MA Tutorial 8 Relevant Cost 1

7/11/2017 Assignment Print View
Score: 100/100 Points 100 %
http://ezto.mheducation.com/hm.tpx?todo=printview 1/19

1. Award: 10 out of 10.00 points

Han Products manufactures 30,000 units of part S-6 each year for use on its production line. At this level of
activity, the cost per unit for part S-6 is as follows:
Direct materials $3.60

Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part $25.00

An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 per part. If
Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to
another company at an annual rental of $80,000. However, Han Products has determined that two-thirds of
the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased
from the outside supplier.

Required:
(a) What is the total amount of avoidable costs if Han buys the units from an outside supplier? (Omit the
"$" sign in your response.)
Total cost $570,000

(b) How much will profits increase or decrease if the outside supplier's offer is accepted? (Input the
amount as positive value. Omit the "$" sign in your response.)
Profits would increase by $20,000
References
Worksheet Learning Objective:

14-03 Prepare a
make or buy
analysis.

Han Products manufactures 30,000 units of part S-6 each year for use on its production line. At this level of
activity, the cost per unit for part S-6 is as follows:

Direct labor 10.00
Fixed manufacturing overhead 9.00
Total cost per part $25.00

An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 per part. If
Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to
another company at an annual rental of $80,000. However, Han Products has determined that two-thirds of
the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased
from the outside supplier.

Required:
(a) What is the total amount of avoidable costs if Han buys the units from an outside supplier? (Omit the
Total cost $ 570,000

(b) How much will profits increase or decrease if the outside supplier's offer is accepted? (Input the
amount as positive value. Omit the "$" sign in your response.)
Profits would increaseby $ 20,000

Explanation:
(a)
The costs that can be avoided as a result of purchasing from the outside are relevant in a make-or-buy
decision. The analysis is:
Per Unit
Differential
Costs 30,000 Units
Make Buy Make Buy
Cost of purchasing $21.00 $630,000
Cost of making:
Direct materials $3.60 $108,000
Direct labor 10.00 300,000
Variable overhead 2.40 72,000
Fixed overhead 3.00* 90,000
Total cost $19.00 $21.00 $570,000 $630,000
* The remaining $6 of fixed overhead cost would not be relevant, because it will continue regardless of
whether the company makes or buys the parts.
(b)
The $80,000 rental value of the space being used to produce part S-6 is an opportunity cost of continuing to
produce the part internally. Thus, the complete analysis is:
Make Buy
Total cost, as above $570,000 $630,000
Rental value of the space (opportunity cost) 80,000
Total cost, including opportunity cost $650,000 $630,000
Net advantage in favor of buying $20,000
Profits would increase by $20,000 if the outside supplier's offer is accepted.


For many years Futura Company has purchased the starters that it installs in its standard line of farm
tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the
starters. The chief engineer has recommended against this move, however, pointing out that the cost to
produce the starters would be greater than the current $8.40 per unit purchase price:

Per
Total
Unit
Direct labor 2.70
Supervision 1.50 $60,000
Depreciation 1.00 $40,000
Rent 0.30 $12,000
Total production cost $9.20
A supervisor would have to be hired to oversee production of the starters. However, the company has
sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge
above is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation
is due to obsolescence rather than wear and tear.
Required:
How much would profits per unit increase or decrease as a result of making the starters? (Input the
amount as positive value. Round your answer to 1 decimal place. Omit the "$" sign in your
response.)

Profits would increase by $0.5 per unit
References

14-03 Prepare a
make or buy
analysis.

For many years Futura Company has purchased the starters that it installs in its standard line of farm
tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the
starters. The chief engineer has recommended against this move, however, pointing out that the cost to
produce the starters would be greater than the current $8.40 per unit purchase price:

Per
Total
Unit
Direct labor 2.70
Supervision 1.50 $60,000
Depreciation 1.00 $40,000
Rent 0.30 $12,000
Total production cost $9.20
A supervisor would have to be hired to oversee production of the starters. However, the company has
sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge
above is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation
is due to obsolescence rather than wear and tear.
Required:
How much would profits per unit increase or decrease as a result of making the starters? (Input the
amount as positive value. Round your answer to 1 decimal place. Omit the "$" sign in your
response.)

