Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study, at a cost of $26,000, to determine which product will be more profitable. The results of the study follow.Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed asset. The advertising expense estimated by Gleason for the introduction of the new products is an example of a(n)
Answer(s): B
Discretionary costs refer to fixed costs that are not absolutely necessary to operate in the current period. The level of these costs is subject to a decision made by management each period. A key characteristic of discretionary costs is that there is no clearly measurable relationship between input (the costs) and output. Advertising is a good example of a discretionary fixed cost.
Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study, at a cost of $26,000, to determine which product will be more profitable. The results of the study follow.Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed asset. Assuming that Gleason elects to produce the frozen dessert, the profit that would have been earned on the breakfast rolls is a(n)
Answer(s): D
An opportunity cost is the maximum return that could have been earned on the next best alternative use of a resource. In this case, the lost profit on the rolls is an opportunity cost. Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead
Regis needs 30000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.If Regis Company purchases the plugs but does not rent the unused facility, the company would
Exclusive of the fixed overhead, the unit cost of making the plugs is $28 ($36 total cost -- $8 fixed OH). Purchasing the plugs will avoid $2 per unit of fixed overhead ($60000 OH applied ÷ 30,000 units). Accordingly, $6 per unit of fixed overhead is unavoidable, and the relevant (avoidable) unit cost of making the plugs is $30 [$36 total cost-($8 fixed OH -$2 avoidable cost)]. The purchase option therefore results in a $3-per-unit loss ($33 purchase price -- $30 relevant cost).
Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $80,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in savings annually. To achieve this goal, the minimum annual rent on the facility must be
Without regard to rental of idle production capacity, the company will lose $3 per unit ($33 purchase price -- $30 relevant cost) by purchasing the plugs. The total annual loss will be $90,000 (30,000 units x $3). Consequently, to achieve the targeted savings, the minimum annual rent must be $190,000 ($90,000 loss from purchasing + $100,000 targeted savings).
Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland's annual manufacturing overhead budget is one-third variable and two4hirds fixed. Scott Supply, one of Leland's reliable vendors. has offered to supply Part Number KJ37 at a unit price of $15,000.If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these parts would be idle. Should Leland decide to purchase the parts from Scott, the unit cost of KJ37 would
Answer(s): A
In addition to the $15,000 purchase price, the company would still incur $8,000 per unit of unavoidable (fixed) manufacturing overhead (2/3 of $12,000). The materials handling charge of 20% of the purchase price of components would add another $3,000 per unit ($15,000 x .2). Therefore the unit cost of purchase would be $26,000 )$15,000 +$8,000 + $3,000), which is $4,800 more than the current cost to manufacture.
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