Chapter 5and 6

5-30 Identification of Relevant Costs

Paul and Paula Petroceli were trying to decide whether to go to the
symphony or to the baseball game. They already have two nonrefundable
tickets to Pops Night at the Symphony that cost $40 each. This is the only
concert of the season they considered attending because it is the only one
with the type of music they enjoy. The baseball game is the last one of the
season, and it will decide the league championship. They can purchase
tickets to the game for $20 each.
The Petrocelis will drive 50 miles round-trip to either event. Variable costs for
operating their auto are $.18 per mile, and fixed costs average $.13 per mile
for the 15,000 miles they drive annually.
Parking at the symphony is free, but it costs $6 at the baseball game.
To attend either event, Paul and Paula will hire a babysitter at $7 per hour.
They expect to be gone 5 hours to attend the baseball game but only 4 hours
to attend the symphony.
Compare the cost of attending the baseball game with the cost of attending
the symphony. Focus on relevant costs. Compute the difference in cost, and
indicate which alternative is more costly to the Petrocelis.
5-35 Contribution Income Statement
Jackson Company had the following data (in thousands) for a given period.
Assume there are no inventories.
Direct labor $170
Direct materials 210
Variable indirect manufacturing 110
Contribution margin 200
Fixed selling and administrative expenses 100
Operating income 10
Sales 990
Compute the (a) variable manufacturing cost of goods sold, (b) variable
selling and administrative expenses, and (c) fixed indirect manufacturing
costs.

6-31 Hospital Opportunity Cost

An administrator at Saint Jude Hospital is considering how to use some space
made available when the outpatient clinic moved to a new building. She has
narrowed her choices, as follows:
a. Use the space to expand laboratory testing. Expected future annual
revenue would be $330,000; future costs, $290,000.
b. Use the space to expand the eye clinic. Expected future annual revenue
would be $500,000; future costs, $480,000.

c. The gift shop is rented by an independent retailer who wants to expand

into the vacated space. The retailer has offered $11,000 for the yearly rental
of the space. All operating expenses will be borne by the retailer.
The administrators planning horizon is unsettled. However, she has decided
that the yearly data given will suffice for guiding her decision.
Tabulate the total relevant data regarding the decision alternatives. Omit the
concept of opportunity cost in one tabulation, but use the concept in a
second tabulation. As the administrator, which tabulation would you prefer if
you could receive only one?
6-33 Make or Buy at Nantucket Nectars
Assume that Nantucket Nectars reports the following costs to make 17.5 oz.
bottles for its Juice Cocktails:
Nantucket Nectars Company
Cost of Making 17.5-Ounce Bottles
Total Cost for Cost per 1,000,000 Bottles Bottle
Direct materials $ 80,000 $.080
Direct labor 30,000 .030
Variable factory overhead 60,000 .060
Fixed factory overhead 85,000 .085
Total costs $255,000 $.255
Another manufacturer offers to sell Nantucket Nectars the bottles for $.25.
The capacity now used to make bottles will become idle if the company
purchases the bottles. Further, one supervisor with a salary of $60,000, a
fixed cost, would be eliminated if the bottles were purchased. Prepare a
schedule that compares the costs to make and buy the 17.5 oz. bottles.
Should Nantucket Nectars make or buy the bottles?