Chapter 23: Q6DQ (page 1049)
Google has many types of costs. What is an out-of-pocket cost? What is an opportunity cost? Are opportunity costs recorded in the accounting records?
The opportunity cost and the out-of-pocket both are the types of relevant costs.
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Kando Company incurs a \(9 per unit cost for Product A, which it currently manufactures and sells for \)13.50 per unit. Instead of manufacturing and selling this product, the company can purchase it for \(5 per unit and sell it for \)12 per unit. If it does so, unit sales would remain unchanged and \(5 of the \)9 per unit costs of Product A would be eliminated. Should the company continue to manufacture Product A or purchase it for resale?
Radar Company sells bikes for \(300 each. The company currently sells 3,750 bikes per year and could make as many as 5,000 bikes per year. The bikes cost \)225 each to make: \(150 in variable costs per bike and \)75 of fixed costs per bike. Radar received an offer from a potential customer who wants to buy 750 bikes for \(250 each. Incremental fixed costs to make this order are \)50,000. No other costs will change if this order is accepted. Compute Radar’s additional income (ignore taxes) if it accepts this order.
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.
Restaurants often add and remove menu items. Visit a restaurant and identify a new food item. Make a list of costs that the restaurant must consider when deciding whether to add that new item. Also, make a list of nonfinancial factors that the restaurant must consider when adding that item.
Bert Asiago, a salesperson for Convertco, received an order from a potential new customer for
50,000 units of Convertco’s single product at a price \(25 below its regular selling price of \)65. Asiago knows
that Convertco has the capacity to produce this order without affecting regular sales. He has spoken to
Convertco’s
controller, Bia Morgan, who has informed Asiago that at the \(40 selling price, Convertco will
not be covering its variable costs of \)42 for the product, and she recommends the order not be accepted.
Asiago knows that variable costs include his sales commission of \(4 per unit. If he accepts a \)2 per unit
commission, the sale will produce a contribution margin of zero. Asiago is eager to get the new customer
because he believes that this could lead to the new customer becoming a regular customer.
Required
1. Determine the contribution margin per unit on the order as determined by the controller.
2. Determine the contribution margin per unit on the order as determined by Asiago if he takes the lower
commission.
3. Do you recommend Convertco accept the special order? What factors must management consider?
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