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Exam 13: Short-Run Decision Making: Relevant Costing

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Question 61

Multiple Choice

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What is the decision called when a manager must decide whether to produce a part or to purchase it from an external supplier?

A) keep or drop
B) special order
C) process further
D) make or buy

E) B) and C)
F) B) and D)

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Question 62

Multiple Choice

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Edison Company produces two types of piano legs, plain and fancy, which have unit contribution margins of $8 and $12, respectively. Each piano leg must spend time on a special machine. The firm owns four machines that together provide 10,000 hours of machine time per year. The plain leg requires 0.25 hours of machine time, and the fancy leg requires 0.5 hours of machine time. -Refer to the Figure.What is the contribution margin per hour of machine time for a plain leg?

A) $8
B) $12
C) $24
D) $32

E) All of the above
F) None of the above

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Question 63

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In deciding the optimal mix of products that use a constrained resource,it is important to determine the contribution margin per unit of scarce resource.

Rudder Company prints a variety of publications and coloured inserts for newspapers. Currently, Rudder produces its own ink, including a special metallic colour. India Inks has offered to supply Rudder with the 25,000 mL of metallic ink that it needs each year for $1.24 per millilitre. Rudder is interested because this is a particularly difficult ink to make. Purchasing must make special efforts to locate suppliers; the metallic component requires special handling; and, since the metallic ink uses machinery that is also used to make other colours of ink, the machinery must be cleaned very well before every batch of metallic. The accounting department supplied the following unit costs: *Fixed overhead is applied on the basis of a plant-wide rate based on direct labour hours. $\begin{array}{lr}\text { Direct materials } & \$ 0.40 \\\text { Direct labour } & 0.15 \\\text { Variable overhead } & 0.06 \\\text { Fixed overhead* } & 0.50\end{array}$ -Refer to the Figure.Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier,Joseph Michaels,the production supervisor,said,"That's nuts! This ink is a real pain to make,and $1.24 per millilitre sounds like a bargain to me!" Based on Jim's feelings,Dominique Rudder (a new CPA in the accounting office)did an ABC analysis of ink production.She came up with the same direct materials,direct labour,and variable overhead,as well as the following information on activities required by metallic ink production: The metallic ink requires 300 purchase orders per year and 80 setups. $\begin{array}{ll}\text { Setups } & \$ 60,000600 \text { setups per year } \\\text { Purchasing } & \$ 270,0009,000 \text { purchase orders per year }\end{array}$ A. If Rudder purchases the ink from the outside supplier, would operating income be higher or lower, and by how much? B. What is the highest price per millilitre that Rudder would pay an outside company for the ink?

Alpha Company produces two models of a component: Model K-3 and Model P-4. The unit contribution margin for Model K-3 is $6, and the unit contribution margin for Model P-4 is $14. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time. -Refer to the Figure.What is the amount of machine time for model K-3 in terms of percentage of a machine hour?

Victor's Detailing customers would be willing to pay $57 per detail. The average job would cost $30. -Refer to the Figure.Assume Victor's Detailing uses target costing to set price on each job.The company requires a 40% profit on each job.What price should Victor's Detailing quote to a new customer?

The operations of Slickers Corporation are divided into the North Division and the South Division.Projections for the next year are as follows: Suppose the South Division were dropped.What would be the operating income for Slickers Corporation? $\begin{array}{llll}&\text { North } & \text { South } \\&\text { Division } & \text { Division } & \text { Total }\\\text { Sales } & \$ 420,000 & \$ 252,000 & \$ 672,000 \\\text { Variable costs } & 147,000 & 115,500 & 262,500\\\text { Contribution margin } & \$ 273,000 & \$ 136,500 & \$ 409,500 \\\text { Direct fixed costs } & 126,000 & 105,000 & 231,000\\\text { Segment margin } & \$ 147,000 & \$ 31,500 & \$ 178,500 \\\text { Allocated common costs } & 63,000 & 47,250 & 110,250 \\\text { Operating income (loss) } & \$ 84,000 & \$(15,750) & \$ 68,250\end{array}$

Alpha Company produces two models of a component: Model K-3 and Model P-4. The unit contribution margin for Model K-3 is $6, and the unit contribution margin for Model P-4 is $14. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time. -Refer to the Figure.What is the contribution margin per unit of scarce resource (machine time) for Model P-4?

Flexible resources may have unused capacity.

Victor's Detailing customers would be willing to pay $57 per detail. The average job would cost $30. -Refer to the Figure.Assume Victor's Detailing uses markup to set the price on each job.The company requires an 80% markup on each job.What price should Victor's Detailing quote to a new customer?

Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs of $80. The tubs sell for $600 and have variable cost of $450. The glass and ceramic sinks and tubs require the use of specialized moulding equipment. The specialized moulding equipment has 4,050 hours of capacity per year. A sink uses an average of two hours of specialized moulding equipment time; a tub uses an average of five hours of specialized moulding equipment time. -Refer to the Figure.What is the contribution margin per hour of specialized moulding equipment time for sinks?

Target costing is a method of determining the price of a product or service based on the cost that the business has to pay.

Butry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte) into two chemicals: dac and tyl. One batch of 5,000 L of dactylyte can be converted to 2,000 L of dac and 3,000 L of tyl at a total joint processing cost of $12,000. At the split-off point, dac can be sold for $3 per litre and tyl can be sold for $4 per litre. Butry has just learned of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700 L of prodac for every 2,000 L of dac. Prodac sells for $5 per litre. -Refer to the Figure.What is Butry's profit from refining one batch of dactylyte if both dac and tyl are sold at the split-off point?

Calculus provides a special technique that can be used to determine the optimal product mix when there are multiple constraints.

The following information relates to a product produced by Creamer Company: Fixed selling costs are $500,000 per year,and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year,the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each. What is the incremental cost per unit associated with the special order? $\begin{array}{lr}\text { Direct materials } & \$ 24 \\\text { Direct labour } & 15 \\\text { Variable overhead } & 30 \\\text { Fixed overhead } & 18 \\\text { Unit cost } & \$ 87\end{array}$

Shredder Inc.produces paper shredders.Shredder is considering a new shredder design for home offices.The marketing vice president believes that a basic unit in a variety of attractive colours could be sold for $100.Shredder requires that all new products yield 35% profit.What is the target cost of the new shredder?

Jester Company was making a product for $70 and selling it for $90.A competitor began selling the same product for $78.Suppose Jester wants to meet the competition's price and maintain the same amount of profit per unit.What would be the target cost?

Tine Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the company logo woven in the middle, to be priced at $30 each. Normally, Tine would charge $60 per carpet for this type of order. Tine figures that yarn and backing will cost $12 per carpet, variable overhead (machining, electricity) is $5 per carpet, direct labour is $10 per carpet, and one setup will be required at $800 per setup. The setup charge costs are 100% labour. Currently, the workers needed to set up and make the carpets are working at Tine. Their wages will be paid whether or not the special order is accepted. Tine's policy is to avoid layoffs to the extent possible. -Refer to the Figure.Which of the following is a cost of the special order in addition to yarn and backing?

Match each statement with the correct item below. -Make-or-buy decision

Match each statement with the correct item below. -Keep-or-drop decision