Profits would increase by $ 0.5 per unit

Explanation:
(a)
The target production level is 40,000 starters per period, as shown by the relations between per-unit and
total fixed costs.
"Cost"
Differential
Per
Costs
Unit
Make Buy
Direct materials $3.10 $3.10
Direct labor 2.70 2.70
Variable manufacturing overhead 0.60 0.60
Supervision 1.50 1.50
Depreciation 1.00
Rent 0.30
Outside purchase price $8.40
Total cost $9.20 $7.90 $8.40
The company should make the starters, rather than continuing to buy from the outside supplier. Making the
starters will result in a $0.50 per starter cost savings, or a total savings of $20,000 per period:
$0.50 per starter × 40,000 starters = $20,000


Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to
members of a wedding party. The normal selling price of a gold bracelet is $189.95 and its unit product cost
is $149.00 as shown below:

Direct labor 45.00
Manufacturing overhead 20.00
Unit product cost $149.00

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced
in any given period. However, $4.00 of the overhead is variable with respect to the number of bracelets
produced. The customer who is interested in the special bracelet order would like special filigree applied to
the bracelets. This filigree would require additional materials costing $2.00 per bracelet and would also
require acquisition of a special tool costing $250 that would have no other use once the special order is
completed. This order would have no effect on the company's regular sales and the order could be fulfilled
using the company's existing capacity without affecting any other order.

Required:
(a) What effect would accepting this order have on the company's net operating income if a special price of
$169.95 per bracelet is offered for this order? (Input the amount as positive value. Omit the "$" sign
in your response.)
Net operating income increased by $449

(b) Should the special order be accepted at this price?
Yes
References

14-04 Prepare an
analysis showing
whether a special
order should be
accepted.

Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to
members of a wedding party. The normal selling price of a gold bracelet is $189.95 and its unit product cost
is $149.00 as shown below:

Direct labor 45.00

Unit product cost $149.00

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced
in any given period. However, $4.00 of the overhead is variable with respect to the number of bracelets
produced. The customer who is interested in the special bracelet order would like special filigree applied to
the bracelets. This filigree would require additional materials costing $2.00 per bracelet and would also
require acquisition of a special tool costing $250 that would have no other use once the special order is
completed. This order would have no effect on the company's regular sales and the order could be fulfilled
using the company's existing capacity without affecting any other order.

Required:
(a) What effect would accepting this order have on the company's net operating income if a special price of
$169.95 per bracelet is offered for this order? (Input the amount as positive value. Omit the "$" sign
in your response.)
Net operating income increased by $ 449

(b) Should the special order be accepted at this price?
Yes

Explanation:
(a)
Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead
and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing
overhead costs are fixed and are not affected by the decision.
Total for
Per
20
Unit
Bracelets
Incremental revenue $169.95 $3,399.00
Incremental costs:
Variable costs:
Direct materials $84.00 1,680.00
Direct labor 45.00 900.00
Variable manufacturing overhead 4.00 80.00
Special filigree 2.00 40.00
Total variable cost $135.00 2,700.00
Fixed costs:
Purchase of special tool 250.00
Total incremental cost 2,950.00
Incremental net operating income $449.00
(b)
Even though the price for the special order is below the company's regular price for such an item, the
special order would add to the company's net operating income and should be accepted. This conclusion
would not necessarily follow if the special order affected the regular selling price of bracelets or if it required
the use of a constrained resource.

Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing
losses on its bilge pump product line for several years. The most recent quarterly contribution format
income statement for the bilge pump product line follows:
Thalassic Kataskeves, S.A.

Income Statement—Bilge Pump
For the Quarter Ended March 31
Sales €850,000
Variable expenses:
Variable manufacturing expenses €330,000
Sales commissions 42,000
Shipping 18,000
Total variable expenses 390,000
Contribution margin 460,000
Fixed expenses:
Advertising 270,000
Depreciation of equipment (no resale value) 80,000
General factory overhead 105,000*
Salary of product-line manager 32,000
Insurance on inventories 8,000
Purchasing department 45,000†
Total fixed expenses 540,000
Net operating loss €(80,000)
*Common costs allocated on the basis of machine-hours.
†Common costs allocated on the basis of sales euros.
Discontinuing the bilge pump product line would not affect sales of other product lines and would have no
effect on the company's total general factory overhead or total Purchasing Department expenses.
Required:
(a) Compute the increase or decrease of net operating income if the bilge pump product line are continued
or discontinued. (Leave no cells blank - be certain to enter "0" wherever required. Input all
amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net
Losses which should be indicated by a minus sign. Omit the "€" sign in your response.)
Net Operating
Keep Product Income Increase
Line Drop Product Line or (Decrease)
Sales €850,000 €0 €(850,000)
Variable expenses:
Variable manufacturing expenses 330,000 0 330,000
Sales commissions 42,000 0 42,000
Shipping 18,000 0 18,000
Total variable expenses 390,000 0 390,000
Contribution margin 460,000 0 (460,000)
Fixed expenses:
Advertising 270,000 0 270,000
Depreciation of equipment 80,000 80,000 0
General factory overhead 105,000 105,000 0
Salary of product line manager 32,000 0 32,000
Insurance on inventories 8,000 0 8,000
Purchasing department 45,000 45,000 0
Total fixed expenses 540,000 230,000 310,000
Net operating Income (loss) €(80,000) €(230,000) €(150,000)
(b) Would you recommend that the bilge pump product line be discontinued?
No
References

