ACG Chapter 6
Which of the following is an advantage of buying a part instead of making it?
economies of scale can result in higher quality and lower costs from suppliers
To effectively deal with a constraint:
efforts should be focused on the weakest link improvements should focus on the constraint
True or false: Depreciation of existing assets is relevant to decisions.
false
True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.
false
Managers may choose to retain an unprofitable product line because it:
helps sell other products attract customers
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative _____ _____
income statements
When customers exercise their right to purchase a competitor's product or allocate their spending budget to some other product, this is called
latitude
The present trend appears to be towards ______ vertical integration.
less
Determining whether to carry out an activity in the value chain internally or use a supplier is a ________ decision.
make or buy
Allocated common costs are...
only relevant to decisions if they are avoidable
The costs provided by a well-designed activity-based costing system are _____ relevant to a decision.
potentially
The sensitivity of demand to changes in price is called ____
price elasticity of demand
If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is:
the profit from the best alternative use of the resource
being less dependent on suppliers and making profits on both parts and the final product are advantages of _______ ____________
vertical integration
When demand for products exceeds the production capacity, a ________ ___________ _____________ decision must be made
volume trade off
When a company does not have enough capacity to produce all of the products and sales volume demanded by their customers, this leads to _____
volume-trade off
ABC Lumber spent $1,000 cutting down a tree. The result was 40 pieces of unfinished lumber that sell for $20.00 each and 100 bags of sawdust that sell for $1.00 each. If the unfinished pieces of lumber are processed into finished lumber at a cost of $8.00 each, they will sell for $35.00. A bag of sawdust can be processed into Presto Logs that sell for $1.25 at a cost of $0.75 per bag. Which of the following statements are true concerning whether the unfinished pieces of lumber should be processed into finished lumber and whether the sawdust should be processed into Presto Logs?
The pieces of unfinished lumber should be processed the sawdust should be sold as is without being processed into presto logs
What of the following forms the basis for a financial advantage when making a business decision?
Whether the differential benefits exceed the differential costs
Joint costs incurred prior to the split-off point _____ relevant in decisions regarding what to do from the split-off point forward.
are not
Average costs:
are often misleading contain sunk costs
A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.
avoidable
which of the following statements about using different approaches to analyze alternatives is NOT true?
considering only the relevant costs give results a different answer than that obtained when all costs are considered
When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a ________
constraint
anything that prevents you from getting more of what you want is a(n)
constraint
Focusing on future costs and benefits that are not the same between alternatives is:
differential analysis
The key to effective decision making is:
differential analysis
When considering decision alternatives, only relevant costs are included when using the ____ _____ approach
differential cost
When is it profitable to continue processing a joint product after the split-off point?
it is profitable when the incremental revenue exceeds the incremental processing cost
The split-off point is the point in the manufacturing process at which the _____ products can be recognized as separate products
joint
All of the following are relevant to the sell or process further decision except
joint costs incurred before the split-off point
the difference between a products selling price and its cost is called
markup
Differential costs and benefits that should be considered in a decision:
may be qualitative or quantitative
If a cost is traced to a segment using activity-based costing, it:
may or may not be an avoidable cost of the segment
A company must make a volume trade-off decision when they
must trade off units of one product for units of another due to limited production capacity do not have enough capacity to satisfy the demand for all of its products
Which of the following can make a product line look less profitable than it really is?
allocated common fixed costs
Potential advantages of dropping a product line or other segment include:
an overall increase in net operating income avoiding more fixed costs than the company loses in CM
The machine or process that is limiting overall output is a(n):
bottleneck
When a manager increases the capacity of constraint or _______, it is called relaxing the constraint
bottleneck
When dealing with a constrained resource, managers should focus their attention on managing the:
bottleneck
In order to prevent confusion and keep attention focused on critical information, it is desirable to:
isolate relevant costs from irrelevant costs
Which of the following should not be included in the analysis when making a decision?
sunk costs non-differential future costs
Which term refers to a company that is involved in more than one activity in the value chain?
vertical integration
When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost.
incremental or avoidable
Joint costs are:
irrelevant in decision regarding what to do with a product after split-off
In deciding whether to drive to a location or take the train, the relaxation factor that comes from not having to drive ___ relevant to the decision.
is
Two or more products produced from a common input are:
joint products
A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) ______ decision
special order
Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales
special order
What is the point in the manufacturing process at which joint products can be recognized as separate products?
