ACC 406 Lecture Notes - Lecture 10: Target Costing, Sunk Costs, Decision Model
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P7.57B
Prepare an incremental analysis for the decision whether to sell or process materials further.
14(LO 4) The following information is for a company that produces four types of microprocessors using the same production process. The common costs of these products, up to the split-off point, are $550,000. Common costs are allocated based on the quantity of output. The following information includes additional processing costs, the selling price of each product at the split-off point, and the selling price of each product after further processing:
| Microprocessor | Number of Units Produced | Selling Price at Split-Off Point | Selling Price after Further Processing | Additional Costs for Further Processing |
|---|---|---|---|---|
| 1 | 3,000 | $10.00 | $15.00 | $14,800 |
| 2 | 4,000 | 9.50 | 12.25 | 8,500 |
| 3 | 2,500 | 11.00 | 15.70 | 12,000 |
| 4 | 500 | 7.75 | 10.25 | 1,250 |
Instructions
a.
Assuming only one product can be processed further, determine which one the company should choose. Briefly explain why.
Product 2
b.
Referring to your answer in part (a), identify which information is relevant to the decision to process this product further.
c.
If common costs up to the split-off point were allocated on the basis of the market values at the split-off point, would your decision in part (a) be different? Briefly explain why.
The Norran Company needs 15,000 units of a certain part to usein its production cycle. If Norran buys the part from WaterlooCompany instead of making it, Norran could not use the releasedfacilities in another activity; thus, all of the fixed overheadapplied will continue regardless of what decision is made.Accounting records provide the following data:
Cost to Norran to make the part:
Direct materials,$3
Direct labor, $12
Variable overhead,$13
Fixed overheadapplied, $8
Cost to buy the part from the WaterlooCompany, $27
18. | What should Norran's decision be, and what is the total costsavings that would result? | |
A) | Make, $90,000 | |
B) | Buy, $90,000 | |
C) | Make, $15,000 | |
D) | Buy, $15,000 | |
27. | When considering the time value of money, usecompounding to find the __________ value of money nowheld. | |
A) | discounted | |
B) | present | |
C) | historical | |
D) | future | |
28. | The normal selling price of our product is $42 per unit.The costs of production are direct materials, $8; direct labor, $6;variable overhead, $7; and fixed overhead, $4 (based on normalcapacity). The company has received a special order for 14,400units at a unit sales price of $23. There is ample unused capacityto fill the order and $1 per unit will be incurred for additionalfreight costs. If the order is accepted, operating incomewill | |
A) | decrease by $28,800. | |
B) | increase by $14,400. | |
C) | decrease by $43,200. | |
D) | increase by $28,800. | |
30. | The point at which products are separated in a joint productionprocess is the | |
A) | joint product point. | |
B) | breakeven point. | |
C) | split-off point. | |
D) | separation point. | |
31. | The difference in total costs between two alternatives isreferred to as the | |
A) | direct cost. | |
B) | incremental cost. | |
C) | sunk cost. | |
D) | opportunity cost. | |
Tactical decision making
Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.
| 1. | Recognize and define theproblem. |
| 2. | Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives. |
| 3. | Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision. |
| 4. | Compare the relevant costsand benefits for each alternative. |
| 5. | Assess qualitative factors. |
| 6. | Select the alternative with thegreatest overall benefit. |
Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.
Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):
| Accept the special order. | - Select your answer -YesNoItem1 |
| Reject the special order. | - Select your answer -YesNoItem2 |
| Sell normal sales for $25 perunit. | - Select your answer -YesNoItem3 |
Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)
| $25 price. | - Select your answer -YesNoItem4 |
| $30 normal price. | - Select your answer -YesNoItem5 |
| Variable cost of making the unitsin the special order. | - Select your answer -YesNoItem6 |
| Depreciation on factory equipmentused in making the special order units. | - Select your answer -YesNoItem7 |
| Increased property taxes on thefactory building which are due while the special order would bemade. | - Select your answer -YesNoItem8 |
While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.
