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Exam 12: Relevant Costs for Decision Making

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Question 61

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Iacollia Company makes two products from a common input.Joint processing costs up to the split-off point total $47,600 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: 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?

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Question 62

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Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product.

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B) False

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Question 63

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Dodge Company makes two products from a common input.Joint processing costs up to the split-off point total $44,800 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: -What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

The management of Austin Corporation is considering dropping product R97C.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued.What would be the effect on the company's overall net operating income if product R97C were dropped?

Nowak Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits.A potential customer has offered to buy 1,600 units of component FHB.Each unit of FHB requires 8 units of material N95 and 1 unit of material K78.Data concerning these two materials follow: Material N95 is in use in many of the company's products and is routinely replenished.Material K78 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials,in total,for purposes of determining a minimum acceptable price for the order for product FHB?

Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is: The part can be purchased from an outside supplier at $20 per unit.If the part is purchased from the outside supplier,two thirds of the fixed manufacturing costs can be eliminated.The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

The management of Zorrilla Corporation is considering dropping product R10C.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $42,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is discontinued. -According to the company's accounting system,what is the net operating income earned by product R10C?

Brubacher Company makes four products in a single facility.These products have the following unit product costs: The grinding machines are potentially the constraint in the production facility.A total of 20,500 minutes are available per month on these machines. Direct labor is a variable cost in this company. -Which product makes the LEAST profitable use of the grinding machines?

Rowena Corporation manufactures laser printers.Rowena currently manufactures the 32,000 imaging drums that it uses in its printers.The annual costs to manufacture these 32,000 drums are as follows: Hardware Solutions,Inc.has offered to provide Rowena with all of its imaging drum needs for $72 per drum.If Rowena accepts this offer,70% of the fixed manufacturing cost above could be totally eliminated.Also,Rowena will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products. -Based on the information presented,would Rowena be better off to make the drums or buy the drums and by how much?

Oran Refiners,Inc. ,processes sugar cane that it purchases from farmers.Sugar cane is processed in batches.A batch of sugar cane costs $76 to buy from farmers and $18 to crush in the company's plant.Two intermediate products,cane fiber and cane juice,emerge from the crushing process.The cane fiber can be sold as is for $21 or processed further for $12 to make the end product industrial fiber that is sold for $43.The cane juice can be sold as is for $47 or processed further for $21 to make the end product molasses that is sold for $88. -How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?

Julison 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 60,000 units per month is as follows: The normal selling price of the product is $79.80 per unit. An order has been received from an overseas customer for 2,000 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 $0.30 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 $71.60 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 700 units for regular customers.What would be the minimum acceptable price per unit for the special order?

When Mr.Ding L.Berry,president and chief executive of Berry,Inc. ,first saw the segmented income statement below,he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued. Required: Recommend which segments,if any,should be eliminated.Prepare a report in good form to support your answer. A segmented income report,without the allocation of common fixed expenses,will provide the basis for deciding which segments to drop.

Policastro 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 $71 each and the cost of processing a batch to produce intermediate products A and B is $10.Intermediate product A can be sold as is for $29 or processed further for $14 to make end product X that is sold for $39.Intermediate product B can be sold as is for $45 or processed further for $29 to make end product Y that is sold for $91. 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.

A cost that will be incurred regardless of which course of action a manager takes is relevant to the manager's decision.

Consider a decision facing a company of either accepting or rejecting a special offer for one of its products.A cost that is not relevant is:

Tjelmeland Corporation is considering dropping product S85U.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $55,000 of the fixed manufacturing expenses and $71,000 of the fixed selling and administrative expenses are avoidable if product S85U is discontinued. Required: a.According to the company's accounting system,what is the net operating income earned by product S85U? Show your work! b.What would be the effect on the company's overall net operating income of dropping product S85U? Should the product be dropped? Show your work!

Product L28N has been considered a drag on profits at Beets Corporation for some time and management is considering discontinuing the product altogether.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $41,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product L28N is discontinued.What would be the effect on the company's overall net operating income if product L28N were dropped?

Opportunity costs are recorded in the accounts of an organization.

Two or more different products that are manufactured in the same production period are known as joint products.

Defective units should be detected and scrapped or reworked after the bottleneck operation rather than before it.