F G H K A B D E J 1 Relevant costing PART 1 Molly Company has a single product called a lifter. The company currently produces and sells the following quantity of lifters each year at a selling price of $32 per unit. The company's unit costs at this 2 level of activity are given below: 3 Volume Production Sales 56,600 lifters 4 Selling Price $ $ 32.00 5 6 7 Direct materials $ 10.00 8 Direct labour 4.50 9 Variable manufacturing overhead 2.30 10 Fixed manufacturing overhead 5.00 $ 283,000 total 11 Variable Selling expenses 1.20 12 Fixed selling expenses 3.50 $ 198,100 total 13 $ 26.50 14 15 A number of questions relating to the production and sale of lifters follow. Each question is independent. 16 17 Required: 1. Assume that Molly Company has sufficient capacity to produce 90.000 lifters each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the current quantity of units each year if it were willing to increase the fixed selling expenses by $80,000. Determine the effect on operating income of this proposal. 18 19 Total production capacity 90,000 lifters 20 Current volume of production and sales 56,600 lifters 21 Increase in sales 25% 22 Fixed selling expenses increase $ 80,000 K A B D E G H 23 24 25 26 27 28 29 30 31 32 Increase (decrease) in Operating Income 33 2. The company has 1,000 lifters on hand that have some irregularities and are therefore considered to be seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. 34 35 What unit cost figure is relevant for setting a minimum selling price? 36 37 Briefly explain. 38 39 40 41 42 Relevant costing PART 2 43 44 Nimesh has been working full-time as store manager in Kemptville, Ontario. He has applied for admission to the Masters - Engineering at Carleton University 45 If accepted, he will resign from his job and move to Ottawa, Ontario. Nimesh has assembled the following data to make the decision: 46