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Exam 23: Relevant Costing for Managerial Decisions

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Question 51

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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) :

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

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

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Question 52

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If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y, and the markets for both products are unlimited, the company should commit 100% of its capacity to the product that has the higher contribution margin.

A) True
B) False

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Question 53

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

Contribution margin lost from a decline in sales is an opportunity cost.

A cost that requires a current and/or future outlay of cash, and is usually an incremental cost, is a(n) :

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

To maximize profit when a constrained resource exists, management should produce the sales mix which has the highest contribution margin per unit of scarce resource.

A company expects its three departments to yield the following income for next year. Compute the change to the company's total net income if Dept. S is eliminated.

A company produces three different products that all require processing on the same machines. There are only 17,000 machine hours available in each year. Production information for each product is: $\begin{array}{lrrr}&A&B&C\\\text { Sales price per unit } & \$ 22.00 & \$ 34.00 & \$ 46.00 \\\text { Variable costs per unit } & \$ 10.00 & \$ 19.00 & \$ 25.30 \\\text { Machine hours necessary to produce one } & .75 & 1.2 & 2.3\\\text { unit }\end{array}$ Required: (1) Determine the preferred sales mix if there are no market constraints on any of the products. (2) Determine the preferred sales mix if the demand is limited to 7,000 units for each product. (3) Determine the preferred sales mix if the demand is limited to 8,000 units for each product.

Sandlewood Company has 15,000 units of its sole product that it produced last year at a cost of $43 each. This year's model is superior to last year's and the 15,000 units cannot be sold for their regular selling price of $80 each. Sandlewood has two alternatives for these items: (1) they can be sold to a wholesaler for $30 each, or (2) they can be reworked at a total cost of $400,000 and then sold for $60 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the company's profits the most?

Explain and give several examples of qualitative decision factors.

A company has already incurred a $55,000 cost in partially producing its three products. Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing. Based on this information, should any products be processed further? $\begin{array}{|c|c|c|c|}\hline \text { Product } & \begin{array}{c}\text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array}{c}\text { Finished } \\\text { Selling Price }\end{array} & \begin{array}{c}\text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \mathrm{A} & \$ 72 & \$ 108 & \$ 35 \\\hline \mathrm{B} & \$ 83 & \$ 124 & \$ 42 \\\hline \mathrm{C} & \$ 94 & \$ 141 & \$ 45 \\\hline\end{array}$

A company expects its three departments to yield the following income for next year. $\begin{array}{llll} & \text { Dept. X } & \text { Dept. Y } & \text { Dept. Z } \\\text { Sales } & \$ 94,000 & \$ 15,000 & \$ 70,000 \\\text { Expenses } & & &\\\text { Avoidable } & 71,000 & 2,000 & 52,000 \\\text { Unavoidable } & 4,000 & 7,000 & 20,000\\\text { Total expenses } & 75,000 & 9,000 & 72,000 \\\text { Net income (loss) } & \$ 19,000 & \$ 6,000 & \$(2,000)\end{array}$ Required: Compute the following independent calculations. (1) The effect on total company income if Dept. X is eliminated. (2) The effect on total company income if Dept. Y is eliminated. (3) The effect on total company income if Dept. Z is eliminated. (4) Should any of these departments be eliminated? Why of why not?

A cost-plus method of determining a product's selling price adds a _________________________ to total product cost to reach a target price.

A company has already incurred a $100 cost in partially producing its two products. Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing. Based on this information, the company should process only product A further. $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 200 & \$ 300 & \$ 120 \\\hline \text { B } & \$ 75 & \$ 130 & \$ 45 \\\hline\end{array}$

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

A company has already incurred $93,000 cost in partially producing its three products. Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing. Based on this information, should any products be processed further? $\begin{array} { | c | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing } \\\text { Costs }\end{array} \\\hline \text { A } & \$ 31.27 & \$ 62.37 & \$ 33.76 \\\hline \text { B } & \$ 42.56 & \$ 96.11 & \$ 49.82 \\\hline \text { C } & \$ 89.01 & \$ 102.72 & \$ 17.29 \\\hline\end{array}$

An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.

An out-of-pocket cost benefits a business, but is paid by an outside party.

When deciding whether to sell partially completed products now or to process them further, what is the correct treatment of the manufacturing costs which have been incurred to date?