Using Accounting Information to Make Managerial Decisions

Matching

1. Match the following terms to the appropriate statement by placing the letter to the left of each statement.

a.	Allocated cost	f.	Incremental analysis
b.	Avoidable cost	g.	Information overload
c.	Bottleneck process	h.	Opportunity cost
d.	Common cost	i.	Sunk cost
e.	Differential	j.	Throughput contribution

____	1. When information differs between alternatives
____	2. A cost that occurs only with the implemental of a particular alternative
____	3. A cost that has been incurred in the past
____	4. The contribution margin of the next-best alternative
____	5. Sales revenue less direct materials cost
____	6. Costs that are not directly caused by the cost object
____	7. Another term for allocated cost
____	8. A process that limits total output
____	9. A phenomenon occurring when managers become overwhelmed by the huge amount of information available to them
____	10. Calculations that show the additional impact of one alternative over another

Brief Exercises

2. Complete the table below by placing an “X” under each heading that classifies the cost as relevant or irrelevant.

	Relevant	Irrelevant
Sales taxes paid on purchases
Original cost of equipment
Direct labor
Sales commissions
Fixed factory overhead

3. Complete the table below by placing an “X” under each heading that classifies the costs as avoidable or unavoidable in a decision to accept a special order.

	Avoidable	Unavoidable
Direct material to produce order
Original cost of factory machinery
Fixed overhead
Cost to deliver products to customers
Salary of supervisor moved to another production line

4. R&W Manufacturing Company produces men’s hiker shorts. The selling price of the shorts is $35. The following standard cost data per unit includes $7 direct material, $4 direct labor and $12 manufacturing overhead (50% variable, 50% fixed). R&W has received a special order for 200 at a price of $20 each. The only additional cost of accepting the special order is a sales commission of $1 per unit. R&W has ample capacity to produce the special order without interrupting regular production. Ignoring qualitative factors, should R&W accept the special order?

5. Elton’s Electronics is a wholesale distributer for TVs and other electronics and appliances. The selling price of TV Model 83G7 is $799. The following standard cost data per Model 83G7 includes $300 direct material, $30 direct labor and $200 manufacturing overhead (75% variable, 25% fixed). Elton has received a special order for 200 Model 83G7s at a price of $450 each. The only additional cost of accepting the special order is a sales commission of $9 per unit. Since the special order is to a retail store that will not be in competition with any other Elton customers. Ignoring qualitative factors, should Elton accept the special order?

6. Paper Moon, a manufacturer of outdoor lighting fixtures is operating at less than full capacity. The plant manager is considering making the mounting brackets now being purchased from a supplier at $8 each. Paper Moon already has the equipment to produce the brackets. The plant manager has analyzed the cost of producing the brackets and determined that each bracket will require $2 of direct material, $1 of direct labor, and $8 of manufacturing overhead. Seventy-five percent of the manufacturing overhead is a fixed cost that would not be affected by the decision to manufacture the brackets. Should Paper Moon continue to purchase the brackets or produce them internally?

7. Power Tools, Inc. produces gas-powered leaf blowers. The company is currently not operating at full capacity. The plant manager is considering making the rewind assembly for the pull cord which is now being purchased from a supplier at $22 each. Power Tools already has the equipment to produce the assembly. The plant manager has analyzed the cost of producing the assemblies and determined that each assembly will require $8 of direct material, $6 of direct labor, and $12 of manufacturing overhead. Two-thirds of the manufacturing overhead is a fixed cost that would not be affected by the decision to manufacture the brackets. Should Paper Moon continue to purchase the brackets or produce them internally?

8. Murphy’s, Inc. has the following production and cost data for two of its products, Standard and Deluxe:

	Standard	Deluxe
Contribution margin per unit	$60	$40
Machine hours needed per unit	2	1

A total of 80,000 hours is available each period for the production of the two products. The demand for both products is strong and Murphy will be able to sell as many of either product as it can produce. Ignoring qualitative issues, which of the two products should Murphy produce?

