Professional Documents
Culture Documents
QUESTIONS
1-3 Cost management information is a broad concept. It is the information the manager
needs to effectively manage the firm or not-for-profit organization -- both financial
information about costs and revenues and relevant non-financial information about
productivity, quality, and other key success factors for the firm. Typically, cost
management is the responsibility of the Chief Financial Officer (CFO) who often
delegates much of this responsibility to the Controller.
11-1 Relevant costs are costs to be incurred at some future time and differ for each option
available to the decision maker.
Relevant costs in replacing equipment would include the cost of purchasing and installing
the new equipment, the operating costs of the new equipment, and the disposal costs of
the old equipment, the cost of repair of the old equipment, and so on. The purchase price
of the old equipment would not be relevant to the decision.
BRIEF EXERCISES
If Adams is at full capacity, then the opportunity cost for lost sales is $500 - $100 = $400
per sofa; the opportunity cost is higher than the contribution on the special order, $200;
so now the special order should not be accepted
Repair:
Variable Costs:
Labor = $0.50 x 10,000 = $5,000
Fixed Costs:
Repair Cost = $1,000
Total Costs: = $5,000 + $1,000 = $6,000
Replace:
Variable Costs:
Labor = $0.25 x 10,000 = $2,500
Fixed Costs:
New Machine = $5,000
Total Costs: = $2,500 + $5,000 = $7,500
EXERCISES
1. The costs fall from $11 to $10 because of the fixed overhead costs which are the same at each
level of production, so that the unit fixed costs decrease as production level increases.
The relevant costs are $8 per unit, so the bid price should be any price above $8. The sales
manager’s price will produce a contribution of 20,000 ($9-$8) = $20,000
a. Make or Buy:
The total cost to purchase the units is $120,000 (i.e., $60 per unit).
b. Disposal of Assets
Re-machine Scrap
Future Revenues $30,000 $2,500
Deduct future costs 25,000
Difference $5,000 $2,500
c. Replacement of an Asset
Replace Rebuild
New boat $92,000 -
Deduct current disposal price $ 9,000
Rebuild of existing boat $75,000
Margin $83,000 $75,000
The difference is in favor of rebuilding. The $90,000 original purchase cost is irrelevant
as it is a “sunk cost.”
11-35 Make or Buy
1. Since the contribution for manufactured fans ($24) is higher than for purchased fans ($12),
the answer for part 1 should be to manufacture as many as possible, or 15,000, and to purchase
the remaining 5,000 from Harris Products.
(1) Of the total per unit manufacturing overhead of $15 per unit, $10 is fixed ($100,000/10,000 units)
and the remainder $5 is variable
(2) Of the total per unit selling and administrative cost, $6 is given as fixed,
and the remainder $14 is variable.
Price and
Relevant Costs
for Pumps
Selling price per unit $ 60.00
Costs per unit
Electric motor 5.50
Other parts 7.00
Direct labor ($15.00/hr.) 7.50
Manufacturing overhead 5.00 (1)
Selling and adm. Cost 14.00 (2)
Total variable cost per unit $ 39.00
(1) Of the total per unit manufacturing overhead of $9 per unit, $4 is fixed ($100,000/25,000 units)
and the remainder $5 is variable
(2) Of the total per unit selling and administrative cost, $6 is given as fixed,
and the remainder $14 is variable.
The contribution from the pumps ($525,000) is greater than for fans ($420,000); subject to
strategic consideration the pumps are more profitable.