Chapter 21

Tharp Industries sells wood pellets at a normal selling price of $200 per ton. The variable cost per ton is $70, and the company's total fixed cost is $100,000 per month. The company has excess capacity of 50,000 tons per month. Management was recently contacted by a potential buyer with whom they had no prior experience. The buyer offered to buy a special order of 200 tons at a discount price of $146 per ton. The order calls for a lower quality of raw materials that would decrease variable costs associated with it by $4 per ton over the normal variable cost. The special order would also increase fixed costs by $20,000. If the special order is accepted, operating income will decrease by $.___________.

$4,000

Which of the following are common examples of short-run decisions? (Select all that apply).

-Joint product decisions -special order decisions -make or buy decisions -product mix decisions

Which of the following statements is/are true regarding short-run decision making? (Select all that apply).

-Short-run decisions are made with a fixed set of resources. -Short-run decisions are inherently different from long-run strategic plans. -Short-run decision making is often referred to as incremental analysis.

Which of the following are nonfinancial concerns pertaining to make or buy decisions? (Select all that apply).

-Will the decision to use an external vendor impact long-term product availability? -Will the decision to use an external vendor impact production scheduling and flexibility? -Will the decision to use an external vendor impact product quality?

Which of the following questions associated with a decision to rebuild defective products instead of scrapping them are considered nonfinancial concerns? (Select all that apply).

-will the time required to rebuild the defective units slow down the time it will take to fill other orders? -will the quality of the rebuilt units meet inspection standards? -are there any ethical issues associated with selling rebuilt products as new without informing potential buyers?

A company is trying to choose between 2 short-term courses of action. Alternative #1 will result in incremental operating costs of $4,000 and incremental operating revenue of $7,000. Alternative #2 will result in incremental operating costs of $5,000 and incremental operating revenue of $9,000. The incremental operating income of Alternative #2 over that of Alternative #1 is $________

1,000

In most cases, joint products will be processed further beyond the split-off point when the _____________ revenue exceeds the incremental _____________ of doing so.

1. Incremental 2. Cost

A company must choose between 2 short-term courses of action. Alternative #1 will result in incremental operating costs of $9,000 and incremental operating revenue of $4,000. Alternative #2 will result in incremental operating costs of $6,000 and incremental operating revenue of $5,000. The incremental operating income of Alternative #2 over that of Alternative #1 is $________.

4,000

Thompson Corporation sells regulators at a normal selling price of $50 per unit. The variable cost per unit of each regulator is $20, and the company's total fixed cost is $500,000 per month. The company has excess capacity of 75,000 units per month. Management was recently contacted by a potential buyer with whom they had no prior experience. The buyer offered to buy a special order of 30,000 regulators at a discount price of $40 per unit. The special nature of the order would increase variable costs associated with it by $5 per unit over the normal variable cost. The special order would have no impact on fixed costs. If the special order is accepted, operating income will increase by $__________.

450,000

Which of the following statements is/are true regarding opportunity costs? (Select all that apply).

Opportunity costs are benefits that could have been obtained by pursuing an alternative decision. The opportunity costs of particular decisions are sometimes not known at the time those decisions are made.

Costs incurred in the past that have no future bearing on an individual's personal financial decisions are referred to as ________ costs.

Sunk costs

Fill in the blank question. As part of the convergence project, the IASB now requires that borrowing costs must be _______________ in a manner consistent with U.S. GAAP requirement.

capitalized

Products for which sales of one contribute to the sales of another are called ____________ products.

complementary

Incremental analysis requires judgment about financial and nonfinancial concerns. Nonfinancial concerns may include: (Select all that apply).

environmental impacts. ethical considerations. legal issues. reputation effects.

Factors relevant to various short-term decisions often involve differences in costs incurred and revenue earned under alternative courses of action. As the title of this chapter implies, these differences are referred to as __________________ (differential) costs and revenue.

incremental

Financial ____________ in business decisions may be viewed as the differences in costs incurred and revenue earned under alternative courses of action.

relevance

________- ________ point is the point at which separate and distinct joint products emerge from common materials and a shared production process.

split-off

When production is constrained by a limited input resource, incremental analysis involves the use of

the contribution margin per unit of limited input resource.

Which of the following statements is/are true?

-Sunk costs represent irreversible cash outflows that have already occurred. -Many businesses fail due to poor cash planning related to short-run business decisions.

Identify the statements considered relevant in deciding whether to mow your own lawn or to hire someone else to mow it for you. (Select all that apply).

-The additional time you would have to play golf by having someone else perform the service. -The savings in gasoline costs realized from having someone else perform the service.

