Marginal Analysis

1. Incremental cost 2. Avoidable cost 3. Opportunity cost

All of the following costs are relevant in a decision analysis situation:

Absorption costs./Absorption costs are not relevant in situations when management must decide on accepting or rejecting one-time-only special orders, and where there is sufficient idle capacity. All of the following costs are relevant in such situations: Direct costs Variable costs Incremental costs

CPA-03280: In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient idle capacity, which one of the following is not relevant to the decision?

Historical cost.

CPA-03552: In a decision analysis situation, which one of the following costs is generally not relevant to the decision?

Potential effect on the decision./The relevance of a particular cost to a decision is determined by potential effect on the decision. Relevant costs are expected future costs that vary with the action taken. All other costs are assumed to be constant and thus have no effect on the decision.

CPA-03554: The relevance of a particular cost to a decision is determined by:

No change

CPA-03576: One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs are $135. X is sold for $2.50 per pound and Y can be sold for $3.00 per pound or processed further into 30 pounds of Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Z can then be sold for $6. What is the effect on profits of processing product Y further into product Z?

Sunk costs./Research and development costs are considered sunk costs because they are in the past, unavoidable, and will not change with different alternatives.

CPA-03671: Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Tape Duplicator Cleaning Unit Raw materials $ 44.00 $ 36.00 Machining @ $12/hr. 18.00 15.00 Assembly @ $10/hr. 30.00 10.00 Variable overhead @ $8/hr. 36.00 18.00 Fixed overhead @ $4/hr. 18.00 9.00 Total cost $ 146.00 $ 88.00 Suggested selling price $169.95 $99.98 Actual research and development costs $240,000 $175,000 Proposed advertising and promotion costs $500,000 $350,000 Research and development costs for Huron's two new products are:

Relevant cost./When considering alternatives, such as discontinuation of a product line, management should consider relevant costs. Relevant costs are those costs that will change under different alternatives.

CPA-03673: Comel, Inc. has two major product lines: stoves and dryers. Comel's management wants to evaluate whether discontinuing dryers will increase profits. Which of the following is best for evaluating the discontinuance of the dryer product line?

$40,750/The minimum acceptable selling price should include only the incremental costs associated with the order: $33,000 variable costs + $7,750 external designers costs = $40,750. Note that this is a special order (won't affect regular sales) and there is idle capacity.

CPA-03721: Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following applied manufacturing overhead costs: Fixed costs $ 21,000 Variable costs 33,000 The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

Increase $9,600: Build Buy Direct materials $ 2,000 $ 30,000 Material handling (20% of DM cost) 400 6,000 Direct labor 16,000 0 Manufacturing OH − variable 8,000 0 Manufacturing OH − fixed 16,000 16,000 Total costs $ 42,400 $ 52,000

CPA-03742: Richardson Motors uses ten units of Part Number T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented below. Direct materials $ 2,000 Material handling (20% of direct material cost) 400 Direct labor 16,000 Manufacturing overhead (150% of direct labor) 24,000 Total manufacturing cost $ 42,400 Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000. If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit of T305 would:

Zero./Zero. If there is excess capacity, then it is not possible to have an opportunity cost because nothing is being foregone.

CPA-04251: The opportunity cost of making a component part where there is no alternative use for the factory is:

Highest contribution margin per unit of the constraining resource./In making decisions about which products to emphasize, managers should select products with the highest contribution margin per unit of the constraining resource.

CPA-04264: When a multi-product plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the:

$50/$50 (variable cost) is the minimum price that is acceptable for this one-time, special order, assuming excess capacity is available:

CPA-04267: Kator Co. is a manufacturer of industrial components. One of their products that is used as a sub-component in auto manufacturing is KB-96. This product has the following financial structure per unit. Selling Price $150 Direct materials $20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs $90 Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assuming Kator has excess capacity, the minimum price that is acceptable for this one-time, special order is in excess of:

$60/ $60 is the minimum price that is acceptable, using the original data, for this one-time, special order. Direct materials $ 20 Direct labor 15 Variable Mfg OH 12 Variable selling 3 Variable cost 50 Alternative use contribution 10 Opportunity cost $ 60

CPA-04268: Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assume that Kator is operating at full capacity, and the next best alternative use of their capacity on existing equipment is LB-64 that would produce a contribution of $10,000. This product has the following financial structure per unit. Selling Price $150 Direct materials $20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs $90 The minimum price that is acceptable for this one-time, special order is in excess of:

Separable costs after the split-off point./Costs subsequent to split-off, and revenues, are relevant to maximizing profits.

