1. Bookpubs Inc. operates a bookbinding division. Management is considering whether to outsource...

Question:

1. Bookpubs Inc. operates a bookbinding division. Management is considering whether to outsource the bookbinding for $25 per book or continue to do the bookbinding internally. The current internal binding costs average $26.50. That includes $4,000 of fixed overhead for the 1,000 books currently bound internally. (In other words, costs are $22.50 per book for everything other than fixed overhead and $4.00 per unit for fixed overhead.) However, 75% of the overhead can be avoided if the binding is outsourced.

A. By how much will net income change if Bookpubs outsources the binding for 1,000 books?

B. Should they outsource the binding?

C. What qualitative factors should Bookpubs consider?


2. Chargex expects to produce 40,000 units and incur the following costs at that production level:

Direct materials$50,000
Direct labor40,000
Variable manufacturing overhead20,000
Fixed manufacturing overhead100,000
Variable selling and administrative costs10,000
Fixed selling and administrative costs30,000

At production above 40,000 units, Chargex must rent additional production facilities at a cost of $15,200. Recently, another company asked Chargex to produce a special order of 10,000 units. No selling or administrative costs will be incurred on the special order.

Calculate the minimum sales price that Chargex should accept for the total special order of 10,000 units.

Relevant & Irrelevant Costs for Decision-Making:

Relevant costs in decision-making are always differences between the two alternatives and therefore never include unavoidable costs or sunk costs, which are costs that have been incurred and will not change regardless of which alternative is selected.

Answer and Explanation: 1

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1. Bookpubs

A

Decrease in variable costs $22,500
($22.50 x 1,000)
Decrease in fixed costs 3,000
($4,000 x 0.75)
Increase in outsourced cost (25,0...

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Relevant & Irrelevant Costs for Decision-Making

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Chapter 8 / Lesson 1
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Explore relevant and irrelevant costs. Study the definitions and types of relevant and irrelevant costs, and discover examples of relevant costs in decision-making.


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