Decision Making and Relevant Cost

One time special order/sale in overseas market/ dumping

Fancy Fabrics (FF) manufactures quality bath towels at its plant. Plant has a production capacity of !"### towels each month. $urrent monthly production is %#"### towels. &'pected results for the coming month are P

*otal

+s.

+s.

+evenues (%#"### towels , +s.-# per towel)

-#

"##"###

$O0/manufacturing costs

1-

%"#"###

2arketing costs

3

-"1#"###

Full costs of the product

14

5"3#"###

Operating income

1

%#"###

2anufacturing costs of +s.1- per unit consists of 6$ P 7irect material 7irect manufacturing labour 2anufacturing overhead costs

F $ P

+s. #.5#

8 1.5#

1

*$ P +s. -

%



2arketing costs per unit is +s.3 (+s.5 of which is variable). FF incurs no + 9 7 costs" product8design costs" distribution costs" or customer8service costs.

:s a result of a strike at its e'isting towel supplier" a lu'ury hotel chain has offered to buy 5"### towels from FF in ne't month at a price of +s.11 per towel. ;o subsequent sales to this hotel chain are anticipated.

0anghi ?td. has been operating at 3#@ capacity and the following particulars relate to the present level of activity nits %"5## 7irect material costs +s.1#"5## 7irect manufacturing labour costs +s.5"-5# 6ariable overhead costs -##@ of direct manufacturing labour costs Fi'ed overhead costs +s.1"### 0ales +s.3"-5# 0anghi received an e'port order for 1"### units of its product at +s.1# per unit. *he e'port order will entail an e'tra 6$ of +e.#.5# per unit.


$urrent

Of producing 1#"###

per unit

costs

nits in -5 batches 7irect materials 7irect labour 6ariable mfg overheads

+s.!#"### 1#"###

+s.! 1

#"###



2i'ed (6 9 F) mfg overheads of material handling and setup

13"5##

1.35

Fi'ed mfg overheads of plant ?ease" insurance" administration

%#"###

%

*otal mfg costs

1"33"5##

13.35

2aterials handling and set up activities occur each time a batch of B70 is made. &$$ produces 1#"### units in -5 batches of ## units each.

*otal materials handling and set up costs equal +s.5"### fi'ed costs C +s.5## per batch. &$$=s customers want to lower their inventory levels" so they are pressuriDing &$$ to supply thermostats in smaller batch siDes. &$$ anticipates producing 1#"### B70 ne't year in 5# batches of -## units each. *hrough continuous improvement" &$$ e'pects to reduce 6$ of material handling and setup to +s.%## per batch ;o other changes in 6$ or F$ are anticipated.

:nother manufacturer offers to sale &$$ 1#"### units of B70 ne't year for +s.1 per unit on whatever delivery schedule &$$ wants. :ssume that financial factors dominate in this make8or8buy decision. 0hould &$$ make or buy B70>

0uppose &$$ buys B70 from the outside supplier. *hen" &$$=s best use of capacity that becomes available is to produce 5"### units of +0 (regular switch) for *errence $orporation. *he accountant of &$$ estimates following future revenues and costs if +0 is manufactured and sold
+s.!#"###


+s.%#"### 5"### 15"###

2aterials handling and set up overheads 5"###
55"### +s.-5"###

Aecause of capacity constraints" &$$ can make either B70 or +0" but not both. Ehich of the following three alternatives should &$$ choose> 2ake B70 and do not make +0 Auy B70 and do not make +0 Auy B70 and make +0

Product8mi' decisions under capacity constraints Power +ecreation (P+) assembles two engines8 a snowmobile engine and a boat engine8 at its plant. 0nowmobile

boat

0elling price

+s.!##

+s.1"###

6$ P

5#

-5

$2 P

-#

%35

$2 @

%#@

%3.5@

:ssume that only ## machine hours are available daily for assembling engines. :dditional capacity cannot be obtained in the short run. P+ can sell as many engines as it produces.

Parle ?td. manufactures three products P1" P- and P%. Production is limited by machine capacity. From the data given below indicate product priority to ma'imiDe profit P1 +2 cost per unit +s.-1-.5#

P-

+s.11-.5#

7? cost per unit

P% +s.1-.5#

-5

-5

-5

Other 6$ P

15

--.5#

%5.5#

0elling price

-5#

%##

%5#

0tandard machine time required P -!m

%4 minutes

$apacity 1"### units each :vailable machine capacity 33"-5# minutes only.

-# m

:llied Eest" the western region office of :llied Furniture" supplies furniture to three local retailers E"  and G. Following are e'pected revenues and costs of :llied Eest for the upcoming year E +evenues +s.1-"##"### $O0 4"-#"### Furniture handling labour



+s.5"##"###

G

+s.%"##"### +s."##"###

%"3#"###

1"###

*otal

-"-#"###

%"%#"###

1!"###

%%"###

4-"###

(a cost written as depreciation) 1-"###

"###

4"###

-5"###

+ent

1"###

!"###

1"###

%"###

2arketing support

11"###

4"###

1#"###

%#"###

Furniture handling equipment

0ales order and delivery processing 1%"### %-"###

3"###

1-"###

eneral administration !"###

1-"###

1"###

-#"###

:llocated corporate office costs 1#"###

"###

!"###

-"###

*otal costs 1-"#3"###

"41"###

-"!"###

"%-"###

Operating income +s.(3"###)

+s.4"###

+s.1"### +s.(%-"###)

Furniture handling labour costs vary with the number of units shipped

For simplicity assume" furniture handling equipment in an area and depreciation costs on equipment are identified with individual customer accounts. :ny equipment not used remains idle. *he equipment has a one8year useful life and Dero disposal value. :llied Eest reserves different areas of the warehouse to stock furniture for different customers. :llied Eest allocates rent to each customer on the basis of the amount of warehouse space reserved for that customer. 2arketing costs vary with the number of sales visits made to customers. 0ales8order costs vary with the number of sales orders received from customersH delivery processing costs vary with the number of shipments made. :llied Eest allocates fi'ed general administration costs to customers on the basis of customer revenues :llied Furniture allocates fi'ed corporate office costs to sales offices on the basis of the square feet area of each sales office. :llied Eest allocates these costs to customers on the basis of customer revenues. 0hould :llied Eest discontinue G account> 0hould it add fourth customer I" having similar profile as that of G> 0hould :llied Furniture close down :llied Eest> 0hould :llied Furniture add another sales office" :llied 0outh" whose returns and costs are identical to those of :llied Eest>

*oledo $ompany is considering replacing a metal cutting machine with a newer model. *he new machine is more efficient than the old machine" but it has a shorter life. +evenues will be unaffected by the replacement decision. 7ata on the e'isting and new machine

Original cost seful life $urrent age

Old 2achine +s.1#"##"###

;ew machine +s."##"###

5 years % years

- years #

+emaining useful life

- years

- years

:ccumulated depreciation

+s."##"###

88

$urrent disposal value *erminal disposal value

+s.#"### +s.#

888 +s.#

(in cash after - years) :nnual operating costs

+s.!"##"###

+s."#"###

*oledo uses 0?2 of depreciation. 0hould *oledo replace the old machine>