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Exam 23: Relevant Costing for Managerial Decisions

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Question 71

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A company expects to produce and sell 7,000 units of a single product. The following additional company information is available: $\begin{array}{cr}\text { Variable costs (per unit) }\\\text { Production costs } & \$ 20 \\\text { Nonproduction costs } & \$ 3 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 175,000 \\\text { Nonproduction } & \$ 14,000\end{array}$ Compute this company's total cost per unit.

A) $23
B) $45
C) $27
D) $50
E) $5

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

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Question 72

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Assume markup percentage equals desired profit divided by total costs. What is the correct calculation to determine the dollar amount of the markup per unit?

A) Total cost times markup percentage.
B) Total cost per unit times markup percentage per unit.
C) Total cost per unit divided by markup percentage per unit.
D) Markup percentage per unit divided by total cost per unit.
E) Markup percentage divided by total cost.

F) All of the above
G) A) and B)

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Question 73

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What is the difference between an opportunity cost and a sunk cost?

A company has already incurred a $600 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 both products further. $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 425 & \$ 500 & \$ 70 \\\hline \text { B } & \$ 375 & \$ 400 & \$ 20 \\\hline\end{array}$

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: 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?

Wilder Inc. manufactures a product which contains a small computer chip. The company has always purchased this computer chip from a supplier for $110 each. Wilder recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the computer chip instead of buying it. The company prepared the following per unit cost projections of making the computer chip, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $\begin{array}{lr}\text { Direct materials } & \$ 32 \\\text { Direct labor } & 40 \\\text { Overhead (fixed and } & \underline{60} \\\text { variable) } & \\\text { Total } & \$ 132\end{array}$ The volume of output to produce the computer chip will not require any incremental fixed overhead. Incremental variable overhead cost is $42 per computer chip. What is the effect on income if Wilder decides to make the computer chips?

An ______________________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Patrick Corporation inadvertently produced 10,000 defective personal radios. The radios cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Patrick's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Patrick should:

A markup percentage equals total costs divided by desired profit.

Bandy Corporation owns a machine which manufactures lawn games. Production time for the croquet set is ten units per hour and for the volley ball game is eight units per hour. The machine's capacity is 1,500 hours per year. Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 4,000 croquet sets and 10,000 volley ball games. Selling prices and variable costs per unit are shown below. Based on this information, what is Bandy Corporation's most profitable sales mix? $\begin{array} { l c c } & \text { Croquet Set } & \text { Volleyball Game } \\\text { Selling price per unit } & \$ 75 & \$ 62 \\\text { Variable costs per unit } & 42 & 25\end{array}$

An additional cost incurred only if a particular action is taken is a(n) :

A company expects to produce and sell 20,000 units of a single product. Management desires a 22% return on assets of $3,000,000. The following additional company information is available: $\begin{array}{cr}\text { Variable costs (per unit) }\\\text { Production costs } & \$ 105 \\\text { Nonproduction costs } & \$ 9 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 350,000 \\\text { Nonproduction } & \$ 120,000\end{array}$ Compute selling price per unit given that markup percentage equals desired profit divided by total costs.

Product X requires 10 machine hours per unit to be produced, Product Y requires only 6 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $32 per unit and has variable costs of $12 per unit. Product B sells for $24 per unit and has variable costs of $7 per unit. Assuming the company can sell as many units of either product as it produces, the company should:

Derby Inc. manufactures a product which contains a small part. The company has always purchased this motor from a supplier for $125 each. Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it. The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. $\begin{array}{lr}\text { Direct materials } & \$ 38 \\\text { Direct labor } & 50 \\\text { Overhead (fixed and } & 75 \\\text { variable) } & \\\text { Total } & \$ 163\end{array}$ The required volume of output to produce the motors will not require any incremental fixed overhead. Incremental variable overhead cost is $21 per motor. What is the effect on income if Derby decides to make the motors?

Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. -If Parker wishes to earn $1,250 on the special order, the size of the order would need to be:

A company expects to produce and sell 5,000 units of a single product. The following additional company information is available: $\begin{array} { l r } \text { Variable costs (per unit) } & \\\text { Production costs } & \$ 30 \\\text { Nonproduction costs } & \$ 2 \\\text { Fixed costs (in total) } & \\\text { Overhead } & \$ 100,000 \\\text { Nonproduction } & \$ 5,000\end{array}$ Compute this company's total cost per unit.