ACCT 2302 CHapter 6 HW

Wilson Co. currently produces 2,000 tennis rackets annually. A supplier has offered to produce the rackets for $370 per racket. Wilson incurs unit-level costs of $360 per racket and spends $10,000 on product design each year. Annual facility-level costs are $100,000. What is the effect on profit if Wilson Co. outsources the rackets?

$10,000 decrease Reason: $720,000 (2,000 × $360) unit-level cost + $10,000 product-level = $730,000 avoidable cost vs. $740,000 (2,000 units × $370) outsourcing cost. Company profits will decrease by $10,000 if the outsourcing option is chosen.

Wilson Co. currently produces 2,000 tennis rackets annually. A supplier has offered to produce the rackets for $370 per racket. Wilson incurs unit-level costs of $360 per racket and spends $10,000 on product design each year. Annual facility-level costs are $100,000. If Wilson outsources the rackets, they can lease their manufacturing space for $20,000 per year. What is the effect on profit if Wilson Co. outsources the rackets?

$10,000 increase Reason: $720,000 (2,000 × $360) unit-level cost + $10,000 product-level + $20,000 opportunity cost = $750,000 relevant cost vs. $740,000 (2,000 units × $370) outsourcing cost. Company profits will increase by $10,000 if the outsourcing option is chosen and the space is leased.

Chris Co. is currently producing 1,000 surfboards annually. A supplier has offered to produce the boards for $300 each. Chris Co. incurs unit-level costs of $280 per surfboard. Chris also spends $25,000 on product design each year and incurs $50,000 of facility-level costs. If Chris Co. outsources the boards, they can lease their manufacturing space for $12,500 per annum. Chris Co.'s relevant cost per surfboard is _blank​_.

$317.50 Reason: $280,000 (1,000 × $280) unit-level cost + $25,000 product-level + $12,500 opportunity cost = $317,500 total relevant cost or $317.50 per unit.

Wilson Co. currently produces 2,000 tennis rackets annually. A supplier has offered to produce the rackets for $370 per racket. Wilson incurs unit-level costs of $360 per racket and spends $10,000 on product design each year. Annual facility-level costs are $100,000. The avoidable production cost for Wilson per racket is:

$365 Reason: $360 unit-level + ($10,000 ÷ 2,000 units) product-level = $365

Chris Co. produces surfboards. A customer has offered Chris Co. $400 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $350 per unit and batch-level costs of $5,500. Chris Co. also incurred $70,000 of product-level costs to design the board and $10,000 of facility-level costs. Calculate the amount of differential revenue.

$40,000 Reason: $400 × 100 = $40,000

Premier Co. is currently producing 10,000 park benches annually. A supplier has offered to produce the bench for $500 per bench. Premier Co. incurs unit-level costs of $490 per unit. Premier also spends $50,000 on product design each year and incurs $100,000 of facility-level costs. The avoidable production cost for Premier Co. per bench is _blank​_.

$495 Reason: $490 unit-level + ($50,000 ÷ 10,000 units) product-level = $495

Chris Co. is currently producing 1,000 surfboards annually. A supplier has offered to produce the boards for $300 each. Chris Co. incurs unit-level costs of $280 per surfboard. Chris also spends $25,000 on product design each year and incurs $50,000 of facility-level costs. What is the effect on profit if Chris Co. outsources the surfboards?

$5,000 increase Reason: $280,000 (1,000 × $280) unit-level cost + $25,000 product-level = $305,000 avoidable cost vs. $300,000 (1,000 units × $300) outsourcing cost. Company profits will increase by $5,000 if the outsourcing option is chosen.

Premium Co. produces park benches. A customer has offered Premium Co. $700 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $500 per unit and batch-level costs of $5,000. Premium Co. also incurred $15,000 of product-level costs to design the bench and has $200,000 of facility-level costs. Calculate the amount of differential cost.

$55,000 Reason: $500 × 100 units= $50,000 + $5,000 batch-level cost = $55,000

Wilson Co. produces tennis rackets. A customer offered Wilson Co. $400 per racket for 200 rackets. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and has $100,000 of facility-level costs. Calculate the amount of differential cost.

