Exam 12: Decision Making: Relevant Costs and Benefits

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Question 41

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Occidental Company is studying whether to drop a product because of ongoing losses. Costs that would be relevant in this situation would include variable manufacturing costs as well as:

A) factory depreciation.
B) avoidable fixed costs.
C) unavoidable fixed costs.
D) allocated corporate administrative costs.
E) general corporate advertising.

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Question 42

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Stowers Corporation manufactures products J, K, and L in a joint process. The company incurred $480,000 of joint processing costs during the period just ended and had the following data that related to production: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Sales Values and Additional }$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Cost if Processed I evond Split-off }$ $\begin{array}{|r|r|r|r|}\hline \underline { \text {Product}}&\underline { \text {Sales Value at Split-off}}&\underline { \text {Sales Value}}&\underline { \text {Additional C'ost}}\\\hline \mathrm{J} & \$ 400,000 & \$ 550,000 & \$ 130,000 \\\hline \mathrm{K} & 350,000 & 540,000 & 240,000 \\\hline \mathrm{L} & 850,000 & 975,000 & 118,000 \\\hline\end{array}$ An analysis revealed that all costs incurred after the split-off point are variable and directly traceable to the individual product line. Required: A. If Stowers allocates joint costs on the basis of the products' sales values at the split-off point, what amount of joint cost would be allocated to product J? B. If production of J totalled 50,000 gallons for the period, determine the relevant cost per gallon that should be used in decisions that explore whether to sell at the split-off point or process further? Briefly explain your answer. C. At the beginning of the current year, Stowers decided to process all three products beyond the split-off point. If the company desired to maximize income, did it err in regards to its decision with product J? Product K? Product L? By how much?