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Exam 10: Relevant Costing for Managerial Decisions

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Question 71

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What is a sunk cost? When would it be relevant to a short-term managerial decision?

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A sunk cost is one that result...

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Question 72

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__________________________ costs are amounts that will continue even if a segment is eliminated.

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A company expects to produce and sell 8,000 units of a single product.Management desires a 20% return on assets of $1,520,000.The following additional company information is available: $\begin{array}{lr} \text { Variable costs (per unit) } \\ \text {Production costs } &\$ 78 \\ \text { Nonproduction costs } &\$ 22 \\ \text { Fixed costs (in total) } \\ \text {Overhead } &\$ 110,000 \\ \text { Nonproduction } &\$ 40,000\end{array}$ Compute markup per unit.Assume that markup percentage equals desired profit divided by total costs.

To maximize profit when a constrained resource exists, management should produce the sales mix that has the highest contribution margin per unit of scarce resource.

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

__________________________ costs are amounts the company would not incur if a segment was eliminated.

Jorgensen Department Store has three departments: Clothing, Toys, and Hardware.The most recent income statement, showing the total operating profit and departmental results is shown below: $\begin{array}{c}\begin{array}{lll}\\\text { Sales }\\\text { Cost of goods sold }\\\text { Gross profit }\\\text { Direct expenses }\\\text { Allocated expenses }\\\text { Net income (loss) }\\\end{array}\begin{array}{lll}\underline{\text { Total }}\\{\$ 2,100,000} \\\underline{(1,260,000)}\\{840,000} \\(420,000) \\\underline{(350,000)}\\\underline{\$ 70,000}\end{array}\begin{array}{lll}\underline{\text { Clothing} }\\\$ 1,000,000 \\\underline{(500,000)}\\{500,000} \\(200,000) \\\underline{(100,000)}\\\underline{\$ 200,000}\end{array}\begin{array}{lll}\underline{\text { Toys }}\\{\$ 600,000} \\\underline{(400,000)} \\ 200,000 \\(100,000) \\\underline{(75,000)}\\\underline{25,000}\end{array}\begin{array}{lll}\underline{\text { Hardware }}\\{\$ 500,000} \\\underline{(360,000}\\140,000 \\(120,000) \\\underline{(175,000)} \\\underline{\$(155,000)}\end{array}\end{array}$ Based on this income statement, management is planning on eliminating the hardware department, as it is generating a net loss.If the hardware department is eliminated, the toy department will expand to fill the space, but sales will not change in total, nor will direct expenses.None of the allocated expenses will be avoided, but they will be reallocated.Clothing will be allocated $200,000 of these expenses, and Toys will be allocated $150,000 of these expenses. Prepare a new income statement for Jorgensen Department Store, showing the results if the Hardware Department is eliminated.Should the Hardware Department be eliminated?

What decision rule should be followed when deciding if a business segment should be eliminated?

Are relevant costs useful to management in determining long-run pricing decisions?

Presented below are terms preceded by letters (a)through (g)and followed by a list of definitions 1 through 7.Match the letter of the term with the definition.Use the space provided preceding each definition.

A company inadvertently produced 5,000 defective portable MP3 players.The players cost $22 each to be manufactured.A salvage company will purchase the defective units as they are for $18 each.The production manager reports that the defects can be corrected for $10 per unit, enabling the company to sell them at the regular price of $33.The repair operations would not affect other production operations.Prepare an analysis that shows which action should be taken.

Which of the following should be classified as production costs?

A company expects to produce and sell a single product.Management desires a 13% return on assets of $2,100,000.The following additional company information is available: $\begin{array}{lr}\text { Variable costs (per unit) }\\\text { Production costs } & \$ 62 \\\text { Nonproduction costs } & \$ 8 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 521,280 \\\text { Nonproduction } & \$ 397,824\end{array}$ Required: Compute selling price per unit given that markup percentage equals desired profit divided by total costs under the following independent assumptions: a.The company produced and sold 19,200 units b.The company produced and sold 114,888 units

Altertech Inc.manufactures a product that contains a circuit board.The company has always purchased this circuit board from a supplier for $32 each.Altertech recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the circuit board instead of buying it.The company prepared the following per unit cost projections of making the circuit board, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 110% of direct labor cost. $\begin{array} { l l } \text { Direct materials } & \$ 2 \\\text { Direct labor } & { 2 0 } \\\text { Overhead (fixed and } & \underline { 2 2 } \\\text { variable) } & \\\text { Total } & \underline { \$ 44}\end{array}$ The required volume of output to produce the circuit boards will not require any incremental fixed overhead.Incremental variable overhead cost is $3 per circuit board.What is the effect on income if Altertech decides to make the circuit boards?

An out-of-pocket cost requires a current and/or future outlay of cash.

In this chapter, you examined several short-term managerial decision tasks.Identify (list)any three of these types of decision tasks: _________________________ _________________________ _________________________

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.

A company has already incurred a $100 cost in partially producing its two products.Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing.Based on this information, the company should process only product A further. $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing Costs }\end{array} \\\hline \text { A } & \$ 200 & \$ 300 & \$ 120 \\\hline \text { B } & 75 & 130 & 45 \\\hline\end{array}$