Chapter 23: Q3DQ (page 1049)
What is a relevant cost? Identify the two types of relevant costs.
The relevant cost is the cost relevant to the company’s decision.
The two types of relevant costs are Avoidable cost and Opportunity cost.
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Santana Rey has found that Business Solutions’s line of computer desks and chairs has become very popular, and she is finding it hard to keep up with demand. She knows that she cannot fill all of her
orders for both items, so she decides she must determine the optimal sales mix given the resources she has available. Information about the desks and chairs follows. Santana has determined that she only has 1,015 direct labor hours available for the next quarter and wants to optimize her contribution margin given the limited number of direct labor hours available.
Selling price per unit . \(1,125 \)375
Variable costs per unit 500 200
Contribution margin per unit . \( 625 \)175
Direct labor hours per unit . 5 hours 4 hours
Expected demand for next quarter 175 desks 50 chairs
Required
Determine the optimal sales mix and the contribution margin the business will earn at that sales mix.
Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The
following information is available.
Product G Product B
Selling price per unit . \(120 \)160
Variable costs per unit . 40 90
Contribution margin per unit . \( 80 \) 70
Machine hours to produce 1 unit 0.4 hours 1.0 hours
Maximum unit sales per month . 600 units 200 units
The company presently operates the machine for a single eight-hour shift for 22 working days each month.
Management is thinking about operating the machine for two shifts, which will increase its productivity
by another eight hours per day for 22 days per month. This change would require \(15,000 additional fixed
costs per month.
Required
1. Determine the contribution margin per machine hour that each product generates.
2. How many units of Product G and Product B should the company produce if it continues to operate
with only one shift? How much total contribution margin does this mix produce each month?
3. If the company adds another shift, how many units of Product G and Product B should it produce?
How much total contribution margin would this mix produce each month? Should the company add
the new shift? Explain.
4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per
month by spending \)12,000 per month in marketing efforts. Should the company pursue this strategy
and the double shift? Explain.
Identify some qualitative factors that should be considered when making managerial decisions.
Helix Company has been approached by a new customer to provide 2,000 units of its regular product at a special price of \(6 per unit. The regular selling price of the product is \)8 per unit. Helix is operating at 75% of its capacity of 10,000 units. Identify whether the following costs are relevant to Helix’s decision as to whether to accept the order at the special selling price. No additional fixed manufacturing overhead will be incurred because of this order. The only additional selling expense on this order will be a \(0.50 per unit shipping cost. There will be no additional administrative expenses because of this order. Place an Xin the appropriate column to identify whether the cost is relevant or irrelevant to accepting this order.
Item Relevant Not Relevant
a. Selling price of \)6.00 per unit
b. Direct materials cost of \(1.00 per unit
c. Direct labor of \)2.00 per unit
d. Variable manufacturing overhead of \(1.50 per unit
e. Fixed manufacturing overhead of \)0.75 per unit
f. Regular selling expenses of \(1.25 per unit
g. Additional selling expenses of \)0.50 per unit
h. Administrative expenses of $0.60 per unit
Childress Company produces three products, K1, S5, and G9. Each product uses the same type of direct material. K1 uses 4 pounds of the material, S5 uses 3 pounds of the material, and G9 uses 6 pounds of the material. Demand for all products is strong, but only 50,000 pounds of material are available. Information about the selling price per unit and variable cost per unit of each product follows. Orders for which product should be produced and filled first, then second, and then third? Support your answer.
Selling price. \(160 \)112 $210
Variable costs 96 85 144
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