T5 (Q) Relevant Costs and Short Term Decision Making 1. The $351.1. Company has two divisions-North and South. The divisions have the following revenues and expenses: North South Sales .............. $900.000 $800.000 Variable expenses .......... 450.000 300.000 Traceable fixed expenses ............................ 260.000 210.000 Allocated common corporate expenses ........ 240.000 190.000 Net operating income (loss) ........................ $150000} $100000 Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated. its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data. what is the company net operating income if North Division is eliminated? 2. Manor Company plans to discontinue a department that has a contribution margin of $24.000 and $48.000 in fixed costs. Ofthe fixed costs. $21.000 cannot be eliminated. What is the effect of this discontinuance on Manor's net operating income? 3. Power Systems Inc. manufactures jet engines for the United States armed forces on a cost-plus basis. The production cost of a particular jet engine is shown below: I .__. 1 Direct materials ..................................... $200,000 Direct labor ............. 150.000 Manufacturing overhead Supervisor's salary ............................. 20.000 + Fringe benets on direct labor ............ 15.000 Depreciation ........................ .. 12.000 Rent... ..... 11.000 Total cost .............................................. $408000 + F J If production of this engine was discontinued. the production capacity would be idle. and the supervisor would be laid off. The depreciation referred to above is for special equipment that would have no resale value and that does not wear out through use. When asked to bid on the next contract for this engine. what is the minimum unit price that Power Systems should bid for. 4. Peluso Company. a manufacturer of snowmobiles. is operating at 70% of plant capacity. m plant manager is considering making the headlights now being purchased from an outside supplier for $11.00 each. The m plant has idle equipment that could be used to manufacture the headlights. The desigr engineer estimates that each headlight requires $4.00 of direct materials. $3.00 of direct labor. and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a xed cost that would be unaffected by this decision. What is the net gain (loss) for each headlight if a decision is made by Peluso Company to manufacture the headlights. 5. Ellis Television makes and sells portable televisions. Each television regularly sells for $210. The following cost data per television is based on a full capacity of 10.000 televisions produced each period. Direct materials ................................... $80 Direct labor ......................................... $60 Manufacturing overhead (70% variable and 30% unavoidable fixed) ............. $40 Ellis has received a special order for a sale of 2.000 televisions to an overseas customer. The only selling costs that would be incurred on this order would be $6 per television for shipping. Ellis is now selling 6.000 televisions through regular channels each period. What should be the minimum selling price per television in negotiating a price for this special order"? 6. The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720.000. If these microcomputers are upg'aded at a total cost of$100.000. they can be sold for a total of $160.000. As an alternative, the microcomputers can be sold in their present condition for $50.000. What is the net advantage or disadvantage to the company 'om upgrading the computers rather than selling them in their present condition? 7. Talboe Company makes wheels that it uses in the production of children's wagons. Talbgveis costs to produce 200.000 wheels annually are as follows: Direct materials... $ 40.000 Direct labor ....................................... 60.000 Variable manufacturing overhead ....... 30,000 Fixed manufacturing overhead ........... 70,000 Total ................................................. $200000 An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $55,000 per year. 1f Talboe chooses to buy the wheel from the outside supplier, what is the change in annual net operating income. 8. Using the same data as Q 7 above, what is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels? Question 9 The WHospal Trust operates two types of specialist X-ray scanning machines, XRl and XR50. Details for the next period are estimated as follows: Machine XRl XRSD Rurming hours 1100 2000 ($} (53) Variable running costs (excluding plates) 27,500 64,000 Fixed costs 20,000 97,500 A brain scan is normally carried out on machine type XRl: this task uses special X-ray plates costing 40 each and takes four hours of machine time. Because of the nature of the process, around 10% of the scans produce blurred and therefore useless results. Required: (a) Calculate the cost of a satisfactory brain scan on machine type XRl. (b) Brain scans can also be done on machine type XR50 and would take only 1.8 hours per scan with a reduced reject rate of 6%. However, the cost of the X-ray plates would be 55 per scan. Required: Advise which type should be used, assuming sufficient capacity is available on both types of machine