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Exam 13: Cost Management and Decision Making

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Question 31

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Variable costs are always relevant in decision making and are the only costs that should be considered.

A) True
B) False

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Question 32

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Because facility costs are fixed and do not change with volume changes, these cost are never relevant in considering alternatives.

A) True
B) False

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Question 33

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To achieve target costing, organizations are often required to redesign their systems.

The Sheila Cabot Construction Company (SCCC) is building a local stadium. They need an office at the stadium site. SCCC can build the office themselves with material costing $50,000 and labor costs of $13,000. When the company takes apart the building at the end of the project, 20% of the material would be reusable. Alternatively, SCCC can rent a pre-fabricated building at a cost of $1000 per month with no set-up or dismantling costs. It will benefit SCCC to build the office if it expects the stadium project to exceed

The target profit equals the desired return on sales times the contribution margin.

(CMA adapted) Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. Required: (1) If Regis purchases the plugs but does not rent the unused facility, how much would the company save or lose per unit? __________ (2) If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in savings annually. To achieve this goal, what must the minimum annual rent on the facility be? ______

When deciding on special order pricing, it is important to consider

Avoidable costs are often a good approximation of the relevant costs between alternatives.

To properly use price-led costing, a company needs to study only its cost.

Jones Corp. currently sells 50,000 units to its normal customers, but it has a capacity to produce 60,000 units. Its product sells for $60 per unit and the variable costs incurred in manufacturing and selling the product are as follows on a per unit basis: Direct materials - $12; Direct labor - $20; Sales commission - $4. A customer has proposed a special order to purchase 10,000 units at a special price of $45 per unit. If Jones accepts the order, the company would not have to pay its sales people their normal commission, but the company would incur a shipping cost of $7 per unit. Required: (1) If Jones accepts the special order, how would operating income is affected? __________ (2) What is the minimum price per unit below which Jones should reject the order? __________ (3) Assume that Jones is operating at full capacity. What is the minimum price per unit below which Jones should reject the order? _____

Travis Corporation sells a product for $100 per unit. Its market share is 32 percent. The market share can be increased to 40 percent with a reduction in price to $87. The product is currently earning a profit of $23 per unit. The president of Travis Corporation feels that the company needs to maintain the same profit level per unit. The total market consists of $1,000,000 (10,000 units). Compute the following items: (1) How many units does Travis Corporation currently sell of the product? __________ (2) What is the target price per unit? __________ (3) What is the original cost per unit? __________ (4) What is the target cost per unit? _____

You purchase baseball tickets last month when the team was doing poorly. You paid $100 a non-refundable ticket. Your best friend offered you $130 for the ticket now that the team is doing well. The opportunity cost of going to the game is

Use the following to answer questions: Richardson Motors uses ten units of part Number T305 each month in the production of large Diesel engines. The cost to manufacture one unit of T305 is presented below: Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their costs. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed) Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000. -Assume the rental opportunity does not exist and Richardson Motors could use the idle Capacity to manufacture another product that would contribute $104,000 per month. If Richardson chooses to manufacture the ten T305 units in order to maintain quality control, Richardson's opportunity cost is:

Use the following to answer questions: Juarez Healthcare Center receives reimbursement from C. H.E.A.T.E.M. insurance company. Juarez receives $20 per physical therapy session. Each session lasts 15 minutes. Because of a shortage of physical therapists, Juarez often finds it necessary to use a temporary service to provide therapists. Assume collections and other variable cost amount to $5 per visit and all other facility costs are fixed. -What is the most Juarez should pay for physical therapists?

Not-for-profit organizations do not need goals and objectives.

Costs that could be avoided if a business unit is dropped are not relevant to the decision.

Which of the following costs are relevant in the decision to drop a business unit?

A business has complete freedom when setting prices for products and services.

An analysis of outsourcing requires an analysis of quality as well as costs.

Use the following to answer questions: Rams Company needs 20,000 units of a certain part to use in its production cycle. If Rams buys the part from Steelers Company instead of making it, Rams cannot use the excess capacity for another manufacturing activity. Forty percent of the fixed overhead will continue regardless of what decision is made. Cost to Rams to make the part: (per unit) Cost to buy the part from Steelers Company - $42 per unit -What decision should Rams make, and what is the total cost advantage that would result?