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Concept introduction:
Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager’s decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.
Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.
Two basic types of the relevant costs are as follows:
- Out-of-pocket costs
- Opportunity costs
To indicate:
The make or buy decision.
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Chapter 10 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
- Gelb Company currently manufactures 40,000 units per year of a key component for its manufacturing process. Variable costs are $1.95 per unit, fixed costs related to making this component are $65,000 per year, and allocated fixed costs are $58,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.50 per unit. Should it continue to manufacture the component, or should it buy this component from the outside supplier?arrow_forwardTechno Corporation is currently manufacturing an item at variable costs of $5 per unit. Annual fixed costs of manufacturing this item are $140,000. The current selling price of the item is $10 per unit, and the annual sales volume is 30,000 units. Alternatively, Techno could increase the selling price to $11 per unit. However, the annual sales volume would be limited to 45,000 units. Should Techno buy the new equipment and raise the price of the item? Why or why not?arrow_forwardGelb Company currently manufactures 40,000 units per year of a key component for its manufacturing process. Variable costs are $1.95 per unit, fixed costs related to making this component are $65,000 per year, and allocated fixed costs are $58,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.50 per unit. Calculate the total incremental cost of making 40,000 units and buying 40,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?arrow_forward
- Gelb Company currently manufactures 47,500 units per year of a key component for its manufacturing process. Variable costs are $4.05 per unit, fixed costs related to making this component are $85,000 per year, and allocated fixed costs are $70,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.70 per unit. Calculate the total incremental cost of making 47,500 units and buying 47,500 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? Complete this question by entering your answers in the tabs below. Outside Supplier Calculate the total incremental cost of making 47,500 units. (Round "variable cost per unit" answers to 2 decimal places.) Incremental Costs to Make Relevant Amount per Unit Costs to Make Costs to Buy Variable cost per unit Fixed manufacturing costs Total incremental cost to make…arrow_forwardGoldberg Company currently manufactures 52,000 units per year of a key component for its manufacturing process. Variable costs are $4.05 per unit, fixed costs related to making this component are $69,000 per year, and allocated fixed costs are $70,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.70 per unit. Calculate the total incremental cost of making 52,000 units and buying 52,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? Complete this question by entering your answers in the tabs below. Outside Costs to Make Costs to Buy Supplier Calculate the total incremental cost of making 52,000 units. (Round "variable cost per unit" answers to 2 decimal places.) Incremental Costs to Make Relevant Amount per Unit Total Relevant Relevant Fixed Costs Costs Variable cost per unit Fixed…arrow_forwardGelb Company currently manufactures 52,000 units per year of a key component for its manufacturing process. Variable costs are $7.35 per unit, fixed costs related to making this component are $67,000 per year, and allocated fixed costs are $82,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.90 per unit. Calculate the total incremental cost of making 52,000 units and buying 52,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? Complete this question by entering your answers in the tabs below. Outside Supplier Calculate the total incremental cost of making 52,000 units. (Round "variable cost per unit" answers to 2 decimal places.) Incremental Costs to Make Relevant Amount per Unit Costs to Make Costs to Buy Variable cost per unit Fixed manufacturing costs Total incremental cost to make…arrow_forward
- Goldberg Company currently manufactures 52,000 units per year of a key component for its manufacturing process. Variable costs are $4.05 per unit, fixed costs related to making this component are $69,000 per year, and allocated fixed costs are $70,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.70 per unit. Calculate the total incremental cost of making 52,000 units and buying 52,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? Complete this question by entering your answers in the tabs below. Outside Costs to Make Costs to Buy Supplier Calculate the total incremental cost of buying 52,000 units. (Round "purchase price per unit" answers to 2 decimal places.) Incremental Costs to Buy Relevant Amount per Relevant Fixed Costs Total Relevant Costs Unit Purchase price per unit Total incremental…arrow_forwardABC Company (ABC) currently produces 6,000 units of M1 (a component uses in many electric appliances) per year under normal capacity and sells M1 at $66 per unit. The company is considering the possibility to buy a similar component from an outside supplier. If ABC accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but 60% of the fixed manufacturing overhead will have to be absorbed by other products. The released factory equipment could be used to produce a net income of $66,000. The cost to produce M1 is as follows.Direct materials $105,000 Direct labor $45,000Total overhead $90,000. The total overhead costs include variable handling costs of $5 per unit. The remainder of the overhead costs consists of 10% variable costs and 90% fixed costs. A very good foreign manufacturer, 3Z Company (3Z) has offered to sell the component at $36 per unit, plus $0.5 shipping cost per unit. GQ Company (GQ), a new local manufacturer, has alsooffered to…arrow_forwardGoldberg Company currently manufactures 52,000 units per year of a key component for its manufacturing process. Variable costs are $4.05 per unit, fixed costs related to making this component are $69,000 per year, and allocated fixed costs are $70,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.70 per unit. Calculate the total incremental cost of making 52,000 units and buying 52,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? Complete this question by entering your answers in the tabs below. Outside Costs to Make Costs to Buy Supplier Should it continue to manufacture the component, or should it buy this component from the outside supplier? Should Gelb make the part or purchase it from the outside supplier?arrow_forward
- The Falling Snow Company is considering production of a lighted world globe that the company would price at a markup of 0.30 above full cost. Management estimates that the variable cost of the globe will be $62 per unit and fixed costs per year will be $240,000. Assuming sales of 1,200 units, what is the full selling price of a globe with a 0.30 markup? Round to two decimal places.arrow_forwardInteliSystems needs 79,000 optical switches next year . By outsourcing them, InteliSystems can use its idle facilities to manufacture another product that will contribute $140,000 to operating income, but none of the fixed costs will be avoidable. Should InteliSystems make or buy the switches? Show your analysis based on the information in the table below for making 70,000 switches.arrow_forwardAxdew Limited is considering whether to manufacture an improved, more expensive version of their current line of best-selling lava lamps. Axdew currently spends $15,000 per year on maintenance and $80,000 on full-time salaries for staff. Maintenance costs are expected to remain the same but an additional labourer will need to be hired at an annual cost of $30,000. Manufacture of the newer version will require re-tooling of its existing machinery at a cost of $40,000. Axdew paid consultants a fee of $30,000 for a feasibility study to determine the viability of the new product. Which of the costs discussed above need to be considered by management in deciding whether to proceed with the new product? Justify your answer.arrow_forward
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