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Exam 10: Relevant Costing for Managerial Decisions

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Question 1

True/False

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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) True
B) False

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Question 2

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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?

A) Yes, as will increase income by $31,000 in total.
B) Yes, as it is always important to have the current technology.
C) No, it will decrease income by $16,000 in total.
D) Yes, as the company will increase income by $16,000 total.
E) J&H will be not be better or worse off by replacing the router platform.

F) A) and C)
G) None of the above

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Question 3

Multiple Choice

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Galla Inc. needs to determine a price for a new product. Galla desires a 25% markup on the total cost of the product. Galla expects to sell 5,000 units. Additional information is as follows: Using the total cost method what price should Galla charge?

Another name for relevant cost is unavoidable cost.

Bricktan Inc. makes three products, basic, classic, and deluxe. The maximum Bricktan can sell is 75,000 units of basic, 420,000 units of classic, and 120,000 units of deluxe. Bricktan has limited production capacity of 90,000 hours. It can produce 10 units of basic, 8 units of classic, and 4 units of deluxe per hour. Contribution margin per unit is $15 for the basic, $25 for the classic, and $55 for the deluxe. What is the total contribution margin if Bricktan chooses the most profitable sales mix?

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

Benjamin Company had the following results of operations for the past year: 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:

Employee morale, timeliness of delivery, and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.

Markup percentage equals total costs divided by desired profit.

Aven Salon charges for their services based on the following: $\begin{array}{lc}\text { Direct labor rate } & \$ 90 \text { per hour } \\\text { Materials markup } & 40 \%\end{array}$ Using time and materials pricing, what is the total price for services requiring 4 direct labor hours and $150 of materials?

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor 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. If Minor wishes to earn $1,250 on the special order, the size of the order would need to be:

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

An opportunity cost:

Ahngram Corp. has 1,000 carton of oranges that cost $10 per carton in direct costs and $16.50 per carton in indirect costs and sold for $30 per carton. The oranges can be processed further into orange juice at an additional cost of $12.50 and sold at a price of $46. The incremental income (loss) from processing the oranges into orange juice would be:

Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units per year. A customer has offered to buy an additional 20,000 units at $32 each and sell them outside the country so as not to compete with Wade. The following data are available: In producing 20,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $6 per unit would be incurred. What is the effect on income if Wade accepts this order?

Logan Company can sell all of the standard and premier products they can produce, but it has limited production capacity. It can produce 6 standard units per hour or 4 premier units per hour, and it has 36,000 production hours available. Contribution margin per unit is $24 for the standard product and $30 for the premier product. What is the most profitable sales mix for Logan Company?

Rosie's Company has three products, P1, P2, and P3. The maximum Rosie's can sell is 65,000 units of P1, 24,000 units of P2, and 12,000 units of P3. Rosie's has limited production capacity of 9,000 hours. It can produce 12 units of P1, 6 units of P2, and 3 units of P3 per hour. Contribution margin per unit is $5 for the P1, $15 for the P2, and $25 for the P3. What is the most profitable sales mix for Rosie's Company?

Sales mix refers to the combination of products sold by a company.

Marshall Company currently manufactures one of its parts at a cost of $3.25 per unit. This cost is based on a normal production rate of 50,000 units. Variable costs are $2.10 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Marshall is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.

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: