Explore BrainMass
Share

# Relevant costs

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

See attached file for full problem description.

EX. 1). Martz Corp. has 3 departments. Data for the most recent year is as follows:
C A T
Sales 4,000 1,920 2,240
Var. Expenses 3,280 1,420 520
Fixed Expenses
Unavoidable 480 180 440
Avoidable 555 265 360
The company is considering eliminating Department C due to its losses. a). If they do not decide to replace C with something, should they eliminate it?, and b). If they eliminate C and replace it with another Dept. T, what would the resultant income be?
EX 2). Cover-up Corp. manufactures two products, Hats & Caps. The following data is available:
Hats Caps
Selling Price per unit \$21 \$13
Variable Cost per unit 12 9
Labor Hours required 3 1
Total fixed cost \$52,000
Labor Hour capacity for the year is 15,000 hours.
a). Which product has the higher contribution margin per unit?, b). Which product has the higher contribution margin per hour?, and, c). Assume they can produce only one product. What will income be?

EX 3). Cleveland Hotel has been offered a contract by a convention planner to reserve a block of 30 rooms for 365 nights at a reduced rate of \$60 per night. The usual room rate is \$120 per night. When a local sports team is in the playoffs, the rooms can sell for \$150 per night. A). Compute the opportunity cost of accepting the contract on a usual night when 15 rooms would normally be occupied. B). Compute the opportunity cost of accepting the contract on a playoff night when all rooms would normally be occupied, assuming that all would definitely be occupied. C). Using the usual room rate, what percent of rooms would have to be rented to make Cleveland Hotel indifferent about accepting the offer?

EX 4). Scrooge Co. produces a part that is used in the manufacture of one of its products. The costs associated with the production of 11,000 units of this part are as follows:
DIRECT MATERIAL: \$25,000; DIRECT LABOR: \$34,000; VARIABLE FACTORY OVERHEAD: \$65,000; FIXED FACTORY OVERHEAD: \$50, 000. TOTAL MANUFACTURING COSTS ARE \$174,000.
We know that 18% of fixed factory overhead can be avoided by buying the part from the supplier who has quoted a price of \$12,50 each for the part. Assume that Scrooge has no viable alternative use for the factory space. Should Scrooge accept the offer from the supplier, or not?

EX 5). Mailman Co. is considering the replacement of a machine that is used to produce its single product. The following data is available:
EXISTING MACHINE
Original Cost: \$210,000; Useful Life: 12 years; Current Age: 5 years; Book Value: \$65,000; Present Disposal Value: \$30,000; Future Disposal Value: -0-; Annual cost of operation: \$10,000.
NEW MACHINE
Original Cost: \$40,000; Useful Life: 7years; Current Age: -0-; Book Value: -0-; Present Disposal Value: -0-; Future Disposal Value: -0-; Annual cost of operation: \$9,000.
Ignoring taxes, prepare a cost comparison showing whether the company should keep the old machine or replace it with a new one.

#### Solution Preview

EX. 1). Martz Corp. has 3 departments. Data for the most recent year is as follows:
C A T
Sales 4,000 1,920 2,240
Var. Expenses 3,280 1,420 520
Fixed Expenses
Unavoidable 480 180 440
Avoidable 555 265 360
The company is considering eliminating Department C due to its losses. a). If they do not decide to replace C with something, should they eliminate it?,
If they eliminate X, they would lose the contribution margin of C. The contribution margin is 4,000-3,280 = 720.
The savings would be the avoidable fixed costs of 555.
The net loss is 720-555=165
Since there is a net loss of \$165, department C should not be closed
and b). If they eliminate C and replace it with another Dept. T, what would the resultant income be?
Department T has a contribution margin of 2,240-520=1,720. The avoidable fixed costs are 360. The net increase in income from T is \$1,360. Taking into account the loss of income of \$165 from C, the resultant net income will be 1,360-165 = \$1,195
EX 2). Cover-up Corp. manufactures two products, Hats & Caps. The following data is available:
Hats Caps
Selling Price per unit \$21 ...

#### Solution Summary

The solution has various problems dealing with relevant costs.

\$2.19