Question 1

Two or more different products that are manufactured in the same production period are known as joint products.

Accepted Answer

The answer of Two or more different products that are...

Question 2

The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier.
New equipment for producing the subassemblies can be purchased at a cost of $400,000.The equipment would have a five-year useful life (the company uses straight-line depreciation)and a $50,000 salvage value.
Alternatively,the subassemblies could be purchased from an outside supplier.The supplier has offered to provide the subassemblies for $9 each under a five-year contract.
Hyatt Company's present costs per unit of producing the subassemblies internally (with the old equipment)are given below.The costs are based on a current activity level of 40,000 subassemblies per year:

$\begin{array}{l}
\begin{array}{lll}
\text { Direct Materials}\
\text { Direct Labour}\
\text { Variable Overhead}\
\text { Fixed Overhead (  \$ 0.80 supervision, \$ 0.90 depreciation, }\
\text { and \$ 2 general company overhead)}\
\text { Total Cost per Unit}\
\end{array}
\begin{array}{lll}
\$ 3.00 \
\$ 4.20 \
\$ 0.60 \
\
\$ 3.70 \
\$ 11.50
\end{array}
\end{array}$

The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company's total general company overhead would not be affected by this decision. Assume direct labour is a variable cost.

Required:

Assume that 40,000 subassemblies are needed each year. Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action.

Accepted Answer

The answer of The Hyatt Company is trying to decide...

Question 3

(Appendix 12A)The markup over cost under the absorption costing approach would increase if the unit product cost increases,holding everything else constant.

Accepted Answer

The answer of (Appendix 12A)The markup over cost under the...

Question 4

Using the profitability index,it is easy to decide which product is less profitable and should be de-emphasized.

Accepted Answer

The profitability index is a measure of the profitability of an investment, not a product. It compares the present value of expected future cash flows to the initial investment. Therefore, it cannot be used to decide which product is less profitable and should be de-emphasized.

Question 5

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product or not.

Accepted Answer

Fixed costs can also be relevant if they are avoidable or directly attributable to the product in question. Decisions on eliminating a product should consider all costs that would change as a result of the decision.

Question 6

Foster Company makes 20,000 units per year of a part that it uses in the products it manufactures.The unit product cost of this part is computed as follows:
$\begin{array}{lccc}
\text { Direct Materials } & \$ 24.70 \
\text { Direct Labour } & \$ 16.30 \
\text { Variable Manufacturing Overhead } & \$ 2.30 \
\text { Fixed Manufacturing Overhead } & \$ 13.40 \
\text { Unit Product Cost } & \$ 56.70
\end{array}$

An outside supplier has offered to sell the company all the parts that Foster needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year.

If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

Required:

a) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
b) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year?

Accepted Answer

The answer of Foster Company makes 20,000 units per year...

Question 7

Madison Optometry is considering the purchase of a new lens grinder to replace a machine that was purchased several years ago.Selected information on the two machines is given below:

$\begin{array}{l}
\begin{array}{lll}
\ \
\text {Original cost when new}\
\text {Accumulated depreciation to date}\
\text {Current salvage value}\
\text {Annual operating cost}\
\text {Remaining useful life}\
\end{array}
\begin{array}{lll}
\text { OId} &\text { New} \
\text { Machine } &\text { Machine } \
 \$ 80,000 & \$ 85,000 \
32,000 & ---\
26,000 &--- \
4,000 & 3,000 \
4 \text { years } & 4 \text { years}
\end{array}
\end{array}$

Ignore income taxes and the time value of money in this problem.

Required:

Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years.

Accepted Answer

The answer of Madison Optometry is considering the purchase of...

Question 8

The cost of resources that has no alternative use in a make or buy decision has an opportunity cost of zero.

Accepted Answer

A resource that has no alternative use has no opportunity cost because it cannot be used in any other way. Therefore, its cost is irrelevant in a make or buy decision.

Question 9

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin,then the firm is better off economically if the product is dropped.

Accepted Answer

If dropping a product saves more in fixed costs than it loses in contribution margin (the amount of revenue left after subtracting variable costs), then the firm's overall profitability will increase by dropping the product. Thus, the firm is better off economically by dropping the product.

Question 10

(Appendix 12A)The markup over cost under the absorption costing approach would increase if the required rate of return increases,holding everything else constant.

Accepted Answer

The markup over cost under absorption costing includes a fixed overhead component based on the required rate of return. Therefore, if the required rate of return increases, the markup over cost will also increase, as the fixed overhead allocation will be higher.

Question 11

Benjamin Signal Company produces products R,J,and C from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced.Data for Benjamin's operations for the current year are as follows:

$\begin{array}{lccc}
\text { Product } & \begin{array} { l } 
\text { Units } \
\text { Produced }
\end{array} & \begin{array} { l } 
\text { Allocated Joint } \
\text { Production Cost }
\end{array} & \begin{array} { c } 
\text { Sales Value } \
\text { at Split-off }
\end{array} \
\hline \mathrm { R } & 8,000 & \$ 32,000 & \$ 76,000 \
\mathrm {~J} & 10,000 & 40,000 & 71,000 \
\mathrm { C } & 5,000 & 20,000 & 48,000
\end{array}$

Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000.

