Chapter 13 – Short-Run Decision Making: Relevant Costing
139. Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the tennis shoes
have fallen off. Veblen is considering several options: 1) drop the tennis shoe line; 2) replace the tennis shoe line with golf
shoes; 3) retool the tennis shoe line to make “Airtennies.” Price and cost data are as follows:
Basketball
Running
Tennis
Golf
Airtennies
Price
$90
$65
$40
$60
$70
Variable cost/unit
$45
$40
$35
$43
$50
Fixed costs
$200,000
$210,000
$50,000
$50,000
$90,000
Number of units
10,000
15,000
2,500
25,000
6,000
If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.
A.
B.
C.
D.
E.
Sales
COGS & Net FC
Net Change
Clearly, the status quo (keeping the tennis shoe line) is the worst option and option 2
Option 2
Sales Increase = 25,000 × $60
$1,500,000 − 100,000 = $1,400,000
25,000 × $43
$1,075,000 +$50,000 − 137,500 = $987,500
Net Increase = $1,400,000 − $987,500 = $412,500
Option 3
Sales Increase = 6,000 × $70
$420,000 − 100,000 = $320,000
Option 3 COGS and Fixed Cost Increase
= 6,000 × $50
$300,000 +90,000 − 137,500 = $252,500
Net Increase = $320,000 − $252,500 = $67,500
Chapter 13 – Short-Run Decision Making: Relevant Costing
140. Tyler Company has been approached by a new customer with an offer to purchase 6,000 units of its product KR200
at a price of $11 each. The existing sales would not be affected by this special order. Tyler normally produces 40,000
units but plans to produce and sell 30,000 in the coming year. The normal sales price is $18 per unit. Unit cost information
is as follows:
Direct materials
$4.00
Direct labor
$2.75
Variable overhead
$1.50
Fixed overhead
$3.25
Total
$11.50
If Tyler accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity.
Required:
A. By how much will profit increase or decrease if the order is accepted?
B. Should Tyler accept the special order?
Direct materials
$4.00
Direct labor
$2.75
Variable overhead
$1.50
$8.25
$2.75 × 6,000 = $16,500 increase
B. Yes the order should be accepted.
141. Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit. Recently the
supplier informed Junior Company that a 20% increase will take effect next year. Junior has some additional space and
could produce the units for the following per-unit costs (based on 30,000 units):
Direct materials
$16
Direct labor
12
Variable overhead
12
Fixed overhead
10
Total
$50
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can
be rented out for $20,000 per year if the parts are purchased externally.
Required: Should Junior Company buy the part externally or make it internally?
Purchase price (30,000 × $40 × 1.20)
Fixed costs
Rent received
Net cost to purchase
Cost to produce (30,000 × $50)
142. Tapeo Company has always made its electronic components that go into their GPS systems in-house. Streeter
Company has offered to supply these electronic components at a price of $38 each. Tapeo uses 18,000 units of these
components each year. The cost per unit of this component is as follows:
Chapter 13 – Short-Run Decision Making: Relevant Costing
Direct material
$13.75
Direct labor
$16.00
Variable overhead
$7.00
Fixed overhead
$8.25
Total
$45.00
Assume that 45% of Tapeo Company’s fixed overhead would be eliminated if the electronic component was no longer
produced in-house.
Required:
A. If Tapeo decided to purchase the electronic component from Streeter Company how much would its operating income
increase or decrease?
B. Should Tapeo continue to make the electronic component or buy it from Streeter Company?
Direct material
Direct labor
Variable overhead
Avoidable Fixed overhead
Purchase cost
$38.00
Total
$38.00
$2.46 × 18,000 = $44,280 increase in operating income
143. Island Princess Pineapples purchases pineapples from area farmers and processes them into rings, juice, and skins.
The cost of the pineapples is a joint cost, as is the initial processing in which the fruits are skinned, cored, and sliced into
rings. At the split-off point, Island Princess sells the skins (for fertilizer). Juice and rings are processed further (further
processing costs occurs for cooking and canning). Data for the three products follows:
Sales
Rings
$2,000
Juice
1,500
Fertilizer
400
Further processing costs:
Rings
500
Chapter 13 – Short-Run Decision Making: Relevant Costing
Juice
300
Joint costs
$1,600
A.
B.
A.
Further processing costs
Product margin
Joint costs
Operating income
B.
costs do not come into play.
144. Rippey Corporation manufactures a single product with the following unit costs for 5,000 units:
Direct materials
$ 60
Direct labor
30
Factory overhead (40% variable)
90
Selling expenses (60% variable)
30
Administrative expenses (20% variable)
15
Total per unit
$225
Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the models are sold to
dealers for $412.50. Rippey’s capacity is sufficient to produce the extra 1,000 units. No additional selling expenses would
be incurred on the special order.
Required:
A.
B.
C.
D.
A.
