19. It costs Tired Professor Mullen $21 of variable costs and $9 of allocated fixed costs to...


19. It costs Tired Professor Mullen $21 of variable costs and $9 of allocated fixed costs to produce an industrial trash can that sells for $45. A buyer in Mexico offers to purchase 3.000 units at $27 each. Tired Professor Mullen has excess capacity and can handle the additional production. What effect will acceptance of the special order offer have on net income?

a. Decrease $9.000

b. Increase $9.000

c. Increase $81,000

d. Increase $18.000

20. Old and Grumpy Professor Mullen Corp can make 100 units of a necessity component pan with the following costs:

Direct materials$60,000
Direct labor10,000
Variable overhead30,000
Fixed overhead20,000

If Old and Grumpy Professor Mullen Corp can purchase the component externally for $110,000 and only $5,000 of the fixed costs can be avoided (eliminated, reduced, goes away) what is the correct make-or-buy decision?

a. Make and save $5.000

b. Buy and save $5,000

c. Make and save $15,000

d. Buy and save $15.000

21. Jao So Mullen produces corn chips. The cost of one batch is below:

Direct materials $18.00
Direct labor 13.00
Variable overhead 11.00
Fixed overhead 14.00

An outside supplier has offered to produce the com chips for $25 per batch How much will Jao So Mullen save if it accepts the make or buy offer? ($ 0) None of the fixed overhead goes away (reduced, avoided, eliminated).

a. $2 00 per batch

b. $17.00 per batch

c. $31.00 per batch

d. $6.00 pet hatch

Relevant Costs:

The relevant costs in decision making are only those costs that are different between the options. Business managers must consider relevant costs when evaluating different decision alternatives. Costs that are not relevant, such as fixed costs that will remain the same independent of the decision selected must not enter into the decision-making analysis as they have no bearing on the final result.

Answer and Explanation: 1

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19. The effect on net income will be:

Incremental income of 3,000 units x $27 per unit $81,000
Incremental cost of making 3,000 units 63,000 ($21...

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Relevant & Irrelevant Costs for Decision-Making


Chapter 8 / Lesson 1

Relevant costs are affected by management decisions while irrelevant costs are not influenced by these decisions. Explore relevant and irrelevant costs in accounting, and learn about their definitions and examples.

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