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Exam 23: Relevant Costing for Managerial Decisions

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Question 31

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Janko Wellspring Inc.has a pump with a book value of $24,000 and a four-year remaining life.A new,more efficient pump,is available at a cost of $45,000.Janko can also receive $8,000 for trading in the old pump.The new pump will reduce variable costs by $10,000 per year over its four-year life.The costs not relevant to the decision of whether or not to replace the pump are:

A) $40,000.
B) $8,000.
C) $10,000.
D) $24,000.
E) $16,000.

F) None of the above
G) C) and D)

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Question 32

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Additional costs incurred if a company pursues a certain course of action are sunk costs.

A) True
B) False

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Question 33

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Benjamin Company had the following results of operations for the past year: $\begin{array} { l r l r } \text { Sales } ( 16,000 \text { units at } \$ 10 ) & & \$ 160,000 \\\text { Direct materials and direct labor } & \$ 96,000 & \\\text { Overhead (20\% variable) } & 16,000 & \\\text { Selling and administrative expenses (all fixed) } & 32,000 & ( 144,000 ) \\\hline \text { Operating income } & & \$ 16,000 \\\hline \end{array}$ A foreign company 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 it accepts the offer,its profits will:

Bandy Corporation owns a machine that manufactures lawn game sets.Production time for the croquet set is 10 units per hour and for the volleyball set is 8 units per hour.The machine's capacity is 1,500 hours per year.Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 4,000 croquet sets and 10,000 volleyball sets.Selling prices and variable costs per unit are shown below.Based on this information,what is Bandy Corporation's most profitable sales mix? $\begin{array}{lcc} & \text { Croquet Set } & \text { Volleyball Game } \\\text { Selling price per unit }& \$ 75 & \$ 62 \\\text { Variable costs per unit } & 42 & 25\end{array}$

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?

Costs already incurred in manufacturing the units of a product that do not meet quality standards are relevant costs in a scrap or rework decision.

A company is planning to introduce a new portable computer to its existing product line.Management must decide whether to make the computer case or buy it from an outside supplier.The lowest outside price is $90.If the case is produced internally,the company will have to purchase new equipment that will yield annual depreciation of $130,000.The company will also need to rent a new production facility at $200,000 a year.At 20,000 cases per year,a preliminary analysis of production costs shows the following: Required: (1)Determine whether the company should make the cases or buy them from the outside supplier. (2)What other factors,besides cost,should the company consider?

Sales mix refers to the combination of products sold by a company.

Ahngram Corp.has 1,000 carton of oranges that cost $10 per carton in direct costs and $16.50 per carton in indirect costs and sold for $30 per carton.The oranges can be processed further into orange juice at an additional cost of $12.50 and sold at a price of $46.The incremental income (loss) from processing the oranges into orange juice would be:

A ________ is the combination of products sold by a company.

Janko Wellspring Inc.has a pump with a book value of $24,000 and a four-year remaining life.A new,more efficient pump,is available at a cost of $45,000.Janko can also receive $8,000 for trading in the old pump.The new pump will reduce variable costs by $10,000 per year over its four-year life.Should the pump be replaced?

A cost that cannot be avoided or changed because it arises from a past decision,and is irrelevant to future decisions,is called a(n) :

Good management accounting indicates that projects be evaluated using relevant data.In choosing among alternatives,what factors (considerations)are relevant?

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit.Minor currently produces and sells 7,500 units at $6.00 each.This level represents 75% of its capacity.Production costs for these units are $4.50 per unit,which includes $3.00 variable cost and $1.50 fixed cost.To produce the special order,a new machine needs to be purchased at a cost of $1,000 with a zero salvage value.Management expects no other changes in costs as a result of the additional production.If Minor wishes to earn $1,250 on the special order,the size of the order would need to be:

Incremental revenues refer to the additional revenue generated by selecting a particular course or action over another.

Employee morale,timeliness of delivery,and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.

Carns Company is considering eliminating its small tools division,which reported an operating loss for the recent year of $85,000.Division sales for the year were $1,310,000 and its variable costs were $1,175,000.The fixed costs of the division were $220,000.If the kitchen division is dropped,45% of the fixed costs allocated it could be eliminated.The impact on Carns's operating income from eliminating the small tools division would be:

Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs.

A(n)________ requires a future outlay of cash and is relevant for current and future decision making.

Valber Company is considering eliminating its phone division.The company allocates fixed costs based on sales.If the phone division is dropped,$150,000 of the fixed costs allocated to that division could be eliminated.The impact on Valber's operating income from eliminating the phone division would be: $\begin{array}{lcrrl} & \text { Desktops } & \text { Laptops } & \text { Tablets } & \text { Phones } \\\text { Sales } & \$ 356,000 & \$ 871,500 & \$ 694,000 & \$ 975,000 \\\text { Variable costs } & 201,000 & 635,000 & 528,000 & 795,000\\\text { Contribution margin } & 155,000 & 236,500 & 166,000 & 180,000 \\\text { fixed coats} & 71,200 & 174,300 & 138,800 & 195,000\\\text {net income(loss} &83,800&62,200&27,200&(15,000) \end{array}$