Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 23
Chapter 23
Relevant Costing for
Managerial Decisions
QUESTIONS
1. The five steps are: (1) define the decision task, (2) identify alternative courses of
2. Nonfinancial information is relevant to decision making because it includes
3. A relevant cost is a cost that differs between two alternatives in a decision
4. Incremental revenues are the additional revenues generated by selecting one
course of action over another.
5. Qualitative factors can include impacts on relationships with other customers,
impact on the relationship with the customer buying more in a “special offer”
6. An out-of-pocket cost requires a current outlay of cash. An opportunity cost is
7. Sunk costs are irrelevant because they remain the same whether the product is
sold in its present condition or processed further.
8. There are virtually no incremental costs associated with shipping the additional
iPod. The company’s employees would not receive any additional compensation
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9. Apple must consider such factors as: contribution margin lost from the closing of
the store and fixed costs saved from the closing. For instance it is possible that a
manager who is employed by the store will not be laid off but will be transferred to
10. The company might be willing to sell the units internationally if (a) the company
has excess capacity, (b) the incremental costs of manufacturing and selling the
11. Price-setters are able to have some control over selling prices, due to some
12. Time and materials pricing is a method that combines the costs of labor and
materials on a project to compute a price. Both the labor and materials costs
include charges for overhead costs and a profit margin.
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QUICK STUDIES
Quick Study 23-1 (5 minutes)
Item
Relevant
Not relevant
a.
Selling price of $6.00 per unit ………………………………………….
X
b.
Direct materials cost of $1.00 per unit …………………………..
X
c.
X
e.
Fixed manuf. overhead of $0.75 per unit ………………………….
g.
X
Quick Study 23-2 (10 minutes)
Additional operating income if Helix accepts the order—
Per unit
Total for
2,000 units
Revenue …………………………………………………………………………
$6.00
$12,000
Direct materials ……………………………………………………….
(1.00)
(2,000)
(2.00)
(4,000)
Variable manufacturing overhead …………………………..
(1.50)
(3,000)
$ 2,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 23
Quick Study 23-3 (5 minutes)
Item
Relevant
Not relevant
a.
$15,000 cost already incurred …………………………..……………..
X
c.
$22,000 additional processing costs …………………………..
$35,000 revenues from processing further ………………………
Quick Study 23-4 (5 minutes)
Quick Study 23-5 (15 minutes)
Revenue if repaired (10,000 x $5) ………………………………….
$50,000
Revenue if sold as is (10,000 x $2) ………………………………..
(20,000)
Incremental revenue …………………………………………………….
Cost to repair ……………………………………………………………….
(18,000)
Incremental net income if the units are repaired ……………
$12,000
Quick Study 23-6 (15 minutes)
Incremental cost analysis
Costs of purchasing
Cost to purchase …………………………..………………………………………………….
Revenue loss from reduced price ($13.50 – $12.00) …………………………..
Total cost ……………………………………………………………………………………
Savings of purchasing
Costs eliminated if purchased ($5 of $9) ……………………………………………
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Quick Study 23-7 (10 minutes)
(Per unit)
Make
Buy
Direct materials …………………………..………………..
$2.25
—-
Purchase price ……………………………………………..
Quick Study 23-8 (15 minutes)
Sell as is
Process
further
Incremental revenue ……………………………………..
$67,500
$468,750*
Incremental costs ($250 x 1,250) ……………………
Quick Study 23-9 (5 minutes)
(Per unit)
Sell as is
Process
further
Incremental revenue ……………………………………..
$15.00
$21.00
Incremental costs …………………………………………
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Quick Study 23–10 (15 minutes)
Scrap
Rework
Sale of scrapped/reworked units …………………..
$30,000
$120,000
Quick Study 23-11 (15 minutes)
X
Y
Contribution margin per unit …………………………………………..
$ 5.00
$ 4.00
Production hours per unit ……………………………………………….
1/2
1/3
Contribution margin per production hour ………………………..
Quick Study 23–12 (15 minutes)
Avoidable
Unavoidable
Expenses
Expenses
Cost of goods sold ……………………………………….
$56,000
—-
Direct expenses ……………………………………………
9,250
$1,250
1,600
Quick Study 23-13 (5 minutes)
Avoidable
Expenses
Variable costs……………………………………………….
$145,000
Direct fixed costs …………………………..……………..
Quick Study 23-14 (10 minutes)
INCREMENTAL INCOME FROM REPLACING MACHINE
Cost to buy new machine ……………………………………………………….
