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Chapter 11 Relevant Cost Associations, Assignments of Accounting

Queen's UniversityAccounting

Practice problems and solution key.

Typology: Assignments

Pre 2010

Uploaded on 04/24/2025

yolo-17
yolo-17 🇨🇦

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Chapter 12, Relevant Costs for ...
1. Foster Company makes 20,000 units per year of a part that it uses in the products it manufactures. The
unit product cost of this part is computed as follows:
Direct Materials $24.70
Direct Labour $16.30
Variable Manufacturing Overhead $ 2.30
Fixed Manufacturing Overhead $13.40
Unit Product Cost $56.70
An outside supplier has offered to sell the company all the parts that Foster needs for $51.80 a unit. If
the company accepts this offer, the facilities now being used to make the part could be used to make
more units of a product that is in high demand. The additional contribution margin on this other
product would be $44,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be
avoided. However, $5.10 of the fixed manufacturing overhead cost that is being applied to the part
would continue, even if the part were purchased from the outside supplier. This fixed manufacturing
overhead cost would be applied to the company's remaining products.
Required:
a) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy
the part?
b) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
c) What is the maximum amount the company should be willing to pay an outside supplier per unit for
the part if the supplier commits to supplying all 20,000 units required each year?
Ans: a) Relevant cost per unit:
Direct Materials $24.70
Direct Labour $16.30
Variable Manufacturing Overhead $ 2.30
Fixed Manufacturing Overhead ($13.40 - $5.10) $ 8.30
Relevant Manufacturing Cost $51.60
b) Net advantage (disadvantage):
Manufacturing Cost Savings ($51.60 x 20,000) $ 1,032,000
Additional Contribution Margin $ 44,000
Cost of Purchasing the Part ($51.80 x 20,000) ($1,036,000)
Net Advantage (Disadvantage) $ 40,000
c) Maximum acceptable purchase price:
Manufacturing Cost Savings $1,032,000
Additional Contribution Margin $ 44,000
Total Benefit $1,076,000
Number of Units 20,000
Benefit per Unit $ 53.80
Difficulty:>>Hard
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  1. Foster Company makes 20,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct Materials $24. Direct Labour $16. Variable Manufacturing Overhead $ 2. Fixed Manufacturing Overhead $13. Unit Product Cost $56. An outside supplier has offered to sell the company all the parts that Foster needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year. If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? b) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year? Ans: a) Relevant cost per unit: Direct Materials $24. Direct Labour $16. Variable Manufacturing Overhead $ 2. Fixed Manufacturing Overhead ($13.40 - $5.10) $ 8. Relevant Manufacturing Cost $51. b) Net advantage (disadvantage): Manufacturing Cost Savings ($51.60 x 20,000) $ 1,032, Additional Contribution Margin $ 44, Cost of Purchasing the Part ($51.80 x 20,000) ($1,036,000) Net Advantage (Disadvantage) $ 40, c) Maximum acceptable purchase price: Manufacturing Cost Savings $1,032, Additional Contribution Margin $ 44, Total Benefit $1,076, Number of Units 20, Benefit per Unit $ 53. Difficulty: Hard
  1. The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value. Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a five-year contract. Hyatt Company's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year: Direct Materials $ 3. Direct Labour $ 4. Variable Overhead $ 0. Fixed Overhead ($0.80 supervision, $0.90 depreciation, and $2 general company overhead) $ 3. Total Cost per Unit $11. The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company's total general company overhead would not be affected by this decision. Assume direct labour is a variable cost. Required: Assume that 40,000 subassemblies are needed each year. Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action.
  1. Benjamin Signal Company produces products R, J, and C from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin's operations for the current year are as follows: Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000. Required: Which products should be processed beyond the split-off point? Ans: Products R and J should be processed beyond the split-off point. Product C should be sold at split-off. Joint production costs are not relevant to the decision to sell at split-off or to process further. Difficulty: Medium
  1. Bowen Company produces products P, Q, and R from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced. Data for Bowen's operations for the current year are as follows: Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $65,000. Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $25,000. Required: Which products should be processed beyond the split-off point? Ans: Products P and R should be processed beyond the split-off point. Product Q should be sold at split-off. Joint production costs are not relevant to the decision to sell at split-off or to process further. Difficulty: Medium Difficulty: Medium

