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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.
Calculate the impact on operating income, using relevant amounts only, for keeping the
tennis shoe line.
B.
Calculate the impact on operating income, using relevant amounts only, for option 1.
C.
Calculate the impact on operating income, using relevant amounts only, for option 2.
D.
Calculate the impact on operating income, using relevant amounts only, for option 3.
E.
Which option is best?
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?
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?
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?
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.
Prepare a segmented income statement for Island Princess, showing results for rings,
juice, fertilizer, and in total. Do not allocate joint costs individually.
B.
Now suppose that Island Princess is considering the option of processing the skins further
into pet food which would sell for $1,000. Additional costs would be $450. Should this
be done?
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.
What is the profit earned by Rippey Corporation on the original 5,000 units?
B.
Should Rippey accept the special order if its goal is to maximize short-run profits? How
much will income be affected?
C.
Determine the minimum price Rippey would want to receive in order to increase profits
by $7,500 on the special order.
D.
When making a special-order decision, what qualitative aspects of the decision should
Rippey Corporation consider?
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.
If Salley makes the housing in-house, net income will be $__________________ Higher
or Lower?
B.
What is the highest price per unit that Salley would pay an outside company for the
housings?
C.
Now assume that all of the fixed overhead is allocated fixed overhead and will not be
affected by making the product in-house or purchasing it. If Salley makes the housing in-
house, net income will be $__________________ (Higher / Lower).
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
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.
Based on the cost figures, if Goutam purchases metallic ink from the outside supplier,
operating income will be $__________________ (Higher / Lower)?
B.
What is the highest price per ounce that Goutam would pay an outside supplier for the
ink?
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.
If Goutam purchases the ink from the outside supplier, operating income would be
$__________________ Higher Lower (circle one)
B.
What is the highest price per ounce that Goutam would pay an outside company for the
ink?
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.
What was the segment margin for tents last year?
B.
What was the segment margin for sleeping bags last year?
C.
What was Sherpa's operating income last year?
D.
If Sherpa stopped making tents, what would operating income be?
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.
Determine whether each product should be sold at split-off or processed further.
B.
Determine the firm's income if the firm processed all three products beyond split-off.
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
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.
Determine operating income for Grant Corporation as a whole if the Split Division is
dropped.
B.
Should the Split Division be eliminated?
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?
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.
What is the contribution margin per hour of machine time for Gear Q? Gear S?
B.
If Gordon faces only the production constraint (25,000 hours of machine time), how
many units of Gear Q should be produced? Gear S? What is the total contribution margin
from this product mix?
C.
Now suppose that Gordon cannot sell more than 200,000 units of each type of gear. How
many units of Gear Q should be produced? Gear S? What is the total contribution margin
from this product mix?
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.
What is the contribution margin per hour of machine time for Gear A? Gear B?
B.
If David faces only the production constraint (12,000 hours of machine time), how many
units of Gear A should be produced? Gear B? What is the total contribution margin from
this product mix?
C.
Now suppose that David cannot sell more than 45,000 units of each type of gear. How
many units of Gear A should be produced? Gear B? What is the total contribution margin
from this product mix?
Chapter 13 - Short-Run Decision Making: Relevant Costing
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.
What is the contribution margin per case for each type?
B.
What is the contribution margin per hour of machine time for each type?
C.
Based on your analysis in requirement B, if the company can sell all that it can make of
all of the products, how many of each type should be sold to maximize total contribution
margin?
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?
Chapter 13 - Short-Run Decision Making: Relevant Costing
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