Required:

Which products should be processed beyond the split-off point?

Accepted Answer

The answer of Benjamin Signal Company produces products R,J,and C...

Question 12

(Appendix 12A)In target costing,the anticipated competitive market price of a product determines its maximum allowable product cost.

Accepted Answer

This statement accurately describes the fundamental principle of target costing, which involves starting with the expected market price and working backward to determine the maximum cost of producing the product while still being able to achieve a desired profit margin.

Question 13

(Appendix 12A)The absorption costing approach to cost-plus pricing will result in attaining the company's required rate of return only if forecasted unit sales are realized,holding all other things constant.

Accepted Answer

Absorption costing takes into account all manufacturing costs, including fixed costs, and spreads them over the total units produced. As a result, the selling price is set at a level that covers all production costs and provides a desired profit margin. However, this approach assumes that the projected sales volume will be achieved. If actual sales fall short of projections, the cost-plus price may not yield the desired rate of return.

Question 14

(Appendix 12A)If a company sells a product for less than its budgeted unit product cost under absorption costing,then the company will lose money.

Accepted Answer

Selling a product for less than its budgeted unit product cost under absorption costing does not necessarily mean the company will lose money, as the total cost includes fixed costs that are spread over all units. If the selling price covers the variable costs and contributes towards covering fixed costs, the company could still be profitable overall, especially if the reduced price leads to higher volume sales.

Question 15

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

Accepted Answer

The answer of Joint production costs are relevant costs in...

Question 16

(Appendix 12A)The time and material approach pricing will result in attaining the company's desired profit only if forecasted billable activity is realized,holding all other things constant.

Accepted Answer

The time and material approach pricing is based on the assumption that the company will bill for the actual amount of time and materials used to complete the project. Therefore, if the forecasted billable activity is realized, the company will be able to attain its desired profit. However, if the actual billable activity falls short of the forecasted amount, the company's profit will be lower than expected.

Question 17

Managers should pay little attention to bottleneck operations because they have limited capacity for producing output.

Accepted Answer

Managers should pay close attention to bottleneck operations as they have limited capacity and can often determine the overall output and efficiency of the entire production process. Identifying and addressing bottlenecks can help increase overall productivity and output.

Question 18

Opportunity costs are recorded in the accounts of an organization.

Accepted Answer

Opportunity costs are not recorded in the accounts of an organization because they refer to the benefits foregone from choosing one option over another and do not involve actual monetary transactions.

Question 19

All other things equal,it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.

Accepted Answer

This statement is true based on the principle of relevant costing. If the incremental revenue from further processing exceeds the incremental costs, then the additional processing will generate a profit. However, if the incremental costs exceed the incremental revenue, then it would not be profitable to continue processing beyond the split-off point.

Question 20

Bowen Company produces products P,Q,and R from a joint production process.Each product may be sold at the split-off point or be processed further.Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced.Data for Bowen's operations for the current year are as follows:

$\begin{array}{lrrr}
&&\text {Allo cated Joint  }&\text { Sales Value}\
\text {Product }&\text { Units Produced}&\text { Production Cost}&\text { at Split-off}\
\mathrm{P} & 4,000 & \$ 28,000 & \$ 38,000 \
\mathrm{Q} & 7,000 & 49,000 & 47,000 \
\mathrm{R} & 2,000 & 14,000 & 16,000
\end{array}$

Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $65,000. Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $25,000.

Required:

Which products should be processed beyond the split-off point?

Accepted Answer

The answer of Bowen Company produces products P,Q,and R from...

Quiz 12: Relevant Costs for Decision Making

Two or more different products that are manufactured in the same production period are known as joint products.

(Appendix 12A)The markup over cost under the absorption costing approach would increase if the unit product cost increases,holding everything else constant.

Using the profitability index,it is easy to decide which product is less profitable and should be de-emphasized.

Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product or not.

The cost of resources that has no alternative use in a make or buy decision has an opportunity cost of zero.

If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin,then the firm is better off economically if the product is dropped.

(Appendix 12A)The markup over cost under the absorption costing approach would increase if the required rate of return increases,holding everything else constant.

(Appendix 12A)In target costing,the anticipated competitive market price of a product determines its maximum allowable product cost.

(Appendix 12A)The absorption costing approach to cost-plus pricing will result in attaining the company's required rate of return only if forecasted unit sales are realized,holding all other things constant.

(Appendix 12A)If a company sells a product for less than its budgeted unit product cost under absorption costing,then the company will lose money.

Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.

(Appendix 12A)The time and material approach pricing will result in attaining the company's desired profit only if forecasted billable activity is realized,holding all other things constant.

Managers should pay little attention to bottleneck operations because they have limited capacity for producing output.

Opportunity costs are recorded in the accounts of an organization.

All other things equal,it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing.