PROBLEM 13–12 Relevant Cost Potpourri (L02, LO3, L04, LO5, L06)
Unless otherwise indicated, each of the following parts is independent. In all cases, show compu-
tations to support your answer.
1. Boyle’s Home Center has two departments, Bath and Kitchen. The most recent income state-
ment for the company follows:
4. For many years, Diehl Company has produced a small electrical part that it uses in the pro
duction of its standard line of diesel tractors. The company’s unit product cost, based on a pro
duction level of 60,000 parts per year, is as follows:
Sales
Less variable expenses
Contribution margin.
Less fixed expenses
Department
Total Bath Kitchen
$5,000,000 $1,000,000 $4,000,000
1,900,000 300,000 1,600,000
3,100,000 700,000 2,400,000
2,700,000 900,000 1,800,000
$ 400,000 $ (200,000) $ 600,000
Per Part Total
$ 4.00
2.75
0.50
3.00 $180,000
Direct materials.
Direct labor
Variable manufacturing overhead.
Fixed manufacturing overhead, traceable….
Fixed manufacturing overhead, common
(allocated on the basis of labor-hours) …
Unit product cost
Net operating income (loss).
2.25
135,000
$12.50
A study indicates that $370,000 of the fixed expenses being charged to the Bath Department
are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In
addition, the elimination of the Bath Department would result in a 10% decrease in the sales
of the Kitchen Department. If the Bath Department is dropped, what will be the effect on the
net operating income of the company as a whole?
2. Morrell Company produces several products from the processing of krypton, a rare mineral.
Material and processing costs total $30,000 per ton, one-third of which is allocated to the
product merifulon. The merifulon produced from a ton of krypton can either be sold at the
split-off point or processed further at a cost of $13,000 and then sold for $60,000. The sales
value of merifulon at the split-off point is $40,000. Should merifulon be processed further or
sold at the split-off point?
3. Shelby Company produces three products, X, Y, and Z. Data concerning the three products fol-
low (per unit):
An outside supplier has offered to supply the electrical parts to the Diehl Company for only
$10 per part. One-third of the traceable fixed manufacturing costs represent supervisory
salaries and other costs that can be eliminated if the parts are purchased. The other two-thirds
of the traceable fixed manufacturing costs represent depreciation of special equipment that has
no resale value. Economic depreciation on this equipment is due to obsolescence rather than
wear and tear. The decision would have no effect on the common fixed costs of the company,
and the space being used to produce the parts would otherwise be idle. Show the dollar ad-
vantage or disadvantage of accepting the supplier’s offer.
5. Glade Company produces a single product. The cost of producing and selling a single unit of
this product at the company’s current activity level of 8,000 units per month is as follows:
Product
X
$80
Y
$56
Z
$70
Selling price.
Less variable expenses:
Direct materials
Labor and overhead.
Direct materials.
Direct labor…
Variable manufacturing overhead.
Fixed manufacturing overhead…
Variable selling and administrative expenses.
Fixed selling and administrative expenses….
$2.50
3.00
0.50
4.25
1.50
2.00
15
27
9
40
N&09l?||$||
42
49
Total variable expenses
Contribution margin.
llelelor
$32
$14
$21
Contribution margin ratio
25%
The normal selling price is $15 per unit. The company’s capacity is 10,000 units per month. An
order has been received from an overseas source for 2,000 units at a price of $12 per unit. This
order would not affect regular sales. If the order is accepted, by how much will monthly profits
be increased or decreased? (The order would not change the company’s total fixed costs.)
6. Refer to the data in (5) above. Assume the company has 500 units of this product left over
from last year that are inferior to the current model. The units must be sold through regular
channels at reduced prices. What unit cost is relevant for establishing a minimum selling price
for these units? Explain.
Demand for the company’s products is very strong, with far more orders each month than the
company can produce with the available raw materials. The same material is used in each
product. The material costs $3 per pound, with a maximum of 5,000 pounds available each
month. Which orders would you advise the company to accept first, those for X, for Y, or for
Z? Which orders second? Third?

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