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Relevant Costing - Solutions

1. Ans: A
Solution:
Opportunity cost of sales foregone if special project is undertaken
($8.35 240) ..................................................................................
Less: delivery cost ...............................................................................
Relevant cost of 240 kilograms of raw material ..................................
2.

$2,004
71
$1,933

Ans: C
Solution:
Demand for wood carvers:
Labor-hours per unit ..................
Monthly demand in units ...........
Total hours required ...................

Letter Openers
1
800
800

Elvis Statues
6
800
4,800

Candle Holders
2
800
1,600

Total time required for all products: 7,200


Optimal production plan:
Selling price per unit .......................................
Variable cost per unit ......................................
Contribution margin per unit ...........................
Labor-hours per unit ........................................
Contribution margin per hour ..........................

Letter Openers
$30.00
$20.00
$10.00
1
$10.00

Elvis Statues
$80.00
$40.00
$40.00
6
$6.67

Candle Holders
$42.00
$20.00
$22.00
2
$11.00

Rank in terms of profitability ..........................

Optimal production..........................................

200

800

Total hours available .............................................................................................


Less: hours required for 800 Candle Holders (800 2) ........................................
Hours remaining ....................................................................................................
Divided by hours required per Letter Opener ........................................................
Number of Letter Openers to produce ...................................................................

1,800
1,600
200
1
200

Maximum contribution margin:


Candle Holders (800 $22) ..............................................................................
Letter Openers (200 $10) ...............................................................................
Maximum contribution margin ..............................................................................

$17,600
2,000
$19,600

3. Ans: C
Solution:
Total rental income = $1,000 + $1,210 + $2,347 + $1,878 + $1,065 = $7,500

Rental income .................


Less expenses ..................
Add back proportional
share
of
common

U
$1,000
800

V
$1,210
1,300

W
$2,347
2,600

X
$1,878
2,400

160

194

376

300

Y
$1,065
1,300
170

expenses
[(Rental
income in each column
Total rental income of
$7,500) $1,200]*
Apartment
complex
margin
$ 360
$ 104
*expenses rounded to nearest whole dollar

$ 123

($222)

($ 65)

Since complexes X and Y have negative margins, ABD Realty should consider dropping those two
divisions.

4. Ans: A
Solution:

Total needed
(3,000 5) =
F85 ................
15,000
(3,000 5) =
E71 ................
15,000

Inventory

# of units to
purchase on market

Relevant
price

Total cost

15,000

$4.75

$ 71,250

(15,000 13,680)
= 1,320

$4.70
13,680
$3.60
Minimum acceptable price for 3,000 units of QEA ............................
$126,702

6,204
49,248

5.
A
B
C
D

J
2nd
2nd
2nd
2nd

K
3rd
1st
3rd
1st

L
1st
4th
4th
3rd

M
4th
3rd
1st
4th

6. ____________________________________________________________________________
Answer: $17,000
Unit Level = $100,000 / 8,000 * 800 = $10,000
Product Level = 20% * $20,000 = $4,000
Batch Level = $12,000 / 100 * 25 = $3,000
Facility Level = $240,000 / 48,000 * 3,000 = $15,000 should not allocate
$10,000 + 4,000 +3,000 = $17,000

7. The Carolina Furniture Company manufactures kitchen cabinets. The company has always used direct labor cost
to allocate overhead to its two cabinet lines, Heritage and Contemporary. The manufacture of both lines has been
labor intensive. Recently, the company automated production of its Contemporary line of cabinets. It continues to
use labor dollars as the overhead allocation base for both lines. This practice will likely result in which of the
following?
A
B
C
D

Overhead cost will be allocated accurately between the two lines.


Too much overhead cost will be allocated to the Heritage line.
Too much overhead cost will be allocated to the Contemporary line.
b and c.