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Relevant costs problems and solutions 2016
Managerial Accounting (Johnson & Wales University)
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Managerial Accounting
Relevant costs decisions
1. Company A manufactures bicycles. It can produce 1,000 units in a month for a fixed cost of
$100,000 and variable cost of $500 per unit. Its current demand is 600 units which it sells at $1,000
per unit. It is approached by Company B for an order of 200 units at $700 per unit. Should the
company accept the order?
The company should accept the order since the will general a contribution margin of $200 per bicycle
($700 - $500).
2. The estimated costs of producing 6,000 units of a component are:
Per Unit
Total
Direct Material
$10
$60,000
Direct Labor
8
48,000
Applied Variable Factory Overhead
9
54,000
Applied Fixed Factory Overhead
12
72,000
$1.5 per direct labor dollar
$39
$234,000
The same component can be purchased from market at a price of $29 per unit. If the component is
purchased from market, 25% of the fixed factory overhead will be saved.
Should the component be purchased from the market?
Relevant costs:
To make
Direct Material
Direct Labor
Applied Variable Factory Overhead
Applied Fixed Factory Overhead
$1.5 per direct labor dollar (25%)
Purchase price
Total cost
To buy
$10
8
9
3
$30
$29
$29
The component should be purchased from market because it would be more cost effective by $1 x
6,000= $6,000.
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3. Product A and B are produced in a joint process. At split-off point, Product A is complete whereas
product B can be process further. The following additional information is available:
Product
A
B
Quantity in Units
5,000
10,000
Selling Price Per Unit:
At Split-Off
$10
$2.5
If Processed Further
$5
Costs After Split-Off
$20,000
Perform sell-or-process-further analysis for product B.
Should the company sell at split-off or process further?
Contribution to income from selling at split-off:
10,000 x $2.5 =$25,000
Contribution to income from selling it after processing it further:
10,000 x $5 = $50,000 - $20,000 = $30,000
The company should sell B after processing it further. The increase in operating income is $5,000.
4. A company has three products: Product A, Product B and Product C. Income statements of the
three product lines for the latest month are given below:
Product Line
A
B
C
Sales
$467,000
$314,000
$598,000
Variable Costs
241,000
169,000
321,000
Contribution Margin
$226,000
$145,000
$277,000
Direct Fixed Costs
91,000
86,000
112,000
Allocated Fixed Costs
93,000
62,000
120,000
Net Income
$42,000
− $3,000
$45,000
Use the incremental approach to determine if Product B should be dropped.
Product B should not be dropped because Allocated fixed costs are considered unavoidable and the
company will incurred those regardless of the decision to drop or keep B. If they keep product B
operating income will increase by $59,000 ($145,000 - $86,000).
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5. A company has 4,000 machine hours of plant capacity per month which are to be allocated to
products A and B. The following per unit figures relate to the products:
Product
A
B
Sale Price
$300
$240
Costs:
Direct Material
100
70
Direct Labor
65
50
Variable Overhead
20
40
Fixed Overhead
15
30
Variable Operating
40
20
Expenses
Total Costs
$240
$210
Net Income
$60
$30
Machine Hours Required
1.5
1.00
Assuming that the company can sell all its products A output but only 3,500 units of product B ,
determine how many machine hours shall be allocated to each product.
A
Contribution margin per unit
$75
Machine hours required
/
1.5
Contribution margin per machine hour $50
B
/
$60
1.00
$60
B is the product with the highest contribution margin per machine hour.
The company should produce 3,500 units of product B. It will take 1 hour per unit.
Total time 4,000 – 3,500 = 500 to be allocated to product A.
Optimal product mix:
A:
500/1.5 = 333 units
B:
3,500 units
Units
Contribution margin
Total CM
A
333
B
3,500
$75
$24,975
$60
+
210,000 = $234,975
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6. Lars Company manufactures a part for use in its production of coats. When 10,000 items are
produced, the costs per unit are:
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
$0.70
3.50
1.40
1.80
$7.40
Kalamar Company has offered to sell to Lars Company 10,000 units of the part for $7.00 per unit. The
plant facilities could be used to manufacture another item at a savings of $8,000 if Lars accepts the
offer. In addition, 75% per unit of fixed manufacturing overhead on the original item would be
eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lars Company? By how much?
To make
Direct materials
$0.70
Direct manufacturing labor
3.50
Variable manufacturing overhead
1.40
Fixed manufacturing overhead (75%) 1.35
To buy
Foregone savings ($8,000/10,000)
.80
Purchase price
$7.00
Total
$7.75
$7.00
Increase in operating income $.75 x 10,000 = $7,500 if purchased from Kalamar Company.
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