Chapter 6 - Variable Costing and Segment Reporting

decrease by $6,000 Since 60% of the fixed expenses are traceable, the company will avoid $84,000 (or $140,000 × 0.60) of fixed expenses while losing $90,000 of contribution margin, which decreases the company's net income by $6,000 (or $84,000 − $90,000).

A company has three product lines, one of which reflects the following results: Sales $215,000 Variable expenses 125,000 Contribution margin 90,000 Fixed expenses 140,000 Net loss$(50,000) If this product line is eliminated, 60% of the fixed expenses are traceable fixed expenses, which can be eliminated, and the other 40% are common fixed expenses that cannot be avoided. If management decides to eliminate this product line, the company's net income will ________.

joint costs incurred before the split-off point

All of the following are relevant to the sell or process further decision except _______. a. costs incurred beyond the split-off point b. revenues at the split-off point c. joint costs incurred before the split-off point d. revenues beyond the split-off point

$120,000 Total relevant cost of producing the units internally will be the costs that can be avoided by opting to purchase the products externally. Nakatomi can avoid the variable costs of $12 per unit ($120,000 for 10,000 units).

Nakatomi Corporation produces 10,000 units of Product A at a cost of $20 per unit. A detailed breakdown of the cost is below. Per Unit Variable costs $12 Allocated manufacturing overhead costs 3 Allocated general administrative costs 5 $20 Outside supplier's offer $17 What are the total relevant cost of producing the units internally?

$90,000 Profit = ($22.00 per unit − $12.00 per unit) × 45,000 units − $360,000 Profit = ($10.00 per unit) × 45,000 units − $360,000 Profit = $450,000 − $360,000 = $90,000

Nappa Corporation manufactures numerous products, one of which is called CD-100. The company has provided the following data about this product: Unit sales (a) 50,000 Selling price per unit $20.00 Variable cost per unit $12.00 Traceable fixed expense $360,000 Nappa is considering increasing the price of CD-100 by 10%, from $20.00 to $22.00. The company's marketing managers estimate that this price hike would decrease unit sales by 10%, from 50,000 units to 45,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product CD-100 earn at a price of $22.00 if this sales forecast is correct?

$42 =30+ 5 + 10*70% = 30 + 5 + 7

Prairie, Inc. produces a single product. It has an annual capacity of 10,000 units, but currently uses only 80% of it. Each unit is sold for $50 and requires direct material worth $30 and direct labor worth $5. Manufacturing overhead cost is $10 per unit of which 70% is variable. What is Prairie's total incremental cost incurred to produce each unit?

$3 per minute =$6/2 min = $3 per minute

Product A Product B Selling price per unit $20 $15 Variable cost per unit 12 9 Contribution margin per unit $8 $6 Labor time 4 minutes 2 Minutes Roberto, Inc. manufactures products A and B. Both products have a contribution margin ratio of 40%. What is the contribution margin per unit of the constrained resource for product B, if labor time is the constrained resource?

Avoidable

Rent paid for the building that houses only the Orange County division. Avoidable or Unavoidable?

600 units

Roberto, Inc. manufactures products A and B. Both products have a contribution margin ratio of 40%. Information about both products follows. Product A Product B Selling price per unit $20 $15 Variable cost per unit 12 9 Contribution margin per unit $8 $6 Labor time 4 minutes 2 Minutes Assume that labor time is the constrained resource and only a total of 3,000 minutes is available. Product A has a total demand of 500 units and product B has a total demand for 600 units. Considering the constraint, how many units of product B should be produced to maximize profits?

$3,000 Incremental revenues = Sales value after further processing of $25,000 - Sales value at split-off point of $15,000 = $10,000Net profit if the product is processed further = Incremental revenues of $10,000 - Incremental costs of $7,000 = $3,000

Superware, Inc. produces multiple products out of a common input. Geratin is one such product, which has a sales value of $15,000 at the split-off point. Joint costs allocated to Geratin are $12,000. Sales value of Geratin increases to $25,000 after further processing, and this processing will cost $7,000. What is the net profit or loss if Superware processes the product further?

desired profit

Target cost is determined by subtracting the ________ from the anticipated selling price.

Unavoidable

The amount of rent paid to lease a private jet for use by the company's management that is allocated to the Orange County division. Avoidable or Unavoidable?

markup

The difference between a product's selling price and its costs is called ________.

