Question 1

Hola Company provided the following information regarding its one and only product-ice skates. $$\begin{array} { l l } 
\text { Direct materials used } & \$ 200,000 \
\text { Direct labor } & 80,000 \
\text { Fixed overhead } & 100,000 \
\text { Fixed s elling and administrative costs } & 150,000 \
\text { Variable overhead } & 20,000 \
\text { Variable selling and administrative } & 60,000 \
\text { Selling unit price } & 75 \
\text { Units produced and sold } & 10,000
\end{array}$$ is the total manufacturing cost if the absorption approach is used.

Accepted Answer

Under the absorption approach, total manufacturing cost includes direct materials, direct labor, variable overhead, and fixed overhead. Therefore, the total manufacturing cost is $200,000 (direct materials) + $80,000 (direct labor) + $20,000 (variable overhead) + $100,000 (fixed overhead) = $400,000.

Question 2

Tony Company is considering replacing a machine that is presently used in the production of its product. The following data are available: $\begin{array}{lll}&& \text { Replacement } \
&\text { Old Machine } & \text { Machine }\
\text { Original cost } & \$ 295,000 & \$ 188,000 \
\text { Useful lif e in years } & 11 & 5 \
\text { Current age in years } & 6 & 0 \
\text { Book value } & \$ 130,000 & - \
\text { Disposal value now } & \$ 52,000 & - \
\text { Disposal value in 5 years } & 0 & 0 \
\text { Annual cash op erating } & \$ 39,000 & \$ 24,000\\text {costs}
\end{array}$ is irrelevant.

Accepted Answer

The book value of the old machine is a sunk cost and does not affect the decision to replace it.

Question 3

Mad Cow Company manufactures a part for its production cycle. The costs per unit for 38,000 units of this part are as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 3 \
\text { Direct labor } & 5 \
\text { Variable factory overhead } & 4 \
\text { Fixed factory overhead } & \underline{3} \
\text { Total costs } & \underline{\underline{15}} \
\end{array}$ The fixed factory overhead costs are unavoidable. Assuming no other use of their facilities, the highest price that Mad Cow Company should be willing to pay for the part is:

Accepted Answer

The answer of Mad Cow Company manufactures a part for...

Question 4

Hawaii Corporation has a joint process which produces three products: X, Y, and Z. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $100,000. Other relevant data are as follows: $\begin{array}{llll}&&\text { Separable }\&&\text { Processing }\
& \text { Sales V alue at } & \text { Costs after } & \text { Sales Value at } \
\text { Product } & \text { Split- off } & \underline{\text { Split-off }} & \text { Completion }\
\mathrm{X} & \$ 128,000 & \$ 16,000 & \$ 160,000 \
\mathrm{Y} & 50,000 & 26,000 & 76,000 \
\mathrm{Z} & 25,600 & 20,000 & 40,000
\end{array}$ Product Y:

Accepted Answer

The additional revenue from processing Y further is $76,000 - $50,000 = $26,000, which equals the additional processing cost of $26,000, resulting in no difference in profit.

Question 5

Reagan 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. Assuming no other use of their facilities, the highest price that Reagan Company should be willing to pay for the part is:

Accepted Answer

The highest price Reagan Company should be willing to pay is the total of the avoidable costs, which are direct materials, direct labor, and variable factory overhead, totaling $51. Fixed factory overhead is unavoidable and should not be considered in the decision.

Question 6

is not likely to be relevant in a decision concerning the disposal of obsolete inventory.

Accepted Answer

The answer of is not likely to be relevant in...

Question 7

Geren Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $200,000 per year. If production decreases from 50,000 to 40,000 units, the cost per unit will:

Accepted Answer

When production decreases, the fixed costs are spread over fewer units, increasing the cost per unit. The fixed cost per unit at 50,000 units is $4 ($200,000/50,000), and at 40,000 units, it is $5 ($200,000/40,000), so the cost per unit increases by $1.

Question 8

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.

Accepted Answer

The answer of Zachary Company produces and sells a product...

Question 9

Hoover 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. Madison Company has offered to sell 10,000 units of the same part to Hoover Company for $55 a unit. Assuming no other use for the facilities, Hoover Company should:

Accepted Answer

The relevant costs for making the part are $51 (Direct materials $20 + Direct labor $15 + Variable factory overhead $16). Since the fixed factory overhead is unavoidable, it should not be considered. Buying from Madison costs $55 per unit, so making the part saves $4 per unit ($55 - $51 = $4).

Question 10

are costs of manufacturing two or more products that are not separately identifiable as individual products until their split- off point.

Accepted Answer

Joint costs are incurred in the production process where two or more products are produced together up to a certain point, known as the split-off point, after which they can be identified separately.

Question 11

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:

Accepted Answer

The answer of Grape Company produces three products using a...

