chapter 6 relevant information

Wilson Co. currently produces 2,000 tennis rackets annually. A supplier has offered to produce the rackets for $370 per racket. Wilson incurs unit-level costs of $360 per racket and spends $10,000 on product design each year. Annual facility-level costs are $100,000. What is the effect on profit if Wilson Co. outsources the rackets?

$10,000 decrease

Chris Co. has three segments -- Surfing, Mountain Biking, and Fly Fishing. The Surfing segment is currently producing 1,000 units annually that sell for $500 each and cost $400 per unit to produce. Product design costs are $110,000 each year and the segment is allocated $100,000 of annual facility-level costs. Calculate the avoidable cost if Chris Co. eliminates the Surfing segment.

$10,000 increase

Wilson Co. currently produces 2,000 tennis rackets annually. A supplier has offered to produce the rackets for $370 per racket. Wilson incurs unit-level costs of $360 per racket and spends $10,000 on product design each year. Annual facility-level costs are $100,000. If Wilson outsources the rackets, they can lease their manufacturing space for $20,000 per year. What is the effect on profit if Wilson Co. outsources the rackets?

$10,000 increase

Grady Corporation is evaluating two decision alternatives. Alternative One has costs of $2,000 and revenues of $5,000 while Alternative Two has costs of $3,200 and revenues of $7,000. Identify the amount of differential revenue.

$2,000

Chris Co. is currently producing 1,000 surfboards annually. A supplier has offered to produce the boards for $300 each. Chris Co. incurs unit-level costs of $280 per surfboard. Chris also spends $25,000 on product design each year and incurs $50,000 of facility-level costs. Chris Co.'s avoidable cost per surfboard is ______.

$305

Chris Co. is currently producing 1,000 surfboards annually. A supplier has offered to produce the boards for $300 each. Chris Co. incurs unit-level costs of $280 per surfboard. Chris also spends $25,000 on product design each year and incurs $50,000 of facility-level costs. If Chris Co. outsources the boards, they can lease their manufacturing space for $12,500 per annum. Chris Co.'s relevant cost per surfboard is ______.

$317.50

Wilson Co. has three segments -- Tennis, Golf, and Fishing. The Tennis segment is currently producing 2,000 units annually. The units sell for $200 each. The cost of each unit is $110. The Tennis segment spends $100,000 on product design each year. The segment also is allocated $200,000 of annual facility-level costs. Calculate the avoidable cost if Wilson Co. were to eliminate the Tennis segment.

$320,000

Chris Co. produces surfboards. A customer has offered Chris Co. $400 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $350 per unit and batch-level costs of $5,500. Chris Co. also incurred $70,000 of product-level costs to design the board and $10,000 of facility-level costs. Calculate the amount of differential revenue.

$40,000 Reason: $400 × 100 = $40,000

Wilson Co. has three segments -- Tennis, Golf, and Fishing. The Tennis segment is currently producing 2,000 units annually that sell for $200 each and cost $110 per unit to produce. Product design costs are $100,000 each year and the segment is allocated $200,000 of annual facility-level costs. Calculate the differential revenue if Wilson Co. eliminates the Tennis segment.

$400,000

Premier Co. has three segments -- Park Benches, Swings, and Lighting. The Bench segment is currently producing 5,000 units annually that sell for $100 each and cost $90 per unit to produce. Product design costs are $40,000 each year and the segment is allocated $100,000 of annual facility-level costs. Calculate the avoidable cost if Premier Co. eliminates the Bench segment.

$490,000

Premier Co. is currently producing 10,000 park benches annually. A supplier has offered to produce the bench for $500 per bench. Premier Co. incurs unit-level costs of $490 per unit. Premier also spends $50,000 on product design each year and incurs $100,000 of facility-level costs. The avoidable production cost for Premier Co. per bench is ______.

