ACCTING COSTS PROBS

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should

Reason: Depreciation is not a relevant cost. The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make × 20,000 units).

Wilson company normally produces 20,000 tennis rackets per year, but has enough capacity to produce 25,000. A customer has requested a special order of 2,000 Wilson tennis rackets for $40 per unit. The normal selling price is $50. Costs related to the special order are $30 per racket plus $11,000 for requested modifications to the special order rackets. Wilson incurred $50,000 of costs to design the racket and has $100,000 of allocated general overhead costs per year. What is the financial advantage or disadvantage of accepting the order?

Reason: Incremental revenue $80,000 - incremental costs $71,000 ($60,000 normal production + $11,000 requested modifications) = $9,000 advantage.

Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will

Reason: The company will lose $84,000 in contribution margin ($170,000 - $86,000). If $95,000 of the fixed costs are avoidable, net income will increase by $11,000.

Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials$35Direct labor$10Manufacturing Overhead*$20Selling & Administrative$15 * The variable portion of the overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What is the financial advantage or disadvantage of accepting the offer?

Reason: The revenue per tire is $70. Each tire will incur $63 of direct materials, direct labor, variable overhead and inspection fee ($100,000/10,000 tires). Thus there is an advantage of $7 per tire or $70,000 in total.

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?

Reason: The total buy price = 20,000 x $18 or $360,000. The cost to make equals (20,000 x $15) + $80,000 forgone opportunity or $380,000. Thus, there is a $20,000 advantage to buying the part.

Abba, Inc. is considering dropping a product line. During the prior year, the line had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: Salaries $60,000 Rent 50,000 Advertising 20,000 Administrative 35,000 Total fixed expenses $165,000 The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped overall net operating income will

The company will lose the $124,000 contribution margin. Only $90,000 of the fixed costs are avoidable, so net income will decrease by $34,000.

A company is considering a sourcing decision. Total annual cost to continue to make is $150,000 and total annual cost to purchase from an outside supplier is $180,000. The company should

purchase the product as long the the opportunity cost is more than $30,000