$(112,500)
$ 12,500
Quick Study 23–15 (15 minutes)
INCREMENTAL INCOME FROM NEW BUSINESS
Sales (750 units @ $250) ……………………………………………………….
$ 187,500
1380
Quick Study 23-16 (10 minutes)
Total Costs
Direct materials ($100 x 10,000) …………………….
$1,000,000
Direct labor ($30 x 10,000) …………………………..
300,000
Per Unit
Total cost ($2,500,000/10,000) ……………………….
$250.00
Quick Study 23-17 (10 minutes)
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Quick Study 23-18 (10 minutes)
Variable
Costs
Direct materials ($110 x 10,000) …………………….
$1,100,000
Per Unit
Variable cost ($1,900,000/10,000) …………………..
$190.00
Markup on variable cost ($190 x 35.58%) ……….
Selling price ………………………………………………….
67.60
$257.60
Quick Study 23–19 (5 minutes)
Quick Study 23-20 (10 minutes)
Time and Materials Price Quote
Price Quote
Direct labor (80 hours x $55 per DLH) ………………………..
$4,400
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Quick Study 23-21 (10 minutes)
a.
Rate per Hour of Direct Labor
Direct labor rate per hour …………………………………………………..
$ 50
b.
Materials Markup per Dollar of Materials Cost (%)
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EXERCISES
Exercise 23-1 (20 minutes)
Make
Buy
Variable costs (65,000 @ $1.95) …………………….
$126,750
—-
RECOMMENDATION: Note that the allocated fixed costs of $62,000 are not
relevant to this managerial decision because they will continue whether the
part is made or bought. Therefore, the incremental costs of making the
Exercise 23-2 (20 minutes)
Make
Buy
Variable costs (40,000 @ $1.95) …………………….
$78,000
—-
RECOMMENDATION: Note that the allocated fixed costs of $58,500 are not
relevant to this managerial decision because they will continue whether the
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Exercise 23-3 (25 minutes)
Sell as is
Process further
Incremental revenue ……………………………………..
$700,000
$1,372,000*
*Revenue from processed products
Units
Price
Total
Product B ……………………………………………………………………
5,600
$105
$ 588,000
Product C ……………………………………………………………………
ALTERNATE SOLUTION FORMAT
Net income (loss) from processed products
Revenue if processed further…………………………………………
$1,372,000
Less: Additional costs of processing…………………………...
RECOMMENDATION: This analysis shows that the company will be better off
Exercise 23-4 (15 minutes)
Instructor note: In the first printing of this edition, this exercise included the sentence: “If the
units are sold as is, the company will be able to build 22,000 replacement units at a cost of $6
each and sell them at the full price of $8.50 each.” That sentence has been deleted in subsequent
printings and in Connect.”
Scrap
Rework
Sale of scrapped/reworked units …………………..
$44,000
$187,000*
(1) The incremental income from selling as scrap is $44,000 (22,000 x $2.00).
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Exercise 23-5 (15 minutes)
INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING
Revenue if processed further (7,000 x $25) ………………………………………..
$175,000
Revenue if sold as is (7,000 x $8) ………………………………………………………
56,000
Incremental revenue …………………………………………………………………………
Less incremental cost of processing …………………………………………………
125,000
Incremental net income …………………………………………………………………….
RECOMMENDATION: Varto should not process these units further, as they will
be $6,000 worse off if they do so. (Note that the $22 per unit manufacturing
cost is not relevant because it is a sunk cost.)
Exercise 23-6 (30 minutes)
Preliminary computations
1. FOR PRODUCT TLX
Maximum sales ……………………………………………………….
4,700
units
Hours needed per unit ……………………………………………………
0.50
Total hours used (4,700 x 0.50) ……………………………………….
2,350
hours
Remaining hours (2,750 – 2,350)……………………………………..
hours
Hours needed per unit ……………………………………………………
0.20
Maximum production* (400/0.20) …………………………..………..
2,000
units
SALES MIX RECOMMENDATION: These results suggest the company
should manufacture as many units of Product TLX as it can produce
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Exercise 23–6 (continued)
1. FOR PRODUCT TLX
Maximum sales ……………………………………………………….
4,700
units
Hours needed per unit ……………………………………………………
0.50
Total hours used (4,700 x 0.50) ……………………………………….
