Relevant Costs

Module Problem

Problem 1.Gears R Us produces high quality grandfather clocks. In the past, it has made all components of the product in house. The selling price of the most popular clock, Old Dependable, with unit sales of 30,000 per year, is $3,500.The unit cost for this clock follows (overhead is applied on the basis of machine hours).

DM$990

DL440

VOH60

FOH200

Recently, a firm located in Vancouver has contacted the buyers of Gears R Us and offered to sell them gear mechanisms at $100 each. The supplier guarantees the quality of the product and offers to alter it in any way necessary so it fits seamlessly into the production process for Old Dependable. The current cost for the gear mechanism if produced in house is:

DM$57

DL33

VOH12

FOH45

Compute the impact on NI if the firm accepts the offer to buy the gear mechanisms instead of producing them in house.

Problem 2. Baubles for Barbie is a jewelry maker that sells its products to retailers in the local tourist area. It makes a wide variety of products. Two of its best sellers are necklaces and a pair of matching earrings. Both are made from Dunovite, a rare mineral found only on the beaches of Lake Erie, with a cost of $3.60 per ounce. Information about the two items follows (note that OH is applied on the basis of DM$):

NecklaceEarrings

SP$100$65

Demand2,000900

DM$13.20$5.60

DL5.407.20

VOH1.32.56

FOH5.282.24

Ounces of Dunovite1.51.1

Recently, the government has imposed strict limits on the harvesting of Dunovite.Baubles will only be able to get 1,200 ounces per year.

Based only on short term financial considerations, how many necklaces and how many earrings should the firm make.Show supporting computations.

Problem 3. Outdoorsy Company is a new company that makes only one product: a set of titanium walking sticks.Each set is custom made to the client's measurements and specifications.The average absorption costing unit cost has been determined as follows:

DM$25.00

DL15.00

VOH13.75

FOH49.00

Total Unit Cost$102.75

Overhead in the firm is applied on the basis of machine hours.Each set of walking sticks requires 5 machine hours.The overhead rates used to determine the unit cost are factory wide rates based on an expected level of activity for the year of 4,000 machine hours.The firm was built to handle 8,000 machine hours per year, since it is expecting a rapid increase in sales after the first year.

Selling and administrative costs for the year are $6 per unit variable and $60,000 per year fixed.

On November 5, a tour company that takes expeditions climbing on Mount Kilimanjaro has approached Outdoorsy with an offer to buy 300 identical sets of walking sticks to be used in its operations.These products would use slightly less expensive materials, saving $5 per unit in direct materials.Machine hours per unit would remain at 5 hours. There would be no impact on fixed selling and administrative costs. The tour company has agreed to pay shipping. The offer price is $75 per unit.

Assume that sales for the first year (January through December) are running as expected and the firm will sell 800 sets of walking sticks without this offer.What would be the impact on net income of accepting the offer from the tour company?

Problem 4. Naturally Pretty is a local nursery that has three product lines. Bushes is the most recent addition and has been underperforming expectations. Contribution income statements follow.