Chapter 23: Quick Study

QS 23-1: Identifying Relevant Costs for Special Offer • • • Scenario: Helix Company is approached to provide 2,000 units at a special price of $6 per unit (normal price: $8/unit). Helix operates at 75% capacity (7,500 units out of 10,000 capacity), so it has excess capacity. No additional fixed overhead or fixed general and administrative costs will be incurred. Relevant Costs: o Variable Costs: Relevant because they change with production. o Fixed Overhead and Fixed General and Administrative Costs: Not relevant because they do not change with the order. Decision: Only costs directly affected by the order should be considered. QS 23-2: Special Offer Decision • Decision: Based on the relevant costs and incremental income, if the variable costs are covered by the $6/unit price and contribute to overall profit, the special order should be accepted. Since Helix is operating below capacity, the additional units will likely add to overall income. QS 23-3: Identifying Relevant Costs for Sell or Process • • Scenario: Zycon has 10,000 units of raw milk produced at $15,000. They can be sold as-is for $20,000, or processed further for $22,000 to yield yogurt worth $35,000. Relevant Costs: o Sell As-Is Revenue ($20,000): Relevant. o Cost to Process Further ($22,000): Relevant. o Revenues from Yogurt Sales ($35,000): Relevant. o Initial $15,000 Cost to Produce Milk: Sunk Cost, Not Relevant. QS 23-4: Identifying Sunk and Relevant Costs 1. Old Machine Replacement: o Book Value of $50,000: Sunk cost. o Sale Value of Old Machine ($55,000): Relevant revenue. o Cost of New Machine ($100,000): Relevant cost. 2. Shirt Rework: o Initial $2,000 Spent: Sunk cost. o Sell As-Is Revenue ($1,000): Relevant. o Cost to Rework ($6,000): Relevant. o Reworked Shirt Revenue ($10,000): Relevant. QS 23-5 & 23-6: Make or Buy Analysis 1. Kando Company: Make Cost: $3 (Direct Materials) + $2 (Direct Labor) + $1 (Incremental Overhead) = $6. o Predetermined Overhead (200% of $2 Labor): $4. o Total Make Cost: $10/unit. o Buy Cost: $7/unit. o Decision: Buy, as $7 is cheaper than the calculated $10/unit. 2. Maya Co.: o Make Cost: $2.25 (Materials) + $1.00 (Labor) + $0.75 (Incremental Overhead) = $4/unit. o Predetermined Overhead (125% of $1 Labor): $1.25. o Total Make Cost: $5.25/unit. o Buy Cost: $3/unit. o Decision: Buy, as $3 is cheaper than the calculated $5.25/unit. o QS 23-7 & 23-8: Sell or Process Further Analysis 1. Holmes Company: o Sell As-Is Revenue: $67,500. o Process Further Cost: $312,500. o Processed Product Revenue: $468,750. o Income from Processing: $468,750 - $312,500 = $156,250. o Decision: Process Further, as the additional income from processing is $88,750 ($156,250 - $67,500). 2. Tomatoes Processing: o Sell As-Is Revenue: $90,000. o Process Further Cost: $48,000. o Processed Product Revenue: $126,000. o Decision: Process Further, additional income is $6,000 ($126,000 $90,000). QS 23-9 & 23-10: Scrap or Rework Analysis 1. Garcia Company: o Scrap Value: $20,000. o Rework Cost: $38,000. o Rework Revenue: $50,000. o Income from Reworking: $50,000 - $38,000 = $12,000. o Decision: Rework, as it results in $12,000 additional income. 2. Rosa Company: o Scrap Value: $30,000. o Rework Cost: $80,000. o Rework Revenue: $120,000. o Income from Reworking: $120,000 - $80,000 = $40,000. o Decision: Rework, as it results in $10,000 more compared to scrapping. QS 23-11 & 23-12: Contribution Margin Analysis 1. Estela Company: o Contribution Margin for Skateboards: (Selling Price - Variable Costs). o Contribution Margin per Machine Hour: Contribution Margin ÷ Machine Hours Required. 2. Surf Company Sales Mix: o Calculate Contribution Margin per Labor Hour. o Choose product mix based on the highest contribution margin per hour. QS 23-13 & 23-14: Segment Elimination 1. Income Analysis for the segment's elimination by comparing avoidable costs to segment losses. 2. Decision is to eliminate if overall income increases. QS 23-15: Keep or Replace Analysis 1. Compare the variable costs saved by replacing machinery with the cost of acquiring the new machine. 2. Replace if it results in increased income. QS 23-16 to QS 23-22: Pricing Analysis 1. Total Cost and Variable Cost Pricing: Calculate the per-unit cost with markup to determine the price. 2. Special Offers: Assess the incremental income from special orders. 3. Time and Materials: Use labor hours and material costs with markup to calculate pricing. This detailed analysis covers decision scenarios based on profitability, resource allocation, and strategic considerations.