b d b b d a a The company can only perform \(12,000\) set-ups each period yet there is unlimited demand for each product. What is the differential profit from
producing product E instead of product F for the year? b Primarily
disagree, but there are a few times where fixed costs can be avoided or partially avoided. Variable costs are avoidable costs since variable costs do not exist if the product is no longer made, or if the portion of the business (such as a segment or division) that generated the variable costs ceases to operate. Fixed costs, on the other hand, may be unavoidable, partially unavoidable, or avoidable only in certain circumstances. When a company discontinues a product or service, certain fixed
costs may not be required. One issue is the concern for how existing customers will feel if they discover that the company offered a lower price to the special-order customer for the same goods or services. If the goods in the special order are modified, and thus cheaper
for that reason, current customers may prefer the modified, cheaper version of the product. The company would need to determine if selling the new version of the project would hurt profitability or the company’s reputation. First and foremost, customer service quality is a consideration, followed closely by the ability of the offshore
personnel to speak clearly in English and to understand the customer’s needs. Chief operating officers should also make sure that the call centers are adequately staffed and run in an ethical manner, similar to the main company contracting with the outsourced service. Offshoring disadvantages should be weighed against domestic outsourcing in the areas of time zone problems, politically correct labor choices, rising labor costs abroad, as well as culture and language. The bakery manager’s salary would be avoidable and therefore differential in the
analysis. In general, if the differential revenue from processing further is greater than the differential costs, then it will be profitable to process a joint product after the split-off point. Any costs
incurred prior to the split-off point are irrelevant to the decision to process further, as those are sunk costs, and only future costs are relevant costs. Joint product costs are common costs that are incurred simultaneously to produce a variety of end products. Even though they are common costs, they are routinely allocated to the joint products. A special order to purchase \(15,000\) arc printers has recently been received from another company and Zena has idle capacity to fill the
order. Zena will incur an additional \(\$2\) per printer for additional labor costs due to a slight modification the buyer wants made to the original product. One-third of the manufacturing overhead costs is fixed and will be incurred no matter how many units are produced. When negotiating the price, what is the minimum selling price that Zena should accept for this special order? A potential supplier has offered to sell Reuben the rolls for \(\$0.90\) each. If the rolls are purchased, \(30\%\) of the fixed overhead could be avoided. If Reuben accepts the offer, what will the effect on profit be?
The manufacturing overhead consists of \(\$2,000\) of variable costs with the balance being allocated to fixed costs. Should Almond Treats make or buy the almond cereal?
If costumes are dropped, what change will occur to profit?
Which of the products should be processed further?
Exercise Set B
A fraternity with which Aspen has a long relationship approached Aspen with a special order for \(6,000\) pins at a price of \(\$2.75\) per pin. Variable costs will be the same as the current production, and the special order will not impact the rest of the company’s orders. However, Aspen is operating at capacity and will incur an additional \(\$5,000\) in fixed manufacturing overhead if the order is accepted. Based on this information, what is the differential income (loss) associated with accepting the special order?
A potential supplier has offered to sell Country Diner the cookies for \(\$0.85\) each. If the cookies are purchased, \(10\%\) of the fixed overhead could be avoided. If Jason accepts the offer, what will the effect on profit be?
The manufacturing overhead consists of \(\$3,000\) of variable costs with the balance being allocated to fixed costs. Should Oat Treats make or buy the oat bars?
If costumes are dropped, what change will occur to profit?
Which of the products should be processed further?
Problem Set A
At the start of the current year, Marcotti received a special order for \(15,000\) cupcakes to be sold for \(\$1.10\) per cupcake. To complete the order, the company must incur an additional \(\$700\) in total fixed costs to lease a special machine that will stamp the cupcakes with the customer’s logo. This order will not affect any of Marcotti’s other operations and it has excess capacity to fulfill the contract. Should the company accept the special order? (Show your work.)
The company received an offer from Elite Mini-Bars to produce the insets for \(\$2,100\) per unit and supply \(1,000\) mini-bars for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the mini-bar production can be used by a different production group that will lease it for \(\$55,000\) per year. Should the company make or buy the mini-bar insert?
Variable manufacturing overhead is applied at \(\$1.00\) per unit. The other \(\$0.30\) of overhead consists of allocated fixed costs. Gent will need \(6,000\) units of part A for the next year’s production. Cory Corporation has offered to supply \(6,000\) units of part A at a price of \(\$7.00\) per unit. If Gent accepts the offer, all of the variable costs and \(\$1,200\) of the fixed costs will be avoided. Should Gent Designs accept the offer from Cory Corporation?
What is the annual financial impact of hiring the extra worker for the bottleneck process?
Problem Set B
At the start of the current year, Cinnamon Depot received a special order for \(18,000\) rolls to be sold for \(\$1.50\) per roll. The company estimates it will incur an additional \(\$1,000\) in total fixed costs in order to lease a special machine that forms the rolls in the shape of a heart per the customer’s request. This order will not affect any of its other operations. Should the company accept the special order? (Show your work.)
The company received an offer from Saied Tents to produce the awnings for \(\$3,200\) per unit and supply \(1,000\) awnings for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the awning production can be used by a different production group that will lease it for \(\$60,000\) per year. Should the company make or buy the awnings?
Variable manufacturing overhead is applied at \(\$1.60\) per unit. The other \(\$0.50\) of overhead consists of allocated fixed costs. Remarkable will need \(8,000\) units of part A for the next year’s production. Altoona Corporation has offered to supply \(8,000\) units of part A at a price of \(\$8.00\) per unit. If Remarkable accepts the offer, all of the variable costs and \(\$2,000\) of the fixed costs will be avoided. Should Remarkable accept the offer from Altoona Corporation?
What is the annual financial impact of hiring the extra worker for the bottleneck process?
Thought Provokers
What is the differential cost of the two alternatives:
Which of the following is always irrelevant in decision making?Since decision making is usually carried out by taking into consideration all the incremental or prospective activities, the sunk costs are always irrelevant in decision making. The avoidable costs are usually the variable costs and are contingent on a given decision.
Which of the following costs is irrelevant to decision making?Fixed costs are irrelevant in a decision. 2. Any cost that is avoidable is relevant for decision purposes.
Which of the following is an irrelevant cost quizlet?Irrelevant costs include: sunk costs: costs that have already been incurred and are irrevocable; cannot be recovered with any decision. future costs: are the same for the alternatives. -depreciation: the cost was incurred when the fixed asset was bought and can not be recovered.
What are the two keys in short term decision making?The two keys in short-term decision making are: Revenues, costs, and profits. Utilization of contribution margin approach.
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