ch 10 learn smart

when there is a contrained resource, the best way to increase profits

increase bottleneck capacity

split off point

point in manufacturing process at which the joint products can be recognized as separate products

how to calculate the benefit of selecting one alternative over another

the difference between the net operating income for the 2 alternatives an analysis that just looks at the relavent costs and benefits an analysis that looks at all costs and benefits and identifies those that are differential

bottleneck

the machine or process that is limiting overall output is called

if dropping product to avoid more fixed costs than loses in CM,

then net operating income would improve by eliminating the product

vertically integrated

when a company is involved in more than one activity in the entire value chain it is

intermediate process

when a product is past the split off point but is not yet a finished product

contraint

when a shortage or limited resource of some type restricts a companys ability to satisfy demand, the company has a

product ABC has a CM per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a CM per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize prift, they should first fill the demand for...

Product ABC the company should fill the demand for the product with the highest CM per unit of the constrained resource. ABC is $2 per minute of machine time (CM of $10/5 min) while XYZ's only $1.50 per minute of machine time (CM of 15/10)

ways to increase capacity of a bottleneck

-investing in additional machines at the bottleneck -selling some of the machines at the bottleneck -shifting workers from processes that are not bottlenecks to the process that is the bottleneck

make or buy decision

a decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier is called

special order

a one time order that is not considered part of the companys normal ongoing business is a

value chain

activities ranging from development to production to after-sales service are called

operating income

any final decision to drop or add a business segment is going to hinge primarily on the impact the decision will have on

joint costs incurred prior to the split off point _____ relevant in decisions regarding what to do from the split off point forward

are not

managers may choose to retain an unprofitable product line because it

attracts customers and helps sell other products

potential advantage of dropping a product line or other segment include

avoiding more fixed costs than the company loses in contribution margin an overall increase in net op income

when making product line decision...

company may focus on lost CM and avoidable fixed costs or prepare comparative income statements

goodstone tire company sells tires for $100 each. per unit costs associated with producing and selling tires are DM-$35 DL-10 factory OH-20 selling and admin-15 variable portion of factory OH is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. the order would not require any selling and admin costs. the purchaser will pay the shipping costs, but goodstone will have to pay $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 goodstones net operating income?

$70,000 increase. the revenue per tire is $70 and the cost is $63(DM, DL,var OH & inspection fee of $10 ($100,000/10,000) so each tire will generate $7 in net operating income or $70,000 total

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 statemnts 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?

1. sawdust should be sold as is without being processed into presto logs - the sawdust has an incremental revenue of $.25(1.25-1.00) and an incremental cosy of .75 so it should be sold as is. 2.pieces of unfinished lumber should be processed pierces of lumber have incremental revenue of $15(35-20) and an incremental cost of $8 so they should be processed

joint products

2 or more products that are produced fro ma common input

when a constraint exists, companies need to focus on maximizing

CM per unit of contraint

Andrew 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 Var man costs- 12 240,000 supervisor salary- 3 60,000 depreciation- 1 20,000 allocated fixed overhead-7 140,000

continue to make 60,000 advantage the avoidable costs of making the products are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price- $12 variable cost- $3 supervisor salary= $3 advantage to make x 20,000 units)

sell or process further decision

deciding what to do with a joint product at the split off point is called

Abby inc is considering dropping a product line. During the prior year, the line had sales of $207,000 and a CM margin of $124,000. fixed expenses consist of Salaries- $60,000 Rent- 50,000 Advertising- 20,000 Administrative-35,000 Total Fixed Expenses- 165,000 the product line managers $60,000 salary is avoidable as is the $20,000 of advertising. of the admin 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 of the building. if this product line is dropped overall net operating income will

decrease by 34,000 the company will lose the $124,000 CM. only $90,000 of the fixed costs (salary, ads, and 10,000 of admin) are avoidable, so net income will be decreased by 34,000

danger in allocating common fixed costs

is that such allocation can make a product line look less profitable than it really is

in order to prevent confusion and keep attention focused on critical in for, it it desirable to

isolate relevant costs from irrelevent costs

relaxing the constraint

it is often possible for a manager to increase the capacity of a bottleneck, called

joint costs are traditionally allocated among the different products at the split off point. typical approach is to allocate the joint costs according to

relative sales value of end products