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Exam 23: Relevant Costing for Managerial Decisions

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Question 61

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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 total increase or decrease in income by replacing the current spotter truck with the new truck (ignoring the time value of money) is:

A) $31,000 decrease
B) $31,000 increase
C) $36,000 decrease
D) $120,000 decrease
E) $36,000 increase

F) A) and E)
G) C) and E)

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Question 62

Multiple Choice

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Beta Inc.can produce a unit of Zed for the following costs: $\begin{array}{lr}\text { Direct material } & \$ 10 \\\text { Direct labor } & 20 \\\text { Overhead } & 50 \\\hline \text { Total costs per unit } & \$ 80 \\\hline \hline\end{array}$ An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit.If Beta buys from the supplier,it will still incur 40% of its overhead.Beta should:

A) Buy Zed since the relevant cost to make it is $60.
B) Make Zed since the relevant cost to make it is $60.
C) Buy Zed since the relevant cost to make it is $80.
D) Make Zed since the relevant cost to make it is $30.
E) Buy Zed since the relevant cost to make it is $30.

F) A) and C)
G) A) and B)

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Question 63

Multiple Choice

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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:

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 cost of $1.50 per unit.Normal cost data,excluding stamping,follows: Prepare an analysis that indicates the selling price per unit this company will require to earn $3,000 on the 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 total contribution margin if Logan chooses the most profitable sales mix?

A company received a special one-time order to buy 6,000 of its portable radios for $20.The radios generally sell for $25.Each radio's total manufacturing cost is $21.50,which includes $2.50 of allocated fixed overhead.Should the company accept the special order?

Granfield Company is considering eliminating its backpack division,which reported an operating loss for the recent year of $42,000.The division sales for the year were $960,000 and the variable costs were $475,000.The fixed costs of the division were $527,000.If the backpack division is dropped,40% of the fixed costs allocated to that division could be eliminated.The impact on Granfield's operating income for eliminating this business segment would be:

Part of 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.

An opportunity cost:

Generalware,Inc.sells a single product and reports the following results from sales of 100,000 units: A foreign buyer wants to purchase 15,000 units.However,they are willing to pay only $36 per unit for this one-time order.They also agree to pay all freight costs.To fill the order,Generalware will incur normal production costs.Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance.No additional administrative costs (variable or fixed)will be incurred in association with this special order. Required: (1)Should Generalware accept the order if it does not affect regular sales? Explain. (2)Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales.Should the company accept the special order under these circumstances?

Epsilon Co.can produce a unit of product for the following costs: $\begin{array}{l}\begin{array} { l l r } \text {Direct material }& \$8\\\text {Direct labor }&24\\\text {Overhead }&40\\\text {Total product costs per unit }&\$72\\\end{array}\end{array}$ An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit.If Epsilon buys from the supplier,the company will still incur 40% of its overhead.Epsilon should choose to:

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

A cost that requires a future outlay of cash,and is relevant for current and future decision making,is a(n) :

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

Bluebird Mfg.has received a special one-time order for 15,000 bird feeders at $3 per unit.Bluebird currently produces and sells 75,000 units at $7.00 each.This level represents 80% of its capacity.These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels.Production costs for these units are $3.50 per unit,which includes $2.25 variable cost and $1.25 fixed cost.If Bluebird accepts this additional business,the incremental cost will be:

Shale Remodeling uses time and materials pricing.It is setting prices for next year using the following information: What is the total price for a project requiring 160 direct labor hours and $150,000 of materials?

A company has the choice of either selling 600 apples or processing them into applesauce.The company could sell the apples as they are 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 cost from processing the apples into applesauce?

Leopal Company is considering replacing a freight elevator.The current freight elevator has a book value of $37,500 and a remaining useful life of four years,at which time its salvage value will be zero.The current market value of the freight elevator is $5,000.Variable operating costs per year are $201,600 per year.Leopal has identified the following two possible replacement options.Prepare an analysis of the alternatives and whether either option should be used to replace the current elevator.

Opportunity costs are the additional or incremental revenues generated by selecting a certain course of action.

Additional power for operating machines,extra supplies,and added cleanup costs are examples of incremental overhead costs.