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Exam 6: Relevant Information and Decision-Making: Product Decisions

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Question 41

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The absorption approach emphasizes the distribution between fixed and variable costs.

A) True
B) False

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Question 42

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Two or more manufactured products that have relatively significant sales values and are not separately identifiable as individual products until their split- off point

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Question 43

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Crenshaw Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: $\begin{array} { l l } \text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & \underline { 168,000 } \\\text { Total costs } & \underline { \$ 504,000 }\end{array}$ Of the fixed factory overhead costs, $72,000 is avoidable. Assuming no other use of their facilities, the highest price that Crenshaw Company should be willing to pay for 5,000 units of the part is:

Janice is considering leaving her current position to open a coffee shop. Janice's current salary is $56,000. Annual coffee shop revenue and costs are estimated at $250,000 and $210,000, respectively. Is the outlay cost associated with the decision to open the coffee shop.

The key reasons that companies outsource are to improve the company's focus and reduce operating costs.

Don Juan Company provided the following information regarding its one and only product-ice skates. $\begin{array}{ll}\text { Direct materials used } & \$ 300,000 \\\text { Direct labor } & 180,000 \\\text { Fixed overhead } & 100,000 \\\text { Fixed s elling and administrative costs } & 150,000 \\\text { Variable overhead } & 120,000 \\\text { Variable selling and administrative } & 60,000 \\\text { Selling unit price } & 75 \\\text { Units produced and sold } & 10,000\end{array}$ is the total manufacturing cost if the contribution approach is used.

A cost that requires a future cash disbursement

Faulk Company has a joint process which produces three products, AA, BB, and CC. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $30,000. Other relevant data are as follows: $\begin{array}{llll}&&\text { Separable }\\&&\text { Processing }\\\text { Product } & \begin{array}{l}\text { Sales Value at } \\\text { Split-off }\end{array} & \begin{array}{l}\text { Costs after } \\\text { Split-off }\end{array} & \begin{array}{l}\text { Sales Value at } \\\text { Completion }\end{array}\\\text { AA } & \$ 15,500 & \$ 2,200 & \$ 17,700 \\\text { BB } & 18,000 & 8,000 & 23,000 \\\text { CC } & 24,000 & 11,500 & 37,500\end{array}$ Required: a. What will be the effect on profits of processing each product further? b. Assume the company maximizes profits, what is Faulk Company's operating income?

A key factor in a make- or- buy decision is:

Product costs incurred after the split- off point

Samantha Company is considering replacing a machine that is presently used in the production of its product. The following data are available: $\begin{array}{lll}& \text { Old Machine } & \begin{array} { l } \text { R eplacem } \\\text { M achine }\end{array} \\\text { Original cost } & \$ 67,000 & \$ 54,000 \\\text { Useful life in years } & 13 & 4 \\\text { Current age in years } & 9 & 0 \\\text { Book value } & \$ 32,000 & - \\\text { Disposal value now } & \$ 18,000 & - \\\text { Disposal value in 5 years } & 0 & 0 \\\text { Annual cash operating } & \$ 9,000 & \$ 7,000\\\text { costs}\end{array}$ is irrelevant.

Floyd Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: $\begin{array}{ll}\text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & \underline{168,000} \\\text { Total costs } & \underline{\$ 504,000} \\\end{array}$ Of the fixed factory overhead costs, $72,000 is avoidable. Assume that Floyd Company can buy 5,000 units of the part from another producer for $105.60 each. The facilities currently used to make the part could be rented out to another manufacturer for $72,000 a year. Floyd Company should:

would be a consideration in a make- or- buy decision.

Zachary Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. _ is the cost per unit if 40,000 units per year are produced and sold.

Grape Company produces three products using a joint process which accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 10,000 units. The following unit information is also available: $\begin{array}{llll}&&\text { Separable }\\&&\text { Processing }\\& \text { Sales V alue at } & \text { Costs after } & \text { Sales Value at } \\\text { Product } & \text { Split- off } & \underline{\text { Split-off }} & \text { Completion }\\\mathrm{A} & \$ 12 & \$ 9 & \$ 21 \\\mathrm{~B} & 10 & 4 & 17 \\\mathrm{C} & 15 & 6 & 19\end{array}$ Product C should be processed beyond the split- off point because:

Miller Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: D $\begin{array}{ll}\text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & \underline{168,000} \\\text { Total costs } & \underline{\$ 504,000} \\\end{array}$ Of the fixed factory overhead costs, $72,000 is avoidable. Assume that Miller Company can buy 5,000 units of the part from another producer for $100.80 each. The current facilities could be used to make 5,000 units of a product that has a contribution margin of $24 per unit. Fixed factory overhead costs to produce this new product would be exactly the same as for the currently produced part. Miller Company should:

The allocation of joint costs should affect the decision to sell or process further.

The salary forgone by a person who quits a job to start a business is an example of a (n) :

Bryant Corporation uses a joint process to produce products A, B, and C. Each product may be sold at split- off or processed further and then sold. Joint processing costs for the year amounted to $100,000. Other information is presented below: $\begin{array}{llll}&&\text { Separable }\\&&\text { Processing }\\\text { Product } & \begin{array}{l}\text { Sales Value at } \\\text { Split-off }\end{array} & \begin{array}{l}\text { Costs after } \\\text { Split-off }\end{array} & \begin{array}{l}\text { Sales Value at } \\\text { Completion }\end{array}\\\text { A } & \$ 94,000 & \$ 28,000 & \$ 116,000 \\\text { B } & 60,000 & \$, 000 & \$ 2,000 \\\text { C } & 66,000 & 14,000 & \$ 0,000\end{array}$ Required: a. Which products, if any, should be processed further? b. If all three products were processed further, what would be the effect on profits?

Kennedy Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: $\begin{array}{ll}\text { Direct materials } & \$ 20 \\\text { Direct labor } & 15 \\\text { Variable factory overhead } & 16 \\\text { Fixed factory overhead } & \underline{10} \\\text { Total costs } & \$ 61\end{array}$ The fixed factory overhead costs are unavoidable. Assume that Kennedy Company can buy 10,000 units of the part from another producer for $60 each. The facilities currently used to make the part could be rented out to another manufacturer for $100,000 a year. Kennedy Company should: