11-30 Relevant Cost Exercises Each of the following situations is independent: a. Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $120,000. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:

Cost per Unit Direct materials $28 Direct labor 18 Variable overhead 16 Allocated fixed overhead 4

Required 1. What is the relevant cost (per unit, rounded to 2 decimal places) to make the product internally? 2. What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier? (Round your answer to nearest whole dollar.) 3. What strategic considerations likely bear on this make-vs.-buy decision?

b. Disposal of Assets A company has an inventory of 2,000 different parts for a line of cars that has been discontinued. The net book value (NBV) of this inventory is $50,000. The parts can be either re-machined at a total additional cost of $25,000 and then sold for $30,000, or the parts can be sold as-is for $2,500. Required What should the company do? Include both financial and strategic considerations.

c. Asset Replacement An uninsured boat costing $90,000 was wrecked the first day it was used. It can be either sold as-is for $9,000 cash and replaced with a similar boat costing $92,000 or rebuilt for $75,000 and be brand new as far as operating characteristics and looks are concerned.

Required What should be done? Include a consideration of both financial and strategic factors.

d. Profit from Processing Further Deaton Corporation manufactures products A, B, and C from a joint process. Joint costs are allocated on the basis of relative sales value of the products at the split-off point. Additional information for Deaton Corporation follows:

A B C Total Units produced 12,000 8,000 4,000 24,000 Joint costs $144,000 $ 60,000 $36,000 $240,000 Sales value before additional processing 240,000 100,000 60,000 . 400,000 Additional costs for further processing 28,000 20,000 12,000 60,000 Sales value if processed further 280,000 120,000 . 70,000 470,000 Final PDF to printer

Required 1. Define the following terms: joint production process, joint production costs, separable processing costs, and split-off point. 2. What is the impact on short-term operating income of processing each of the three products (A, B, and C) beyond the split-off point? Round each answer to nearest whole dollar. 3. Why do accountants allocate joint/common costs to individual products in a joint manufacturing process?

e. Make vs. Buy (Sourcing Decision) Eggers Company needs 20,000 units of a part to use in producing one of its products. If Eggers buys the part from McMillan Company for $90 instead of making it, Eggers will not use the released facilities in another manufacturing activity. Forty percent of the fixed overhead will continue irrespective of CEO Donald Mickeys decision. The cost data are as follows:

Cost to make the part: Direct materials $35 Direct labor 16 Variable overhead 24 Fixed overhead . 20 $95

Required 1. Determine which alternative is more attractive to Eggers, and by what amount. 2. What strategic factors might bear upon the ultimate decision?

f. Short-Term Product-Mix Decision DVD Production Company produces two basic types of video games, Flash and Clash. Pertinent data for DVD Production Company follow:

*Based on direct labor hours: 4 direct labor hours (DLHs) per unit of Flash and 2 DLHs per unit of Clash.

Flash Clash Sales price $250 $140 Costs Direct materials 50 . 25 Direct labor (@ $25/hr.) 100 50 Variable factory overhead* 50 25 Fixed factory overhead* 20 10 Marketing costs (all fixed) 10 10 Total costs $230 $120 Operating profit $ 20 $ 20

The DVD game craze is at its height so that either Flash or Clash alone can be sold to keep the plant operating at full capacity. However, labor capacity in the plant is insufficient to meet the combined demand for both games. Flash and Clash are processed through the same production departments. Required 1. What is the meaning and importance of the statement that Flash and Clash are processed through the same production departments? 2. Which of the two products should be produced? Briefly explain your answer.

g. Special-Order Pricing Barrys Bar-B-Que is a popular lunch time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 600 patrons for his $5 lunch. His variable cost for each meal is about $2, and he figures his fixed costs, on a daily basis, are about $1,200. From time to time, bus-tour groups with 50 patrons stop by. He has welcomed them because he has capacity to seat 700 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $3.50 per meal for each of the 50 bus-tour members. Required 1. What is the incremental profit (loss) per bus-tour meal? Should Barry accept the bus-tour offer? 2. What if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $3.00 per meal? What is the incremental profit (loss) for each meal? Is the offer financially attractive?