$61,000 Reason: $300 × 200 units= $60,000 + $1,000 batch-level cost = $61,000

Premium Co. produces park benches. A customer has offered Premium Co. $700 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $500 per unit and batch-level costs of $5,000. Premium Co. also incurred $15,000 of product-level costs to design the bench and has $200,000 of facility-level costs. Calculate the amount of differential revenue.

$70,000 Reason: $700 × 100 = $70,000

Wilson Co. produces tennis rackets. A customer offered Wilson Co. $400 per racket for 200 rackets. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and has $100,000 of facility-level costs. Calculate the amount of differential revenue.

$80,000 Reason: $400 × 200 = $80,000

Cakes by Jacki offers wedding cakes, birthday cakes and miscellaneous special occasion cakes. Wedding cakes have a contribution margin of $700 and take 5 hours to decorate. Birthday cakes have a contribution margin of $75 and take 1/2 hour to decorate. Special occasion cakes have a contribution margin of $250 and take 2 hours to decorate. If Cakes by Jacki is limited by the number of cake decorating hours available per week, which type of cake will they want to sell?

Birthday cakes Reason: Wedding cakes: $700 ÷ 5 = $140 CM per decorating hour Special occasion cakes: $250 ÷ 2 = $125 CM per decorating hour Birthday cakes: $75 ÷ 0.5 = $150 CM per decorating hour

Relevant costs are frequently called___ costs. (Enter only one word per blank.)

Blank 1: avoidable

Anything that limits a company's ability to produce and sell its products is a(n)___ . (Enter only one word per blank.)

Blank 1: bottleneck or constraint

Constrained resources are also known as___ . (Enter only one word per blank.)

Blank 1: bottlenecks or bottleneck

Factors that limit a business's ability to satisfy the demand for its product are called___ . (Enter only one word per blank.)

Blank 1: constraints, constraint, bottlenecks, or bottleneck

Revenue that varies among alternatives is called relevant or ___ revenue. (Enter only one word per blank.)

Blank 1: differential

Costs incurred to support an entire company are called___ -level costs. (Enter only one word per blank.)

Blank 1: facility

The sacrifice that is incurred in order to obtain an alternative option is a(n)___ cost. (Enter only one word per blank.)

Blank 1: opportunity

Buying goods and services from other companies rather than producing them internally is commonly called ___. (Enter only one word per blank.)

Blank 1: outsourcing

Costs incurred to support specific products or services are called___ -level costs. (Enter only one word per blank.)

Blank 1: product

Historical costs are frequently called___ costs because they cannot be changed and are not relevant for making current decisions. (Enter only one word per blank.)

Blank 1: sunk

Costs incurred each time a company generates one individual item of product are called___ -level costs. (Enter only one word per blank.)

Blank 1: unit

In many circumstances,___ costs act as proxies for avoidable costs. (Enter only one word per blank.)

Blank 1: variable

Select all that apply Which of the following are not qualitative characteristics that should be considered in an outsourcing decision?

Cost savings Increased profits

Which of the following is a qualitative characteristic of a special order decision?

Current customers demanding a price reduction

Select all that apply Which of the following statements are true?

Eliminating a batch eliminates both batch- and unit- level costs. A particular cost may be either batch-level or unit-level depending on the situation.

When faced with a scarce resource, a company should only sell and produce the product with the highest contribution margin per scarce resource.

False

True or false: Qualitative characteristics are never as important as quantitative characteristics when making special order decisions.

False Reason: Qualitative characteristics may even be more important.

Chris Co. produces surfboards. A customer has offered Chris Co. $400 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $350 per unit and batch-level costs of $5,500. Chris Co. also incurred $70,000 of product-level costs to design the board and $10,000 of facility-level costs. Based on your quantitative analysis, should Chris Co. accept the special order?

No Reason: $40,000 differential revenue - $40,500 differential costs = ($500). Since differential revenue is greater than differential cost, the order should not be accepted.

Chris Co. produces surfboards. A customer has offered Chris Co. $400 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $350 per unit and batch-level costs of $5,500. Chris Co. also incurred $70,000 of product-level costs to design the board and $10,000 of facility-level costs. Chris Co. can rent out its excess capacity for $2,000 if it does not accept the special order. Based on your quantitative analysis, should Chris Co. accept the special order? What is the effect on profit?

