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Exam 6: Relevant Information for Special Decisions

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Question 1

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The Page Turner Publishing Company is trying to decide whether or not to accept a special order for its latest blockbuster.In making this decision,which level of costs will most likely be relevant to the decision?

A) Batch-level costs
B) Facility-level costs
C) Unit-level costs
D) None of the above.

E) B) and D)
F) B) and C)

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Question 2

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What is a segment elimination decision? Under what conditions should a company decide to eliminate a segment?

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A segment elimination ...

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Question 3

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Easton Company makes and sells scooters.Easton incurred the following costs in its most recent fiscal year: $\begin{array}{|l|l|}\hline{\text { Cost Items Appearing }} & \text { on the Income Statement } \\\hline \text { Materials cost (\$10 per unit) } & \text { Depreciation on manufacturing equipment } \\\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \\\hline \text { Labor cost (\$4 per unit) } & \text { Research and development costs } \\\hline \text { Advertising costs }(150,000 \text { per vear) } & \text { Real estate taxes on factory } \\\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \\\hline\end{array}$ Easton can currently purchase the scooters it makes from Weston Company.If the company purchases the scooters,Easton would still continue to use its own logo,sales staff,and advertising programs.If Easton outsources the scooters to Weston,which of the following costs would be relevant to the outsourcing decision?

Select the incorrect statement regarding sunk costs.

Mountain Gear has been using the same machines to make its name brand clothing for the last five years.A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery.The old machines cost the company $100,000.The old machines presently have a book value of $60,000 and a market value of $6,000.They are expected to have a five-year remaining life and zero salvage value.The new machines would cost the company $50,000 and have operating expenses of $9,000 a year.The new machines are expected to have a five-year useful life and no salvage value.The operating expenses associated with the old machines are $15,000 a year.The new machines are expected to increase quality,justifying a price increase,and thereby increasing sales revenue by $5,000 a year.Select the

King Company has two divisions whose most recent financial statements are shown below: $\begin{array}{c}\begin{array}{|l|}\hline\\\hline\\\hline \text {Unit sales}\\\hline \text {Sales}\\\hline \text {Less: cost of goods sold:}\\\hline \text {Unit-level production costs}\\\hline \text {Depreciation, production equipment}\\\hline \text {Gross margin}\\\hline \text {Less: operating expenses:}\\\hline \text {Unit-level selling and admiristrative}\\\hline \text {Corporate-level facility costs (fixed)}\\\hline \text {Net income (loss)}\\\hline\end{array}\begin{array}{l|}\hline \text {Commercial}\\\hline \text {Division}\\\hline \text {5,000}\\\hline \text { \$ 400,000 }\\\hline \\ \hline \text {175,000 }\\\hline \text {75,000} \\ \hline 150,000\\\hline \\\hline \text {40,000 }\\ \hline \text {\quad 12,500} \\ \hline \quad 97,500 \\ \hline \end{array}\begin{array}{l|} \hline\text { Residential }\\ \hline\text { Division }\\ \hline1,000\\ \hline\$100,000\\ \hline\\ \hline60,000 \\ \hline25,000 \\\hline \$ 15,000\\ \hline\\ \hline10,000 \\\hline 7,500 \\\hline \$(2,500 \\\hline \end{array} \end{array}$ Required: 1)Compute the impact on profit if the Residential Division is eliminated. 2)Do you recommend that King eliminate the Residential Division?

Dapper Dan produces a man's suit that sells for $200.Although the company's production capacity is 3,000 suits per year,only 2,500 suits are currently being produced and sold.At this level of production,the company incurs the following costs: $\begin{array}{|l|r|}\hline \text { Unit-level material cost per suit } & \$ 80 \\\hline \text { Unit-level labor cost per suit } & \$ 40 \\\hline \text { Unit-level overhead per suit } & \$ 20 \\\hline \text { Batch-level set-up cost for each batch of } 500 \text { suits } & \$ 1,200 \\\hline \text { Annual product-level costs } & \$ 15,000 \\\hline \text { Allocated facility-level costs } & \$ 50,000\\\hline\end{array}$ Easton Clothiers has offered to purchase 500 suits as a one-time special purchase at a price of $135. Required: Prepare a quantitative analysis that indicates whether the special order should be accepted.

Variable costs that are proxies for long-term costs should be used to measure profitability.

Differential revenues are expected future revenues that vary between the alternatives under consideration.

