Professional Documents
Culture Documents
1
Other Information
Relevant Costing Decision Rule
Demand for the company’s products is very strong,
with far more orders on hand each month than the
company has raw materials available to produce. The SCARCE RESOURCES – Total contribution
same material is used in each product. The material margin will be maximized by promoting those
costs $3 per pound, with a maximum of 5000 pounds
available each month. Which orders would you advise
products that promise the greatest Contribution
the company to accept first, those for X, for Y, or for Margin in relation to the scarce resources of
Z? Which orders second? Third? the firm.
3. For many years, Diehl Company has produced a small Other Information
electrical part that it uses in the production of its
standard line of diesel tractors. The company’s cost of An outside supplier has offered to supply the electrical
producing one part, based on a production level of parts to the Diehl Company for only $10 per part. The
60,000 parts per year, is: company has determined that one third of the direct
Per Part Total fixed costs represent supervisory salaries and other costs
Direct Materials ………………….$ 4.00 that can be eliminated if the parts are purchased. The
other two thirds of the direct fixed costs represent
Direct labor ……………………… 2.75
depreciation of special equipment that has no resale
Variable overhead ……………….. 0.50
value. The decision would have no effect on the
Fixed overhead, direct …………… 3.00 $180,000 common fixed costs of the company, and the space
Fixed overhead, common (allocated being used to produce the parts would otherwise be idle.
on a basis of labor-hours)…….. 2.25 $135,000 Show the dollar advantage or disadvantage of accepting
Total cost per part ………………..$12.50 the supplier’s offer.
2
Relevant Costing Decision Rule Solution
Differential Costs
Make or Buy – For short-run decision making Cost per
purposes, fixed factory overhead costs applied to Item Part Make Buy
a product are committed costs, the total amount of DM $4.00 $4.00 $0
which will be the same regardless of the DL 2.75 2.75 0
alternative chosen. Therefore, the outside V – FOH 0.50 0.50 0
purchase price should be compared with internal F – FOH (direct) 3.00 1.00 0
manufacturing costs that can be avoided if the F – FOH (common) 2.25 n/a 0
outside purchase is made. If avoidable costs are Outside Purchase Price $10.00
less than the outside purchase costs then continue Total Cost $8.25 $10.00
to make internally. Net advantage to make
vs. alternative $1.75
3
5. Refer to the data from question 4 shown below. Assume
that the company has 500 units of this product left over from
Note: The fixed costs are not relevant to the last year, which are inferior to the current model. The units
decision, since they will not change in total must be sold through regular channels at reduced prices.
amount regardless of whether the special order What unit cost figure is relevant for establishing a minimum
is accepted or rejected. selling price for these units? Explain.