LearnSmart10

Which of the following can make a product line look less profitable than it really is?

Allocated common fixed costs.

Which of the following are ways in which to calculate the benefit of selecting one alternative over another?

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. An analysis that just looks at the relevant costs and benefits. (3 answers)

Which of the following would be an advantage of dropping a product line or other segment?

An overall increase in net operating income. Avoiding more fixed costs than the company loses in CM.

Joint costs incurred prior to the split off point __ relevant in decisions regarding what to do from the split-off point forward.

Are NOT.

Choosing a movie instead of a DVD means that the cost of the DVD would be eliminated. Example of what type of cost?

Avoidable

Which of the following should be included in the analysis when making a decision?

Avoidable, Relevant, Opportunity, and Differential costs.

An ___ cost is a cost that can be eliminated by choosing one alternative over another.

Avoidable.

Managers may choose to retain an unprofitable line:

Because it attracts customers. Because it helps sell other products.

The machine or process that is limiting overall output is a:

Bottleneck

When dealing with a constrained resource, managers should focus their attention on managing the:

Bottleneck.

Joint costs:

Cannot be avoided once a process is started. Are irrelevant in decisions in regarding what to do with a product after split-off.

When a limited resource of some type restricts a company's ability to satisfy demand, the company has a:

Constraint.

Stephens Co. can purchase 20K units of Part XYZ from a supplier for $18 per part. Stephens' per unit Manufacturing costs for 20K units is: Variable manufacturing cost- per unit $12-total $240K, Supervisor salary- per unit $3- total $60K, Depreciation- per unit $1- total $20K, Allocated fixed OH- per unit $7- total-140K. If the part is purchased, supervisor salary will be eliminated. The special equipment has no other use or salvage value. Total allocated fixed OH would be unaffected. Should the company continue to make it?

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

When determining which product or service makes the best use of a constrained resource, a Co has to determine which course of action will maximize the Co's total:

Contribution margin.

Costs that differ between alternatives are called?

Differential costs.

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.

Which of the following are ways to increase the capacity of a bottleneck?

Investing in additional machines at the bottleneck. Shifting workers from processes that are not bottlenecks to the process that is the bottleneck.

When deciding whether to fly or take the train, the cost of putting your pet in a boarding facility while you are away is an:

Irrelevant.

Which of the following statements are true?

Joint costs are common costs that are incurred to produce two or more products. Improper allocation of joint costs can lead to incorrect decisions. Allocation of joint costs is needed for inventory valuation. (3 answers)

___ are two or more finished products produced from a common input.

Joint products.

Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are called ___ costs.

Joint.

The split-off point is the point in the manufacturing process at which ___ products can be recognized as separate products.

Joint.

Costs that are relevant in one decision situation:

May not be relevant in another.

Any final decision to drop or add a business segment is going to hinge primarily on the impact the decision will have on net __.

Operating income.

If a Co has a resource that could be used for something else, the ____cost is the profit that could be derived from the best alternate use of the resource.

Opportunity

Abba, Inc. is considering dropping a product a product line. During the prior year, the line had sales of $207K and a CM of $124K. Fixed expenses consist of: Salaries $60K, Rent $50K, Advertising $20K, Admin $35K, Total Fixed Exp $165K. The product line manager's $60K salary and $20K advertising is avoidable. Of the admin exp, $10K is avoidable. The rest are general allocated exp that won't change. The rent exp 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, what will happen to the Co's overall net income?

Overall net income will decrease by $34K. The company will lose the $124K CM. Only $90K of the fixed costs (salary, advertising, and $10K of admin) are avoidable, so net income will decrease by $34K.

Clarke, Inc. makes 2 products. Product A sells for $10. Its variable costs are $3 and allocated fixed costs are $2. Each unit of Product A requires 1/3 hour (20 min) of machine processing time. Product B sells for $15. Its variablee costs are $6 and allocated fixed costs are $3. Each unit of Product B requires 1/2 hour (30 min) of machine time. Clarke has only 2000 machine hours available to process products. Assuming sufficient demand for both, Clarke should:

Process product A only. Although B has the highest CM per unit, A has the highest CM per hour. $21 ($7x3) vs. $18 ($9x2) for Product B. (Product A: $10-VC $3= $7x3 per hr= $21) (Product B: $15-VC $6= $9x2 per hr= $18)

If some products must be cut back because of a constraint:

Produce the products with the highest CM per unit of constrained resource.

Product ABC has a CM per unit of $10. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a CM per unit of $15 and each unit requires 10 minutes of machine time. If the Co's constraint is machine hours, to maximize profit, they should first fill the demand for:

Product ABC (CM x machine time) ABC: 10x12(60/5)=120 XYZ: 15x6=90

It is often possible for a manager to increase the capacity of a bottleneck, which is called __ the constraint.

Relaxing

Only rarely will enough information be available to prepare a detailed income statement for both alternatives in a decision. This makes isolating ___ costs desirable.

Relevant.

Only those costs and benefits that differ in total between alternatives are ___ in a decision.

Relevant.

What kind of cost is gasoline when planning a trip and deciding to drive your car or take the train?

Relevant.

A one-time order that is not considered part of the company's normal ongoing business is referred to as a:

Special order decision.

A __ cost is a cost that has already been incurred and cannot be avoided regardless of what a manger decides to do.

Sunk.

ABC Lumber spent $1K cutting down a tree. The result was 40 unfinished logs that sell for $20 each and 100 bags of sawdust that sell for $1 each. If the unfinished logs are processed into finished lumber at a cost of $8 each, they will sell for $35. A bag of sawdust can be processed into Presto Logs that sell for $1.25 at a cost of $.75 per bag. Which statements are true concerning whether the logs should be processed further?

The logs should be processed. The sawdust should be sold as is. (Sales from further processing-original sales revenue-cost of further processing) Logs: $35x40=$1,400 minus $20x40= $600 minus $8x40= $280 Sawdust: $1.25 - $1.00 - $.75 = -$.50

Which of the following is a sunk cost when planning a trip?

The original cost of the car.

In a make or buy decision, the Co should decide to buy if:

The purchase price is less than the variable cost + the avoidable fixed costs of production.

Allocating joint costs to products at the split-off point is misleading for decision making about the products.

True

Effectively managing on organization's constraints is a key to increased profits:

True

A ___ includes activities ranging from development to production at after-sales service.

Value chain

When a company is involved in more than one activity in the entire value chain, it is ___ ___.

Vertically integrated.

A ___ involves determining whether to carry out an activity in the value chain internally or use a supplier.

make or buy decision.

Deciding what to do with a joint product at the split-off point is a:

sell of process further decision.

Goodstone Tire Co sells tires for $100 each. Per unit costs associated with producing and selling the tires are: DM $35, DL$10, FOH $20, S&A $15. The variable portion of the FOH is $8 per unit. A foreign Co wants to purchase 10K tires for $70 each. The order would not require any S&A costs. Purchaser pays shipping, but Goodstone will have to pay $100K inspection fee. Accepting will not affect current sales. What effect would accepting have on net income?

$70K increase. The revenue per tire iss $70 and the cost is $63 (DM $35, DL $10, FOH $8, and inspection fee $10 ($100K/10K) tires) so each tire will generate $7 in net operating income.