Which of the following statements is/are true regarding the relevance of information required to make business decisions? (Select all that apply).

-The only information relevant to a particular business decision is that which varies among possible outcomes. -Identifying relevant information requires judgment. -Relevant financial information focuses primarily upon costs and revenues.

Ames Manufacturing recently upgraded its production equipment at a cost of $500,000. During the testing phase of the new equipment, calibrations were set incorrectly, and 10,000 defective units were produced at a cost of $100,000 before the company discovered the issue. Recalibrating the equipment will cost $8,000. The defective products can be sold as scrap for $2 per unit. As an alternative, the defects can be corrected at a cost of $6 per unit, after which they can be sold for $14 per unit. 1. Costs irrelevant to this scrap or rebuild decision total $.__________ 2. If the units are scrapped, incremental income will increase by $_________. 3. If the units are rebuilt, incremental income will increase by $______________.

1. $608,000 2.$20,000 3.$80,000

Joint product decisions involve two basic issues. First, managers must decide how to _______________ joint costs among the various joint products being manufactured. Second, they must apply ________________ analysis to decide which joint products to _____________ further to create additional products.

1. allocate 2. Incremental 3. Process

Elsworth has been approached by an outside vendor that wishes to sell the company a particular part that is currently manufactured internally. If Elsworth accepts the vendor's offer, the production space currently used to manufacture the part could instead be used to manufacture a new product that would generate incremental operating income of $50,000 per year. If Elsworth rejects the vendor's offer, the $50,000 would be viewed as a(n) ____________ ______________.

1. opportunity 2. cost

Wilson Corporation sells an industrial solvent at a normal selling price of $100 per barrel. The variable cost per barrel is $40, and the company's total fixed cost is $900,000 per month. The company has excess capacity of 30,000 barrels per month. Management was recently contacted by a potential buyer with whom they had no prior experience. The buyer offered to buy a special order of 5,000 barrels at a discount price of $80 per barrel. The special nature of the order would increase variable costs associated with it by $10 per barrel over the normal variable cost. The special order would also increase fixed costs by $60,000. If the special order is accepted, operating income will increase by $__________.

90,000

Mac manufactures 2 products: pants and shirts. Pants have a selling price of $60 and a variable cost per unit of $40. Shirts have a selling price of $50 and a variable cost per unit of $30. Pants require 0.20 machine-hours per unit, whereas shirts require 0.25 machine-hours per unit. The company's fixed costs average $200,000 per month. Monthly demand for pants is 14,000 units, whereas monthly demand for shirts is 15,000 units. If the company has only 3,000 machine-hours (MH) available per month, the maximum amount of operating income it can earn is $__________.

96,000

Pan Corporation incurs costs of $1.8 million building a custom piece of machinery for one of its customers. The machine is 90% complete when Pan receives notice that the customer has declared bankruptcy. As a result, the customer is not able to accept delivery or pay anything for the machinery it ordered. Due to the custom design of the machine, there are no other potential buyers. Pan can sell the machine as scrap for $80,000 or it can redesign and complete the machine for $900,000, after which it could be sold for $1 million. Given the above information and assuming Pan's cost and revenue estimates pertaining to scrapping or rebuilding the machine are accurate, answer the following questions: 1. Costs irrelevant to this decision total $. ________ 2. If Pan sells the machine as scrap, its incremental income will increase by $________. 3. If Pan rebuilds and then sells the machine, its incremental income will increase by $_________.

Blank 1: 1,800,000, 1,620,000 Blank 2: 80,000 Blank 3: 100,000

Fill in the blank question. Oregon Hardwoods produces multiple products from a shared production process, including wood shavings and wood veneer. Up to the split-off point for these 2 products, the joint costs associated with their shared processes total $12 million per year. Wood shavings can be sold for $15 million in annual revenue, and wood veneer can be sold for $20 million in annual revenue. Wood shavings can be processed further into pellets at a cost of $6 million, which can then be sold for $35 million. Wood veneer can be processed further into paneling at a cost of $7 million, which can then be sold for $32 million. 1. The amount by which operating income will increase if wood shavings are processed further into wood pellets is $_________ million. 2. The amount by which operating income will increase if wood veneer is processed further into paneling is $______ million.Fill in the blank question. Oregon Hardwoods produces multiple products from a shared production process, including wood shavings and wood veneer. Up to the split-off point for these 2 products, the joint costs associated with their shared processes total $12 million per year. Wood shavings can be sold for $15 million in annual revenue, and wood veneer can be sold for $20 million in annual revenue. Wood shavings can be processed further into pellets at a cost of $6 million, which can then be sold for $35 million. Wood veneer can be processed further into paneling at a cost of $7 million, which can then be sold for $32 million. 1. The amount by which operating income will increase if wood shavings are processed further into wood pellets is $ million. 2. The amount by which operating income will increase if wood veneer is processed further into paneling is $ million.