split-off point
A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n)___________ cost.
sunk
When making a decision, only relevant items are included in the analysis of the alternatives when using:
the differential cost approach only
To increase the strength of a chain, efforts should be concentrated on strengthening:
the weakest link
When considering accepting a special order:
there must be idle capacity normal sales must not be affected
When a constraint exists, companies need to focus on maximizing
total CM
activities ranging from development to production to after-sales service are called ____ ___________
value chain
What is considered in the calculation of unit cost under absorption costing?
variable and fixed manufacturing overhead Variable and fixed selling and admin
Less dependence on suppliers is an advantage of:
vertical integration
The involvement by a company in more than one of the activities in the entire value chain from development through production distribution sales and after-sales service is called
vertical integration
When should a special order be accepted?
when the incremental revenue from the special order exceeds the incremental costs of the order
The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer.
will always
The reduction in resale value of an asset through use or over time is called ____ or _____ depreciation
real or economic
The potential benefit given up when selecting one alternative over another is a(n) ________ cost.
opportunity
the potential benefit that is given up when one alternative is selected over another is called
opportunity cost
A set of activities ranging from development to production to after-sales service is called:
the value chain
A joint product should be processed after split-off if the:
incremental revenue after split-off exceeds the incremental processing cost after split-off
When a product is past the split-off point, but is not yet a finished product, it is called a(n) _______ product
intermediate
As it applies to sell or process further decisions, which term refers to a product that is in the process of being made?
intermediate product
Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.
irrelevant
When planning a trip and deciding whether to drive or fly, the _________ is a sunk cost and should be ignored.
original cost of the car
Which of the following is not correct?
reference value >_ value-based price >_ EVC
Which of the following involves increasing the capacity of a bottleneck?
relaxing the constraint
Differential revenue is an example of a(n) ______ benefit.
relevant
High Roller Inc. is trying to decide whether to buy a private jet or to lease one. The finder's fee is incurred only if the private jet is bought. The finder's fee is a ________ cost for this decision.
relevant
When making a decision only ______ costs and benefits should to be included in the analysis.
relevant
When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) _________ cost.
relevant
It is profitable to continue processing a joint product after the split-off point, so long as the incremental _______ from such processing exceeds the incremental processing cost incurred after the split-off point
revenue
A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?
salvage value alternative uses for the equipment
deciding what to do with a joint product at the split-off point is a ___ or _____ ____ decision
sell or process further
Deciding what to do with a joint product at the split-off point is a:
sell or process further decision
When making a decision, qualitative differences between alternatives _______ be ignored.
should not
A one-time order that is not considered part of the company's normal ongoing business is a _______ order.
special
Costs that have no impact on future cash flows and are irrelevant to decisions are _____ costs.
sunk
costs that have been incurred and cannot be eliminated regardless of the alternative chosen are
sunk costs
When a company cannot fully satisfy demand because of a constraint, which of the following describes an action that should NOT be taken?
tightening the constraint
When considering decision alternatives, both relevant and irrelevant costs are included in the _____- ______ approach
total cost
When making a decision, irrelevant items are included in the analysis of both alternatives when using:
total cost approach only
True or false: Effectively managing an organization's constraints is a key to increased profits.
true
True or false: When deciding whether to take a train or drive for a weekend trip to visit an out-of-town friend, the monthly fee a student pays to park at school is not relevant to the decision.
true
Nakatomi Corporation produces 10,000 units of Product A at a cost of $20 per unit. VC $12/unit Allocated MOH 3/unit Allocated Admin 5/unit total $20 Outside supplier offer $17 What are the total relevant cost of producing the units internally?
$120,000 Total relevant cost of producing the units internally will be the costs that can be avoided by opting to purchase the products externally. They can avoid the variable cost of $12 per unit (12 x 10,000)
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is $ ______ per minute
$3 ($15 CM/ 5 minutes of labor time)
Product DGH has a monthly demand of 5,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 4,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 1,500 direct labor hours available, the company should produce ________- units of Product DGH and ________ units of product RBG
1,000 4,000
Product A- SP $20, VC/unit $12, CM/unit $8, Labor time 4 minutes Product B- SP $15, VC/unit $9, CM/unit $6, labor time 2 minutes 1. Roberto Inc manufactures products A and B. Both products have a contribution margin ratio of 40%. What is the contribution margin per unit of the constrained resource for product B, if labor time is the constrained resource? 2. Assume labor time is the constrained resource and only a total of 3,000 minutes is available. Product A has a total demand of 500 units and product B has a total demand of 600 units. Considering the constraint, how many units of product B should be produced to maximize profits?