14-02 Prepare an
analysis showing
whether a product
line or other
business segment
should be dropped or
retained.
Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing
losses on its bilge pump product line for several years. The most recent quarterly contribution format
income statement for the bilge pump product line follows:
Thalassic Kataskeves, S.A.

Income Statement—Bilge Pump
For the Quarter Ended March 31
Sales €850,000
Variable expenses:
Variable manufacturing expenses €330,000
Sales commissions 42,000
Shipping 18,000
Total variable expenses 390,000
Contribution margin 460,000
Fixed expenses:
Advertising 270,000
Depreciation of equipment (no resale value) 80,000
General factory overhead 105,000*
Salary of product-line manager 32,000
Insurance on inventories 8,000
Purchasing department 45,000†
Total fixed expenses 540,000
Net operating loss €(80,000)
*Common costs allocated on the basis of machine-hours.
†Common costs allocated on the basis of sales euros.
Discontinuing the bilge pump product line would not affect sales of other product lines and would have no
effect on the company's total general factory overhead or total Purchasing Department expenses.
Required:
(a) Compute the increase or decrease of net operating income if the bilge pump product line are continued
or discontinued. (Leave no cells blank - be certain to enter "0" wherever required. Input all
amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net
Losses which should be indicated by a minus sign. Omit the "€" sign in your response.)
Net Operating
Keep Product Income Increase
Line Drop Product Line or (Decrease)
Sales € 850,000 € 0 € -850,000
Variable expenses:
Variable manufacturing expenses
330,000 0 330,000
Sales commissions 42,000 0 42,000
Shipping 18,000 0 18,000
Total variable expenses 390,000 0 390,000
Contribution margin 460,000 0 -460,000
Fixed expenses:
Advertising 270,000 0 270,000
Depreciation of equipment 80,000 80,000 0
General factory overhead 105,000 105,000 0
Salary of product line manager 32,000 0 32,000
Insurance on inventories 8,000 0 8,000
Purchasing department 45,000 45,000 0
Total fixed expenses 540,000 230,000 310,000
Net operating Income (loss) € -80,000 € -230,000 € -150,000
(b) Would you recommend that the bilge pump product line be discontinued?
No

Explanation:
(b)
No, the bilge pump product line should not be discontinued.


Kristen Lu purchased a used automobile for $8,000 at the beginning of last year and incurred the following
operating costs:
$1,600
Depreciation ($8,000 ÷ 5 years)
$1,200
Insurance
Garage rent $360
Automobile tax and license $40
Variable operating cost $0.14 per mile

The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that,
at her current rate of usage, the car will have zero resale value in five years, so the annual straight-line
depreciation is $1,600. The car is kept in a garage for a monthly fee.

Requirement 1:

Kristen drove the car 10,000 miles last year. Compute the average cost per mile of owning and operating
the car. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Average cost per mile $0.46

Requirement 2:
Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-
country trip for two weeks during spring break. What costs above are relevant in this decision?
Variable operating costs Relevant

Depreciation Irrelevant
Automobile tax Irrelevant
License costs Irrelevant
Insurance costs Irrelevant
References

14-01 Identify
relevant and
irrelevant costs and
benefits in a
decision.

Kristen Lu purchased a used automobile for $8,000 at the beginning of last year and incurred the following
operating costs:
$1,600
Depreciation ($8,000 ÷ 5 years)
$1,200
Insurance
Garage rent $360
Automobile tax and license $40
Variable operating cost $0.14 per mile

The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that,
at her current rate of usage, the car will have zero resale value in five years, so the annual straight-line
depreciation is $1,600. The car is kept in a garage for a monthly fee.

