410-Cag Management Accounting: Relevant Cost Assessment Answers
Questions:
1.
Adm2341 Inc. manufactures and sells a unique product at a normal price of $40 per unit.
The manufacturing costs, based on a production of 300,000 units, is as follows:
|
DM $10 |
|
DL $8 |
|
MOH fixed $4 |
|
MOH variable $2 |
Adm2341 Inc. received a special order for 20,000 units from a Korean company.
This special order would require additional direct materials costing $1 per unit and would also require acquisition of a special tool costing $10,000 that would have no other use once the special order was completed.
Adm2341 Inc. has sufficient capacity to manufacture the additional units.
Required:
- What is the relevant cost per unit in considering the special order decision?
- What is the minimum sale price of each unit in the special order if Adm2341 Inc.
Wants to increase its operating income by $40,000.
Mention and explain 2 qualitative factors, Adm2341 Inc. should consider before making any decision on the special order.
2.
|
Raw sugar |
Brown sugar |
White sugar |
Total | |
|
Sales $ |
100,000 |
150,000 |
200,000 |
450,000 |
|
Variable costs |
48,000 |
105,000 |
100,000 |
253,000 |
|
Total fixed costs |
40,000 |
50,000 |
60,000 |
150,000 |
|
OI |
12,000 |
-5,000 |
40,000 |
47,000 |
Top management of SugarOttawa wonders whether Brown sugar should be dropped because of its weak performance. Traceable fixed costs represent 50 % of total fixed costs of each product line. The remaining portion represents allocated fixed costs.
Required:
- What is the impact of dropping the Brown sugar product line?
- Determine the OI for SugarOttawa if the Brown sugar product line is dropped.
Answers:
1:
a. Depicting relevant cost per unit in consideration with special order unit:
|
Units (A) |
20,000 |
|
Particulars |
Amount |
|
Dm |
$ 11 |
|
DL |
$ 8 |
|
MOH Fixed |
$ 4 |
|
MOH Variable |
$ 2 |
|
Cost per unit (B) |
$ 25 |
|
Cost (C = B * A) |
$ 500,000 |
|
Special tool costing (D) |
$ 10,000 |
|
Total Cost (E = C + D) |
$ 510,000 |
|
Cost per unit (F = E/A) |
$ 25.5 |
Table 1: Depicting Cost per unit of special order unit
(Source: As created by the author)
The above table mainly depicts the relevant cost per unit, which is $25.5 for 20,000 special units.
b. Depicting the minimum sales price per unit:
|
Particulars |
Special order |
|
Sales |
800,000 |
|
Dm |
220,000 |
|
DL |
160,000 |
|
MOH Fixed |
80,000 |
|
MOH Variable |
40,000 |
|
Profit |
290,000 |
|
Units |
20,000 | |
|
Particulars |
Price per unit |
Amount |
|
Sales |
42 |
$ 840,000 |
|
Dm |
11 |
$ 220,000 |
|
DL |
8 |
$ 160,000 |
|
MOH Fixed |
4 |
$ 80,000 |
|
MOH Variable |
2 |
$ 40,000 |
|
Operating Income |
$ 330,000 | |
|
Additional Income |
$ 40,000 | |
Table 2: Depicting Selling price of special order unit
(Source: As created by the author)
For generating additional revenue of 40,000 in operating income Adm2341 Inc, needs to have a selling price of $42. The selling price raised from $40 to $42 will mainly increase the overall operating income by $40,000.
c.
The relative qualitative factors, which need to be considered by Adm2341 Inc. before conducting the special order, are depicted as follows.
- The company after accepting the special ordermight negatively affect current customers as they find out about special price. This unethical decision might reduce demand of the company and hamper its current sales.
- The increment in spare capacity could also increase the overall fixed costs for adding special order.
- The new order will mainly decline the profits by increasing costs of manufacturing the special unit. However, the company will still go on with the production, as it might help in increasing its market share and raise its revenue.
2:
|
Particulars |
Raw sugar |
White sugar |
Total |
|
Sales $ |
$ 100,000 |
$ 200,000 |
$ 300,000 |
|
Variable costs |
$ 48,000 |
$ 100,000 |
$ 148,000 |
|
Traceable fixed cost |
$ 20,000 |
$ 30,000 |
$ 50,000 |
|
Profit Margin |
$ 32,000 |
$ 70,000 |
$ 102,000 |
|
allocated fixed expenses |
|
|
$ 75,000 |
|
Net operating income |
|
|
$ 27,000 |
Table 3: Depicting net operating income SugarOttawa Inc
(Source: As created by the author)
a.
There are relatively two type of fixed cost, traceable and allocated, while traceable is been ignored for Brown sugar and allocated fixed cost is subtracted from the total revenue. Moreover, after dropping the Brown sugar product line the total sales revenue of SugarOttawa Inc will mainly fall from $450,000 to $300,000. In addition, the discontinuation of the Brown sugar product line could also have an impact on net operating income of the company, which will mainly fall from $47,000 to $27,000. The company will mainly be losing a profit of additional $20,000 if it continues with the dropping decision of Brown sugar product line.
b.
If Brown sugar product line is dropped then the Net operating income of SugarOttawa Inc will be $27,000.
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