1. $3 per minute The CM per unit of product B is $6 and total labor time required to produce each unit is 2 minutes. Therefore the CM per unit of constrained resource for product B is $3 ($6/2) 2. 600 units CM per unit of constrained resource for product B is $3 (6/2) CM for product A is $2 (8/4). CM for product B is higher so Product B should produce all the units it can sell before producing product A. 3,000 minutes available, 1,200 minutes will be used for product B (600 units x 2)
What is the amount of the markup percentage on the absorption cost that should be used to derive the selling price of this product?
27.50% Unit product cost = DM +DL + VMOH + FMOH $150 + 20 + (300,000/10,000) = 200 Markup percentage on absorption = (required ROI x investment) + selling and admin)/( unit product cost x unit sales) ((2,000,000 x 20%)+150,000)/ (200x 10,000) =27.50%
Which of the following are ways in which to calculate the benefit of selecting one alternative over another?
An analysis that just looks at the relevant costs and benefits. An analysis that looks at all costs and benefits and identifies those that are differential. The difference between the net operating income for the two alternatives.
If some products must be cut back because of a constraint, produce the products with the highest:
CM per unit of constrained resource
A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in:
contribution margin
Isolating relevant costs is desirable because:
critical info may be overlooked with the total cost approach irrelevant costs may be used incorrectly in the analysis all info needed for the total cost approach is rarely available
Latitude and private information are two components of _____ influence that impact the determination of selling prices
customers'
The first step in decision making is to:
define the alternatives
target cost is determined by subtracting the ____ from the anticipated selling price
desired profit
Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will:
increase by $11,000 ( the company will lose $84,000 in CM ($170,000-86,000). if $95,000 of the fixed costs are avoidable, net income will increase by $11,000)
Synonyms for differential costs include ______ cost.
incremental or avoidable
Which of the following may be an advantage of making a part rather than buying it?
a smoother flow of parts and materials for production less dependence on outside suppliers
Managers should not rely on absorption costing when
actual sales are less than estimated sales
Abba, Inc. is considering dropping a product line. During the prior year, the line had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: Salaries $60,000 Rent 50,000 Advertising 20,000 Admin 35,000 total fixed expenses $165,000 The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped overall net operating income will:
decrease by $34,000 (Reason: the company will lose the $124,000 CM. Only $90,000 of the fixed costs (salary, advertising and $10,000 of admin) are avoidable, so net income will decrease by $34,000)
True or false: Some decisions only have one alternative.
false
When making a volume-trade off decision, managers should ignore:
fixed costs
If a company has a resource that could be used for something else, the _____ cost is the profit that could be derived from the best alternative use of the resource
opportunity
When a resource, such as space in the factory, has no alternative use, its opportunity cost is:
zero
Dandle Inc. has developed a new robot, model AB-400, that is designed to offer superior performance to a comparable robot sold by its main competitor. The competing robot sells for $50,000 and needs to be replaced after 10,000 hours of use. It also requires $5,000 of preventive maintenance during its useful life. Model AB-400's performance capabilities are similar to the competing product with two important exceptions; it needs to be replaced only after 20,000 hours of use and it requires $8,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is model AB-400's differentiation value to the customer over its 20,000 hours of life?
$52,000 The differentiation value has two elements. First, customers who purchase model AB-400 rather than the competing alternative would avoid the need to buy two of the competitor's robots for $50,000 rather than just one AB-400 to achieve 20,000 hours of usage. This is a savings of $50,000 (= $50,000 × 1 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase AB-400 rather than the competing alternative would realize preventive maintenance savings computed as follows: Preventative maintenance cost for 20,000 hours of service: Competitors product ($5,000 x (20,000 hours/10,000 hours))= 10,000 AV-400 (8,000 x (20,000/20,000 hours))= 8,000 Preventative maintenance cost savings =$2,000 Total differential value = $50,000+2,000 = $52,000
When there is a constrained resource, the best way to increase profits is to:
increase the capacity of the bottleneck
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for:
product ABC Reason: The company should fill the demand for the product with the highest CM per unit of the constrained resource. ABC's is $2 per minute of machine time (CM of $10 ÷ 5 minutes) while XYZ's is only $1.50 per minute of machine time (CM of $15 ÷ 10 minutes).
