ACG6309 Ch 14

The City of San Diego is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision?

Purchase price of the old vehicle.

A firm that decides to emphasize those goods with the highest contribution margin per unit may have made an incorrect decision when the company:

has capacity constraints in the form of limited resources.

The theory of constraints (TOC) calls for ______.

identifying limiting constraints finding ways to relax constraints

The difference between the analysis of long-run vs. short-run decisions is ______.

incorporating the time value of money

The relative sales value method uses relative ______.

sales value of each product at split off point

A computer based program to determine the solution to the product mix questions when there are multiple constraints is a(n) ______ algorithm.

simplex

The point in a production process when the joint products are identifiable as separate products is called the ______ point.

split-off

Costs that are irrelevant to decision making include ______ costs.

sunk

Costs that have been incurred in the past and can not be changed by any current or future action are called

sunk costs.

To make optimal decisions, managerial performance should be based upon ______.

the same criterion used for decision making

When managers are criticized for past decisions ______.

they may begin treating sunk costs as relevant to future decisions

In order to provide cross functional teams with relevant information, a managerial accountant needs to ______.

understand decisions faced by managers throughout the organization

Decisions that arise infrequently are called ______ decisions.

unique

Relevant costs in decision making include ______ costs.

unit variable opportunity avoidable incremental

One of the common errors in identification of relevant costs is ______ costs.

unitizing fixed

The proper order of steps in linear programing are ______.

write the constraints: 3 write the objective function: 2 identify the decision variables: 1

Jersey Chocolate makes two chocolate bars: Crispy & Creamy. The Crispy bar takes 0.5 machine hours, and the Creamy bar takes 0.8 machine hours. Only 350 machine hours are available per month. The Crispy bar sells for $1, and the Creamy bar sells for $0.75. The variable costs to produce the Crispy and Creamy bars are $.50 and $.35 respectively. The contribution margin per machine hour is ______.

$1 Crispy & $0.50 Creamy

Brilliant, Inc. reported the following results from the sale of 24,000 units of IT-54: Sales$528,000 Variable manufacturing costs 288,000 Fixed manufacturing costs 120,000 Variable selling costs 52,800 Fixed administrative costs 35,200 Extra Company has offered to purchase 3,000 IT-54s at $16 each. Brilliant has available capacity, and the president is in favor of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is opposed because the "full cost" of production is $17. Which of the following correctly notes the change in income if the special order is accepted?

$12,000 increase. Explanation $16 − ($288,000 / 24,000) = $4 margin; $4 × 3,000 = $12,000 increase in income with special order.

Popping Pops makes two types of popcorn. There is limited time available in the popper. The Cheddar version takes 0.10 hrs per bag, while the Caramel takes 0.20 per bag. Sales and variable cost information are as follows: Cheddar Caramel Selling price per bag $5.49 $6.89 Variable cost per bag $3.11 $3.45 The contribution margin per unit of limited resource for the popcorn is:

$23.80 for Cheddar & $17.20 for Caramel

Brighton Company's results of operations for its most recent year are shown below. Brighton makes two products, CJ11 and PX22. Variable selling expenses for CJ11 are $3 per unit and $16 per unit for PX22. Cost of goods sold includes $3 per unit of fixed manufacturing costs for CJ11 and $16 per unit for PX22 (remaining selling amounts are fixed). CJ11 PX22 Units 8,000 2,960 Sales revenue $192,000 $592,000 Less: Cost of goods sold 144,000 384,800 Gross Margin $48,000 $207,200 Less: Selling expenses 40,000 107,200 Operating income (loss) $8,000 $100,000 Brighton is considering a proposal to drop CJ11, which would decrease the company's fixed manufacturing costs by 25%. What would be the impact on operating income if CJ11 is discontinued?

$30,160 decrease. Explanation CJ11 $192,000 − [$144,000 − ($3 × 8,000)] = $72,000 GM; $72,000 − ($3 × 8,000) = $48,000 operating income; Fixed manufacturing costs = ($3 × 8,000) + ($16 × 2,960) = $71,360; 25% × $71,360 = $17,840; If CJ11 discontinued $48,000 operating income − $17,840 benefit from lower costs = $30,160 decrease.