No, profit decreases by $2,500. Reason: $40,000 differential revenue - $40,500 differential costs = ($500). The company will give up an additional $2,000 from not renting the space, making the total decrease in profit $2,500.

Select all that apply Which of the following are qualitative characteristics that should be considered in an outsourcing decision?

Reliability of the supplier. Employee displacement Existing employee morale and loyalty Difficulty in reestablishing internal production

Defining a cost as fixed or variable has no effect on whether or not the cost is considered relevant.

True

The decision to outsource can change when expected production levels change.

True

Wilson Co. produces tennis rackets. A customer offered Wilson Co. $400 per racket for 200 rackets. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and has $100,000 of facility-level costs. Based on your quantitative analysis, should Wilson Co. accept the special order?

Yes Reason: $80,000 differential revenue - $61,000 differential cost = $19,000 contribution to income.

Wilson Co. produces tennis rackets. A customer offered Wilson Co. $400 per racket for 200 rackets. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and has $100,000 of facility-level costs. If Wilson Co. does not accept the special order, they can rent out the excess capacity for $10,000. Should Wilson Co. accept the special order? What or why not?

Yes, profits increase by $9,000. correct Reason: $80,000 differential revenue - $61,000 differential cost = $19,000 contribution to income. Since the company will only receive $10,000 in rent, they are $9,000 better off to accept the special order.

Costs that can be eliminated by making specific choices are called _blank​_ costs.

avoidable

Select all that apply To be relevant, information must _blank​_.

be future oriented differ among alternatives

When making a scarce resource decision, the focus should _blank​_.

be on both quantitative and qualitative factors

Outsourcing involves a decision about whether to _blank​_.

buy goods and services from other companies or produce them internally

A company that produces cars has a division that makes sound systems for the cars. If the company decides to stop producing the sound systems internally, the product-level costs related to the sound system division _blank​_ be avoided.

can

Unit-level costs _blank​_ be avoided by eliminating the production of a single unit of product.

can

Factors that limit a business's ability to satisfy the demand for its product are called _blank​_.

constraints

A management practice of identifying and eliminating bottlenecks is the theory of _blank​_.

constraints (TOC)

Classifying costs as unit- versus batch-level frequently depends on the _blank​_.

context of the cost

When faced with a scarce resource, a company should produce the product with the highest _blank​_.

contribution margin per unit of scarce resource

Wilson Co. currently produces 2,000 tennis rackets annually. A supplier has offered to produce the rackets for $370 per racket. Wilson incurs unit-level costs of $360 per racket and spends $10,000 on product design each year. Annual facility-level costs are $100,000. If Wilson Co. increases annual production to 2,500 rackets, the avoidable cost per unit will _blank​_.

decrease by $1 Reason: The avoidable unit-level cost will stay the same, but the avoidable product-level cost will decrease from $5 per unit ($10,000 ÷ 2,000 units) to $4 per unit ($10,000 ÷ 2,500 units).

Select all that apply Issues that need to be considering in an outsourcing decision include _blank​_.

delivery time supplier reliability quality

Relevant revenue is sometimes called _blank​_ revenue.

differential

Accountants normally measure opportunity cost as the _blank​_ value of the available alternatives.

highest

Theory of constraints (TOC) is a management practice of _blank​_.

identifying and eliminating bottlenecks

The practice of enticing clients with a low price and then increasing prices once clients are dependent is called _blank​_ pricing.

low-ball

Relevant costs _blank​_.

may be fixed or variable

A particular cost that is relevant in one context _blank​_.

may be irrelevant in another context

Eliminating a business segment (such as a division, department, or office) _blank​_ facility-level costs.

may enable a company to avoid some

Outsourcing _blank​_ the level of vertical integration.

reduces

Information that is future oriented and differs among the alternatives is known as _blank​_ information.

relevant

A furniture store that is losing money is considering two options. One is to close the entire store. The other is to close the outdoor furniture department only. The salary of the manager of the outdoor furniture department is _blank​_.

relevant to both decisions

If a product is eliminated _blank​_ costs will be avoided.

variable

Companies that have control over the full range of activities from acquiring raw materials to distributing goods and services use _blank​_.

vertical integration

Sunk costs _blank​_.

were incurred in the past and are not relevant