Sales (5,000 × $412.50)
Less: costs (5,000 × $225)
Net income
Yes, profit will increase by:
Increase in sales (1,000 × $225)
Increase in direct labor (1,000 × $30)
Increase in var. overhead (1,000 × $90 × 0.40)
Chapter 13 – Short-Run Decision Making: Relevant Costing
145. Salley Company makes pagers. Currently, Salley purchases 10,000 plastic housings per year from an outside
company for $1 each. One of Salley’s engineers suggested that the company make its plastic housings in-house. Estimated
unit costs are as follows:
Direct materials
$0.30
Direct labor
0.20
Variable overhead
0.15
Fixed overhead*
0.40
* Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per
year in general overhead costs to be allocated to this line
A.
B.
C.
$0.89 = $0.30 + 0.20 + 0.15 + 0.24
traceable fixed overhead is irrelevant.
Figure 13-10.
Goutam Company prints a variety of publications and colored inserts for newspapers. Currently, Goutam produces its own
ink, including a special metallic color. India Inks has offered to supply Goutam with the 25,000 ounces of metallic ink that
it needs each year for $1.24 per ounce. Goutam is interested because this is a particularly difficult ink to make. The
purchasing department 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 colors of ink, the machinery must be cleaned
very well before every batch of metallic. The accounting department supplied the following unit costs:
Direct materials
$0.40
Direct labor
0.15
Variable overhead
0.06
Increase in var. adm. (1,000 × $15 × 0.20)
Increase in profits
$60 + $30 + ($90 × 0.40) + ($15 × 0.20) + ($7,500 / 1,000)
= $136.50 per unit
What is the impact on regular customers?
Chapter 13 – Short-Run Decision Making: Relevant Costing
Fixed overhead*
0.50
*Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours.
146. Refer to Figure 13-10.
A.
B.
147. Refer to Figure 13-10. Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it
from an outside supplier, Jim Webb, the production supervisor said “That’s nuts! This ink is a real pain to make and $1.24
per ounce sounds like a bargain to me!” Based on Jim’s feelings, Anna Ruiz (a new CMA in the accounting office) did an
ABC analysis of ink production. She came up with the same direct materials, direct labor and variable overhead, as well
as the following information on activities required by metallic ink production.
Setups
$ 60,000
600 setups per year
Purchasing
$270,000
9,000 purchase orders per year
The metallic ink requires 300 purchase orders per year and 80 setups.
A.
B.
A.
$1,250 higher
= [$1.24 − ($0.40 + 0.15 + 0.06 + 0.68)] × 25,000
($0.68 is the per ounce cost of setups and purchasing)
Setups = [($60,000 / 600) × 80] / 25,000 = 0.32
Purchasing = [($270,000 / 9,000) × 300] / 25,000 = 0.36
$1.29, since this is the avoidable cost of making the ink in-house, Goutam would not pay
148. Sherpa Company manufactures tents and sleeping bags. Tents are priced at $80, have variable cost of $55, and direct
fixed costs of $120,000. Sleeping bags are priced at $60, have variable cost of $35, and direct fixed costs of $66,000.
Common fixed costs equal $200,000. Last year, the division sold 5,000 tents and 10,000 sleeping bags.
A.
B.
C.
D.
Sales ($80 × 5,000; $60 × 10,000)
10,000)
Chapter 13 – Short-Run Decision Making: Relevant Costing
149. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is $30,000.
Information about the three products follows:
X
Y
Z
Anticipated production
5,600 lbs.
10,000 lbs.
2,500 lbs.
Selling price/lb. at split-off
$2.00
$1.00
$3.00
Additional processing costs/lb. after split-off
(all variable)
$1.50
$1.25
$.75
Selling price/lb. after further processing
$2.50
$3.75
$6.25
Allocated joint costs
$12,000
$10,500
$7,500
Required:
A.
B.
A.
Sell at split-off
Process further
Process further
B.
150. The operations of Grant Corporation are divided into the Fix Division and the Split Division. Projections for the next
year are as follows:
Fix
Split
Division
Division
Total
Sales revenue
$60,000
$40,000
$100,000
Variable expenses
20,000
15,000
35,000
Contribution margin
$40,000
$25,000
$ 65,000
Contribution margin
$125,000
Less: Direct fixed overhead
Segment margin
Less: Common fixed overhead
Operating income
$ (11,000)
A.
Segment margin for tents = $5,000
B.
Segment margin for sleeping bags = $184,000
C.
Operating income = ($11,000)
D.
Operating income without tents = ($16,000)
Chapter 13 – Short-Run Decision Making: Relevant Costing
Direct fixed expenses
12,500
30,000
42,500
Segment margin
$27,500
$ (5,000)
$ 22,500
Allocated common costs
10,000
7,500
17,500
Total relevant benefit (loss)
$17,500
$(12,500)
$ 5,000
Required:
A.
B.
A.
Sales
$60,000
Variable costs
Contribution margin
$40,000
Direct fixed costs
Segment margin
$27,500
Allocated common costs:
($10,000 + $7,500)
Operating income
$10,000
151. Classy Carry manufactures two types of handbags, the Clutch and the Tote, with unit contribution margins of $9 and
$15, respectively. Regardless of the type, each handbag must go through a stitching machine. The company owns 4
stitching machines and each provides 3,000 hours of machine time per year. Each Clutch handbag requires 12 minutes of
machine time and each Tote handbag requires 30 minutes of machine time. There are no other constraints.