Deltones, a manufacturer of computer peripherals, has excess capacity. The company's Alabama plant has the following per-unit cost structure for item no. 89: Variable manufacturing$40 Fixed manufacturing 15 Variable selling 8 Fixed selling 11 Traceable fixed administrative 4 Allocated administrative 2 The traceable fixed administrative cost was incurred at the Alabama plant; in contrast, the allocated administrative cost represents a "fair share" of Deltones' corporate overhead. Alabama has been presented with a special order of 5,000 units of item no. 89 on which no selling cost will be incurred. The proper relevant cost in deciding whether to accept this special order would be:

$40. Explanation The per-unit variable cost of $40 is relevant to the special order decision.

Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow. Regular Super TotalUnits 10,000 3,700 13,700 Sales revenue$240,000 $740,000 $980,000 Less: Cost of goods sold 180,000 481,000 661,000 Gross Margin$60,000 $259,000 $319,000 Less: Selling expenses 60,000 134,000 194,000 Operating income (loss)$0 $125,000 $125,000 Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed.If Omar Industries eliminates Regular and uses the available capacity to produce and sell an additional 1,500 units of Super, what would be the impact on operating income?

$55,000 increase. Explanation Regular $240,000 − [$180,000 − ($3 × 10,000)] = $90,000 GM; $90,000 − ($4 × 10,000) = $50,000 operating income; Super $481,000 / 3,700 = $130/unit; $130 − $20 = $110; ($200 × 1,500 units) − ($110 × 1,500) − ($20 × 1,500) = $105,000. $105,000 − $50,000 = $55,000 increase.

Imaging Associates is considering replacing their 2 year old X-ray equipment that cost $105,000 and is being depreciated at a rate of $21,000 per year. The accumulated depreciation is $42,000. The new equipment will allow better imaging which will save both technician and doctor evaluation time. Information regarding the potential equipment purchase is as follows: Expected proceeds from sale of old: $5,000 Cost of new equipment: $125,000 Expected useful life (new): 2 years Expected salvage value (new): $15,000 Annual operating costs (old): $132,000 Annual operating costs (new): $99,000 Depreciation per year (new) $55,000 The dollar value of sunk costs is ______.

$63,000 $105,000 - $42,000 = $63,000, the book value of the old equipment

Newton Manufacturing has 31,000 labor hours available for producing M and N. Consider the following information: Product M Product NRequired labor time per unit (hours) 2 3 Maximum demand (units) 6,500 8,000 Contribution margin per unit$5 $5.70 Contribution margin per labor hour$2.50 $1.90 If Newton follows proper managerial accounting practices in terms of setting a production schedule, how much contribution margin would the company expect to generate?

$66,700. Explanation 31,000 − (6,500 of Product M × 2) = 18,000 for Product N; 18,000 / 3 = 6,000 Product N units; CM = (6,500 × $5) + (6,000 × $5.70) = $32,500 + $34,200 = $66,700.

In early July, Colin Marks purchased a $70 ticket to the December 15 game of the Sarasota Shippers. Parking for the game was expected to cost approximately $22, and Marks would probably spend another $15 for a souvenir program and food. It is now December 14. The Shippers were having a miserable season and the temperature was expected to peak at 5 degrees on game day. Marks therefore decided to skip the game and took his wife to the movies, with tickets and dinner costing $50. The sunk cost associated with this decision situation is:

$70. Explanation The sunk cost is the $70 for the ticket already purchased.

Forrest Corporation manufactures parts that are used in the production of washers and dryers. The following costs are associated with part no. 65: Direct materials$50 Direct labor 19 Variable manufacturing overhead 22 Fixed manufacturing overhead 15 Variable selling costs 11 The company received a special-order inquiry from an appliance manufacturer in Brazil for 15,000 units of part no. 65. The variable selling costs per unit will amount to only $8. Since Forrest has excess capacity, the minimum price that Forrest should charge the Brazil manufacturer is:

$99. Explanation The minimum price is: $50 + $19 + $22 + $8 = $99.

Fairline Skyways has a significant presence at the Charlotte International Airport and therefore operates the Diamond Club, which is across from gate 36 in terminal 1. The Diamond Club provides food and business services for the company's frequent flyers. Consider the following selected costs of Club operation: Receptionist and supervisory salaries Catering Terminal depreciation (based on square footage) Airport fees (computed as a percentage of club revenue) Allocated Fairline administrative overhead Management is exploring whether to close the club and expand the seating area for gate 36. Which of the preceding expenses would the airline classify as unavoidable?

