Question

1.

Test Company produces a component part included in its final product. A supplier has contacted the company with an offer to provide the component part. In evaluating the offer, Test Company identified the following costs to produce the component.

Direct materials	$20 per unit
Direct labor	$15 per unit
Variable overhead	$12 per unit
Fixed overhead	$8,000 per month

Test Company’s average monthly demand is 5,000 components per month.

Assume that none of the fixed overhead costs are avoidable if Test Company discontinues production of the component.

Determine the total relevant cost of producing the component.

Note: Give your answer using dollar signs and commas but not decimal points (cents).

Example: $12,345

2.

Test Company’s average monthly demand is 5,000 components per month.

Assume that 40% of the fixed overhead costs are avoidable if Test Company discontinues production of the component.

Determine the total relevant cost of producing the component.

3.

Test Company produces two products from a common input: Product A and Product B. One batch of the common input yields 500 units of Product A and 100 units of Product B. The joint costs for one batch are $25,000. Product A can be sold at the split-off point for $60 per unit. Product B can be sold at the split-off point for $200 per unit. Alternatively, Product B can be processed into 80 units of Product C that will sell for $300 per unit. Additional process costs for one batch of Product C will be $3,500.

Determine the increase (decrease) in income if Product B is processed further into Product C.

overhead costs are avoidable if Test Company discontinues production of the component.

Determine the total relevant cost of producing the component.

Note: Give your answer using dollar signs and commas but not decimal points (cents). Give negative numbers in parentheses.

Example: $12,345 or $(12,345)

4.

Test Company reported the following segmented operating results for the most recent period.

	Segment A	Segment B	Total
Sales	$500,000	$350,000	$850,000
Variable expenses	200,000	250,000	450,000
Contribution margin	300,000	100,000	400,000
Direct fixed expenses	180,000	175,000	355,000
Segment margin	$120,000	$(75,000)	45,000
Common fixed expenses			50,000
Operating income (loss)			$(5,000)

Test Company management is considering dropping Segment B. If Segment B is dropped, all of the direct fixed expenses will be eliminated.

Assume that Segment A and Segment B are independent of one another.

Determine the amount that operating income will increase (decrease) if Test Company drops Segment B.

Note: Give your answer using dollar signs and commas but not decimal points (cents). Give negative numbers in parentheses.

Example: $12,345 or $(12,345)

5.

Test Company reported the following segmented operating results for the most recent period.

	Segment A	Segment B	Total
Sales	$500,000	$350,000	$850,000
Variable expenses	200,000	250,000	450,000
Contribution margin	300,000	100,000	400,000
Direct fixed expenses	180,000	175,000	355,000
Segment margin	$120,000	$(75,000)	45,000
Common fixed expenses			50,000
Operating income (loss)			$(5,000)

Test Company management is considering dropping Segment B. If Segment B is dropped, all of the direct fixed expenses will be eliminated.

Assume that Segment A and Segment B are substitutes. If Test Company drops Segment B, sales of Segment A will increase by 10%.

Determine the amount that operating income will increase (decrease) if Test Company drops Segment B.

Note: Give your answer using dollar signs and commas but not decimal points (cents). Give negative numbers in parentheses.

Example: $12,345 or $(12,345)

Answer 1

1.

Relevant Cost
Direct Material	$      100,000
Direct Labor	$         75,000
Variable Overhead	$         60,000
Fixed Overhead	$                 -
Total Relevant Cost	$      235,000

2.

Relevant Cost
Direct Material	$      100,000
Direct Labor	$         75,000
Variable Overhead	$         60,000
Fixed Overhead	$           3,200
Total Relevant Cost	$      238,200

3.

Incremental Revenue	$           4,000	=80*300-100*200
Incremental Expenses	$           3,500
Financial Advantage (Disadvantage)	$              500

Increase in Income = $500

4.
Operating Income will increase by $75000

5.
Increase in Operating Income = $75000 + 300000 x 10% = $105000