Requirement 1:

Kristen drove the car 10,000 miles last year. Compute the average cost per mile of owning and operating
the car. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Average cost per mile $ 0.46

Requirement 2:
Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-
country trip for two weeks during spring break. What costs above are relevant in this decision?
Variable operating costs Relevant

Depreciation Irrelevant
Automobile tax Irrelevant
License costs Irrelevant
Insurance costs Irrelevant

Explanation:
(1)
Fixed cost per mile ($3,200* ÷ 10,000 miles) $0.32

Variable operating cost per mile 0.14
Average cost per mile $0.46
*Depreciation $1,600
Insurance 1,200
Garage rent 360
Automobile tax and license 40
Total $3,200
(2)
The variable operating cost is relevant in this situation. The depreciation is not relevant because it is a sunk
cost. However, any decrease in the resale value of the car due to its use is relevant. The automobile tax
and license costs would be incurred whether Kristen decides to drive her own car or rent a car for the trip
during spring break and therefore are irrelevant. It is unlikely that her insurance costs would increase as a
result of the trip, so they are irrelevant as well. The garage rent is relevant only if she could avoid paying
part of it if she drives her own car.

Birch Company normally produces and sells 30,000 units of RG-6 each month. RG-6 is a small electrical
relay used as a component part in the automotive industry. The selling price is $22 per unit, variable costs
are $14 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total
$30,000 per month.
Employment-contract strikes in the companies that purchase the bulk of the RG-6 units have caused Birch
Company's sales to temporarily drop to only 8,000 units per month. Birch Company estimates that the
strikes will last for two months, after which time sales of RG-6 should return to normal. Due to the current
low level of sales, Birch Company is thinking about closing down its own plant during the strike, which
would reduce its fixed manufacturing overhead costs by $45,000 per month and its fixed selling costs by
10%. Start-up costs at the end of the shutdown period would total $8,000. Because Birch Company uses
Lean Production methods, no inventories are on hand.
Requirement 1:
(a) Assuming that the strikes continue for two months, compute the increase or decrease in income in
closing the plant. (Input the amount as positive value. Omit the "$" sign in your response.)
Decrease in income $40,000

(b) Would you recommend that Birch Company close the Northwest plant?
No

Requirement 2:
At what level of sales (in units) for the two-month period should Birch Company be indifferent between
closing the plant or keeping it open?
Level of sales 11,000 units

References

14-02 Prepare an
analysis showing
whether a product
line or other
business segment
should be dropped or
retained.
Birch Company normally produces and sells 30,000 units of RG-6 each month. RG-6 is a small electrical
relay used as a component part in the automotive industry. The selling price is $22 per unit, variable costs
are $14 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total
$30,000 per month.
Employment-contract strikes in the companies that purchase the bulk of the RG-6 units have caused Birch
Company's sales to temporarily drop to only 8,000 units per month. Birch Company estimates that the
strikes will last for two months, after which time sales of RG-6 should return to normal. Due to the current
low level of sales, Birch Company is thinking about closing down its own plant during the strike, which
would reduce its fixed manufacturing overhead costs by $45,000 per month and its fixed selling costs by
10%. Start-up costs at the end of the shutdown period would total $8,000. Because Birch Company uses
Lean Production methods, no inventories are on hand.
Requirement 1:
(a) Assuming that the strikes continue for two months, compute the increase or decrease in income in
closing the plant. (Input the amount as positive value. Omit the "$" sign in your response.)
Decrease in income $ 40,000

(b) Would you recommend that Birch Company close the Northwest plant?
No

Requirement 2:
At what level of sales (in units) for the two-month period should Birch Company be indifferent between
closing the plant or keeping it open?
Level of sales 11,000 units

Explanation:
1(a):
Product RG-6 has a contribution margin of $8 per unit ($22 – $14 = $8). If the plant closes, this contribution
margin will be lost on the 16,000 units (8,000 units per month × 2 months) that could have been sold during
the two-month period. However, the company will be able to avoid some fixed costs as a result of closing
down. The analysis is:
Contribution margin lost by closing the plant for

$(128,000)
two months ($8 per unit × 16,000 units)
Costs avoided by closing the plant for two months:
Fixed manufacturing overhead cost ($45,000
per month × 2 months = $90,000) $90,000
Fixed selling costs ($30,000 per month × 10%
× 2 months) 6,000 96,000
Net disadvantage of closing, before start-up costs (32,000)
Less start-up costs (8,000)
Disadvantage of closing the plant $(40,000)
1(b):
No, the company should not close the plant; it should continue to operate at the reduced level of 8,000 units
produced and sold each month. Closing will result in a $40,000 greater loss over the two-month period than
if the company continues to operate. An additional factor is the potential loss of goodwill among the
customers who need the 8,000 units of RG-6 each month. By closing down, the needs of these customers
will not be met (no inventories are on hand), and their business may be permanently lost to another
supplier.
2:
Birch Company will not be affected at a level of 11,000 total units sold over the two-month period. The
computations are:
Cost avoided by closing the plant for two months $96,000

