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Introduction to Managerial Accounting

Jeannie M. Folk
Ray H. Garrison
Eric Noreen

Relevant Costs for Decision Making

Multiple Choice Quiz

Costs that are always relevant in decision-making are:

avoidable costs.

fixed costs.

sunk costs.

variable costs.

The managers of a firm are in the process of deciding whether to accept or reject a special offer for one of its products. A cost that is not relevant is their decision is the:

common fixed overhead that will continue if the special offer is not accepted.

direct materials.

fixed overhead that will be avoided if the special offer is accepted.

variable overhead.

The Empire Corporation has 2,000 obsolete units of a product that are carried in inventory at a manufacturing cost of $40,000. If the units are remachined for $10,000, they could be sold for $18,000. Alternatively, the units could be sold for scrap for $2,000. Which alternative is more desirable and what are the total relevant costs for that alternative?

remachine; $10,000.

remachine; $50,000.

scrap; $40,000.

The Calculex Company has 800 obsolete calculators that are carried in inventory at a total cost of $53,400. If these calculators are upgraded at a total cost of $20,000, they can be sold for a total of $60,000. As an alternative, the calculators can be sold in their present condition for $22,400. The sunk cost in this situation is:

$20,000.

$22,400.

$53,400.

A study has been conducted to determine if one of the departments of Lucy Company should be discontinued. The contribution margin in the department is $100,000 per year. Fixed expenses charged to the department are $130,000 per year. It is estimated that $80,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, Lucy's overall net operating income would:

decrease by $20,000 per year.

increase by $20,000 per year.

decrease by $50,000 per year.

increase by $50,000 per year.

Brown Company produces 2,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is:

Variable manufacturing cost	$24
Fixed manufacturing cost	18
Unit product cost	$42

The part can be purchased from an outside supplier at $40 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on Brown's net operating income as a result of buying the part from the outside supplier would be:

$4,000 increase.

$4,000 decrease.

$8,000 increase.

$8,000 decrease.

The following are the Goodman Company's unit costs of making and selling an item at a volume of 20,000 units per month (which represents the company's capacity):

Manufacturing:
Direct materials	$2.00
Direct labor	4.00
Variable overhead	1.00
Fixed overhead	1.80
Selling and administrative:
Variable	3.00
Fixed	1.20

Assume the company has 100 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. What cost is relevant as a guide for setting a minimum price on these defective units?

$3.00

$7.00

$10.00

$13.00

Reddy Corporation manufactures coolers. The company can manufacture 600,000 coolers a year at a variable cost of $1,500,000 and a fixed cost of $900,000. Based on management's predictions for next year, 480,000 coolers will be sold at the regular price of $10.00 each. In addition, a special order was placed for 120,000 coolers to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased as a result of the special order?

$240,000

$300,000

$420,000

$720,000

Chapman Company sells its product for $42 per unit. The company's unit product cost based on the full capacity of 400,000 units is as follows:

Direct materials	$ 8
Direct labor	10
Manufacturing overhead	12
Unit product cost	$30

A special order offering to buy 40,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $6 per unit for shipping. The company has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price for the special order, the minimum acceptable selling price per unit should be:

$28.

$30.

$32.

$36.

Consider the following production and cost data for two products, A and B:

	Product A	Product B
Contribution margin per unit	$260	$240
Machine set-ups needed per unit	20 set-ups	16 set-ups

The company can only perform 130,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?

$1,690,000.

$1,950,000.

$1,820,000.

$3,640,000.

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