EXERCISE 12-16 Identification of Relevant Costs [LO12-1] Bill has just returned from a duck hunting trip. He has brought home eight ducks. Bill's friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John has presented him with the following cost estimate per duck: $150 58 Camper and equipment: Cost, $12,000; usable for eight seasons; 10 hunting trips per season. ........... Travel expense (pickup truck): 100 miles at $0.31 per mile (gas, oil, and tires-$0.21 per mile; depreciation and insurance-$0.10 per mile) ....... Shotgun shells (two boxes) Boat: Cost, $2,320, usable for eight seasons; 10 hunting trips per season Hunting license Cost, $30 for the season; 10 hunting trips per season .......... Money lost playing poker: Loss, $24 (Bill plays poker every weekend) .................. Bottle of whiskey: Cost, $15 (used to ward off the cold) ........... Total cost .. Cost per duck ($272 = 8 ducks) .... $272 Required: 1. Assuming that the duck hunting trip Bill has just completed is typical, what costs are relevant to a decision as to whether Bill should go duck hunting again this season? 2. Suppose that Bill gets lucky on his next hunting trip and shoots 10 ducks in the amount of time it took him to shoot 8 ducks on his last trip. How much would it have cost him to shoot the last two ducks? Explain. 3. Which costs are relevant in a decision of whether Bill should give up hunting? Explain.
Related questions
7.
Come-Clean Corporation produces a variety of cleaning compoundsand solutions for both industrial and household use. While most ofits products are processed independently, a few are related, suchas the companyâs Grit 337 and its Sparkle silver polish. |
Grit 337 is a coarse cleaning powderwith many industrial uses. It costs $1.60 a pound to make, and ithas a selling price of $7.80 a pound. A small portion of the annualproduction of Grit 337 is retained in the factory for furtherprocessing. It is combined with several other ingredients to form apaste that is marketed as Sparkle silver polish. The silver polishsells for $5.00 per jar. |
This further processing requiresone-fourth pound of Grit 337 per jar of silver polish. Theadditional direct costs involved in the processing of a jar ofsilver polish are: |
| Otheringredients | $ | 0.50 |
| Direct labor | 1.44 | |
| Total directcost | $ | 1.94 |
| Overhead costs associated withprocessing the silver polish are: |
| Variable manufacturing overhead cost | 25% | of direct laborcost | |
| Fixed manufacturingoverhead cost (per month): | |||
| Production supervisor | $ | 3,200 | |
| Depreciation of mixing equipment | $ | 1,400 | |
The production supervisor has no dutiesother than to oversee production of the silver polish. The mixingequipment is special-purpose equipment acquired specifically toproduce the silver polish. Its resale value is negligible and itdoes not wear out through use. |
| Directlabor is a variable cost at Come-Clean Corporation. |
Advertising costs for the silver polishtotal $1,800 per month. Variable selling costs associated with thesilver polish are 5% of sales. |
Due to a recent decline in the demandfor silver polish, the company is wondering whether its continuedproduction is advisable. The sales manager feels that it would bemore profitable to sell all of the Grit 337 as a cleaningpowder. |
| Required: | |
| 1. | What is the incremental contribution margin per jar from furtherprocessing of Grit 337 into silver polish? (Do not roundintermediate calculations. Round your answer to 2 decimalplaces.) |
| Incremental contribution margin:____ per jar | |
| 2. | What is the minimum number of jars of silver polish that must besold each month to justify the continued processing of Grit 337into silver polish? (Round your intermediate calculationsto 2 decimal places.) Number of Jars:_________ |
8.
Bill has just returned from a duck hunting trip. He hasbrought home eight ducks. Billâs friend, John, disapproves of duckhunting, and to discourage Bill from further hunting, John haspresented him with the following cost estimate perduck: |
| Camper andequipment: | ||
| Cost,$1,100; usable for eight seasons; 10 hunting trips perseason | $ | 110 |
| Travel expense (pickuptruck): | ||
| 100 miles at $0.44 per mile (gas,oil, and tiresâ$0.30 per mile; depreciation and insurance â$0.14 per mile) | 44 | |
| Shotgunshells (two boxes) | 35 | |
| Boat: | ||
| Cost, $2,480, usablefor eight seasons; 10 hunting trips per season | 31 | |
| Huntinglicense: | ||
| Cost, $60 for theseason; 10 hunting trips per season | 6 | |
| Money lostplaying poker: | ||
| Loss, $26 (Bill plays pokerevery weekend) | 26 | |
| Bottle ofwhiskey: | ||
| Cost, $25 (used to ward off the cold) | 25 | |
| Totalcost | $ | 233 |
| Cost perduck ($233 ÷ 8 ducks) | $ | 29 |
| Required: | |
| 1. | Assuming that the duck hunting trip Bill has just completed istypical, what costs are relevant to a decision as to whether Billshould go duck hunting again this season? |
| 2. | Suppose that Bill gets lucky on his next hunting trip and shoots10 ducks in the amount of time it took him to shoot 8 ducks on hislast trip. How much would it have cost him to shoot the last twoducks? |
