Cost Accounting A Managerial Emphasis 14th Edition By Charles – Test Bank

11-16 (20 min.) Disposal of assets.
1. This is an unfortunate situation, yet the $78,000 costs are irrelevant regarding the
decision to remachine or scrap. The only relevant factors are the future revenues and future costs.
By ignoring the accumulated costs and deciding on the basis of expected future costs, operating
income will be maximized (or losses minimized). The difference in favor of remachining is
$2,000:
(a) (b)
Remachine Scrap
Future revenues $33,000 $6,500
Deduct future costs 24,500 –
Operating income $ 8,500 $6,500

Difference in favor of remachining $2,000
2. This, too, is an unfortunate situation. But the $101,000 original cost is irrelevant to this
decision. The difference in relevant costs in favor of replacing is $3,500 as follows:
(a) (b)
Replace Rebuild
New truck $103,500 –
Deduct current disposal
price of existing truck 17,500 –
Rebuild existing truck – $89,500
$ 86,000 $89,500

Difference in favor of replacing $3,500

Note, here, that the current disposal price of $17,500 is relevant, but the original cost (or book
value, if the truck were not brand new) is irrelevant.

11-17 (20 min.) Relevant and irrelevant costs.
1.
Make Buy
Relevant costs
Variable costs $190
Avoidable fixed costs 10
Purchase price ____ $260
Unit relevant cost $200 $260
Dalton Computers should reject Peach’s offer. The $80 of fixed costs are irrelevant because they
will be incurred regardless of this decision. When comparing relevant costs between the choices,
Peach’s offer price is higher than the cost to continue to produce.
2.
Keep Replace Difference
Cash operating costs (3 years) $52,500 $46,500 $6,000
Current disposal value of old machine (2,200) 2,200
Cost of new machine _ _____ 9,000 (9,000)
Total relevant costs $52,500 $53,300 $ (800)
AP Manufacturing should keep the old machine. The cost savings are less than the cost to
purchase the new machine.
11-18 (15 min.) Multiple choice.
1. (b) Special order price per unit $6.00
Variable manufacturing cost per unit 4.50
Contribution margin per unit $1.50
Effect on operating income = $1.50 × 20,000 units
= $30,000 increase
2. (b) Costs of purchases, 20,000 units × $60 $1,200,000
Total relevant costs of making:
Variable manufacturing costs, $6 + $30 + $12 $48
Fixed costs eliminated 9
Costs saved by not making $57
Multiply by 20,000 units, so total
costs saved are $57 × 20,000 1,140,000
Extra costs of purchasing outside 60,000
Minimum overall savings for Reno 25,000
Necessary relevant costs that would have
to be saved in manufacturing Part No. 575 $ 85,000

11-19 (30 min.) Special order, activity-based costing.
1. Direct materials cost per unit ($262,500 ÷ 7,500 units) = $35 per unit
Direct manufacturing labor cost per unit ($300,000 ÷ 7,500 units) = $40 per unit
Variable cost per batch = $500 per batch
Award Plus’ operating income under the alternatives of accepting/rejecting the special
order are:
Without OneTime Only
Special Order
7,500 Units
With OneTime Only
Special Order
10,000 Units
Difference
2,500 Units
Revenues $1,125,000 $1,375,000 $250,000
Variable costs:
Direct materials 262,500 350,000
1
87,500
Direct manufacturing labor 300,000 400,000
2
100,000
Batch manufacturing costs 75,000 87,500
3
12,500
Fixed costs:
Fixed manufacturing costs 275,000 275,000 ––
Fixed marketing costs 175,000 175,000 ––
Total costs 1,087,500 1,287,500 200,000
Operating income $ 37,500 $ 87,500 $ 50,000
1
$262,500 + ($35 × 2,500 units) 2$300,000 + ($40 × 2,500 units) 3$75,000 + ($500 × 25 batches)
Alternatively, we could calculate the incremental revenue and the incremental costs of the
additional 2,500 units as follows:
Incremental revenue $100 × 2,500 $250,000
Incremental direct manufacturing costs $35 × 2,500 units 87,500
Incremental direct manufacturing costs $40 × 2,500 units 100,000
Incremental batch manufacturing costs $500 × 25 batches 12,500
Total incremental costs 200,000
Total incremental operating income from
accepting the special order $ 50,000
Award Plus should accept the one-time-only special order if it has no long-term implications
because accepting the order increases Award Plus’ operating income by $50,000.
If, however, accepting the special order would cause the regular customers to be
dissatisfied or to demand lower prices, then Award Plus will have to trade off the $50,000 gain
from accepting the special order against the operating income it might lose from regular customers.

2. Award Plus has a capacity of 9,000 medals. Therefore, if it accepts the special one-time
order of 2,500 medals, it can sell only 6,500 medals instead of the 7,500 medals that it currently
sells to existing customers. That is, by accepting the special order, Award Plus must forgo sales
of 1,000 medals to its regular customers. Alternatively, Award Plus can reject the special order
and continue to sell 7,500 medals to its regular customers.
Award Plus’ operating income from selling 6,500 medals to regular customers and 2,500
medals under one-time special order follow:
Revenues (6,500 × $150) + (2,500 × $100) $1,225,000
Direct materials (6,500 × $35) + (2,500 × $35) 315,000
Direct manufacturing labor (6,500 × $40) + (2,500 × $40) 360,000
Batch manufacturing costs (130
1
× $500) + (25 × $500) 77,500
Fixed manufacturing costs 275,000
Fixed marketing costs 175,000
Total costs 1,202,500
Operating income $ 22,500
1
Award Plus makes regular medals in batch sizes of 50. To produce 6,500 medals requires 130 (6,500 ÷ 50) batches.
Accepting the special order will result in a decrease in operating income of $15,000
($37,500 – $22,500). The special order should, therefore, be rejected.
A more direct approach would be to focus on the incremental effects––the benefits of
accepting the special order of 2,500 units versus the costs of selling 1,000 fewer units to regular
customers. Increase in operating income from the 2,500-unit special order equals $50,000
(requirement 1). The loss in operating income from selling 1,000 fewer units to regular
customers equals:
Lost revenue, $150 × 1,000 $(150,000)
Savings in direct materials costs, $35 × 1,000 35,000
Savings in direct manufacturing labor costs, $40 × 1,000 40,000
Savings in batch manufacturing costs, $500 × 20 10,000
Operating income lost $ (65,000)
Accepting the special order will result in a decrease in operating income of $15,000 ($50,000 –
$65,000). The special order should, therefore, be rejected.
Even if operating income had increased by accepting the special order, Award Plus
should consider the effect on its regular customers of accepting the special order. For example,
would selling 1,000 fewer medals to its regular customers cause these customers to find new
suppliers that might adversely impact Award Plus’s business in the long run.
3. Award Plus should not accept the special order.
Increase in operating income by selling 2,500 units
under the special order (requirement 1) $ 50,000
Operating income lost from existing customers ($10 × 7,500) (75,000)
Net effect on operating income of accepting special order $(25,000)
The special order should, therefore, be rejected.