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Exam 30: Cost-Revenue Analysis for Decision Making

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Question 51

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The Alvarado Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 2,500 of these parts are used. Cost data for the past year that relates to the 2,500 parts is given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $45 a unit, plus a shipping charge of $2 a unit. The plant capacity now used by Alvarado to manufacture the part would not be used within the foreseeable future if the part is purchased outside. $\begin{array}{lr}\text { Direct Materials } & \$ 60,000 \\\text { Direct Labor } & 65,000 \\\text { Variable Overhead Costs } & 2,500 \\\text { Fixed Overhead Costs } & 5,000\end{array}$ Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it. Based on the analysis, indicate the decision that should be made.

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Analysis of the Effe...

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Question 52

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The Lourdes Corporation manufactures fans. A newly-formed construction company in the area desires to buy up to 300 of their Model CSB3192 this year. Lourdes quoted them a price of $67 which covers all costs plus markon. The construction company has indicated that they will buy all the fans they need in the future from Lourdes Corporation if Lourdes will sell the fans for $60 each. Lourdes Corporation has the capacity to make the 300 fans above their usual production needs. Currently, Lourdes ships all of their production to companies in other parts of the country, but do not usually sell any locally. If the $60 offer covers all costs and allows a small markon, what other things should Lourdes consider before coming to a final decision?

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Lourdes should consider the possibility ...

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Question 53

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Under------------ costing procedures, fixed manufacturing costs are included in the cost of goods manufactured.

What is the differential cost of Alternative Y over Alternative X in the example below? $\begin{array}{lll}&\text { Alternative } X & \text { Alternative } \\\text { Material Cost } & \$ 27,000 & \$ 27,000 \\\text { Labor cost } & \$ 28,000 & \$ 43,000 \\\text { Equipment rental } & \$ 18,000 & \$ 16,000 \\\text { Facility rent } & \$ 22,000 & \$ 36,000\end{array}$

Under direct costing, all fixed manufacturing overhead is charged off as a current expense.

Costmore Manufacturing has provided the following operating results for its first year operations: $\begin{array}{lr}\text { Beginning inventory of finished goods } & 0 \\\text { Units produced (no work in process) } & 22,000 \\\text { Units sold } & 18,000 \\\text { Units in ending inventory of finished goods } & 4,000\\\text { Sales price }&\$55\text { per unit }\\\text { Variable manufacturing costs }&\$25\text { per unit }\\\text { manufactured Variable selling and }\text { administrative expenses }&\$ 7 \text { per unit }\\\text { sold Fixed manufacturing }\text { costs for the year } & \$ 110,000 \\\text { Fixed selling and administrative expenses for the year } & \$ 124,000\end{array}$ - Using the absorption costing method, the net income for year is:

Using the given information, determine the income under both the absorption and the direct (variable)costing methods for the company for the year. Explain the difference, if any.

Before deciding whether to purchase new equipment, a firm should consider employee morale and the quality of the new equipment's output.

Which of the following is NOT relevant in evaluating whether to accept or reject a special order?

Costs that are not directly traceable to any specific department are called----------- costs.

Which of the following is NOT considered regarding the purchase of new equipment when looking at the net income under each alternative?

The profitability of a segment is judged by its contribution margin.

Match the following descriptions with the appropriate term.

Bianca Jewel Box Manufacturing received an offer from a nonprofit organization for a one-time purchase of 2,000 of its Model RYA18261 at $20 each for distribution to flood victims in the South. Full capacity at Bianca is 25,000 units. Bianca currently expects to make 20,000 units in the current year and based all estimates on that expectation. There will be no delivery costs for this special order. The average costs to Bianca to produce one Model RYA18261 are $27 each as shown. Should Bianca accept this special offer? Explain your decision.

Net income under variable costing will differ from reported net income under absorption costing when finished good inventory levels change.

Costs that are not directly traceable to a segment of a business are called

If a decision must be made to close a warehouse, non-refundable prepaid rent on the warehouse is

Assume that the Venus Company, which now sells its product for $75 per unit, has an opportunity to sell 3,000 units in a foreign country for $54 a unit. The order will not affect its current domestic sales. Shipping costs of $9 a unit would be incurred on the order. Current variable manufacturing costs are $31 per unit manufactured. Variable selling and administrative costs are $14 per unit sold. Included in variable selling expenses is a sales commission of $1 per unit, which would not apply to the special order. Fixed manufacturing costs are $75,000 per year and fixed selling and administrative expenses are $45,000 per year. The company is now manufacturing and selling 5,000 units per year. 1. Should the Venus Company take the order? 2. What impact would the special order have on profits?

On an income statement prepared with a direct costing approach, the excess of sales over the cost of goods sold, based on variable costs only, is referred to as

Before deciding to accept a special order, the company should evaluate if it has adequate manufacturing --------------.