ABC Company has just received a special order for 1,000 deckchairs. ABC has sufficient idle capacity to accept the order.Indicate whether the given cost is a sunk cost, opportunity cost,relevant or not relevant to the decision to accept the specialorder, variable or fixed. A variable cost is one that varies withthe number of chairs that Halley makes. Note: you will choosemultiple options for each scenario.
1. Raw materials to make 1,000 deck chairs
2. Depreciation on equipment that will be used to make chairs
3. Revenue that could be earned if special order is notaccepted
4. Salary of the production department manager (department thatwill make the chairs)
5.Equipment set-up costs incurred to make the chairs
6. Company president's salary
7. Material's handling cost
8. Effect of accepting the order on Company's reputation
9. Engineering design costs incurred when chair's design was firstdeveloped
10. Engineering design costs incurred to customize the chairs tocustomers' specifications
11. Direct labor costs to make 1,000 chairs
12. Maintenance on the equipment that would have been performedduring the idle time if the order had not been accepted
13. manager's estimates of revenue that may be generated from thiscustomer in the future if the special order is accepted
ABC Company has just received a special order for 1,000 deckchairs. ABC has sufficient idle capacity to accept the order.Indicate whether the given cost is a sunk cost, opportunity cost,relevant or not relevant to the decision to accept the specialorder, variable or fixed. A variable cost is one that varies withthe number of chairs that Halley makes. Note: you will choosemultiple options for each scenario.
1. Raw materials to make 1,000 deck chairs
2. Depreciation on equipment that will be used to make chairs
3. Revenue that could be earned if special order is notaccepted
4. Salary of the production department manager (department thatwill make the chairs)
5.Equipment set-up costs incurred to make the chairs
6. Company president's salary
7. Material's handling cost
8. Effect of accepting the order on Company's reputation
9. Engineering design costs incurred when chair's design was firstdeveloped
10. Engineering design costs incurred to customize the chairs tocustomers' specifications
11. Direct labor costs to make 1,000 chairs
12. Maintenance on the equipment that would have been performedduring the idle time if the order had not been accepted
13. manager's estimates of revenue that may be generated from thiscustomer in the future if the special order is accepted
Related questions
Tactical decision making
Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.
| 1. | Recognize and define theproblem. |
| 2. | Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives. |
| 3. | Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision. |
| 4. | Compare the relevant costsand benefits for each alternative. |
| 5. | Assess qualitative factors. |
| 6. | Select the alternative with thegreatest overall benefit. |
Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.
Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):
| Accept the special order. | - Select your answer -YesNoItem1 |
| Reject the special order. | - Select your answer -YesNoItem2 |
| Sell normal sales for $25 perunit. | - Select your answer -YesNoItem3 |
Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)
| $25 price. | - Select your answer -YesNoItem4 |
| $30 normal price. | - Select your answer -YesNoItem5 |
| Variable cost of making the unitsin the special order. | - Select your answer -YesNoItem6 |
| Depreciation on factory equipmentused in making the special order units. | - Select your answer -YesNoItem7 |
| Increased property taxes on thefactory building which are due while the special order would bemade. | - Select your answer -YesNoItem8 |
While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.
1) All of the following are examples of product costs except:
depreciation on the company's administrative offices.
salary of the plant manager.
insurance on the factory equipment.
rental costs of the factory facility.
2) Period costs:
are treated as expenses in the period they are incurred
are directly traceable to products
include direct labor
are also referred to as manufacturing overhead costs
.
3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:
Direct materials $30
Direct manufacturing labor 5
Variable manufacturing overhead 10
Fixed manufacturing overhead 40
Total manufacturing costs $85
The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?
a. $85,000
b. $170,000
c. $107,500
d. $102,500
4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:
overstate period expenses on the income statement.
overstate the cost of goods sold on the income statement.
understate the cost of goods manufactured.
have no effect on the cost of goods manufactured.
5) In CVP analysis, focusing on target net income rather than operating income:
a. will increase the breakeven point
b. will decrease the breakeven point
c. will not change the breakeven point
d. does not allow calculation of breakeven point
6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.
a. True
b. False
7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.
a. True
b. False
8) Which of the following statements is correct with regard to a CVP graph?
A CVP graph shows the maximum possible profit.
A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
A CVP graph assumes that total expense varies in direct proportion to unit sales.
A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.
9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?
| Cost of purchasing clothing | Sales commissions | |
| a. | Product | Product |
| b. | Product | Period |
| c. | Period | Product |
| d. | Period | Period |
10) The principal difference between variable costing and absorption costing centers on:
whether variable manufacturing costs should be included as product costs.
whether fixed manufacturing costs should be included as product costs.
whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.
none of these.
11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?
3,300 hot dogs
3,000 hot dogs
2,727.27 hot dogs
2,728 hot dogs
12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:
| Unit product cost under variable costing.......................... | $5.20 per unit | |
| Fixed manufacturing overhead cost for the year.............. | $260,000 | |
| Fixed selling and administrative cost for the year............ | $180,000 | |
| Units (calculators) produced and sold.............................. | 400,000 |
What is Shun's unit product cost under absorption costing for last year?
$4.10
$4.55
$5.85
$6.30.
Use the following information to answer questions 13 to 15:
Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.
13) Calculate the number of equivalent units for materials.
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
14) Calculate the number of equivalent units for conversion?
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:
| Materials | Conversion | ||
| Work in process 5/1....................... | $13,800 | $3,740 | |
| Costs added during May................ | $42,000 | $26,260 |
The total cost per equivalent unit for May was:
$5.02
$5.10
$5.12
$5.25
