Relevant Costing Problems

I.
Comprehensive review of short-term decisions. The following data
relate to the planned operations of Kimble Company before considering the changes
described later. All fixed costs are direct, but unavoidable.

Selling price
Variable costs
Fixed costs
Total costs
Profit per unit
Annual volume

Product
Table
$400
$160
120
$280
$120
3,000

Chair
$120
$ 40
30
$70
$50
8,000

Sofa
$600
$360
180
$540
$ 60
4,000

Required:
Answer each of the following questions independently, unless otherwise instructed.
1.
2.
3.
4.

5.
6.

What is total profit expected to be?

What will happen to profit if Kimble drops sofas?
What will happen to profit if Kimble drops chairs, but is able to shift the facilities
to making more sofas so that volume of sofas increases to 7,000 units? (Total
fixed costs remain constant.)
Variable cost per sofa includes $60 for parts that the company now buys outside.
The company could make the parts at a variable cost of $45. It would also have to
increase fixed costs by $35,000 annually. What would happen to profit if the
company took the proposed action?
Kimble has received a special order for 1,000 tables at $245. Capacity is
sufficient to make the units, and sales at the regular price would not be affected.
What will happen to profit if Kimble accepts the order?
Repeat item 5 assuming now that that the order is for 1,500 tables and that
capacity is limited to 4,000 tables.

II.
Using per-unit data. The managers of Ferrara Company expect the
following per-unit results at a volume of 200,000 units.
Sales
Variable costs
Fixed costs
Total costs
Profit

$10
$6
3
9
$1

Required:
Answer each of the following questions independently.
1.
Ferrara has the opportunity to sell 20,000 units to a chain store for $8 each. The
managers expect that sales at the regular price will drop by about 8,000 units as
some customers will buy from the chain store instead of from the regular outlets.
What will happen to the companys profit it if accepts the order?
2.
Of the total unit variable cost of $6, $2.80 is for a part that Ferrara now buys from
an outside supplier. Ferrara could make the part for $2.25 variable cost plus
$100,000 per year fixed costs for renting additional machinery. What will happen
to annual profit if Ferrara makes the part?
3.
The company is considering a new model to replace the existing product. The
new model has a $6 unit variable cost and the same total fixed costs as the
existing product. The new model has expected sales of 100,000 units per year. At
what selling price per unit will the new model give the same total profit as the
existing one?
III.
Multiple choice, comprehensive problem on relevant costs. The
following are the Class Companys unit costs of manufacturing and marketing a highstyle pen at an output level of 20,000 units per month:
Manufacturing costs
Direct materials
$1.00
Direct manufacturing labor
1.20
Variable manufacturing indirect costs 0.80
Fixed manufacturing indirect costs
0.50
Marketing costs
Variable
1.50
Fixed
0.90
Required:
The following situations refer only to the preceding data: there is no connection between
the situations. Unless stated otherwise, assume a regular selling price of $6 per unit.
Choose the best answer to each question. Show your calculations.
1. In an inventory of 10,000 units of the high-style pen presented in the balance sheet,
the unit cost used should be (a) $3.00, (b) $3.50, (c) $5.00, (d) $2.20, (e) $5.90.
2. The pen is usually produced and sold at the rate of 240,000 units per year (an average
of 20,000 per month). The selling price is $6 per unit, which yields total annual
revenues of $1,440,000. Total costs are $1,416,000, and operating income is $24,000,
or $0.10 per unit. Market research estimates that unit sales could be increased by
10% if prices were cut to $5.80. Assuming the implied cost-behavior patterns
continue, this action, if taken, would
a) Decrease operating income by $7,200.
b) Decrease operating income by $0.20 per unit ($48,000) but increase operating
income by 10% of revenues ($144,000) for a net increase of $96,000.

c) Decrease unit fixed costs by 10%, or $0.14, per unit, and thus decrease operating
income by $0.06 ($0.20 - $0.14) per unit.
d) Increase unit sales to 264,000 units, which at the $5.80 price would give total
revenues of $1,531,200, and lead to costs of $5.90 per unit for 264,000 units,
which would equal $1,557,600, and result in an operating loss of $26,400.
e) None of these.
3. A contract with the government for 5,000 units of the pens calls for the
reimbursement of all manufacturing costs plus a fixed fee of $1,000. No variable
marketing costs are incurred on the government contract. You are asked to compare
the following two alternatives:
Sales Each Month to
Regular customers
Government

Alternative A
15,000 units
0 units

Alternative B
15,000 units
5,000 units

Operating income under alternative B is greater than that under alternative A by (a)
$1,000, (b) $2,500, (c) $3,500, (d) $300, (e) none of these.
4. Assume the same data with respect to the government contract as in requirement 3
except that the two alternatives to be compared are:
Sales Each Month to
Regular customers
Government

Alternative A
20,000 units
0 units

Alternative B
15,000 units
5,000 units

Operating income under alternative B relative to that under alternative A is (a) $4,000
less, (b) $3,000 greater, (c) $6,500 less, (d) $500 greater, (c) none of these.
5. The company wants to enter a foreign market in which price competition is keen.
The company seeks a one-time-only special order for 10,000 units on a minimumunit-price basis. It expects that shipping costs for this order will amount to only
$0.75 per unit, but the fixed costs of obtaining the contract will be $4,000. The
company incurs no variable marketing costs other than shipping costs. Domestic
business will be unaffected. The selling price to break even is (a) $3.50, (b) $4.15, (c)
$4.25, (d) $3.00, (e) $5.00.
6. The company has an inventory of 1,000 units of pens that must be sold immediately
at reduced prices. Otherwise, the inventory will be worthless. The unit cost that is
relevant for establishing the minimum selling price is (a) $4.50, (b) $4.00 (c) $3.00,
(d) $5.90, (e) $1.50.
7. A proposal is received from an outside supplier who will make and ship these highstyle pens directly to the Class Companys customers as sales orders are forwarded
from Classs sales staff. Classs fixed marketing costs will be unaffected, but its
variable marketing costs will be slashed by 20 percent. Classs plant will be idle, but
its fixed manufacturing overhead will continue at 50% of present levels. How much
per unit would the company be able to pay the supplier without decreasing operating
income? (a) $4.75, (b) $3.95, (c) $2.95, (d) $5.35, (e) none of these.