Relevant costs problems and solutions 2016 PDF

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Managerial Accounting Relevant costs decisions 1. Company A manufactures bicycles. It can produce 1,000 units in a month for a fixed cost of $100,000 and variable cost of $500 per unit. Its current demand is 600 units which it sells at $1,000 per unit. It is approached by Company B for an order of 200 units at $700 per unit. Should the company accept the order?

The company should accept the order since the will general a contribution margin of $200 per bicycle ($700 - $500).

2. The estimated costs of producing 6,000 units of a component are: Per Unit Total Direct Material $10 $60,000 Direct Labor 8 48,000 Applied Variable Factory Overhead 9 54,000 Applied Fixed Factory Overhead 12 72,000 $1.5 per direct labor dollar $39 $234,000 The same component can be purchased from market at a price of $29 per unit. If the component is purchased from market, 25% of the fixed factory overhead will be saved. Should the component be purchased from the market?

Relevant costs: To make Direct Material Direct Labor Applied Variable Factory Overhead Applied Fixed Factory Overhead $1.5 per direct labor dollar (25%) Purchase price Total cost

To buy

$10 8 9 3

$30

$29 $29

The component should be purchased from market because it would be more cost effective by $1 x 6,000= $6,000.

3. Product A and B are produced in a joint process. At split-off point, Product A is complete whereas product B can be process further. The following additional information is available: Product A B Quantity in Units 5,000 10,000 Selling Price Per Unit: At Split-Off $10 $2.5 If Processed Further $5 Costs After Split-Off $20,000 Perform sell-or-process-further analysis for product B. Should the company sell at split-off or process further?

Contribution to income from selling at split-off: 10,000 x $2.5 =$25,000 Contribution to income from selling it after processing it further: 10,000 x $5 = $50,000 - $20,000 = $30,000 The company should sell B after processing it further. The increase in operating income is $5,000.

4. A company has three products: Product A, Product B and Product C. Income statements of the three product lines for the latest month are given below: Product Line A B C Sales $467,000 $314,000 $598,000 Variable Costs 241,000 169,000 321,000 Contribution Margin $226,000 $145,000 $277,000 Direct Fixed Costs 91,000 86,000 112,000 Allocated Fixed Costs 93,000 62,000 120,000 Net Income $42,000 − $3,000 $45,000 Use the incremental approach to determine if Product B should be dropped.

Product B should not be dropped because Allocated fixed costs are considered unavoidable and the company will incurred those regardless of the decision to drop or keep B. If they keep product B operating income will increase by $59,000 ($145,000 - $86,000).

5. A company has 4,000 machine hours of plant capacity per month which are to be allocated to products A and B. The following per unit figures relate to the products: Product A B Sale Price $300 $240 Costs: Direct Material 100 70 Direct Labor 65 50 Variable Overhead 20 40 Fixed Overhead 15 30 Variable Operating 40 20 Expenses Total Costs $240 $210 Net Income $60 $30 Machine Hours Required 1.5 1.00

Assuming that the company can sell all its products A output but only 3,500 units of product B , determine how many machine hours shall be allocated to each product.

A Contribution margin per unit $75 Machine hours required / 1.5 Contribution margin per machine hour $50

B

/

$60 1.00 $60

B is the product with the highest contribution margin per machine hour. The company should produce 3,500 units of product B. It will take 1 hour per unit. Total time 4,000 – 3,500 = 500 to be allocated to product A. Optimal product mix: A: 500/1.5 = 333 units B: 3,500 units

Units Contribution margin Total CM

A 333

B 3,500

$75 $24,975

$60 +

210,000 = $234,975

6. Lars Company manufactures a part for use in its production of coats. When 10,000 items are produced, the costs per unit are: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total

$0.70 3.50 1.40 1.80 $7.40

Kalamar Company has offered to sell to Lars Company 10,000 units of the part for $7.00 per unit. The plant facilities could be used to manufacture another item at a savings of $8,000 if Lars accepts the offer. In addition, 75% per unit of fixed manufacturing overhead on the original item would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Lars Company? By how much? To make Direct materials $0.70 Direct manufacturing labor 3.50 Variable manufacturing overhead 1.40 Fixed manufacturing overhead (75%) 1.35

To buy

Foregone savings ($8,000/10,000) .80 Purchase price $7.00 Total $7.75 $7.00 Increase in operating income $.75 x 10,000 = $7,500 if purchased from Kalamar Company....