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relevant costing

relevant costing

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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P5.2 (LO 1, 2, 3, 4), AP Justin studied relevant costing in his introductory and upper-level accounting courses, but never thought he would use those skills-let alone so soon! Yet here he is, in the second month of his sum- mer internship at a snowmobile and personal watercraft manufacturer. His boss, Jeff, needs help. The company currently makes its own handlebar kits for all snowmobile models and personal watercraft models. Variable costs to produce one batch of 120 units are as follows. Variable Costs to Make DM $12,000 DL 16,000 Variable-MOH 3,000 The company's fixed manufacturing costs related to the handlebar kits amount to $15,000. One-third of these costs are avoidable if it chooses to buy these components rather than make them in-house. Jeff is receiving some pressure from company executives to find cost savings in operations and processes. The handlebar kit is the starting point in his review of products and processes. Required a. What is the relevant cost to make one handlebar kit? b. If a supplier approached Justin's boss and offered to sell the company handlebar kits for $400 each, what would Jeff's response be? Why? c. If a supplier offers to sell the company handlebar kits for $250 each, what would Jeff's response be? Describe what other factors would be relevant to this decision. d. Jeff conducts additional research to determine if the handlebar manufacturing space could be used for any other purpose. He finds that if the company can free up that space, it can be used to increase production volume for snowmobiles and watercraft. Given that demand for these products has been strong, the com- pany feels confident it could sell the higher volume of products with no difficulty. This additional volume would increase the company's operating income by $10,000. Does this situation change your answer to either part (b) or part (c)? Explain.
Transcribed Image Text:P5.2 (LO 1, 2, 3, 4), AP Justin studied relevant costing in his introductory and upper-level accounting courses, but never thought he would use those skills-let alone so soon! Yet here he is, in the second month of his sum- mer internship at a snowmobile and personal watercraft manufacturer. His boss, Jeff, needs help. The company currently makes its own handlebar kits for all snowmobile models and personal watercraft models. Variable costs to produce one batch of 120 units are as follows. Variable Costs to Make DM $12,000 DL 16,000 Variable-MOH 3,000 The company's fixed manufacturing costs related to the handlebar kits amount to $15,000. One-third of these costs are avoidable if it chooses to buy these components rather than make them in-house. Jeff is receiving some pressure from company executives to find cost savings in operations and processes. The handlebar kit is the starting point in his review of products and processes. Required a. What is the relevant cost to make one handlebar kit? b. If a supplier approached Justin's boss and offered to sell the company handlebar kits for $400 each, what would Jeff's response be? Why? c. If a supplier offers to sell the company handlebar kits for $250 each, what would Jeff's response be? Describe what other factors would be relevant to this decision. d. Jeff conducts additional research to determine if the handlebar manufacturing space could be used for any other purpose. He finds that if the company can free up that space, it can be used to increase production volume for snowmobiles and watercraft. Given that demand for these products has been strong, the com- pany feels confident it could sell the higher volume of products with no difficulty. This additional volume would increase the company's operating income by $10,000. Does this situation change your answer to either part (b) or part (c)? Explain.
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