Ans: a)

  • Direct Materials $29. Variable cost per unit on normal sales:
  • Direct Labour $ 5.
  • Variable Manufacturing Overhead $ 2.
  • Variable Selling & Administrative Expense $ 1.
  • Variable Cost per Unit on Normal Sales $39.
  • Normal Variable Cost per Unit $39. Variable cost per unit on special order:
  • Reduction in Variable Selling & Administrative $ 1.
  • Variable Cost per Unit on Special Order $38.
  • Selling Price for Special Order $ 66.
  • Variable Cost per Unit on Special Order $ 38.
  • Unit Contribution Margin on Special Order $ 27.
  • Number of Units in Special Order 2,
  • Increase (Decrease) in Net Operating Income $55,
  • Normal Selling Price per Unit $72. b) The opportunity cost is just the contribution margin on normal sales:
  • Variable Cost per Unit on Normal Sales $39.
  • Unit Contribution Margin on Normal Sales $33.
  • Unit Contribution Margin on Normal Sales $ 33. c) Minimum acceptable price:
  • Displaced Normal Sales 1,
  • Lost Contribution Margin Displaced Sales $ 43,
  • Total Variable Cost on Special Order ($38.60 x 2,000) $ 77,
    • $120,
  • Number of Units in Special Order 2,
  • Minimum Acceptable Price on Special Order $ 60.
  1. When Mr. Ding L. Berry, president and chief executive of Berry, Inc., first saw the segmented income statement below, he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued. Required: Recommend which segments, if any, should be eliminated. Prepare a report in good form to support your answer. A segmented income report, without the allocation of common fixed expenses, will provide the basis for deciding which segments to drop. The only segment that possibly should be eliminated is segment W, which shows a negative segment margin of $2,000.Ans: Difficulty: Medium
  1. Kramer Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow: Direct Materials $ Direct Labour $ Variable Manufacturing Overhead $ 8 Fixed Manufacturing Overhead $ Total Manufacturing Cost per Unit $ An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If Kramer Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labour is a variable cost. Required: a) Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, should Kramer Company accept the offer? Fully support your answer with appropriate calculations. b) Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps? Ans: a) The analysis of the alternatives follows below: * 40% x $ The company should make the part rather than buy it from the outside supplier because it costs $4 less under that alternative. b) The maximum acceptable price is $81 because that is the cost to the company of making the part itself when the opportunity cost is included: Total cost of making the part internally $ Opportunity cost per unit ($80,000 ÷ 4,000) $ Total $ Difficulty: Hard
  1. Glocker Company makes three products in a single facility. These products have the following unit product costs: Additional data concerning these products are listed below. The mixing machines are potentially a constraint in the production facility. A total of 5,900 minutes are available per month on these machines. Direct labour is a variable cost in this company. Required: a) How many minutes of mixing machine time would be required to satisfy demand for all four products? b) How much of each product should be produced, rounded to the nearest whole unit, to maximize net operating income? c) Up to how much should the company be willing to pay, rounded to the nearest whole cent, for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity?
  1. Holt Company makes three products in a single facility. Data concerning these products follow: The mixing machines are potentially a constraint in the production facility. A total of 25,800 minutes are available per month on these machines. Direct labour is a variable cost in this company. Required: a) How many minutes of mixing machine time would be required to satisfy demand for all four products? b) How much of each product should be produced, rounded to the nearest whole unit, to maximize net operating income? c) Up to how much should the company be willing to pay, rounded to the nearest whole cent, for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Ans: a) Demand on the mixing machine: Total time required for all products: 26,700 minutes b) Optimal production plan: c) The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $5.15. Difficulty: Medium

  1. Iaci Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below: Required: a) What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? b) What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? c) What is the minimum amount the company should accept for Product X if it is to be sold at the split- off point? d) What is the minimum amount the company should accept for Product Y if it is to be sold at the split- off point? Ans: a) & b) c) & d) Minimum selling price at split-off Product X $29, Product Y $28, Difficulty: Hard
  1. Harris Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $200,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are: The "Further Processing Costs" consist of variable and avoidable fixed costs. Required: Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations. Ans: Product K should be sold after further processing beyond the split-off point. Products J and L should be sold at the split-off point without any further processing. Difficulty: Medium