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Exercise 11-14 Identification of Relevant Costs [LO11-1) Kristen Lu purchased a used automobile for $11,900 at the beginning of last year and incurred the following operating costs: Depreciation ($11,900 + 5 years) Insurance Garage rent Automobile tax and license Variable operating cost $ 2,380 $ 1,200 $ 600 $ 320 $ 0.09 per mile The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that, at her current rate of usage. the car will have zero resale value in five years, so the annual straight-line depreciation is $2,380. The car is kept in a garage for a monthly fee. Required: 1. Kristen drove the car 15,000 miles last year, Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.) Answer is complete but not entirely correct. s 0.40 Average fixed cost per mile Variable operating cost per mile Average cost per mile $ 4,500.00 $ 4,500.40 2. Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-country trip for two weeks during spring break. What costs above are relevant in this decision? Assume that there is no decrease in the resale value of the car due to its use. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) Variable operating costs Depreciation Automobile tox License costs Insurance costs The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Dirt Mountain Racing Total Bikes Bikes Bikes $ 924,000 $268,000 $ 405,000 $ 251,000 472,000 113,000 207,000 152,000 452.000 155,000 198,000 99,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses Net operating income (losa) 68,900 8,200 40,400 20,300 44,300 20,800 7,600 15,900 115,700 40,600 38,500 36,600 184,800 53,600 81,000 50,200 413,700 123,200 167,500 123,000 $ 38,300 $ 31,800 $ 30,500 $(24,000) "Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: 1. What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes? 2. Should the production and sale of racing bikes be discontinued? 3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long run profitability of the various product lines. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes? 2. Should the production and sale of racing bikes be discontinued? 3. Prepare a property formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Prepare a property formatted segmented Income statement that would be more useful to management in assessing the long- run profitability of the various product lines. Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable forced expenses Total traceable fixed expenses Product line segment margin loss) Net operating income (loss) Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $37 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overbead, allocated Total cost 23,000 Per Unit Unit per Year $ 16 $ 368.000 9 207.000 4 92,000 6 138,000 207.000 $ 44 $1,012.000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value) Required: 1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 23.000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted? 3. Suppose that if the carburetors were purchased, Troy Engines, Ltd. could use the freed capacity to launch a new product. The segment margin of the new product would be $230,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 23,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3. should the outside supplier's offer be accepted? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 23,000 carburetors from the outside supplier? Required 2 > Required 1 Required 2 Required 3 Required 4 Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $230,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 23,000 carburetors from the outside supplier? Imperial Jewelers manufactures and sells a gold bracelet for $410.00. The company's accounting system says that the unit product cost for this bracelet is $271.00 as shown below: Direct materials Direct labor Manufacturing overhead Unit product cost $144 88 39 $271 The members of a wedding party have approached Imperial Jewelers about buying 14 of these gold bracelets for the discounted price of $370.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $462 and that would increase the direct materials cost per bracelet by $13. The special tool would have no other use once the special order is completed. To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party's order using its existing manufacturing capacity Required: 1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party? 2. Should the company accept the special order? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What is the financial advantage (disadvantage) or accepting the special order from the wedding party