Ch12

Otool Inc. is considering using stocks of an old raw material in a special project. The special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company $2,112 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $9.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $8.35 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $71 for all 240 kilograms. What is the relevant cost of the 240 kilograms of the raw material when deciding whether to proceed with the special project? A) $1,933 B) $2,004 C) $2,220 D) $2,112

A) $1,933 Explanation: The company's relevant cost in this case is how much it could earn by selling the 240 kilograms at the discounted price of $8.35 per kilogram, less delivery costs of $71 for all 240 kilograms. Proceeds of sale at the discounted price: 240 kgs × $8.35 per kg $2,004 Less delivery cost 71 Relevant cost $1,993

Munafo Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,500 units of component VGI. Each unit of VGI requires 1 unit of material I57 and 5 units of material M97. Data concerning these two materials follow: Material Units in Stock Original Cost Per Unit Current Market Price Per Unit Disposal Value Per Unit I57 2,400 $9.10 $9.40 $8.95 M97 33,960 $4.70 $4.70 $3.50 Material I57 is in use in many of the company's products and is routinely replenished. Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VGI? A) $174,850 B) $213,130 C) $213,850 D) $171,925

A) $174,850 Explanation: Materials requirements for I57: 6,500 units of VGI × 1 units of I57 per unit of VGI = 6,500 units of I57 Materials requirements for M97: 6,500 units of VGI × 5 units of M97 per unit of VGI = 32,500 units of M97 Relevant cost of I57: 6,500 units × current market price of $9.40 per unit $61,100 Relevant cost of M97: 32,500 units × disposal value of $3.50 per unit 113,750 Relevant cost of materials $174,850

In a sell or process further decision, consider the following costs: I. A variable production cost incurred prior to split-off. II. A variable production cost incurred after split-off. III. An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further? A) Only I B) Only III C) Only I and II D) Only I and III

A) Only I

Product X-547 is one of the joint products in a joint manufacturing process. Management is considering whether to sell X-547 at the split-off point or to process X-547 further into Xylene. The following data have been gathered: I. Selling price of X-547 II. Variable cost of processing X-547 into Xylene. III. The avoidable fixed costs of processing X-547 into Xylene. IV. The selling price of Xylene. V. The joint cost of the process from which X-547 is produced. Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene? A) I, II, and IV. B) I, II, III, and IV. C) II, III, and V. D) I, II, III, and V

B) I, II, III, and IV.

Which of the following costs are always irrelevant in decision making? A) avoidable costs B) sunk costs C) opportunity costs D) fixed costs

B) sunk costs

Accepting a special order will improve overall net operating income if the revenue from the special order exceeds: A) the contribution margin on the order. B) the incremental costs associated with the order. C) the variable costs associated with the order. D) the sunk costs associated with the order.

B) the incremental costs associated with the order.

The Jabba Corporation manufactures the "Snack Buster" which consists of a wooden snack chip bowl with an attached porcelain dip bowl. Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier? Fixed overhead cost that can be eliminated if the bowls are purchased from the outside supplier The variable selling cost of the Snack Buster A)YesYes B)YesNo C)NoYes D)NoNo

B)YesNo

Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C. The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter. Material W34C is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $7.60 per liter. New stocks of the material can be readily purchased for $8.35 per liter. What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order? A) $6,481 B) $6,376 C) $6,513 D) $5,928

C) $6,513 Explanation: The relevant cost is the current market cost which is 780 liters × current market $8.35 per liter = $6,513.

Hodge Inc. has some material that originally cost $74,600. The material has a scrap value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for $54,400. What would be the financial advantage (disadvantage) of reworking and selling the material rather than selling it as is as scrap? A) ($79,100) B) ($21,700) C) ($4,500) D) $52,900

C) ($4,500) Explanation: Sales value of reworked material $54,400 Less: Cost to rework material 1,500 Net sales value 52,900 Current scrap value 57,400 Financial advantage (disadvantage) of reworking rather than selling as scrap $(4,500)

Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called: A) sunk costs. B) opportunity costs. C) avoidable costs. D) irrelevant costs.

C) avoidable costs.

United Industries manufactures a number of products at its highly automated factory. The products are very popular, with demand far exceeding the factory's capacity. To maximize profit, management should rank products based on their: A) gross margin B) contribution margin C) selling price D) contribution margin per unit of the constrained resource

D) contribution margin per unit of the constrained resource

Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that: A) uses the least amount of stamping time. B) generates the highest contribution margin per unit. C) generates the highest contribution margin ratio. D) generates the highest contribution margin per stamping machine hour.

D) generates the highest contribution margin per stamping machine hour.

A joint product is: A) any product which consists of several parts. B) any product produced by a company with more than one product line. C) any product involved in a make or buy decision. D) one of several products produced from a common input.

D) one of several products produced from a common input.

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is: A) the variable manufacturing cost of the component. B) the total manufacturing cost of the component. C) the fixed manufacturing cost of the component. D) zero.

D) zero.

Which of the following would be relevant in the decision to sell or throw out obsolete inventory? Direct material cost assigned to the inventory Fixed overhead cost assigned to the inventory A)YesYes B)YesNo C)NoYes D)NoNo

D)NoNo