Chapter 23: Q4DQ (page 1049)
Why are sunk costs irrelevant in deciding whether to sell a product in its present condition or to make it into a new product through additional processing?
The sunk cost does not affect the future decisions of the company.
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Goshford Company produces a single product and has capacity to produce 100,000 units per month. Costs to produce its current sales of 80,000 units follow. The regular selling price of the product is \(100 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for \)75 per unit. If the order is accepted, there will be no additional fixed manufacturing overhead and no additional fixed selling and administrative expenses. The customer is not in the company’s regular sellingterritory, so there will be a \(5 per unit shipping expense in addition to the regular variable selling and administrative expenses Unit 80,000 Units
Direct materials . \)12.50 \(1,000,000
Direct labor 15.00 1,200,000
Variable manufacturing overhead . 10.00 800,000
Fixed manufacturing overhead 17.50 1,400,000
Variable selling and administrative expenses . 14.00 1,120,000
Fixed selling and administrative expenses . 13.00 1,040,000
Totals \)82.00 $6,560,000
1. Determine whether management should accept or reject the new business.
2. What nonfinancial factors should management consider when deciding whether to take this order?
A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost \(6 per unit to manufacture. The units can be sold as is for \)2.00 each, or theycan be reworked for \(4.50 each and then sold for the full price of \)8.50 each. If the units are sold as is, the company will be able to build 22,000 replacement units at a cost of \(6 each, and sell them at the full price of \)8.50 each. (1) What is the incremental income from selling the units as scrap? (2) What is the incremental income from reworking and selling the units? (3) Should the company sell the units as scrap or rework them?
Refer to QS 23-1 and QS 23-2. What nonfinancial factors should Helix consider before accepting this order? Explain.
Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 50,000 units of RX5 follows.
Direct materials . \( 5.00
Direct labor 8.00
Overhead . 9.00
Total cost per unit \)22.00
Check (1) Incremental cost
to make RX5, \(740,000
Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for \)18.00 per unit.
Required
1. Determine whether the company should make or buy the RX5.
2. What factors besides cost must management consider when deciding whether to make or buy RX5?
Garcia Company has 10,000 units of its product that were produced last year at a total cost of \(150,000. The units were damaged in a rainstorm because the warehouse where they were stored developed a leak in the roof. Garcia can sell the units as is for \)2 each or it can repair the units at a total cost of \(18,000 and then sell them for \)5 each. Should Garcia sell the units as is or repair them and then sell them? Explain.
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