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Exam 10: Relevant Costing for Managerial Decisions

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Question 31

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A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the machine is an example of a(n) :

A) Incremental cost.
B) Opportunity cost.
C) Variable cost.
D) Sunk cost.
E) Out-of-pocket cost.

F) A) and D)
G) A) and E)

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Question 32

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Incremental costs are the additional costs incurred if a company pursues a certain course of action.

A) True
B) False

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Question 33

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Listmann Corp. processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: $\begin{array} { | l | r | r | r | } \hline \text { Product } & \begin{array} { c } \text { Sales Value } \\\text { with no further } \\\text { Processing }\end{array} & \begin{array} { c } \text { Additional } \\\text { Processing } \\\text { Costs }\end{array} & { \begin{array} { c } \text { Sales } \\\text { Value after } \\\text { further } \\\text { processing }\end{array} } \\\hline \text { Premier } & \$ 1,350 & \$ 900 & \$ 2,700 \\\hline \text { Deluxe } & 450 & 225 & 630 \\\hline \text { Super } & 900 & 450 & 1,800 \\\hline \text { Basic } & 90 & 45 & 180 \\\hline\end{array}$ Which product(s) should not be processed further?

Benjamin Company had the following results of operations for the past year: $\begin{array} { | l | r | r | } \hline \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \\\hline \text { Direct materials and direct labor } & \$ 96,000 & \\\hline \text { Overhead ( } 20 \% \text { variable) } & 16,000 & \\\hline \text { Selling and administrative expenses (all fixed) } & \underline { 32,000 } & \underline { ( 144,000 ) } \\\hline \text { Operating income } & & \underline { \$ 16,000 }\\\hline\end{array}$ A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. Assuming Benjamin's productive capacity is 16,000 units per year and accepts the offer, its profits will:

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What is the amount of incremental cost from rebuilding?

Mays Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 30,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?

The concept of incremental cost is the same as the concept of differential cost.

A markup percentage equals total costs divided by desired profit.

In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks: ________; ________; ________

What decision rule should be followed when deciding if a business segment should be eliminated?

A cost that requires a future outlay of cash, and is relevant for current and future decision making, is a(n) :

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. Chang should:

A company manufactures two products. Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. If the company can sell all that it produces of both products, what should the sales mix be?

Rocko Inc. has a machine with a book value of $50,000 and a five-year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life. Should the machine be replaced?

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

Factor Co. can produce a unit of product for the following costs: $\begin{array}{llcc} \text { Direct material } &\$8\\ \text { Direct labor } &24\\ \text { Overhead } &\underline{40}\\ \text {Total costs per unit } &\$72\\\end{array}$ An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. Assuming Maxim further processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:

A special order of goods or services should always be accepted when the incremental revenue exceeds the normal revenue.

Goodfellow Company had the following results of operations for the past year: Sales (8,000 units at $6.80) $ 54,400 Materials and direct labor (20,000) Overhead (40% variable) (10,000) Selling and administrative expenses (all fixed) (6,000) Operating income $ 18,400 A foreign company (whose sales will not affect Goodfellow's regular sales) offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Prepare an analysis of this additional business to show whether Goodfellow should take this order.

An additional cost incurred only if a company pursues a particular course of action is a(n) :