Global Chemical Company, located in Buenos Aires, Argentina, recently received an order for a product it does not normally produce. Since the company has excess production capacity, management is considering accepting the order.

In analyzing the decision, the assistant controller is compiling the relevant costs of producing the order. Production of the special order would require 9,400 kilograms of theolite. Global does not use theolite for its regular product, but the firm has 9,400 kilograms of the chemical on hand from the days when it used theolite regularly.

The theolite could be sold to a chemical wholesaler for 15,300 p. The book value of the theolite is 3.70 p per kilogram. Global could buy theolite for 4.10 p per kilogram. (p denotes the peso, Argentina's national monetary unit. Many countries use the peso as their unit of currency. On the day this exercise was written, Argentina's peso was worth .1891 U.S. dollars.)

Question #1

Required: 1-a. What is the relevant cost of theolite for the purpose of analyzing the special-order decision?

Relevant cost p sheet is drawn here 1-b. The relevant cost of theolite for the purpose of analyzing the special-order decision is an example of: Sunk cost Opportunity cost Historical cost

Question #2

2. Identify the relevance of each of the numbers given in the exercise in making the decision. Martinez, Inc., is a small firm involved in the production and sale of electronic business products.

The company is well known for its attention to quality and innovation. During the past 15 months, a new product has been under development that allows users handheld access to e-mail and video images. Martinez named the product the Wireless Wizard and has been quietly designing two models: Standard and Enhanced.

Development costs have amounted to $196,500 and $277,500, respectively. The total market demand for each model is expected to be 50,000 units, and management anticipates being able to obtain the following market shares:

Standard, 20 percent; Enhanced, 15 percent.

Forecasted data follow.

Standard Enhanced Projected selling price $ 395.00 $ 495.00

Production costs per unit:

Direct material 52.00 82.50

Direct labor 27.50 40.00

Variable overhead 46.00 58.00

Marketing and advertising per product line 205,000 350,000

Sales salaries per product line 90,500 90,500

Sales commissions* 10 % 10 % *Computed on the basis of sales dollars. Since the start of development work on the Wireless Wizard, advances in technology have altered the market somewhat, and management now believes that the company can introduce only one of the two models.

Consultants confirmed this fact not too long ago, with Martinez paying $35,500 for an in-depth market study.

The total fixed overhead is expected to be the same regardless of which product is manufactured.

Question #3

Required: 1. Compute the per-unit contribution margin for both models. (Round your answers to 2 decimal places.) Standard Enhanced Per-unit contribution margin sheet is drawn here References eBook & Resources Problem

Learning Objective: 14-04 Identify relevant costs and benefits, giving proper treatment to sunk costs, opportunity costs, and unit costs.

Difficulty: MediumLearning Objective: 14-05 Prepare analyses of various special decisions, properly identifying the relevant costs and benefits.

Question #4

Required information 2. Which of the following should be ignored in making the product-introduction decision? (Select all that apply.) Armstrong Corporation manufactures bicycle parts.

The company currently has a $19,300 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $7,100, or modified for $9,900 and sold for $21,300.

Question #5

Required: 1. Identify the relevance of the data given in the exercise to the decision about what to do with the obsolete parts. Current sales value for unmodified parts Sales value for modified parts Modification costs Current book value of inventory sheet is drawn here References eBook & Resources

ExerciseLearning Objective: 14-04 Identify relevant costs and benefits, giving proper treatment to sunk costs, opportunity costs, and unit costs.

Difficulty: EasyLearning Objective: 14-05 Prepare analyses of various special decisions, properly identifying the relevant costs and benefits.

Question #6

2-a. Calculate the benefit under each alternative for disposing of the obsolete parts. Benefit if parts are sold without modification Net benefit if parts are sold after being modified sheet is drawn here

2-b. How should the obsolete parts be disposed? Modify and then sell. Sell in unmodified condition.