2,350
hours
Remaining hours (2,750 – 2,350)……………………………………..
hours
Hours needed per unit ……………………………………………………
0.20
*Below market maximum production.
SALES MIX RECOMMENDATION: These results suggest the company
should manufacture as many units of Product TLX as it can produce
2. CONTRIBUTION MARGIN FROM THE RECOMMENDED SALES MIX
Units
Contribution
per Unit
Total
Product TLX ………………………………..
4,700
$10.20
$47,940
Product MTV ……………………………….
2,000
Total ……………………………………………
2. CONTRIBUTION MARGIN FROM THE RECOMMENDED SALES MIX
Units
Contribution
per Unit
Total
Product TLX ………………………………..
4,700
$10.20
$47,940
Product MTV ……………………………….
2,000
Total ……………………………………………
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Exercise 23-7 (30 minutes)
K1
S5
G9
Selling price per unit………………………………
$160
$112
$210
Exercise 23-8 (15 minutes)
If canoes are discontinued
Revenue lost ………………………………………………………….
$2,000,000
Variable costs saved
Direct materials ……………………………………………………
$450,000
Direct labor ………………………………………………………….
Variable overhead ………………………………………………..
Variable selling & administrative ………………………….
200,000
Total variable costs saved ……………………………………..
Income lost ……………………………………………………………
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 23
Exercise 23-9 (30 minutes)
Instructor note: In all cases, the total unavoidable expenses of $107,800 remain the same
because they cannot be avoided by eliminating departments.
1. DEPARTMENTS WITH EXPECTED NET LOSSES ELIMINATED
Total
M
N
O
P
T
Sales…………………………..
$119,000
$63,000
$ 0
$56,000
$ 0
$ 0
Expenses
2. DEPARTMENTS WITH LESS SALES THAN AVOIDABLE EXPENSES ELIMINATED
Total
M
N
O
P
T
Sales…………………………..
$161,000
$63,000
$ 0
$56,000
$42,000
$ 0
Expenses
0
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Exercise 23-10 (20 minutes)
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine ……………………………………………………….
$(115,000)
Cash received to trade in old machine ………………………………………………
52,000
Reduction in variable manufacturing costs* …………………………..
Total change in net income ……………………………………………………….
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine ……………………………………………………….
$(125,000)
Cash received to trade in old machine ………………………………………………
52,000
Reduction in variable manufacturing costs** …………………………..
Total change in net income ……………………………………………………….
Exercise 23-11 (20 minutes)
(1)
Total
Costs
Direct materials ($100 x 10,000) …………………….
$ 1,000,000
Direct labor ($25 x 10,000) …………………………..
Variable overhead ($20 x 10,000) …………………..
250,000
200,000
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Exercise 23–11 (continued)
(3)
Per Unit
Total cost …………………………………………………………………..
$240
Exercise 23-12 (20 minutes)
(1) Variable cost per unit
Variable Cost
Per Unit
Direct materials …………………………..……………………………..
$ 70
Direct labor ………………………………………………………………..
40
(3) Selling price using variable cost method
Per Unit
Total variable cost ……………………………………………………..
$150
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Exercise 23–13 (25 minutes)
Normal
Additional
Combined
Volume
Volume*
Total
Sales …………………………………………..
$2,250,000
$180,000
$2,430,000
Costs and expenses
Direct materials …………………………
300,000
30,0001
330,000
Administrative expenses …………..
The company should accept the offer as it increases income by $3,000.
1 (15,000 x $2) 2 (15,000 x $4)
* ADDITIONAL VOLUME COMPUTATIONS
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 23
Exercise 23-14 (20 minutes)
Normal
Additional
Combined
Volume
Volume
Total
Sales …………………………………………..
$8,000,000
$1,500,000
$9,500,000
Costs and expenses
Direct materials …………………………
1,000,000
250,000
1,250,000
Direct labor ……………………………….
1,200,000
300,000
1,500,000
Variable overhead ……………………..
200,000
1,000,000
Fixed overhead………………………….
1,400,000
1,400,000
Variable selling and admin. exp. ..
1,120,000
380,000
1,500,000
Fixed selling and admin. exp. …….
Total costs and expenses ………….
Calculations:
Normal volume sales: 80,000 units x $100 per unit = $8,000,000
For the instructor, additional factors Goshford might consider:
Other factors that Goshford should consider before deciding whether to accept the new
business are:
• Will regular customers demand a reduction in their selling price if they hear of the sale
to the new customer?