9. Ledbetter, Inc. has the following production and cost data for three of its products, Basic, Standard and Deluxe:

	Basic	Standard	Deluxe
Contribution margin per unit	$40	$50	$60
Machine hours needed per unit	2	5	4

A total of 8,000 hours is available each period for the production of the three products. The demand for both products is strong and Ledbetter has orders for 1,200 of Basic, 3,000 of Standard and 800 of Deluxe. Ignoring qualitative issues, how many of each product should Ledbetter produce?

10. Kentucky Distributors has two divisions – Northern and Southern. The divisions have provided the following financial information:

	Northern	Southern
Sales	$150,000	$210,000
Variable costs	95,000	110,000
Common fixed costs	65,000	75,000
Net operating income	($ 10,000)	$ 25,000

Kentucky’s executives are considering the elimination of the Northern division. If the division is eliminated, the common fixed costs will remain unchanged. Given these data, should the Northern division be eliminated? Why?

11. Cabells, Inc. has two divisions – Electronics and Appliances. The divisions have provided the following financial information:

	Electronics	Appliances
Sales	$310,000	$410,000
Variable costs	225,000	270,000
Avoidable fixed costs	92,000	60,000
Common fixed costs	35,000	35,000
Net operating income	($ 42,000)	$ 45,000

Cabells’ executives are considering the elimination of the Electronics division. If the division is eliminated, the common fixed costs will remain unchanged. Given these data, should the Electronics division be eliminated? Why?

Exercises

12. Suppose you are trying to decide whether to rent an apartment across the street from campus or a nicer apartment one mile from campus. Indicate whether the following pieces of information are relevant or irrelevant to your decision.

	Relevant	Irrelevant
Cost of apartment
Car insurance
Renter’s insurance
Cost of gasoline
Cost of campus parking permit
Cost of car wash
Cost of shoes
Original cost of your car
Amount of utility expense

13. Brandon, Inc. is a consulting firm headquartered in Dallas. Trish Hardin, CEO of the company plans to attend a professional conference in Atlanta where she intends to network in the pursuit of business. She enjoys shopping and dining in Atlanta and is looking forward to the trip. She registered for the conference and made hotel and airfare reservations six weeks ago. Her airline ticket and registration fee are non-refundable, but it is not too late to cancel her hotel room. The day before the conference, a company executive from El Dorado calls and wishes to meet with Trish the next day regarding a consulting project. If Trish chooses to make the trip to El Dorado, she will drive. Both trips will require an overnight stay. Trish does not have a prediction of how much revenue either trip may generate. Costs related to the two trips are as follows:

Cost of Atlanta trip	Cost of El Dorado trip
Airfare	$450	Mileage	$120
Meals	$150	Meals	$ 50
Hotel	$250	Hotel	$100
tration	$100

Required:

a. Which of the above costs are not relevant?

b. Without considering qualitative factors, which alternative will Trish choose? Why?

c. What are three factors other than costs that Trish should consider?

14. Place and “X” in the column that corresponds to the cost classification for each of the following scenarios. Some items may fit in more than one column.

	Avoidable Cost	Unavoidable Cost	Sunk Cost	Common Fixed Cost
Original cost of factory machinery
Direct material
Depreciation on home office furniture
Salary of employees who will be fired if product is outsourced
Cost of item previously made in factory, but now purchased from supplier
Depreciation on factory equipment
Salary of supervisor who will be moved to another production line if product is eliminated
Cost of nonrefundable airline ticket purchased last week
Cost of delivery of products to customers
Direct labor

15. Sanderson’s Woodworking Company is considering the addition of a new line of quilt frames to its current product lines. If the new quilt frames are added to Sanderson’s production, contribution margin of the other products is expected to drop by $2,000. Sanderson has summarized the projected revenue and cost for the new line of frames.