Required:
A. What is the contribution margin per hour of machine time for each type of handbag?
B. What is the optimal mix of handbags?
C. What is the total contribution margin earned for the optimal mix?
Contribution margin per unit
Required machine time per unit*
Contribution margin per hour of machine time
C. 60,000 Clutch handbags × $9 CM = $540,000
152. Gordon Company produces two types of gears, Gear Q and Gear S, with unit contribution margins of $2 and $5,
Chapter 13 – Short-Run Decision Making: Relevant Costing
respectively. Each gear must spend time on a special machine. The firm owns ten machines that together provide 25,000
hours of machine time per year. Gear Q requires 0.10 hours of machine time; Gear S requires 0.4 hours of machine time.
A.
B.
C.
A.
Contribution margin per unit
Hours of machine time
Contribution margin per hour of machine
Since Gear Q has the higher contribution margin per hour of the scarce resource, Gordon should produce
Gear Q units = 25,000 / 0.10 = 250,000
Gear S units = 0
Total contribution margin = ($2 × 250,000) = $500,000
Gear Q units = 200,000
Remaining machine time = 25,000 hours − (200,000 × 0.10) = 5,000 machine hours
Gear S units = 5,000 / 0.40 = 12,500
Total contribution margin = ($2 × 200,000) + ($5 × 12,500) = $462,500
153. David Company produces two types of gears, Gear A and Gear B, with unit contribution margins of $6 and $8,
respectively. Each gear must spend time on a special machine. The firm owns five machines that together provide 12,000
hours of machine time per year. Gear A requires 12 minutes of machine time; Gear B requires 24 minutes of machine
time.
A.
B.
C.
A.
Contribution margin per unit
Hours of machine time
Contribution margin per hour of machine
only Gear A, and no Gear B.
Chapter 13 – Short-Run Decision Making: Relevant Costing
Gear A units = 12,000 / 0.20 = 60,000
Gear B units = 0
Total contribution margin = ($6 × 60,000) = $360,000
C.
Gear A units = 45,000
Remaining machine time = 12,000 hours − (45,000 × 0.20) = 3,000 machine hours
Gear B units = 3,000 / 0.40 = 7,500
Total contribution margin = ($6 × 45,000) + ($8 × 7,500) = $330,000
154. Auden makes three types of vitamin supplements, all of which require the use of encapsulating machines that have
capacity of 10,000 hours. Information on the three types (per case) follows:
Basic
Vita-Stress
Antioxidant+
Selling price
$100
$125
$160
Variable cost
50
70
90
Machine hours required
0.4
0.50
0.8
A.
B.
C.
Price
Contribution margin per unit
Hours of machine time required
CM per hour of machine time
Basic has the highest contribution margin per machine hour. Therefore, the company would devote all
Basic = (1 hour / 0.40 cases per hour) × 10,000 hours
Vita-Stress = 0
Antioxidant+ = 0
155. The Exchange Company is in the process of developing a new product called LS500. The company requires a 35%
profit. The LS500 current design carries with it a total cost of $125.
Required:
A. What is the sales price of the LS500 using markup costing?
B. Assume that the Exchange Company’s marketing department has determined that consumers are willing to pay $140
for the LS500. What is the target cost for this product?
A. $125 × 1.35 = $168.75
Chapter 13 – Short-Run Decision Making: Relevant Costing
$140 – $49 = $91 target cost
156. “The accounting decision making model is not useful in real life because it only looks at the numbers.” Critique this
statement and give an example for which it does not hold true.
157. Why does a special order decision frequently ignore fixed overhead?
You decide
158. The managers of Computer World are trying to determine the best method of deciding the price of their new ultra
minicomputer. This computer will present the customers with several unique features that their other computers do not
offer. They have asked you to explain the advantages and disadvantages of the two costing methods they are considering;
markup costing and target costing.
Match each statement with the correct item below.
a.
the difference in total cost between the alternatives in a decision
b.
determine whether or not a segment should be kept or dropped
c.
limited resources and limited demand for each product
d.
a specific set of procedures that produces a decision
e.
the point at which products that have common processes and costs of production become distinguishable
f.
method of determining the cost of a product based on the price that customers are willing to pay
Chapter 13 – Short-Run Decision Making: Relevant Costing
g.
decisions involving a choice between internal and external production
h.
products that have common processes and costs of production up to a point
i.
past costs that cannot be affected by future decisions
j.
a percentage applied to the base cost to cover other costs plus profit
k.
determine whether a specially priced order should be accepted or rejected
l.
determine whether it is more profitable to process a joint product further
159. Decision model
160. Sunk costs
161. Differential cost
162. Joint products
163. Keep–or-drop decisions
164. Make-or–buy decisions
165. Sell-or-process-further decision
166. Special-order decisions
167. Split-off point
168. Constraints
169. Markup
170. Target costing