ACCT 203
Part S51 is used in one of Haberkorn Corporation's products. The company makes 12,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Per Unit Direct materials$6.30 Direct labor$5.70 Variable manufacturing overhead$4.80 Supervisor's salary$7.00 Depreciation of special equipment$8.60 Allocated general overhead$7.20 An outside supplier has offered to produce this part and sell it to the company for $37.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $17,000 of these allocated general overhead costs would be avoided. The annual financial advantage (disadvantage) for the company as a result of buying the part from the outside supplier would be:
$149,800 Direct materials (12,000 units × $6.30 per unit)$75,600 Direct labor (12,000 units × $5.70 per unit) 68,400 Variable overhead (12,000 units × $4.80 per unit) 57,600 Supervisor's salary (12,000 units × $7.00 per unit) 84,000 Depreciation of special equipment (not relevant) 0 Allocated general overhead (avoidable only) 17,000 Total relevant cost to make$302,600 Total cost to purchase (12,000 units × $37.70 per unit)$452,400 Total relevant cost to make 302,600 Higher cost to purchase
A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for $20.50 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $14.40: Direct materials $3.10 Direct labor 1.50 Variable manufacturing overhead 6.40 Fixed manufacturing overhead 3.40 Unit product cost$14.40 Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product S47 that would increase the variable costs by $5.00 per unit and that would require an investment of $36,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:
4,500 Incremental revenue (9,000 units × $20.50 per unit)$184,500 Less incremental costs: Direct materials (9,000 units × $3.10 per unit) 27,900 Direct labor (9,000 units × $1.50 per unit) 13,500 Variable manufacturing overhead(9,000 units × ($6.40 per unit + $5.00 per unit)) 102,600 Special molds 36,000 Total incremental cost 180,000 Financial advantage (disadvantage)
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: A)Yes B)Yes C)No D)No The variable selling cost of the Snack Buster: A)Yes B)No C)Yes D)No
Choice B: Yes No
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?
I,II,III,IV
Costs associated with two alternatives, code-named Q and R, being considered by Albiston Corporation are listed below: Alternative Q Alternative R Supplies costs$86,000 $86,000 Power costs$42,000 $41,000 Inspection costs$37,000 $41,000 Assembly costs$45,000 $45,000 Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives? Supplies costs power costs inspection costs assembly costs differential cost:
NR R R NR 3000 Alternative QAlternativeR Differential Supplies costs $86,000 $86,000 $0 Power costs 42,000 41,000 (1,000) Inspection costs 37,000 41,000 4,000 Assembly costs 45,000 45,000 0 Total $210,000 $213,000 $3,000
Fixed costs are sunk costs
false
In a decision to drop a project, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative se and the rental payment is unavoidable
false
Opportunity costs represent costs that can be reduced by effective management of operations
false
avoidable costs are irrelevant costs in decisions
false
A joint product is
one of several products produced from a common input
What is always irrelevant in decision making?
sunk costs
accepting a special order will improve overall net operating income if the revenue from the special order exceeds:
the incremental costs associated with the order
A complete income statement need not be prepared as part of a differential cost analysis
true
A cost that can be avoided by choosing one alternative over another is relevant for decision purposes.
true
A cost that will be incurred regardless of which alternative is selected is NOT relevant when choosing between the alternatives
true
Sunk costs are never relevant in decision making
true
a product whose revenues do not cover its variable costs and its traceable fixed costs should usually be dropped
true
the term joint cost is sed to describe the costs incurred up to the split off point in a process involving joint products
true
the opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is
zero
