- Only future costs that differ between alternatives are relevant in decision making.
True
- Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:
Alternative A Alternative B
Materials costs $33,000 $53,000
Processing costs $38,000 $57,000
Equipment rental $11,000 $11,000
Occupancy costs $18,000 $29,000
Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.)
Both materials costs and processing costs are relevant
- Tawstir Corporation has 800 obsolete personal computers that are carried in inventory at a total cost of $1,100,000. If these computers are upgraded at a total cost of $40,000, they can be sold for a total of $750,000. As an alternative, the computers can be sold in their present condition for $690,000.
What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition?
$20,000 advantage
Sales value of upgraded computers $750,000
Less sales value as is 690,000
Incremental revenue from upgrading 60,000
Less cost of upgrading 40,000
Profit (loss) from upgrading $ 20,000
- Tawstir Corporation has 800 obsolete personal computers that are carried in inventory at a total cost of $1,100,000. If these computers are upgraded at a total cost of $40,000, they can be sold for a total of $750,000. As an alternative, the computers can be sold in their present condition for $690,000.
The sunk cost in this situation is:
$1,100,000
The carrying value of the computers in inventory is their original cost, which is a sunk cost.
- The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below:
Sales $938,000
Variable expenses $413,000
Fixed manufacturing expenses $525,000
Fixed selling and administrative expenses $352,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $215,000 of the fixed manufacturing expenses and $126,000 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 $184,000.
Sales $938,000
Variable expenses 413,000
Contribution margin 525,000
Less avoidable fixed expenses:
Fixed manufacturing expenses $215,000
Fixed selling and administrative expenses 126,000 341,000
Effect on net operating income $184000
Net operating income would drop by $184,000 if this product were dropped.
- The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 130,000 wheels annually are:
Direct materials $26,000
Direct labor $39,000
Variable manufacturing overhead $19,500
Fixed manufacturing overhead $61,000
An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $16,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $42,500 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 $39,000
Direct materials $26,000
Direct labor 39,000
Variable manufacturing overhead 19,500
Avoidable fixed manufacturing overhead 16,000
Outside purchase price (130,000 wheels × $0.80 per wheel) $104,000
Opportunity cost (42,500)
Total cost $100,500 $61,500
Annual net operating income would increase by $39,000.
- 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 $ 43.8
Direct labor $ 10.4
Variable manufacturing overhead $ 1.9
Fixed manufacturing overhead $ 26.0
Variable selling & administrative expense $ 2.4
Fixed selling & administrative expense $ 13.8
The normal selling price of the product is $104.4 per unit.
An order has been received from an overseas customer for 1,650 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 $1.8 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?
$45.90
Direct materials $ 43.80
Direct labor 10.40
Variable manufacturing overhead 1.9
Variable selling & administrative expense 2.40
Variable cost per unit $ 58.50
Normal selling price per unit $ 104.40
Variable cost per unit on normal sales 58.50
Unit contribution margin on normal sales $ 45.90
- 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 $248.51 $508.40 $236.80
Variable cost per unit $207.47 $428.1 $172.9
Centiliters of compound W 3.8 7.3 4.5
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 $248.51 $508.40 $236.80
Variable cost per unit 207.47 428.10 172.90
Contribution margin per unit (a) 41.04 80.30 63.90
Amount of the constrained resource required to produce one unit (b) 3.80 7.30 4.50
Contribution margin per unit of the constrained resource (a) ÷ (b) 10.80 11.00 14.20
Ranking 3 2 1
- 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 $ 282.30 $ 483.74 $ 524.62
Variable cost per unit $ 192.42 $ 346.68 $ 385.18
Minutes on the constraint 4.20 7.70 8.40
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 $ 282.30 $ 483.74 $ 524.62
Variable cost per unit 192.42 346.68 385.18
Contribution margin per unit (a) $ 89.88 $ 137.06 $ 139.44
Amount of the constrained resource required to produce one unit (b) 4.20 7.70 8.40
Contribution margin per unit of the constrained resource (a) ÷ (b) $ 21.40 $ 17.80 $ 16.60
Ranking 1 2 3
- Gary Corporation produces products X, Y, and Z from a single raw material input. Budgeted data for the next month is as follows:
Product X Product Y Product Z
Units produced 1,400 1,900 2,900
Per unit sales value at split-off $ 12 $ 17 $ 14
Added processing costs per unit $ 3 $ 5 $ 5
Per unit sales value if processed further $ 18 $ 18 $ 23
If the cost of raw material input is $67,000, which of the products should be processed beyond the split-off point?
Product X Product Y Product Z
A) yes yes no
B) yes no yes
C) no yes no
D) no yes yes
Option B
Final sales value after further processing $18.00 $18.00 $23.00
Less sales value at split-off point 12.00 17.00 14.00
Incremental revenue from further processing $6.00 $1.00 $9.00
Less cost of further processing 3.00 5.00 5.00
Profit (loss) from further processing $3.00 $(4.00) $4.00
Only Product X and Product Z should be processed beyond the split-off point.