What would the effect on operating income

Assignment Help Managerial Accounting

Reference no: EM133049403

Discussions

DQ 1. Define relevant costs. Why are historical costs irrelevant?

DQ 2. "Variable costs are always relevant, and fixed costs are always irrelevant." Do you agree? Why?

Exercises

Question 1. Comfy Company manufactures slippers and sells them at $20 a pair. Variable manufacturing cost is $6.50 a pair, and allocated fixed manufacturing cost is $3.0 a pair. It has enough idle capacity available to accept a one-time-only special order of 15,000 pairs of slippers at $16 a pair. Comfy will not incur any marketing costs as a result of the special order. What would the effect on operating income be if the special order could be accepted without affecting normal sales? Show your calculations.

Problems

1. Arora Corporation manufactures cellular modems. It manufactures its own cellular modem circuit boards (CMCB), an important part of the cellular modem. It reports the following cost information about the costs of making CMCBs in 2020 and the expected costs in 2021:

Arora manufactured 8,000 CMCBs in 2020 in 40 batches of 200 each. In 2021, Arora anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80 batches of 125 each.

The GM Corporation has approached Arora about supplying CMCBs to Arora in 2021 at $350 per CMCB on whatever delivery schedule Arora wants.

Required:
a) Calculate the total expected manufacturing cost per unit of making CMCBs in 2021.
b) Suppose the capacity currently used to make CMCBs will become idle if Arora purchases CMCBs from GM. On the basis of financial considerations alone, should Arora make CMCBs or buy them from GM? Show your calculations.

c) Now suppose that if Arora purchases CMCBs from GM, its best alternative use of the capacity currently used for CMCBs is to make and sell special circuit boards (CB3s) to the Suxuz Corporation. Arora estimates the following incremental revenues and costs from CB3s:

Total expected incremental future revenues $3,100,000 Total expected incremental future costs 2,850,000

On the basis of financial consideration alone, should Arora make CMCBs or buy them from GM? Show your calculations.

Reference no: EM133049403

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