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

## Question:

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 labor 10,000 Variable overhead 30,000 Fixed overhead 20,000 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.

19. The effect on net income will be:

 $18,000 Incremental income of 3,000 units x$27 per unit $81,000 Incremental cost of making 3,000 units 63,000 ($21 x 3,000; The fixed costs would not increase) Increase in net income

The correct option is d.

20. The relevant costs are:

Direct materials$60,000 Direct labor10,000 Variable overhead30,000 Fixed overhead (only the avoidable costs)5,000 Purchase price$110,000
Total cost $105,000$110,000

The correct option is a.

21.Jao So Mullen will save, per batch:

 $17.00 Direct materials$18.00 Direct labor 13.00 Variable overhead 11.00 Fixed costs 0.00 (all the fixed costs are unavoidable) Purchase price (25.00) Saving

The correct option is b.