Use the following to answer questions 11-12:
11. Rams Company needs 20,000 units of a certain part to use in its production cycle. If Rams buys the part from Steelers Company instead of making it, Rams cannot use the excess capacity for another manufacturing activity. Forty percent of the fixed overhead will continue regardless of what decision is made.
Cost to Rams to make the part: (per unit)
Direct Materials $12
Direct Labor $26
Fixed Overhead $10
Cost to buy the part from Steelers Company - $42 per unit. In deciding whether to make or buy the part, Rams' total relevant costs to make the part are:
12. Based on data from question 11:
What decision should Rams make, and what is the total cost advantage that would result?
a Make, $40,000
b Make, $120,000
c Buy, $80,000
d Buy, $40,000
Relevant Cost = DM + DL + Variable Fixed Overhead
As 40% FO are fixed, then ...
The solution uses relevant cost for decision making purpose whether make or buy and the total cost advantage.
ABC; Cost behavior; Decision making and relevant information
By the end of its second year of operations, First General Associates (FGA) had accumulated the following data. FGA delivers certain services to various organizations on a cost - plus basis. Service delivery involves considerable labor and materials as well as significant equipment usage. As a basis to estimate cost behavior for different activity bases, the CFO of FGA has asked you to analyze the data in the table below and provide your estimates for the items following the table.
Total costs incurred for 2 years Cost behavior
Note: all costs are paid monthly Equipment Hours Service Delivery Units
Cost category Amount
Service delivery labor 4,997,000
Supervisory and support salaries and wages 630,000
Utilities (heat and air conditioning) 206,000
Electrical Power to run equipment 104,000
Equipment Maintenance 224,000
Equipment Depreciation 72,000
Research and Development 171,000
Total costs $7,205,,000
Units of service delivered 202,500
Equipment hours 1,022,700
Service delivery labor hours 815,800
1. For each cost category above, determine whether the cost is fixed (F), semi-variable (M) or variable (V) with respect to each level of activity shown above - Equipment Hours and Service Delivery Units - and place an F, M or V in the appropriate column.
2. Based on your determination of cost behavior in part 1, what is your best estimate for each of the following:
Annual total costs
Average monthly fixed costs:
Variable cost per unit of service delivered:
Total cost per unit of service delivered:
3. What additional data would you need to make a better determination of cost behavior for FGA? Be specific and cite illustrations of how you would determine cost behavior using the criteria in Chapter 10 of the text.
4. In this situation, is the total cost per unit of service delivered affected by your determination of cost behavior?
If not, what is the value of separating costs for service delivery into fixed and variable or semi-variable components?
5. In each case in the table below, would FGA recover all its costs in the next year if the prices charged to organizations of each service unit delivered was at least equal to the total cost per unit of service delivered you calculated in part 2? (In making your determination, compare the estimated total costs below with the annual costs incurred determined in Part 2 above.)
Service units Fixed costs Variable costs Total costs Total Revenues
Fairfax Treatment Agency
The Fairfax Treatment Agency delivers the following program services:
• Alcoholic rehabilitation
• Drug-addict treatment
• Basic health care services, and
• Counseling and suicide prevention
The Agency's FY 200X staffing and operating data are as follows:
6 physicians $100,000 $600,000
19 psychologists $50,000 950,000
23 treatment technicians $25,000 575,000 $2,125,000
Medical supplies 300,000
Administrative salaries, rent, utilities, and related costs 1,275,000
The agency director needs to know the cost of each program as a basis for planning and budgeting decisions. She specifically needs to decide on whether to provide funds to alcoholic rehabilitation or drug-addict treatment. She has determined that if the cost to treat a drug-addict patient for a year is more than 15% higher than the cost to treat an alcoholic rehabilitation patient for a year, the alcohol program would receive additional funds. Otherwise the drug-addict program would receive additional funds.
Personnel assigned to individual programs are as follows:
Alcohol Drug - Basic
Rehab Addict Health Counseling Total
Physicians 2 4 6
Psychologists 6 4 9 19
Technicians 4 6 4 9 23
Costs of medical supplies are allocated to programs on the basis of physician-hours spent in each program. Administrative costs are allocated on the basis of direct labor cost of each program (i.e., the total cost of professional salaries for each program).
Eighty patients are in residence in the alcohol rehabilitation program, each staying about six months, equating to 40 patient-years of service delivery in the drug and alcohol program. 100 patients are involved in the drug addict program for about six months each, equating to 50 patient-years of service delivery in the drug program.
Required: Based on the information provided:
1. Complete the following table to determine the cost of each program and the cost per patient-year of the alcohol rehabilitation and drug-addict treatment programs.
Cost Item Alcohol Rehab Drug Addict Treatment Basic Health Counseling Total Cost
Total Costs $3,700,000
Patient years 40 50
2. Based on your analysis, should the director provide additional funds to the drug program or to the alcohol program?
3. What factors, other than cost, do you think the Fairfax Treatment Agency should consider in providing resources to its programs?
Safe Center Program
An organization operates a "safe center" program for youthful offenders (e.g., those arrested for minor drug violations and runaways). These safe centers provide food, temporary lodging, and counseling assistance. While at the centers, youths meet with trained counselors to address their problems.
Each center has a rated capacity to serve 40 youths. The average stay is two months. Therefore, each center serves approximately 240 youths annually (i.e., 40 rooms each occupied by 6 different youths over the course of a year). There are currently twenty centers in operation. Since the program began operations, each of the centers has always been filled to its rated capacity of 40.
Due to increased demand, the program director has asked you to investigate ways to increase the number of youths served. She prefers to increase the number of centers. However, another alternative is to increase the rated capacity at each center from 40 to the maximum capacity of 50.
The annual cost of operating the entire program is $5,240,000 or $262,000 per center. The cost per youth served at each center is, on average, $6,550 a year or $1,092 for a two month stay.
A detailed analysis of annual costs for operating a center at its rated capacity of 40 is as follows:
Counselors (2@ $30,000) (note 1) 60,000
Furniture/Fixtures (note 2) 6,000
Food Service ($2,400 per youth) 96,000
Hotelling support ($375 per youth) 15,000
Medical support ($400 per youth) 16,000
Central Office Costs (note 3) _ 9,000
Total Costs Per Center $262,000
Note 1: A counselor must be hired full-time and can handle a maximum of 20 youths at any one time.
Note 2: This cost is annual depreciation of furniture and fixtures with useful life of four years. The furniture will have to be replaced in about two years at a cost of $24,000.
Note 3: Central office costs of $180,000 are divided equally among the twenty centers. Of these costs, $120,000 are fixed: $60,000 is variable ($3,000 per center).
1. Specify the annual costs of increasing capacity of each existing center by ten places per center to its maximum capacity.
2. Specify the costs of adding 200 places at an additional five centers (rated capacity of 40). Consider only the costs of the first year to simplify the analysis.
3. Why might you not recommend the option with the lower cost?
4. Suppose that resource constraints forced the reduction of the scope of the program by a budget reduction of 15 percent or $786,000. How would you recommend the cuts be made:
A: by reducing the number of centers, or
B: by reducing the number of places at each center?
Consider only savings for the first year. Explain and indicate any factors for which information is not provided that you would want to take into consideration.View Full Posting Details