3, 5. Explanation Terminal depreciation (based on square footage) and Allocated Fairline administrative overhead would be unavoidable.

Jersey Chocolate makes two chocolate bars: Crispy & Creamy. The Crispy bar takes 0.5 machine hours, and the Creamy bar takes 0.8 machine hours. Only 348 machine hours are available per month. The Crispy bar sells for $1, and the Creamy bar sells for $0.75. The variable costs to produce the Crispy and Creamy bars are $.50 and $.35 respectively. If all the time is used to produce Creamy bars, the number of bars that can be produced this month is ______.

435 Reason: 348 hr/0.8 hrs = 435 bars

Kingston Manufacturing has 27,000 labor hours available for producing X and Y. Consider the following information: Product X Product YRequired labor time per unit (hours) 2 3 Maximum demand (units) 6,000 8,000 Contribution margin per unit$5 $6 Contribution margin per labor hour$2.50 $2 If Kingston follows proper managerial accounting practices, how many units of Product X should it produce?

6,000. Explanation Product X has the greater contribution margin per hour, so the maximum amount of 6,000 should be produced.

Which of the following is not true regarding relevant costing in an ABC environment?

ABC changes the concepts underlying relevant costing analysis.

Popping Pops makes two types of popcorn. There is limited time available in the popper. The Cheddar version takes 0.40 hrs per bag, while the Caramel takes 0.20 per bag. Information about the products are as follows: Cheddar Caramel Contribution margin per bag $2.50 $2.25 Which type of popcorn should be produced first?

Caramel Reason: Cheddar CM: $2.50/0.4 = $6.25 per hr. Caramel CM: $2.25/0.2 - $11.25 per hr

Indicate the correct order of the decision making process.

Clarify the decision problem: 1 Collect the data: 5 Develop a decision model: 4 Evaluate decision effectiveness: 7 Identify the alternatives: 3 Select an alternative: 6 Specify the criterion: 2

True or false: ABC costing systems identify costs as fixed that are not really fixed.

False

True or false: All future costs and benefits for each alternative should be considered in decision making.

False

True or false: The allocation of joint costs is an essential first step in the decision to sell a product at it's split off point or process the product further.

False

Consider the following costs and decision-making situations: I. The cost of existing inventory, in a keep vs. disposal decision. II. The cost of special electrical wiring, in an equipment acquisition decision. III. The salary of a supervisor who will be transferred elsewhere in the organization, in a department-closure decision. Which of the above costs is (are) relevant to the decision situation noted?

II only.

Consider the following statements about relevant costing and activity-based costing: I. The concept of relevant costs and benefits cannot be used in conjunction with an activity-based costing system. II. The concept of relevant costs and benefits must be modified for use with an activity-based costing system. III. Generally speaking, the decision maker can better associate relevant costs with the activities that drive them under an activity-based costing system than under a conventional product-costing system. Which of the above statements is (are) true?

III only.

Which of the following costs can be ignored when making a decision?

Sunk costs.

Which of the following are not relevant to the decision making process?

Sunk costs. Future benefits that are the same across alternatives. Costs that are the same across alternatives.

True or false: Linear programming uses information supplied by managerial accountants.

True

True or false: The decision maker's ability to determine what costs are relevant to a decision changes in a setting where activity-based-costing is used.

True

Which of the following should not be considered when deciding whether or not to eliminate a product?

Unavoidable fixed expenses.

Which of the following characteristics would best explain the use of probabilities and expected values in a decision analysis?

Uncertainty.

Which of the following statements is false?

When resources are limited, the product with the highest contribution margin per unit sold should be produced.

Stone Industries produces chemicals used in the production of granite and quartz countertops used in residential homes. In one joint process, 20,000 gallons of Benzonite is processed into 14,000 gallons of Ultralite and 6,000 gallons of Concentralite. The joint process costs are $38,000. The following information is available: UltraliteConcentraliteAllocated joint process costs $26,600 $11,400 Sales price per gallon at split-off point $0.85 $1.25 Variable cost to process further $52,000 $6,600 Sales price per gallon after further processing $4.60 $2.20 Should Concentralite be processed further, and why or why not?

Yes Concentralite should be processed further because the net benefit is $6,600. Explanation Concentralite should be processed further because the variable costs to process further are less than the revenue from processing further. (6,000 gallons × $2.20) − $6,600 = $6,600.

