Cost Accounting Ch 11

CHAPTER 11

DECISION MAKING AND RELEVANT INFORMATION

11-18 (15 min.) Multiple choice.

1. (b) Special order price per unit $6.00

Variable manufacturing cost per unit 4.50

Contribution margin per unit $1.50

Effect on operating income = $1.50  20,000 units

= $30,000 increase

2. (b) Costs of purchases, 20,000 units  $60 $1,200,000

Total relevant costs of making:

Variable manufacturing costs, $6 + $30 + $12 $48

Fixed costs eliminated 9

Costs saved by not making $57

Multiply by 20,000 units, so total

costs saved are $57  20,000 1,140,000

Extra costs of purchasing outside 60,000

Minimum overall savings for Reno 25,000

Necessary relevant costs that would have

to be saved in manufacturing Part No. 575 $ 85,000

11-19 (30 min.) Special order, activity-based costing.

1. Direct materials cost per unit ($262,500  7,500 units) = $35 per unit

Direct manufacturing labor cost per unit ($300,000  7,500 units) = $40 per unit

Variable cost per batch = $500 per batch

Award Plus’ operating income under the alternatives of accepting/rejecting the special order are:

Without One-Time Only Special Order

7,500 Units With One-Time Only Special Order

10,000 Units

Difference

2,500 Units

Revenues $1,125,000 $1,375,000 $250,000

Variable costs:

Direct materials 262,500 350,0001 87,500

Direct manufacturing labor 300,000 400,0002 100,000

Batch manufacturing costs 75,000 87,5003 12,500

Fixed costs:

Fixed manufacturing costs 275,000 275,000 ––

Fixed marketing costs 175,000 175,000 ––

Total costs 1,087,500 1,287,500 200,000

Operating income $ 37,500 $ 87,500 $ 50,000

1$262,500 + ($35  2,500 units) 2$300,000 + ($40  2,500 units) 3$75,000 + ($500  25 batches)

Alternatively, we could calculate the incremental revenue and the incremental costs of the additional 2,500 units as follows:

Incremental revenue $100 ...