Question

In the long-term, the primary objectives of for profit and non-profit entities include:

		minimize costs and maximize profit (or services)
		minimize cost and maximize compliance (or services)
		minimize costs and maximize sale (or services)
		minimize costs and maximize variable/fixed costs (or services)

Fame Company manufactures engines. Fame produces all the parts necessary for its engines, except for one electronic component, which is purchased from two local suppliers: Hydra International and Parable Company. Both suppliers are reliable and rarely deliver late. Hydra sells the component for $12.00 per unit, while Parable sells the same component for $10.00. Fame purchases 80% of its components from Parable because of the lower price it offers. The total annual demand is 95,000 units.

	I. Activity Data			​
	​			Activity Cost
	Inspecting components (sampling only)			$ 210,000
	Reworking products (due to failed component)			$2,454,000
	Warranty work (due to failed component)			$1,923,000
II. Supplier Data		​	​
​		Hydra	Parable
​		International	Company
Unit purchase price		$12.00	$10.00
Units purchased		19,000	76,000
Sampling hours		60	2,600
Rework hours		150	3,800
Warranty hours		550	7,000

Calculate the total cost per component associated with using Parable Company as the supplier. (Note: Round the activity rates to the nearest dollar and the cost per component to two decimal places.)

	a.	$12.45
	b.	$78.42
	c.	$67.24
	d.	$15.74

Which of the following costs is least likely to be relevant in deciding whether to accept a special order?

		variable direct labor costs
		variable selling costs
		fixed manufacturing overhead
		variable packaging and shipping costs

Answer 1

Solution:

Solution 1) In the long-term, the primary objectives of for profit and non-profit entities include:

Correct Option is minimize costs and maximize sale (or services)

Explanation: In the long term, the objective of the company should be to capture market share by increasing sales.

Solution 2) Calculation of Rate per Cost Driver as per Activity Based Costing

Activity	Cost $	Cost Driver	Number of Cost Drivers (Hydra International + Parable Company)	Rate Per Cost Driver = Cost $ / Number of Cost Drivers
Inspecting components (sampling only)	2,10,000.00	Sampling hours	2,660	79
Reworking products (due to failed component)	24,54,000.00	Rework hours	3,950	621
Warranty work (due to failed component)	19,23,000.00	Warranty hours	7,550	255
	45,87,000.00

Calculation of Overhead Cost per Unit as per Activity Based Costing

	Hydra International			Parable Company
Costs	Number of Activities	Activity Rate $	Cost $	Number of Activities	Activity Rate $	Cost $
Inspecting components (sampling only)	60	79	4,736.84	2,600	79	2,05,263.16
Reworking products (due to failed component)	150	621	93,189.87	3,800	621	23,60,810.13
Warranty work (due to failed component)	550	255	1,40,086.09	7,000	255	17,82,913.91
Total Overhead Cost $	2,38,012.81			43,48,987.19
Number of Units	19,000			76,000
Overhead Cost per Unit $	12.53			57.22

Calculation of Total Cost per Unit

	Hydra International	Parable Company
Units Purchase Price $	12.00	10.00
Overhead Cost per Unit $	12.53	57.22
Total Cost per Unit $ = Units Purchase Price $ + Overhead Cost per Unit $	24.53	67.22

Calculate the total cost per component associated with using Parable Company as the supplier.

Therefore, the Correct Option is Option C: $67.24

Solution 3) Which of the following costs is least likely to be relevant in deciding whether to accept a special order?

the Correct Option is fixed manufacturing overhead

Explanation: Fixed manufacturing overhead is considered as irrelevant as this cost will be incurred irrespective of the decision of accepting or rejecting the special order.