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Exam 13: Relevant Information for Special Decisions

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Question 51

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How would you determine whether a particular cost is unit level or batch level? Use as an example: product inspection costs.

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A cost is unit level i...

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Question 52

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Lindsay purchased a raffle ticket for $5. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $30, and another offered $65. What is Lindsay's opportunity cost of keeping the raffle ticket?

A) $60
B) $65
C) $90
D) $95

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Question 53

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Groove Music Company produces compact discs of background music for restaurants and other retail shops. Its disc recording machines are capable of producing 50 discs per hour. The unit-related cost of producing the discs is $2.00. The discs sell for $10.00 each. Mood Music Company has asked the company to produce 10,000 copies of a disc for $9.00. Groove Music estimates that for this special order the unit-related cost of producing the disc will be $4.00 and that, due to the unique nature of the recording, its machines will only be able to produce 20 discs per hour. Groove Music has a total of 5,000 machine hours of capacity. In addition, to accept the special order, Groove Music will have to lease an additional special-purpose machine that will cost $6,500.Required:Assume that existing demand for Groove Music's compact discs is 200,000 units and that the special order has to be either taken in full or rejected. Prepare an analysis that indicates whether or not the special order should be accepted.

Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: $\begin{array}{lcc}&\text {contract x }&\text {contract z }\\\text { Contract Revenue } & \$ 200,000 & \$ 260,000 \\\text { Materials } & 10,000 & 10,000 \\\text { Labor } &88,000 & 120,000 \\\text { Depreciation on Equipment } & 88,000 & 10,000\\\text { Cost Incurred for Consulting Advice}&\underline{1,500}&\underline{1,500}\\\text { Allocated Portion of Overhead}&\underline{5,000}&\underline{5,000}\end{array}$ The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another?

Western Classics Publishing Company produces updated versions of literary classics targeted for children. Its bookbinding machines are capable of producing 50 books per hour. The unit-related cost of producing books is $2.50, and Western Classics sells its books for $9.50 each. Reading Ready Publishing has asked the company to produce 10,000 copies of a book for $7.50. Western Classics estimates that unit-level costs for the new book will be $3.00, and due to the size of the book, its binding machines will only be able to produce 20 books per hour. Western Classics has a total of 5,000 machine hours of capacity. In addition, to complete the special order, Western Classics will have to purchase an additional special-purpose machine that will cost $8,000.Required:Assume that existing demand for Western Classic's children's classics is 230,000 units and that the special order has to be either taken in full or rejected. Prepare an analysis that indicates whether or not the special order should be accepted.

Select the incorrect statement regarding relevant costs and revenues.

Select the correct statement regarding relevant costs and revenues.

Bates Golf Supply produces a golf bag that sells for $220. Although the company's production capacity is 5,000 bags per year, only 4,000 bags are currently being produced and sold. The production costs for 4,000 bags are as follows: $\begin{array}{llr} \text {Unit-level material cost } &\$300,000\\ \text { Unit-level labor cost } &240,000\\ \text {Unit-level overhead } &75,000\\ \text { Batch-level setup costs (500 units per batch)} &16,000\\ \text { Product-level costs} &20,000\\ \text { Allocated facility-level costs } &25,000\\\end{array}$ Golf Mart Stores has offered to purchase 1,000 golf bags as a one-time special purchase at a price of $170 per bag.Required:Prepare a quantitative analysis that indicates whether the special order should be accepted.What qualitative factors should be considered in this special order decision?

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity, with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $4,500. The size of the proposed job is 11,000 square feet. The company's normal service costs are as follows: $\begin{array} { l l } \text { Unit-level materials } & \$ 0.18 \text { per squar foot } \\\text { Unit-level labor } & \$ 0.25 \text { per square foot } \\\text { Unit-level variable overhead } & \$ 0.08 \text { per square foot } \\\text { Facility-level overhead } & \text { Allocated at } \$ 0.10 \text { per square foot }\end{array}$ If the company accepts the special offer:

Hancock Company manufactures and sells two lines of furniture, case goods and upholstery. During the most recent accounting period, the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below: (Do not round intermediate calculations.) If unit sales for both divisions increased 10%, the company would report which of the following?

Select the correct statement regarding relevant costs and revenues.

Alex brought his lunch today but now a coworker has asked him to go to the deli across the street. Select the correct statement from the following.

Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date. The same equipment would cost $800,000 to replace. What is the total amount of sunk cost in this decision?

Select the incorrect statement regarding sunk costs.

Which of the following costs is an example of a product-level cost?

Indicate whether each of the following statements is true or false.

Eastern Company currently produces a component that it uses in making some of its products. The company has calculated the following costs for making the component: $\begin{array}{lr}\text { Unst-level costs }\\\\\text { Materials } & \$ 20 \\\text { Labor } & 28 \\\text { Overhead } & 2 \\\text { Allocated facility-level costs } & 10 \\\text { Total cost } & \$ 60\end{array}$ Eastern is considering outsourcing the component. A supplier has offered to sell the component to Eastern for $55 each. Eastern needs 10,000 units each year. If Eastern does outsource the component, it can use the facilities to make another product that would yield a contribution margin of $60,000 per year.Required:Should Eastern outsource the component? Support your answer with appropriate computations.What qualitative factors should be considered in this decision?

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $28 each. The company is considering making the switches internally at the following projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$4\\ \text { Unit-level labor cost } &\$3\\ \text { Unit-level overhead } &\$2\\ \text { Batch-level set-up cost ( 6,000 units per batch) } &\$43,000\\ \text {Product-level supervisory salaries } &\$46,500\\ \text { allocated facilitv-level costs } &\$38,000\\\end{array}$ The company expects an annual need for 6,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $3,300 a month. If the company decides to make the parts, total costs will be:

Sunk costs are sometimes relevant for decision-making purposes.

The Page Turner Publishing Company is trying to decide whether to accept a special order for its latest blockbuster. In making this decision, which level of costs will most likely be relevant to the decision?