Vertical Integration

The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service is called ________.

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another is called ________.

price elasticity of demand

The sensitivity of demand to changes in price is called ________.

Avoidable

Wages paid to the Orange County division employees who work directly for this division and will be discharged if the division is dropped. Avoidable or Unavoidable?

Whether the differential benefits exceed the differential costs

What of the following forms the basis for a financial advantage when making a business decision? a. Whether opportunity costs are present b. Whether irrelevant costs and benefits arise c .Whether the differential benefits exceed the differential costs d. Whether alternatives exist

Tightening the constraint

When a company cannot fully satisfy demand because of a constraint, which of the following describes an action that should NOT be taken? a. Relaxing the constraint b. Tightening the constraint c. Investing to improve the capacity of the bottleneck d. Reducing the number of defective units produced through the bottleneck

Volume Trade Off Decisions

When a company does not have enough capacity to produce all of the products and sales volume demanded by their customers, this leads to ________.

latitude

When customers exercise their right to purchase a competitor's product or allocate their spending budget to some other product, this is called ________.

Reference value ≥ Value-based price ≥ EVC

Which of the following is NOT correct? a. EVC = Reference value + Differentiation value b. Reference value ≤ Value-based price ≤ EVC c. Reference value ≥ Value-based price ≥ EVC d. Reference value = the price of the best alternative

Direct labor cost Variable manufacturing overhead Fixed manufacturing overhead Direct material cost

Which of the following is considered in the calculation of unit cost under absorption costing? Direct labor cost Variable manufacturing overhead Fixed manufacturing overhead Direct material cost Fixed selling and administrative expense Variable selling and administrative expense

Considering only the relevant costs gives results a different answer than that obtained when all costs are considered.

Which of the following statements about using different approaches to analyze alternatives is NOT true? a. Considering only the relevant costs gives results a different answer than that obtained when all costs are considered. b. Differential analysis focuses on the future costs and benefits that differ between any two alternatives. c. Mixing irrelevant costs with relevant costs may cause confusion and distract attention from the information that is critical. d. Costs and revenues that do not differ between alternatives are irrelevant to decision making

Special Orders

Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales?

Sunk Costs

Costs that have been incurred and cannot be eliminated regardless of the alternative chosen are ________.

$52,000 Total differentiation value = $50,000 + $2,000= $52,000

Dandle Inc. has developed a new robot, model AB-400, that is designed to offer superior performance to a comparable robot sold by its main competitor. The competing robot sells for $50,000 and needs to be replaced after 10,000 hours of use. It also requires $5,000 of preventive maintenance during its useful life. Model AB-400's performance capabilities are similar to the competing product with two important exceptions; it needs to be replaced only after 20,000 hours of use and it requires $8,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is model AB-400's differentiation value to the customer over its 20,000 hours of life?

Unavoidable

Depreciation expense on previously purchased machinery that is used in the Orange County division; the machinery will have no other use or resale value if the division is dropped. Avoidable or Unavoidable?

Unavoidable

General administrative expenses allocated to the Orange County division on the basis of sales dollars. Avoidable or Unavoidable?

Relevant costs

High Roller Inc. is trying to decide whether to buy a private jet or to lease one. The finder's fee is incurred only if the private jet is bought. The finder's fee is what type of cost for this decision?

27.5% Unit product cost = $150 + $20 + ($300,000 ÷ 10,000 units) = $150 + $20 + $30 = $200Markup percentage on absorption cost = [(Required ROI x Investment) + Selling and administrative expenses] ÷ (Unit product cost x Units sales)Markup percentage on absorption cost = [($2,000,000 x 20%) + $150,000] ÷ ($200 x 10,000 units) = $550,000 ÷ $2,000,000 = 27.50%

Honey Bell Corporation has the following information about its Eclipse Product: Honey Bell Corporation Eclipse Product Expected Sales 10,000 units Direct material and labor costs $150per unit Variable manufacturing overhead $20per unit Fixed manufacturing overhead $300,000 Fixed selling and administrative expenses $150,000 Average operating assets $2,000,000 Required return on investment 20% What is the amount of the markup percentage on the absorption cost that should be used to derive the selling price of this product?

Customer

Latitude and private information are two components of ________ influence that impact the determination of selling prices.

actuals sales are less than estimated sales

Managers should not rely on absorption costing when ________.