Less start-up costs (8,000)
Net avoidable costs $88,000
Net avoidable costs $88,000

= = 11,000 units
Per unit Contribution margin $8 per unit

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect
repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the
company to consider is the production of winter lotions and creams to prevent dry and chapped skin.
After considerable research, a winter products line has been developed. However, Silven's president
has decided to introduce only one of the new products for this coming winter. If the product is a success,
further expansion in future years will be initiated.
The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The
product will be sold to wholesalers in boxes of 24 tubes for $8 per box. Because of excess capacity, no
additional fixed manufacturing overhead costs will be incurred to produce the product.
However, a $90,000 charge for fixed manufacturing overhead will be absorbed by the product under the
company's absorption costing system.
Using the estimated sales and production of 100,000 boxes of Chap-Off, the Accounting Department
has developed the following cost per box:


Direct labor 2.00
Total cost $7.00

The costs above include costs for producing both the lip balm and the tube that contains it. As an
alternative to making the tubes, Silven has approached a supplier to discuss the possibility of purchasing
the tubes for Chap-Off. The purchase price of the empty tubes from the supplier would be $1.35 per box of
24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing
overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced
by 25%.

Requirement 1:
(a) Calculate the total variable cost of one box of Chap-Off if the company manufactures all of its own tubes
from start to finish. (Do not round intermediate calculations. Round your answer to 1 decimal
place. Omit the "$" sign in your response.)

Total variable cost per box $6.1

(b) Calculate the total variable cost of one box of Chap-Off if the tubes are purchased from the outside
supplier. (Do not round intermediate calculations. Round your answer to 1 decimal place. Omit
the "$" sign in your response.)


(c) Should Silven Industries accept/reject the outside supplier's offer?
Reject

Requirement 2:
What is the maximum price that Silven Industries should be willing to pay the outside supplier per box of 24
tubes? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the

Maximum price $1.15 per box

Requirement 3:
Instead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this new
volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $40,000.
Calculate the cost under the three alternatives. (Round your total variable cost per box to 2 decimal
places. Omit the "$" sign in your response.)

(a) Total variable cost to produce 120,000 boxes of Chap-off, if all tubes required are produced internally:

Total Variable Cost $772,000

(b) Total variable cost to produce 120,000 boxes of Chap-off, if all tubes required are purchased externally:


(c) What is the total variable cost of producing 120,000 boxes of Chap-off, if 100,000 Chap-off boxes are
produced with tubes manufactured internally and tubes for remaining 20,000 Chap-off boxes are
purchased externally?

rev: 04-29-2011

References

14-03 Prepare a
make or buy
analysis.
Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect
repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the
company to consider is the production of winter lotions and creams to prevent dry and chapped skin.
After considerable research, a winter products line has been developed. However, Silven's president
has decided to introduce only one of the new products for this coming winter. If the product is a success,
further expansion in future years will be initiated.
The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The
product will be sold to wholesalers in boxes of 24 tubes for $8 per box. Because of excess capacity, no
additional fixed manufacturing overhead costs will be incurred to produce the product.
However, a $90,000 charge for fixed manufacturing overhead will be absorbed by the product under the
company's absorption costing system.
Using the estimated sales and production of 100,000 boxes of Chap-Off, the Accounting Department
has developed the following cost per box:


Direct labor 2.00
Total cost $7.00

The costs above include costs for producing both the lip balm and the tube that contains it. As an
alternative to making the tubes, Silven has approached a supplier to discuss the possibility of purchasing
the tubes for Chap-Off. The purchase price of the empty tubes from the supplier would be $1.35 per box of
24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing
overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced
by 25%.

Requirement 1:
(a) Calculate the total variable cost of one box of Chap-Off if the company manufactures all of its own tubes
from start to finish. (Do not round intermediate calculations. Round your answer to 1 decimal
place. Omit the "$" sign in your response.)

Total variable cost per box $ 6.1

(b) Calculate the total variable cost of one box of Chap-Off if the tubes are purchased from the outside
supplier. (Do not round intermediate calculations. Round your answer to 1 decimal place. Omit
the "$" sign in your response.)