Annual sales	200 units
Selling Price per unit	$250
Variable costs per unit
Manufacturing	$180
Selling	$5
Avoidable fixed costs per year
Production	$3,000
Selling	$4,000
Allocated common fixed costs per year	$1,600

Required:

a. If Sanderson adds the new quilt frame to its line of products, what will be the increase in operating income?

b. What are three issues that Sanderson should consider before adding the new line?

16. Barber Manufacturing currently makes 2,000 high-end kaleidoscopes each year. Barber has been manufacturing all parts of the units. However, the company has found a manufacturing company that can provide the tubes at a price of $14 each. Since the company’s machine that molds the tubes is getting old, the company is considering purchasing the tubes. If the company purchases the tubes, the machine will be idle. Barber’s standard cost of the molding process for one unit is listed below.

Direct material	$4
Direct labor	$2
Variable overhead	$4
Direct fixed overhead (Utility cost associated with molding machine)	$3
Non-differential fixed overhead	$8
Total Cost	$21

Required

Should Barber purchase the tubes or continue manufacturing them? Why?

17. Mountaineer, Inc. currently makes 6,000 pairs of weatherproof hiking boots each year. The boots sell for $119. Mountaineer has been manufacturing the boots and applying the weatherproofing as the final process before packaging. However, the company is concerned about the costs associated with the weatherproofing process. The company is concerned that the EPA will not approve of their disposal of the residue from the process, resulting in heavy monetary penalties. Mountaineer has found a manufacturing company that can waterproof the boots and package them at a cost of $18 each. If the company outsources the waterproofing and packaging of the boots, its insurance premiums will be reduced. Mountaineer’s standard cost of the waterproofing and packaging process for one unit is listed below.

Direct material ($1 for waterproofing and $4 for packaging)	$5
Direct labor (same person waterproofs and packages)	$3
Variable overhead ($6 for waterproofing and $2 for packaging)	$8
Direct fixed overhead (Insurance)	$6
Nondifferential fixed overhead	$8
Total Cost	$30

Required

Should Barber outsource the waterproofing and packaging? Why?

18. Newport Manufacturing makes and sells backyard fire pits. Each fire pit regularly sells for $269. The following cost data per unit are based on a full capacity of 3,000 fire pits produced each period.

Direct material $100

Direct labor $75

Manufacturing overhead (75% variable) $64

Newport is negotiating a special order for the sale of 75 fire pits to an overseas customer. The only selling cost that would be incurred on the special order would be a $10 sales commission. Newport is expected to make 2,500 fire pits before the special order.

Required:

a. What is the minimum selling price Newport should negotiate for the special order?

b. What are three factors other than relevant costs that Newport should consider concerning this special order?

19. London, Inc. uses 2,000 units of Part 8G3 each year in the manufacture of one of its products. The company currently produces the part internally, but an outside supplier has offered to provide the part at a price of $15 per part. If London chooses to purchase the part from the outside supplier, one half of it’s the fixed manufacturing overhead will be eliminated. London’s standard unit cost of producing the part is listed below.

Direct material	$6
Direct labor	$4
Variable manufacturing overhead	$2
Fixed manufacturing overhead	$4
Total unit cost	$16

Required

Ignoring qualitative factors, should London continue to make the parts internally or purchase them from the outside supplier? Why?

20. The Inland Corporation manufactures 1,000 motors that are used in the production of its go-karts. Inland has been approached by an outside supplier that will sell the motor to Inland for $39 each. Inland’s cost to manufacture each motor are as follows:

Direct material $25

Direct labor $8

Variable overhead $4

Fixed overhead $6

Total $43

All fixed overhead is unavoidable, and is allocated based on machine hours. The facilities that are used to manufacture the motors have no alternative uses.

Required:

a. Should Inland continue to manufacture the motors?

b. Would your answer change if Inland could lease the facilities previously used to produce the motors for $4,800 per year?