A trade-off in a decision situation sometimes occurs between information:

accuracy and timeliness.

Selecting data pertinent to the decision is performed ______.

after the most important elements of the problem are highlighted

An opportunity cost is the ______.

benefit given up when one alternative is chosen over another

To be useful in the decision making process, information must be ______.

both accurate and relevant

Qualitative characteristics ______.

cannot be expressed effectively in numerical form can be just as important as quantitative measures

The analysis of long-run decisions requires the use of _______ budgeting.

capital

Managerial accountants:

collect data and provide information so that decisions can be made and often serve as a cross-functional team member, making a wide range of decisions.

A decision variable is a(n) ______.

component about which a choice must be made

When resources limit production, the choice of what product(s) to produce should be based on the ______.

contribution margin per unit of limited resource used

When ABC costing is used in decision making ______.

costs can be more accurately be associated with the activities that drive them avoidable costs can more easily be identified relevant costing concepts are valid and can be applied more accurately

When deciding whether to keep or replace a piece of equipment, sunk costs include ______.

depreciation per year on the old equipment cost of the old equipment

The process of highlighting the most important elements of a problem is ______.

developing a decision model

A differential cost is the ______.

difference in a cost item under two decision alternatives

A convenient way of summarizing the relative dollar advantage of one alternative over another is to focus on ______ costs.

differential

Costs and benefits that are relevant to a sell or process further decision ______ joint processing costs.

exclude

The sum of the possible values for a random variable, each weighted by its probability is called the

expected value

The process of taking possible values times their probability and summing the results to help decease uncertainty is basing a decision on

expected values

Sensitivity analysis provided by computer programs shows the ______.

extent to which the estimates used can change without changing the solution

In graphical solutions, the axes and constraints form an area called the ______ ______ in which the solution to the linear program must lie.

feasible region

In graphical solutions, the axes and constraints form an area called the ______.

feasible region

When no excess capacity exists, ______ are not relevant to the special order decision.

fixed costs per unit

Phillippe Inc. manufactures A and B from a joint process (cost = $80,000). Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and then sold for $25 per pound. If Phillippe decides to process A beyond the split-off point, operating income will:

increase by $5,000. Explanation 5,000 × $20 = $100,000 + $20,000 = $120,000 cost; Selling price = $125,000 = 5,000 × $25; Net difference: $125,000 − $120,000 = $5,000 increase.

When decision makers receive more data than can be effectively processed, they experience

information overload

To be considered relevant, information must ______.

involve a future event

Future costs and benefits that do not differ between alternatives are ______ costs to a decision.

irrelevant

When information is accurate, it means that it ______.

is precise

A production process that results in two or more products is called a(n)

joint production process

A constraint function in a linear-programming problem might focus on:

labor hours.

When the same decision must be made over and over again ______.

large amounts of historical data is available on which to make predictions it is worthwhile to keep an ongoing file of relevant information

A constraint is a(n) ______.

limitation faced by the firm

An outsourcing decision is also called a ______ decision.

make or buy

An expression of the goal to be attained is a(n) ______.

objective function

When making decisions, ______ costs are most frequently overlooked.

opportunity

The potential benefit given up when one action precludes a different action is called a(n)

opportunity cost

Ways to manage a constraint include ______.

outsource bottleneck operations add additional equipment to increase capacity add additional shifts or work overtime

A make or buy decision is also called a(n)

outsourcing decision

In considering relevant information, managerial accountants ______.

predict the amounts of future costs and benefits use estimates of cost behavior based on historical data determine what costs and benefits will be incurred in the future

When excess capacity exists, relevant costs of a special order decision include ______.

product variable costs other variable costs associated with the special order

The role of the managerial accountant in linear programming is to ______.

provide relevant cost data make the final decision possible

The primary role of a management accountant in a cross functional team is to ______.

provide relevant information

Factors in a decision problem that cannot be expressed effectively in numerical terms are ______ characteristics.

qualitative

Isolating relevant information is important to ______.

reduce the likelihood of information overload keep the cost and effort of information gathering down shorten the data-gathering process

A common method for allocating joints costs among joint products is the ______ method.

relative sales value

If information pertains to the decision problem under consideration, it is ______ information.

relevant

Information that is pertinent to a decision is ______ information.

relevant