Total variable cost per box $ 6.3

(c) Should Silven Industries accept/reject the outside supplier's offer?
Reject

Requirement 2:
What is the maximum price that Silven Industries should be willing to pay the outside supplier per box of 24
tubes? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the

Maximum price $ 1.15 per box

Requirement 3:
Instead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this new
volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $40,000.
Calculate the cost under the three alternatives. (Round your total variable cost per box to 2 decimal
places. Omit the "$" sign in your response.)

(a) Total variable cost to produce 120,000 boxes of Chap-off, if all tubes required are produced internally:

Total Variable Cost $ 772,000

(b) Total variable cost to produce 120,000 boxes of Chap-off, if all tubes required are purchased externally:


(c) What is the total variable cost of producing 120,000 boxes of Chap-off, if 100,000 Chap-off boxes are
produced with tubes manufactured internally and tubes for remaining 20,000 Chap-off boxes are
purchased externally?

rev: 04-29-2011

Explanation:
1(c):
The $90,000 in fixed overhead cost charged to the new product is a common cost that will be the same
whether the tubes are produced internally or purchased from the outside. Hence, it is not relevant. The
variable manufacturing overhead per box of Chap-Off would be $0.50, as shown below:
Total manufacturing overhead cost per box of Chap-Off $1.40

Less fixed portion ($90,000 ÷ 100,000 boxes) 0.90
Variable overhead cost per box $0.50
The total variable cost of producing one box of Chap-Off would be:

Direct labors 2.00
If the tubes for the Chap-Off are purchased from the outside supplier, then the variable cost per box of
Chap-Off would be:
Direct materials ($3.60 × 75%) $2.70

Direct labor ($2.00 × 90%) 1.80
Variable manufacturing overhead ($0.50 × 90%) 0.45
Cost of tube from outside 1.35
Therefore, the company should reject the outside supplier's offer. A savings of $0.20 per box of Chap-Off
will be realized by producing the tubes internally.
2:
The maximum purchase price would be $1.15 per box. The company would not be willing to pay more than
this amount because the $1.15 represents the cost of producing one box of tubes internally, as shown in
Requirement 1. To make purchasing the tubes attractive, however, the purchase price should be less than
$1.15 per box.
3(a):
Cost of making 120,000 boxes:

120,000 boxes × $6.10 per box $732,000
Rental cost of equipment 40,000
Total variable cost $772,000
3(b):
Cost of buying 120,000 boxes:
120,000 boxes × $6.30 per box = $756,000.
3(c):
Cost of making: 100,000 boxes × $6.10 per box $610,000

Cost of buying: 20,000 boxes × $6.30 per box 126,000
Total variable cost $736,000

MA Tutorial 8 Relevant Cost 1

Uploaded by

Copyright:

Available Formats

MA Tutorial 8 Relevant Cost 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MA Tutorial 8 Relevant Cost 1

Uploaded by

Copyright:

Available Formats

7/11/2017 Assignment Print View

Score: 100/100 Points 100 %

Direct materials $3.60

Total cost $570,000

Profits would increase by $20,000

Worksheet Learning Objective:

Direct materials $3.60

Total cost $ 570,000

Profits would increaseby $ 20,000

Profits would increase by $20,000 if the outside supplier's offer is accepted.

Worksheet Learning Objective:

Total production cost $9.20

Direct materials $84.00

Net operating income increased by $449

Worksheet Learning Objective:

Direct materials $84.00

Manufacturing overhead 20.00

Net operating income increased by $ 449

Thalassic Kataskeves, S.A.

Worksheet Learning Objective:

Thalassic Kataskeves, S.A.

Average cost per mile $0.46

Variable operating costs Relevant

Worksheet Learning Objective:

Average cost per mile $ 0.46

Variable operating costs Relevant

Fixed cost per mile ($3,200* ÷ 10,000 miles) $0.32

Decrease in income $40,000

Level of sales 11,000 units

Worksheet Learning Objective:

Decrease in income $ 40,000

Level of sales 11,000 units

Contribution margin lost by closing the plant for

Cost avoided by closing the plant for two months $96,000

Net avoidable costs $88,000

Direct materials $3.60

Worksheet Learning Objective:

Direct materials $3.60

Total variable cost per box $ 6.1

Total manufacturing overhead cost per box of Chap-Off $1.40

Direct materials $3.60

Direct materials ($3.60 × 75%) $2.70

Cost of making 120,000 boxes:

Cost of making: 100,000 boxes × $6.10 per box $610,000

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.