Superware Inc produces multiple products out of a common input. Geratin is one such product, which has sales value of $15,000 at the split-off point. Joint costs allocated to Geratin are $12,000. Sales value of Geratin increase to $25,000 after further processing and this processing will costs $7,000. What is the net profit or loss if superware processes the product further?
$3,000 profit Incremental revenues = sales value after further processing of $25,000 - sales value at split off point of $15,000 = $10,000 Net profit if the product is processed further= incremental revenue of $10,000 - incremental costs of $7,000= $3,000
Prairie, Inc. produces a single product. It has an annual capacity of 10,000 units, but currently uses only 80% of it. Each unit is sold for $50 and requires direct material worth $30 and direct labor worth $5. Manufacturing overhead cost is $10 per unit of which 70% is variable. What is Prairie's total incremental cost incurred to produce each unit?
$42 Total incremental cost= 30 + 5 + (10 x .70) = 42
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 Factory overhead 20 Selling and administrative 15 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What effect would accepting the special order have on Goodstone's net operating income?
$70,000 increase Reason: The revenue per tire is $70 and the cost is $63 (direct materials, direct labor, variable overhead and inspection fee of $10 ($100,000/10,000) tires) so each tire will generate $7 in net operating income or $70,000 total.
Unit sales 50,000 SP 20 VC/unit 12 traceable FC $360,000 Nappa is considering increasing the price of CD-100 by 10%, from $20 to $22. The company's marketing managers estimate that this price hike would decrease unit sales by 10% from 50,000 units to 45,000 units. Assuming that the total traceable fixed expenses does not change, what net operating income will product CD-100 earn at a price of $22 is this sales forecast is correct?
$90,000 Profit- (P-V) x Q -FC ($22 per unit- $12 per unit x 45,000 units - $360,000 =$90,000
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?
Buy — $20,000 advantage. Reason: The total buy price = 20,000 x $18 or $360,000. The cost to make equals (20,000 x $15) + $80,000 forgone opportunity or $380,000. Thus, there is a $20,000 advantage to buying the part.
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is: Cost per unit total VMOH $12 $240,000 Salary $3 $60,000 Deprec $1 $20,000 Allocated FOH $7 $140,000 If the part is purchased, the supervisor position would be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. Should the company buy the part or continue to make it?
Continue to make- $60,000 advantage (The avoidable costs of making the product are the variable costs plus the supervisor salary of $15 per unit. The total savings is $60,000- ($18 buy price - $12 VC - $3 supervisor salary = $3 advantage to make X 20,000 units)
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised profits are expected to ______ by $_________ per year
Decrease by $45,000 (orginal= 975,000 sales - 450,000 VC - 350,000 FC = 175,000 New= 840,000 sales - 360,000 VC - 350,000 FC = 130,000 Difference 175,000- 130,000 = 45,000)
Sales $215,000 Vexp 125,000 CM 90,000 Fexp 140,000 Net loss ($50,000) if this product line is eliminated, 60% of the fixed expenses are traceable fixed expenses, which can be eliminated and the other 40% are common fixed expenses that cannot be avoidable. If management decides to eliminate this product line, the company's net income will _____
decrease by $6,000 Since 60% of the fixed expenses are traceable, the company will avoid $84,000 (140,000x.60) of fixed expenses while losing $90,000 of CM, which decreases the company's net income by $6,000 ($84,000-$90,000)
Which of the following techniques describe how a bottleneck should be managed?
find ways to increase the capacity of the bottleneck Focus business process improvement efforts on the bottleneck ensure there is minimal lost time at the bottleneck due to breakdowns and set ups
A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.
fixed
One of the great dangers in allocating common __________ costs is that such allocations can make a product line look less profitable than it really is.
fixed
The capacity of a bottleneck can be effectively increased by:
focusing business process improvement efforts on the bottleneck subcontracting some of the processing that would be done in that area
Irrelevant costs include:
future costs that do not differ between two alternatives sunk costs
To maximize total contribution margin when a constrained resource exists, produce the products with the:
highest CM per unit of the constrained resource