21. Paris Manufacturing Company Inc. uses 400 units of Part #4317 each year in the manufacture of one of its products. The company currently produces the part internally, but an outside supplier has offered to provide the part at a price of $20 per part. If Paris chooses to purchase the part from the outside supplier, one third of it’s the fixed manufacturing overhead will be eliminated. The company’s standard unit cost of producing the part is listed below.

Direct material	$8
Direct labor	$6
Variable manufacturing overhead	$5
Fixed manufacturing overhead	$9
Total unit cost	$28

Required

Ignoring qualitative factors, should Paris continue to make the parts internally or purchase them from the outside supplier? Why?

22. Logan’s, Inc. has the following production and cost data for two of its products, Basic and Supreme:

	Basic	Supreme
Contribution margin per unit	$160	$140
Machine hours needed per unit	4	5

A total of 40,000 hours is available each period for the production of the two products The demand for both products is strong and Logan is not sure it can fill all orders expected to be received.

Required:

a. Ignoring qualitative issues, which of the two products should Logan focus on filling orders first?

b. List three alternatives that Logan should consider in order to produce more units within the 40,000 hours?

23. Holt Manufacturing Company produces three products in its Dallas factory. Data relating to the products are given below:

	Product A	Product B	Product C
Unit selling price	$80	$70	$60
Variable manufacturing costs	$52	$50	$46
Variable selling costs	$4	$4	$4
Hours required per unit	2	½	1
Demand per period	3,000	4,000	2,600

A total of 8,200 hours are available in the Dallas facility.

Required:

a. How many hours will be required to satisfy the demand for all three products?

b. How much of each product should be produced to maximize Hold’s operating income?

24. Mantle, Inc. produces two types of wooden mallets, Ash and Oak, in its Miami factory. Data relating to the mallets are given below:

	Ash	Oak
Unit selling price	$30	$28
Variable manufacturing costs	$11	$12
Variable selling costs	$1	$1
Minutes required per unit	20	15
Demand per period	1,200	1,600

A total of 600 hours are available in the Miami facility.

Required:

a. How many hours will be required to satisfy the demand for both products?

b. How much of each product should be produced to maximize Mantle’s operating income?

25. Jerry Mounds, controller for Pearl Distributing, has prepared the following financial information for the most recent period showing profitability the of its three departments :

	Department A	Department B	Department C
Sales	$52,000	$18,000	$20,000
Variable expenses	36,000	10,000	14,000
Contribution margin	16,000	8,000	6,000
Fixed expenses:
Factory rent	2,000	1,400	3,200
Depreciation	2,000	600	2,600
Utilities	1,800	1,000	1,200
Total fixed expenses	5,800	3,000	7,000
Operating income	$10,200	$5,000	($1,000)

The factory rent of $3,200 assigned to Department C is avoidable if the department is eliminated. Depreciation will remain unchanged if a department is dropped. Discontinuing Department C will reduce the utilities by $600.

Required:

Prepare an analysis showing whether Department C should be eliminated.

26. Betty Hopper, controller for Diamond Manufacturing Company, has prepared the following financial information for the most recent period showing profitability the of its three divisions:

	Appliance	Electronics	Furniture
Sales	$102,000	$108,000	$120,000
Variable expenses	86,000	92,000	114,000
Contribution margin	16,000	16,000	6,000
Fixed expenses:
Factory insurance	1,000	1,400	2,200
Depreciation	2,000	2,600	3,600
Advertising	600	600	600
Utilities	800	1,000	1,200
Total fixed expenses	4,400	5,600	7,600
Operating income	$11,600	$10,400	($ 1,600)

The factory insurance and advertising assigned to the furniture division is avoidable if the division is discontinued. Depreciation will remain unchanged if a division is dropped. Discontinuing furniture will reduce the utilities by $800.

Required:

a. Prepare an analysis showing whether Product C should be eliminated.

b. If the Furniture division is eliminated, what will be effect on the overall profit for Diamond?