Chapter 7
Relevant Costs and Product Planning Decisions
Concept Questions
1. (LO 1—Special order decisions)
2. (LO 1—Special order decisions: relevant costs)
In a special order decision with excess capacity, the relevant costs are likely to
3. (LO 2—Make or buy decision: relevant costs)
The relevant costs are typically the costs of buying the product from an outside
4. (LO 2—Make or buy decision: qualitative factors)
5. (LO 2—Outsourcing: disadvantages)
Disadvantages of outsourcing the production of a component part include:
6. (LO 2—Make or buy decision: relevant costs)
Fixed costs that are unavoidable would be irrelevant as well as any sunk costs
Solutions Manual
7. (LO 3—Dropping a product line)
The decision to drop a product should be based on many factors. From a
8. (LO 4—Limited resources)
9. (LO 5—Bottlenecks and the theory of constraints)
Management should focus its time and resources to alleviate the bottleneck by
10. (LO 6—Sell or process further)
Exercises
1. (LO 1—Special order pricing decision)
2. (LO 1—Special order decision: Relevant costs)
Chapter 7: Relevant Costs and Product Planning Decisions
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3. (LO 2—Make or buy: Effect on income)
Relevant cost to make themselves:
Variable costs:
Direct materials
$ 3
Direct labor
Variable overhead
2
Relevant VC to make (per unit)
$ 8
Total relevant VC to make
$ 80,000
Add: Relevant FC to make
(new supervisor)
$ 112,000
Increase in cost if make themselves
$ 2,000
Decrease in overall CM
$(15,000)
Decrease in FC
Overall decrease in operating income
$(15,000)
4. (LO 2—Make or buy decision)
The relevant costs of making the product are the variable costs of $47 per unit. If
5. (LO 3—Impact of dropping a product line)
If Product C is dropped, operating profit will decrease an additional $15,000
6. (LO 3—Impact of dropping a product line)
If painted rockers are dropped, overall operating profit will not be affected as
follows:
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Overall decrease in operating income
7. (LO 4—Limited resource decision)
To maximize profits, the company should produce the product with the highest
contribution margin per unit of limited resource. In this case, they should produce
Compact Disc 1, which has a CM/machine hour of $4.
Compact Disc 1
Compact Disc 2
Less: Fixed costs
Maximum net income
Although not required to answer the problem, notice that the maximum net
income Kerrie would be able to have is $160,000.
8. (LO 4—Maximizing contribution margin given a limited resource)
A. The contribution margin for queen beds is $75 per unit ($525 sales price
B. Given the limited resource of stuffing hours, Soft Mattress, Inc., should
Incremental revenue per chair ($125 – $85)
Incremental cost per chair ($90 – $65)
Incremental profit per chair
Chapter 7: Relevant Costs and Product Planning Decisions
9. (LO 6—Sell or process further decision)
The company should sell the units “as is” because all previous costs of
10. (LO 6—Sell or process further decision)
Based on the computations below, DePaulis should finish the chairs since the
Problems
11. (LO 1—Special order decision: Qualitative factors)
A.
Expected level of operating profit:
Sales
$500,000
Variable manufacturing costs (20,000 $10)
200,000
Fixed manufacturing costs
Fixed marketing & admin. costs
Net income
B.
Yes, accepting the special order would increase profits by $8,000:
Increase in incremental revenue (1,000 $20)
$20,000
Increase in profit
C.
Accepting this special order would increase profits by $27,000 as follows:
Incremental revenue (3,000 $19)
$57,000
Incremental profit
D. Considering the impact of special orders on existing customers is always
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12. (LO 2—Make or buy decision: Relevant costs and qualitative factors)
A. The total relevant costs of making the part are $48 per unit or $480,000 in
total which includes direct materials, direct labor, variable overhead, and
13. (LO 3—Temporary suspension of operations: Qualitative factors)
A. Some fixed costs will continue to be incurred despite the temporary
B. Suspension of operations would be desirable when sales volume drops
below 6,000 units.
C. Shutting down operations gives the company a bad image. Attempts to
14. (LO 4 and 5—Limited resource decision)
A. This decision should be based on the contribution margin per hour of
machine time.
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Contribution margin per pair of boots:
B. The company can sell 1,000 pairs of each product each month.
Manufacturing 1,000 pairs of men’s boots requires 250 hours of machine
15. (LO 6—Sell or process further decision)
A. No, it would not be advantageous to smoke the salmon. The incremental
cost of $1.25 per pound ($3.25 – $2.00) is greater than the incremental
revenue of $1.00 ($6.50 – $5.50).