CPA-04269: In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold in order to maximize profits?

Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.

CPA-04276: Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000. Concerning AM-12, which one of the following alternatives is most advantageous?

The operating profit last month was $50,000 and the inventory value is $45,000

CPA-04277: Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation after further processing for $5.50 per unit. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. Joint costs attributable to AM-12 were $180,000, and costs of processing AM-12 further were $90,000. With respect to AM-12, which one of the following statements is correct?

$150,000/The opportunity cost is the opportunity foregone, the $150,000 in lost contribution from not taking the new job: Sales $ 600,000 Variable costs (75%) (450,000) Contribution (25%) $ 150,000

CPA-05124: The Waller Walleye Plant is operating at capacity and currently generates revenue of $1,600,000 per year by processing stewed walleye for cat food. The plant currently has a 15% contribution margin. The company has been offered the opportunity to prepare stewed sturgeon for upscale cat food using one-quarter of the plant's capacity. The sturgeon job would take one year and pay $600,000 with a 25% contribution margin. The opportunity cost of not accepting the sturgeon project is:

$14/The lowest unit price that Rodder should accept is the variable cost of producing the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of the alternative use for the production capacity. The total of these amounts is $14 [$3 + $3 + $3 + $5 = $14].

CPA-05248: Rodder, Inc. manufactures a component in a router assembly. The selling price and unit cost data for the component are as follows: Selling price $ 15 Direct materials cost 3 Direct labor cost 3 Variable overhead cost 3 Fixed manufacturing overhead cost 2 Fixed selling and administration cost 1 The company received a special one-time order for 1,000 components. Rodder has an alternative use of production capacity for the 1,000 components that would produce a contribution margin of $5,000. What amount is the lowest unit price Rodder should accept for the component?

The use of resource markets outside of LQR involves opportunity cost./The use of resource markets outside of LQR involves opportunity cost. Opportunity costs are costs that would have been saved or the profit that would have been earned if another decision alternative had been selected. Financial accounting records do not record opportunity costs.

CPA-05255: The CPA reviewed the minutes of a board of director's meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR couldn't fill the order. By having SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was completed. Which of the following statements is correct regarding LQR's action?

$25/This question is on transfer pricing. The best transfer pricing model is based on market price, which, in this question, is $25.

CPA-05325: Spring Co. had two divisions, A and B. Division A created Product X, which could be sold on the outside market for $25 and used variable costs of $15. Division B could take Product X and apply additional variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special order for a large amount of Product Y. If Division A were operating at full capacity, which of the following prices should Division A charge Division B for the Product X needed to fill the special order?

Idle space that has no alternative use has an opportunity cost of zero./Opportunity cost is the potential benefit lost by selecting a particular course of action. If idle space has no alternative use, there is no benefit foregone; opportunity cost is zero.

CPA-05797: Which of the following statements is true regarding opportunity cost?

$18,000/The elimination of the tables line will eliminate unavoidable costs to the extent that they do not produce an operating loss. The rental income net of the reduced costs is the amount by which operating income will increase computed as follows: Rental income 24,000 Tables line unavoidable costs 10,800 Operating loss 4,800 Unabsorbed costs (6,000) Increase in net income $18,000 Viewed as a comparison, the change in operating income is as follows: Rental income 24,000 Unavoidable costs 10,800 Net operating income 13,200 Current operating loss (4,800) Overall change/Improvement in operating income $18,000

CPA-05823: The following information is available on Crain Co.'s two product lines: Chairs Tables Sales $180,000 $48,000 Variable costs (96,000) (30,000) Contribution margin 84,000 18,000 Fixed costs: Avoidable (36,000) (12,000) Unavoidable (18,000) (10,800) Operating income (loss) $30,000 ($4,800) Assuming the tables line is discontinued, and the factory space previously used to make tables is rented for $24,000 per year, operating income will increase by what amount?

$5.00/Assuming available capacity, the minimum cost per unit of a special order is equal to the variable cost per unit. Fixed costs are irrelevant.