Question 12

Major Nelson Company is considering replacing a machine that is presently used in the production of its product. The following data are available: $\begin{array}{lll}&& \text { Replacement } \
&\text { Old Machine } & \text { Machine }\
\text { Original cost } & \$ 57,000 & \$ 35,000 \
\text { Useful life in years } & 17 & 5 \
\text { Current age in years } & 12 & 0 \
\text { Book value } & \$ 39,000 & - \
\text { Disposal value now } & \$ 8,000 & - \
\text { Disposal value in 5 years } & 0 & 0 \
\text { Annual cash operating } & \$ 7,000 & \$ 4,000\\text {costs}
\end{array}$ The difference in cost between keeping the old machine and replacing the old machine, ignoring income taxes, is:

Accepted Answer

The answer of Major Nelson Company is considering replacing a...

Question 13

If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:

Accepted Answer

When a company has excess capacity, it would only consider the variable costs of producing the product, as fixed costs are already covered. Therefore, the most it would pay is the total variable cost of producing the product.

Question 14

Dumpster 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 1,000 units. The following unit information is also available: $\begin{array}{llll}&&\text { Separable }\&&\text { Processing }\
& \text { Sales V alue at } & \text { Costs after } & \text { Sales Value at } \
\text { Product } & \text { Split- off } & \underline{\text { Split-off }} & \text { Completion }\
\mathrm{A} & \$ 12 & \$ 9 & \$ 21 \
\mathrm{~B} & 10 & 4 & 17 \
\mathrm{C} & 15 & 6 & 19
\end{array}$ If Dumpster Company makes the decisions that maximize profit, Dumpster Company's net income will be:

Accepted Answer

The answer of Dumpster Company produces three products using a...

Question 15

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

Accepted Answer

Idle facilities can impact the cost-effectiveness of making a product in-house versus buying it from an external supplier.

Question 16

Hoopster 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 are avoidable. Knight Company has offered to sell 5,000 units of the same part to Hoopster for $86.40 per unit. Assuming there is no other use for the facilities, Hoopster Company should:

Accepted Answer

The cost to make the part is $504,000, but $72,000 of fixed costs are avoidable, making the relevant cost $432,000. Buying the part costs $432,000 (5,000 units x $86.40). Thus, making the part saves $4.80 per unit ($432,000 - $432,000 = $0 savings, but $504,000 - $432,000 = $72,000 savings, or $14.40 per unit, but considering avoidable costs, it's $4.80 per unit).

Question 17

Tangerine Manufacturing 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: $\begin{array}{llll}&&\text { Separable }\&&\text { Processing }\
& \text { Sales V alue at } & \text { Costs after } & \text { Sales Value at } \
\text { Product } & \text { Split- off } & \underline{\text { Split-off }} & \text { Completion }\
\mathrm{A} & \$ 12 & \$ 9 & \$ 21 \
\mathrm{~B} & 10 & 4 & 17 \
\mathrm{C} & 15 & 6 & 19
\end{array}$ If product A is processed beyond the split- off point, profit will:

Accepted Answer

The answer of Tangerine Manufacturing Company produces three products using...

Question 18

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:

Accepted Answer

The answer of Kennedy Company manufactures a part for its...

Question 19

Hogan Corporation has a joint process which produces three products: P, G, and A. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $25,000. Other relevant data are as follows: $\begin{array}{llll}&&\text { Separable }\&&\text { Processing }\
& \text { Sales V alue at } & \text { Costs after } & \text { Sales Value at } \
\text { Product } & \text { Split- off } & \underline{\text { Split-off }} & \text { Completion }\
\mathrm{P} & \$ 32,000 & \$ 5,000 & \$ 40,000 \
\mathrm{G} & 16,500 & 7,500 & 29,000 \
\mathrm{~A} & 6,400 & 8,000 & 10,000
\end{array}$ Once product P is produced, processing it further will cause profits to:

Accepted Answer

The increase in profit from processing product P further is calculated by taking the sales value at completion ($40,000) minus the sales value at split-off ($32,000) and subtracting the separable processing costs ($5,000). This results in an increase of $3,000 ($40,000 - $32,000 - $5,000 = $3,000).

Question 20

Finch Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 3 \
\text { Direct labor } & 5 \
\text { Variable factory overhead } & 4 \
\text { Fixed factory overhead } & \underline{2} \
\text { Total costs } & \$ 14
\end{array}$ The fixed factory overhead costs are unavoidable. Scalding Corporation has offered to sell 5,000 units of the same part to Finch Company for $15 a unit. Assuming no other use for the facilities, Finch Company should:

Accepted Answer

The fixed factory overhead costs are unavoidable, so they should not be considered in the decision-making process. The relevant costs are the variable costs, which are $11 per unit. The cost to make the part is $14 per unit. Therefore, Finch Company should buy the part from Scalding Corporation to save $3 per unit.

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