Chapter 23: Q7DQ (page 1032)
Samsung must confront sunk costs. 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 is the type of irrelevant cost and is not considered in decision-making.
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Xia Co. currently buys a component part for \(5 per unit. Xia believes that making the part would require\)2.25 per direct materials and \(1.00 per unit of direct labor. Xia allocates overhead using a predeterminedoverhead rate of 200% of direct labor cost. Xia estimates an incremental overhead rate of \)0.75per unit to make the part. Should Xia make or buy the par.
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.
Holmes Company produces a product that can be either sold as is or processed further. Holmes has already spent \(50,000 to produce 1,250 units that can be sold now for \)67,500 to another manufacturer. Alternatively, Holmes can process the units further at an incremental cost of \(250 per unit. If Holmes processes further, the units can be sold for \)375 each. Compute the incremental income if Holmes processes further.
Identify the five steps involved in the managerial decision-making process.
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.
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