PROBLEM in RELEVANT COSTING

1. Kara Ring owns a successful flower shower called Always Blooming. Kara wants to expand the
shop by leasing the space next door for $1,200 per month, and adding refrigerators to keep the flowers fresh and two
checkout counters so the customers do not have to wait in long lines. She currently pays $1,000 per month for her
current store space and has two refrigerators that cost her $6,000 each two years ago. She figures that the new
refrigerators and counters will cost $25,000. She also has determined that the current cash register that initially cost
her $1,000 two years ago and has been depreciated $250 each year would have to be replaced with two new cash
registers costing $1,500 each. She thinks sales would increase by $10,000 per month. Variable costs are 40% of
sales.

Required:
A. What are the relevant costs and benefits of expanding into the new space?
B. What are the irrelevant costs and benefits of expanding into the new space?

2. Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the
tennis shoes have fallen off. Veblen is considering several options: 1) drop the tennis shoe line; 2) replace the tennis
shoe line with golf shoes; 3) retool the tennis shoe line to make "Airtennies." Price and cost data are as follows:
Basketball Running Tennis Golf Airtennies
Price $90 $65 $40 $60 $70
Variable cost/unit $45 $40 $35 $43 $50
Fixed costs $200,000 $210,000 $50,000 $50,000 $90,000
Number of units 10,000 15,000 2,500 25,000 6,000

If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.
A. Calculate the impact on operating income, using relevant amounts only, for keeping the tennis
shoe line.
B. Calculate the impact on operating income, using relevant amounts only, for option 1.
C. Calculate the impact on operating income, using relevant amounts only, for option 2.
D. Calculate the impact on operating income, using relevant amounts only, for option 3.
E. Which option is best?

3. Tyler Company has been approached by a new customer with an offer to purchase 6,000 units of its product
KR200 at a price of $11 each. The existing sales would not be affected by this special order. Tyler normally
produces 40,000 units but plans to produce and sell 30,000 in the coming year. The normal sales price is $18 per
unit. Unit cost information is as follows:

Direct materials $4.00

Direct labor $2.75
Variable overhead $1.50
Fixed overhead $3.25
Total $11.50
If Tyler accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess
capacity.
Required:
A. By how much will profit increase or decrease if the order is accepted?
B. Should Tyler accept the special order?

4. Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit.
Recently the supplier informed Junior Company that a 20 percent increase will take effect next year. Junior has
some additional space and could produce the units for the following per-unit costs (based on 30,000 units):

Direct materials $16

Direct labor 12
Variable overhead 12
Fixed overhead 10
Total $50
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the
plant can be rented out for $20,000 per year if the parts are purchased externally.
Required: Should Junior Company buy the part externally or make it internally?

5. Tapeo Company has always made its electronic components that go into their GPS systems in-house.
Streeter Company has offered to supply these electronic components at a price of $38 each. Tapeo uses 18,000 units
of these components each year. The cost per unit of this component is as follows:
Direct material $13.75
Direct labor $16.00
Variable overhead $7.00
Fixed overhead $8.25
Total $45.00
Assume that 45% of Tapeo Company's fixed overhead would be eliminated if the electronic component was no
longer produced in-house.
Required:
A. If Tapeo decided to purchase the electronic component from Streeter Company how much would its operating
income increase or decrease?
B. Should Tapeo continue to make the electronic component or buy it from Streeter Company

6. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is $30,000.
Information about the three products follows:
X Y Z
Anticipated production 5,600 lbs. 10,000 lbs. 2,500 lbs.
Selling price/lb. at split-off $2.00 $1.00 $3.00
Additional processing costs/lb. after split-off
(all variable) $1.50 $1.25 $.75
Selling price/lb. after further processing $2.50 $3.75 $6.25
Allocated joint costs $12,000 $10,500 $7,500
Required:
A. Determine whether each product should be sold at split-off or processed further.
B. Determine the firm's income if the firm processed all three products beyond split-off.

7. The operations of Grant Corporation are divided into the Fix Division and the Roach Division. Projections
for the next year are as follows:
Fix Roach
Division Division Total
Sales revenue $60,000 $40,000 $100,000
Variable expenses 20,000 15,000 35,000
Contribution margin $40,000 $25,000 $ 65,000
Direct fixed expenses 12,500 30,000 42,500
Segment margin $27,500 $ (5,000) $ 22,500
Allocated common costs 10,000 7,500 17,500
Total relevant benefit (loss) $17,500 $(12,500) $ 5,000
Required:
A. Determine operating income for Grant Corporation as a whole if the Roach Division is dropped.
B. Should the Roach Division be eliminated?

8. Gordon Company produces two types of gears, Gear Q and Gear S, with unit contribution margins of $2
and $5, respectively. Each gear must spend time on a special machine. The firm owns ten machines that together
provide 25,000 hours of machine time per year. Gear Q requires 0.10 hours of machine time; Gear S requires 0.4
hours of machine time.
A. What is the contribution margin per hour of machine time for Gear Q? Gear S?
B. If Gordon faces only the production constraint (25,000 hours of machine time), how many units
of Gear Q should be produced? Gear S? What is the total contribution margin from this product
mix?
C. Now suppose that Gordon cannot sell more than 200,000 units of each type of gear. How many
units of Gear Q should be produced? Gear S? What is the total contribution margin from this
product mix?

9. Auden makes three types of vitamin supplements, all of which require the use of encapsulating machines
that have capacity of 10,000 hours. Information on the three types (per case) follows:
Basic Vita-Stress Antioxidant+
Selling price $100 $125 $160
Variable cost 50 70 90
Machine hours 0.4 0.50 0.8

A. What is the contribution margin per case for each type?

B. What is the contribution margin per hour of machine time for each type?
C. Based on your analysis in requirement B, if the company can sell all that it can make of all of
the products, how many of each type should be sold to maximize total contribution margin?

10. The Exchange Company is in the process of developing a new product called LS500. The company
requires a 35% profit. The LS500 current design carries with it a total cost of $125.
Required:
A. What is the sales price of the LS500 using markup costing?
B. Assume that the Exchange Company’s marketing department has determined that consumers are willing to pay
$140 for the LS500. What is the target cost for this product?