Question from Managerial Accounting, Jimbalvo, 4th edition, pg. 230,Exercise 6-9

Question

Question from Managerial Accounting, Jimbalvo, 4th edition, pg. 230,Exercise 6-9. Problems associated with cost allocation. Custom metal works received an offer from a big box retail company to purchase 300 metal outdoor tables for $200 ea. Custom Metal accountants determine that the following costs apply to the tables: Dir materials $100; dir labor $45; manuf overhead $70, Total $215; Of the $70 overhead, $14 variable and $56 relates to fixed costs. The $56 of fixed overhead is allocated as $1.25 per direct labor dollar. 1. What will be the real effect on profit if the order is accepted? b. Explain why managers who focus on reported cost per unit may be incluined to turn down the order?

Explanation / Answer

1. What will be the real effect on profit if the order is accepted? The relevant costs would include: 100 direct material 45 direct labor 14 variable overhead = 159 per unit profit per unit = 200 - 159 = 41 300*41 = 8200 answer: $12,300 b. Explain why managers who focus on reported cost per unit may be incluined to turn down the order? If they focused on reported cost per unit, they would conclude that they would lose money, 200-215 = -15. -15*300 = -4500. They would think they would lose $4500 on the order.

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