1. A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts:
   
   Consider the following two cases independently.
   
   Case 1:
   The company chronically has no idle capacity and the old Model B100 machine is the company's constraint. Management is considering purchasing a Model B300 machine to use in addition to the company's present Model B100 machine. The old Model B100 machine will continue to be used to capacity as before, with the new Model B300 machine being used to expand production. This will increase the company's production and sales. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead.
   
   Case 2:
   The old Model B100 machine is not the company's constraint, but management is considering replacing it with a new Model B300 machine because of the potential savings in direct materials with the new machine. The Model B100 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste.
   
   Required:
   Indicate whether each item is relevant or not relevant in the following situations.

Sales Revenue: (Case 1: Relevant)(Case 2: Not Relevant)
Direct Materials: (Relevant)(Relevant)
Direct Labor: (Relevant)(Not)
Variable Manufacturing Overhead: (Relevant)(Not)
Depreciation-Model B100 Machine: (Not)(Not)
Book Value-Model B100 Machine: (Not)(Not)
Disposal Value-Model B100 Machine: (Not)(Relevant)
Market Value-Model B300 Machine (cost): (Relevant)(Relevant)
Fixed Manufacturing Overhead (general): (Not)(Not)
Variable Selling Expense: (Relevant)(Not)
Fixed Selling Expense: (Relevant)(Not)
General Administrative Overhead: (Relevant)(Not)

2. The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below:
   
   
   Sales $939,000
   Variable expenses $413,500
   Fixed manufacturing expenses $525,500
   Fixed selling and administrative expenses $353,000
   
   
   All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $215,500 of the fixed manufacturing expenses and $126,500 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued.
   
   What would be the effect on the company's overall net operating income if product V41B were dropped?

Overall net operating income would decrease by $183,500.
Explanation:
Sales $939,000
Variable expenses 413,500
Contribution margin 525,500
Less avoidable fixed expenses:
Fixed manufacturing expenses $215,500
Fixed selling and administrative expenses 126,500 342,000
Effect on net operating income $183500

Net operating income would drop by $183,500 if this product were dropped.

3. The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 220,000 wheels annually are:
   
   
   Direct materials $44,000
   Direct labor $66,000
   Variable manufacturing overhead $33,000
   Fixed manufacturing overhead $72,000
   
   
   An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $27,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $65,400 per year. Direct labor is a variable cost.
   If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would:

decrease by $59,400


Make Buy
Direct materials $44,000
Direct labor 66,000
Variable manufacturing overhead 33,000
Avoidable fixed manufacturing overhead 27,000
Outside purchase price (220,000 wheels × $0.80 per wheel) $176,000
Opportunity cost (65,400)
Total cost $170,000 $110,600


Annual net operating income would increase by $59,400.

4. Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:
   
   
   Direct materials $ 44.3
   Direct labor $ 12.2
   Variable manufacturing overhead $ 1.5
   Fixed manufacturing overhead $ 20.3
   Variable selling & administrative expense $ 2.0
   Fixed selling & administrative expense $ 12.6
   
   
   The normal selling price of the product is $99.1 per unit.
   An order has been received from an overseas customer for 1,450 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.4 less per unit on this order than on normal sales.
   Direct labor is a variable cost in this company.
   
   What is the contribution margin per unit on normal sales?

$39.10

Direct materials $ 44.30
Direct labor 12.20
Variable manufacturing overhead 1.5
Variable selling & administrative expense 2.00
Variable cost per unit $ 60.00

Normal selling price per unit $ 99.10
Variable cost per unit on normal sales 60.00
Unit contribution margin on normal sales $ 39.10

5. Hoang Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:
   
   KI LH RP
   Selling price per unit $282.40 $554.74 $248.98
   Variable cost per unit $232.24 $463.1 $173.5
   Centiliters of compound W 4.4 7.9 5.1
   
   
   Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

RP,LH,KI

Selling price per unit $282.40 $554.74 $248.98
Variable cost per unit 232.24 463.10 173.50
Contribution margin per unit (a) 50.16 91.64 75.48
Amount of the constrained resource required to produce one unit (b) 4.40 7.90 5.10
Contribution margin per unit of the constrained resource (a) ÷ (b) 11.40 11.60 14.80
Ranking 3 2 1

6. The constraint at Bonavita Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:
   
   UN ZG PW
   Selling price per unit $ 266.31 $ 479.44 $ 468.38
   Variable cost per unit $ 201.63 $ 364.52 $ 350.63
   Minutes on the constraint 3.30 6.80 7.50
   
   
   
   Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

UN,ZG,PW

Selling price per unit $ 266.31 $ 479.44 $ 468.38
Variable cost per unit 201.63 364.52 350.63
Contribution margin per unit (a) $ 64.68 $ 114.92 $ 117.75
Amount of the constrained resource required to produce one unit (b) 3.30 6.80 7.50
Contribution margin per unit of the constrained resource (a) ÷ (b) $ 19.60 $ 16.90 $ 15.70
Ranking 1 2 3

7. Kosakowski Corporation processes sugar beets in batches. A batch of sugar beets costs $89 to buy from farmers and $17 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $46 or processed further for $36 to make the end product, industrial fiber that is sold for $82. The beet juice can be sold as is for $65 or processed further for $43 to make the end product, refined sugar that is sold for $130. How much more profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

$27

Combined final sales value ($82 + $130) $212
Less costs of producing the end products:
Cost of further processing ($36 + $43) $79
Cost of crushing $17
Cost of sugar beets $89 $185
Profit (loss) $27

8. A fixed cost cannot be a differential cost.

False

9. The book value of old equipment is a relevant cost in a decision to replace that equipment. (Ignore taxes.)

False

10. Fixed costs may or may not be sunk costs.

True