Stephenson Company is trying to decide which one of two contracts it will accept.The costs and revenues associated with each are listed below: $\begin{array} { | l | r | r | } \hline & \text { Contract X } & \text { Contract Z } \\\hline \text { Contract Revenue } & \$ 200,000 & \$ 260,000 \\\hline \text { Materials } & 10,000 & 10,000 \\\hline \text { Labor } & 88,000 & 120,000 \\\hline \text { Depreciation on Equipment } & 8,000 & 10,000 \\\hline \text { Cost Incurred for Consulting Advice } & 1,500 & 1,500 \\\hline \text { Allocated Portion of Overhead } & 5,000 & 3,000 \\\hline\end{array}$ The equipment was purchased last year and has no resale value.Which of these amounts is relevant for the selection of one contract over another?

Lindsay purchased a raffle ticket for $5.Just before the grand prize drawing two people tried to buy her ticket.The first person offered $30,and another offered $65.What is Lindsay's opportunity cost of keeping the raffle ticket?

Rachel is deciding whether to remain in the home she has lived in for the past ten years,which is located very near her work,or to move into a newer home that is located in the suburbs further from her job.The old house was purchased for $160,000 and has a market value of $220,000.The new home can be purchased for $285,000.Which of the following is not relevant to Rachel's decision?

Ethan paid $3 for a bottle of ThirstAid.Later while on a hiking trip,she was offered $8 for the ThirstAid.Select the correct statement from the following:

Omega Company reported the following information for the company's two products: $\begin{array}{|l|c|c|}\hline & \text { Product } \mathrm{X} & \text { Product Y } \\\hline \text { Selling price per unit } & \$ 35 & \$ 25 \\\hline \text { Variable cost per unit } & 20 & 15 \\\hline\end{array}$ Assume that 75,000 machine hours are available;product X takes 4 machine hours to produce,and product Y takes 2 machine hours to produce.The company can sell all it can make of either product.Which of the following statements is

Easton Company makes and sells scooters.Easton incurred the following costs in its most recent fiscal year: $\begin{array}{|l|l|}\hline{\text { Cost Items Appearing }} & \text { on the Income Statement } \\\hline \text { Materials cost (\$10 per unit) } & \text { Depreciation on manufacturing equipment } \\\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \\\hline \text { Labor cost (\$4 per unit) } & \text { Research and development costs } \\\hline \text { Advertising costs }(150,000 \text { per vear) } & \text { Real estate taxes on factory } \\\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \\\hline\end{array}$ Easton can currently purchase the scooters it makes from another company.If the company purchases the scooters,Easton would still continue to use its own logo,sales staff,and advertising programs.Which of the following costs would be classified as a facility-level cost?

Asset replacement decisions involve:

Select the correct statement regarding relevant revenues.

Time Unlimited makes grandfather clock kits that it sells to hobbyists who then assemble and finish the clocks.The company has the capacity to make 5,000 of the kits,and its current volume is 3,000 kits.The costs of a clock kit are: $300 for unit-level materials,$200 for unit-level labor,and $150 for an allocation of facility-level overhead.The normal selling price is $950.The Clock Builder has received a special order for 600 clock kits at a price of $600 each. Required: Should The Clock Builder accept the special order? Support your answer with appropriate computations.

Jason is trying to decide which one of two job offers he will accept.Several items are presented below: $\begin{array} { | l | r | r | } \hline & \text { Job Offer A } & \text { Job Offer B } \\\hline \text { (1) Base salary } & \$ 40,000 & \$ 40,000 \\\hline \text { (2) Overtime compensation } & \text { Comp. time } & \text { Hourly rate } \\\hline \text { (3) Moving allowance } & \$ 2,000 & \$ 2,000 \\\hline \text { (4) Signing bonus } & \$ 1,000 & \$ 0 \\\hline \text { (5) Job search costs incurred } & \$ 500 & \$ 500 \\\hline\end{array}$ Which of the above items would be considered relevant costs?

The Mighty Music Company produces and sells a desktop speaker for $100.The company has the capacity to produce 50,000 speakers each period.At capacity,the costs assigned to each unit are as follows: $\begin{array} { | l | l | } \hline \text { Unit level costs } & \$ 45 \\\hline \text { Product level costs } & \$ 15 \\\hline \text { Facility level costs } & \$ 5 \\\hline\end{array}$ The company has received a special order for 500 speakers.If this order is accepted,the company will have to spend $15,000 on additional costs.Assuming that no sales to regular customers will be lost if the order is accepted,at what selling price will the company be indifferent between accepting and rejecting the special order?