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BEC - Business Environment & Concepts (Forum Locked Forum Locked)
 CPAnet Forum : BEC - Business Environment & Concepts
Subject Topic: MCQ @ Special order (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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thesame2
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Posted: 19 Jul 2009 at 00:55 | IP Logged  

Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following applied manufacturing overhead costs:

fixed cost        $21,000

Variable cost    $33,000

The fixed cost includes a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job? (b)

a. $36,700

b. $40,750

c. $54,000

d. $58,050

I know the calculation for (b) is = 33,000 + 7,750

my question is: why can't we choose (a) and caculate in this way :33,000 + (7,750- 3,700)? as it's the real change part



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jay_usa
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Posted: 19 Jul 2009 at 01:07 | IP Logged  

I think that will not be included because it is not relevant to decision making, $3,700 will remain same no matter which alternative you select ( Inhouse design or external design ). These are Sunk Costs.

 



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thesame2
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Posted: 19 Jul 2009 at 01:22 | IP Logged  

jay_usa wrote:

I think that will not be included because it is not relevant to decision making, $3,700 will remain same no matter which alternative you select ( Inhouse design or external design ). These are Sunk Costs.

yes, you are right. but the second alternative doesn't need $3,700, instead, it requires 7,750. the difference between the two alternatives is (7,750- 3,700). why can't we see it in this way?



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Zeratul
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Posted: 19 Jul 2009 at 10:02 | IP Logged  

You're making the same mistake I used to make a lot. Read the problem again.

thesame2 wrote:

Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following applied manufacturing overhead costs:

fixed cost        $21,000

Variable cost    $33,000

The fixed cost includes a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job? (b)

a. $36,700

b. $40,750

c. $54,000

d. $58,050

I know the calculation for (b) is = 33,000 + 7,750

my question is: why can't we choose (a) and caculate in this way :33,000 + (7,750- 3,700)? as it's the real change part


Remember that fixed costs allocated will never change with alternatives. Allocation is essentially an arbitrary process by which we assign fixed costs to various elements of manufacturing overhead (e.g. single applied manufacturing overhead rate, ABC). These costs will always be incurred no matter what you do with the facility. For this particular job, the company will probably reallocate those costs to some other aspect of manufacturing overhead.
Basically the reason why 3,700 allocated to in-house design is included is because it will always be a part of fixed costs. The problem threw in that information to throw you off. Since the company has excess manufacturing capacity, any information about fixed costs or how they happen to be allocated can be safely ignored.
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thesame2
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Posted: 19 Jul 2009 at 12:06 | IP Logged  

got it. thanks a lot

I really need to be more careful on the question reading.



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