Blank 1: 14 Blank 2: 5

Bentley Corporation currently makes Part #332, used in its manufacturing of engines. At 15,000 units, the total cost of making Part #332 is $97,000, computed as follows: Direct Labor = $15,000 ($1 per unit) Direct Materials = $30,000 ($2 per unit) Variable Overhead = $12,000 ($0.80 per unit) Fixed Overhead = $40,000 An outside vendor has offered to supply Bentley with 15,000 units of Part #332 for $75,000. If the company accepts the offer, its fixed overhead costs will be reduced by $3,000. 1. If Bentley buys the parts instead of continuing to manufacture them, its costs increase by $__________. 2. At a total purchase price of $_________, the company would be indifferent between making or buying 15,000 units of the part. (Hint: The amount must be less than the current purchase price of $75,000.)

Blank 1: 15,000 Blank 2: 60,000

Myron Chemical produces 2 products from a shared production process: cleansers and solvents. Up to the split-off point for these 2 products, the joint costs associated with their shared processes total $5 million per year. Cleansers generate $18 million in annual revenue, and solvents generate $12 million in annual revenue. The company allocates joint costs to the 2 products on the basis of their relative sales value. 1. The amount of joint costs allocated to cleansers is $ _________ million per year. 2. The amount of joint costs allocated to solvents is $________ million per year.

Blank 1: 3 Blank 2: 2

Weston Corporation currently makes Part #500, used in its manufacturing of engines. At 15,000 units, the total cost of making Part #500 is $129,000, computed as follows: Direct Labor = $30,000 ($2 per unit) Direct Materials = $60,000 ($4 per unit) Variable Overhead = $24,000 ($1.60 per unit) Fixed Overhead = $15,000 An outside vendor has offered to supply Weston with 15,000 units of Part #500 for $115,000. If the company accepts the offer, its fixed overhead costs will be reduced by $6,000. 1. If Weston buys the parts instead of continuing to manufacture them, the company will save $.___________ 2. At a total purchase price of $___________, the company would be indifferent between making or buying 15,000 units of the part. (Hint: The amount must be more than the current purchase price of $115,000.)

Blank 1: 5,000 Blank 2: 120,000

Flint Corporation incurs costs of $900,000 building a custom piece of machinery for one of its customers. Prior to delivering the machine, the customer cancels the order. Flint sues the customer and is awarded $400,000 in damages. Due to the custom design of the machine, there are no other potential buyers. Flint can sell the machine as scrap for $50,000 or it can redesign the machine for $80,000, after which it could be sold for $150,000. Given the above information, and assuming Flint's cost and revenue estimates pertaining to scrapping or redesigning the machine are accurate, answer the following questions: 1. Costs irrelevant to this decision total $_________. 2. If Pan sells the machine as scrap, its incremental income will increase by $_______. 3. If Pan rebuilds and then sells the machine, its incremental income will increase by $________. 4. The legal settlement of $400,000 is ___________ (relevant/irrelevant) to Flint's decision.

Blank 1: 900,000 Blank 2: 50,000 Blank 3: 70,000 Blank 4: irrelevant

The profitability of a particular business decision depends on its ___________ revenue and expenses. Judgment also plays an important role in performing incremental analysis, such as assessing the ____________ costs that result from forgoing benefits by selecting one alternative over another.

Blank 1: incremental Blank 2: opportunity

Products that result from shared manufacturing processes as a group are called ___________ products, and the manufacturing costs that these products share in common are called ___________ ________ .

Blank 1: joint Blank 2: joint Blank 3: costs

Prior to the FASB/IASB convergence project, interest costs incurred on funds borrowed to bring assets into marketable condition (such as money borrowed to finance construction costs) were not _____________________ under international standards (IFRS).

Capitalized

If a decision to rebuild defective units and sell them at regular prices, as opposed to scrapping them at reduced prices, interferes with the production space required to fulfill other orders, the revenue lost while the defective units are being rebuilt is considered a(n) ________ cost.

Opportunity cost

Benefits forgone (given up) by choosing one alternative over another are referred to as ____________ costs.

Opportunity costs

A(n) _____________ cost is one that has already been incurred and cannot be changed by future actions.

Sunk

TRUE OR FALSE: The only information relevant to a business decision is that which varies among possible courses of outcomes be considered.

True