Cases of Relevant cost

Problem 1 –
Coleman Company owns a special machine that produces a component which the company uses
as raw material for production of Product K. The company uses 1,800 units of this component in
production each year. The costs of making one unit of this component are
Direct material $7
Variable manufacturing overhead 6
Direct labor 4
Fixed manufacturing overhead 5

The fixed overhead costs are unavoidable, and the fixed cost per unit is based on the present
annual usage of 1,800 units of the component. An outside supplier has offered to sell Coleman
this component for $18 per unit and can supply all the units it needs.

A. If Coleman buys the component from the outside supplier instead of making it, how much
will net income change? Should Coleman make or buy the component?
B. Suppose Coleman could rent the machine to another company for $5,000 per year. How
would your response change to part A?

Problem 2
ABC Ltd. Company makes and sells 12,000 pairs of running shoes each year. The cost of
making one pair of these shoes is
Direct material $ 11
Variable manufacturing overhead 5
Direct labor 4
Fixed manufacturing overhead 7
The fixed overhead costs are unavoidable. The company allocates fixed overhead costs based on
its annual capacity of 15,000 pairs it is able to make. An overseas company recently offered to
buy 3,000 pairs of shoes at $21 per pair. Regular customers buy shoes from ABC Ltd. at $30 per
pair.
How much is incremental income if the company accepts the special order? Should the company
accept it?

Problem 3 –
Brislin Company makes and sells two products, Olives and Popeyes. The income statement for
the prior year, 2001, was as follows:
Olives Popeyes
Sales $16,000 $24,000
Variable cost of goods sold 6,000 10,000
Manufacturing contribution margin $10,000 $14,000
Fixed production cost 5,000 7,500
 Selling and administration 3,000 8,000
Net income $2,000 ($1,500)
Brislin's fixed costs are unavoidable and are allocated to products on the basis of sales revenue.
If Popeyes are dropped, sales of Olives are expected to increase by 40 percent next year. Should
the company drop Popeyes Production?