CPA-06169: The Danforth corporation circuit production plant has a 12,000 unit capacity and currently produces 10,000 circuits per year. The company incurs $50,000 in variable costs for its current production and carries a $40,000 fixed cost burden. If Danforth has an opportunity to fill a special order for 1,000 circuits, the price per unit for the order should exceed:

$7/At capacity, the minimum price for a special order is the sum of the variable costs of current utilization plus the contribution margin from the next best alternative. Variable costs ($50,000 ÷ 10,000) $ 5 Contribution margin, next best ($2,000 ÷ 1,000) 2 Total $ 7

CPA-06170: The Danforth corporation circuit production plant has a 10,000 unit capacity and currently produces 10,000 circuits per year. The company incurs $50,000 in variable costs for its current production and carries a $40,000 fixed cost burden. Danforth has explored other alternatives and knows that the next best alternative would produce a $2,000 contribution margin for a 1,000 unit run. If Danforth has an opportunity to fill a special order for 1,000 circuits, the price per unit of the order should exceed:

Total fixed costs do not change, and operating income increases./Adding a job with a positive contribution margin within idle capacity will increase operating income. The company will still make a profit for the special order even though the gross profit percent will be lower. The question states that fixed costs in total will be the same (i.e., the company is operating within the relevant range). Variable costs per unit will be the same.

CPA-06662: A company is offered a one-time special order for its product and has the capacity to take this order without losing current business. Variable costs per unit and fixed costs in total will be the same. The gross profit for the special order will be 10%, which is 15% less than the usual gross profit. What impact will this order have on total fixed costs and operating income?

The value of the next best use of the space./Opportunity cost is the next best use of productive capacity. The production that is forfeited to produce the special order is referred to as the next best alternative use of the facility.

CPA-07002: Jackson Co. is considering a project that will use 2,000 square feet of storage space at one of its facilities to store used equipment. What will determine Jackson's opportunity cost?

$10,000/The opportunity cost is $10,000, the value of the next best use of the space. The alternative selected carries a contribution margin of $25,000 and the next best use is renting the space for $10,000.

CPA-07003: Jones Corp. had an opportunity to use its capacity to produce an extra 5,000 units with a contribution margin of $5 per unit, or to rent out the space for $10,000. What was the opportunity cost of using the capacity?

Increase $5,000. Explanation: Monthly costs of the company would increase by $5,000 if the company elects to buy rather than make its component part. Change in cost is computed as follows: Cost of purchased component (10,000 parts × $8 per part) $ 80,000 Rental of idle capacity 5,000 Net cost $ 75,000 Avoidable costs—direct materials $ 40,000 Avoidable costs—direct labor 30,000 Total costs avoided $ 70,000 Cost increase $ 5,000

CPA-08310: A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows: Per unit Total Direct materials$4 $ 40,000 Direct labor3 30,000 Fixed plant facility cost 2 20,000 The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company's monthly costs change?

Production of Product Y would be eliminated./The maximum number of combined product units that can be produced under each of the five strategies shown is 400. Currently the company is using Strategy C, which involves 200 units of X and 150 units of Y. Doubling the production of Product X entails producing 400 units of X, which would leave no capacity to produce any units of Product Y.

CPA-08356: A company with limited production resources that is currently using strategy C provides the following production information: Strategy Units produced Product X Units Produced Product Y A 0 200 B 100 180 C 200 150 D 300 100 E 400 0 The company would encounter what opportunity cost if it doubled its production of Product X?

$425,000/At 95% capacity, $2 million in sales is generated from using $950,000 ($1 million × 95%) in fixed assets. In order to generate $3 million in sales, the amount of fixed assets needed can be calculated as follows: $2,000,000=$3,000,000$950,000 X X = $1,425,000 Assuming it operates at full capacity, the company will need $1,425,000 in fixed assets in order to generate $3,000,000 in sales. Since it already has $1,000,000 in fixed assets, it just needs another $425,000.

CPA-08372: A company uses its fixed assets of $1,000,000 at 95% capacity to generate sales of $2,000,000. The company wishes to generate sales of $3,000,000. What amount of additional fixed assets must be acquired, assuming that all fixed assets will operate at maximum capacity?

$20,000/The scenario facts indicate the company will use its excess capacity for the special order. The special order will be profitable as long as the selling price is above the $80 per unit variable cost. The contribution margin for each special order unit is $50 ($130 - $80). Assuming the company makes 400 special order units over the next two months, the company will increase its profit by $20,000 ($50/unit × 400 units).

CPA-08554: In a lean accounting environment, a company accepts a special order to make 200 units of a product each month for the next two months for $130 per unit. The company normally sells the unit for $170 per unit with variable costs per unit at $80. The company plans to use excess capacity. By what amount would this special order increase profit?

True.

T or F: Fixed costs per unit decrease with increased production.