margin for both labor and materials}&20 \%\end{array}\end{array}$ What should Yelk set as the direct labor rate per hour?

Hordel Company needs to determine a markup for a new product.Hordel expects to sell 5,000 units and wants a target profit of $82 per unit.Additional information is as follows: $\begin{array} { l r } \text { Variable product cost per unit } & \$ 79 \\\text { Variable administrative cost per unit } & 21 \\\text { Total fixed overhead } & 42,000 \\\text { Total fixed administrative } & 31,000\end{array}$ Using the variable cost method,what markup percentage to variable cost should be used?

A special order of goods or services should be accepted when the incremental revenue exceeds the normal revenue.