$495

Chris Co. is currently producing 1,000 surfboards annually. A supplier has offered to produce the boards for $300 each. Chris Co. incurs unit-level costs of $280 per surfboard. Chris also spends $25,000 on product design each year and incurs $50,000 of facility-level costs. What is the effect on profit if Chris Co. outsources the surfboards?

$5,000 increase

Oliver Company owns a machine with a current book value of $50,000. The market value of the machine is $20,000. The operating expenses are $9,000. Oliver is evaluating whether to sell the machine for $20,000 and purchase a new machine that will have lower operating expenses. In this scenario, what is the sunk cost related to Oliver's decision?

$50,000

Chris Co. has three segments -- Surfing, Mountain Biking, and Fly Fishing. The Surfing segment is currently producing 1,000 units annually that sell for $500 each and cost $400 per unit to produce. Product design costs are $110,000 each year and the segment is allocated $100,000 of annual facility-level costs. Calculate the differential revenue if Chris Co. eliminates the Surfing segment.

$500,000

Premier Co. has three segments -- Park Benches, Swings, and Lighting. The Bench segment is currently producing 5,000 units annually. The units sell for $100 each. The cost of each unit is $90. The Bench segment spends $40,000 on product design each year. The segment also is allocated $100,000 of annual facility-level costs. Calculate the differential revenue if Premier Co. were to eliminate the Bench segment.

$500,000

Premium Co. produces park benches. A customer has offered Premium Co. $700 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $500 per unit and batch-level costs of $5,000. Premium Co. also incurred $15,000 of product-level costs to design the bench and has $200,000 of facility-level costs. Calculate the amount of differential revenue.

$55,000

Wilson Co. produces tennis rackets. A customer offered Wilson Co. $400 per racket for 200 rackets. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and has $100,000 of facility-level costs. Calculate the amount of differential cost.

$61,000

Wilson Co. produces tennis rackets. A customer offered Wilson Co. $400 per racket for 200 rackets. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and has $100,000 of facility-level costs. Calculate the amount of differential cost.

$61,000 Reason: $300 × 200 units= $60,000 + $1,000 batch-level cost = $61,000

Outdoor Living Company has just received a special order for 500 tents. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Which type of cost is considered a sunk cost to Outdoor Living's decision of whether to accept or reject the special order

$7,000 depreciation costs on equipment used to make the tents

Premium Co. produces park benches. A customer has offered Premium Co. $700 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $500 per unit and batch-level costs of $5,000. Premium Co. also incurred $15,000 of product-level costs to design the bench and has $200,000 of facility-level costs. Calculate the amount of differential revenue.

$70,000

Wilson Co. produces tennis rackets. A customer has offered Wilson Co. $400 per unit for 200 units. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and $100,000 of facility-level costs. Calculate the amount of differential revenue.

$80,000

Wilson Co. has three segments -- Tennis, Golf, and Fishing. The Tennis segment is currently producing 2,000 units annually that sell for $200 each and cost $110 per unit to produce. Product design costs are $100,000 each year and the segment is allocated $200,000 of annual facility-level costs. Calculate the impact on company profits if Wilson Co. eliminates the Tennis segment.

$80,000 decrease

Select all that apply Which of the following characteristics are qualitative? (Select all that apply.)

Appearance Customer satisfaction

Select all that apply Which of the following characteristics are qualitative? (Select all that apply.)

Appearance Employee satisfaction Customer satisfaction

Costs that can be eliminated by making specific choices are called _____ costs. (Enter only one word.)

Blank 1: avoidable

Relevant costs are frequently called _____ costs. (Enter only one word per blank.)

Blank 1: avoidable

Costs incurred each time a company generates a set quantity of goods produced at one time are called ______ -level costs. (Enter only one word.)

Blank 1: batch

Factors that limit a business's ability to satisfy the demand for its product are called _____ . (Enter only one word per blank.)

Blank 1: constraints, constraint, bottlenecks, or bottleneck

Revenue that varies among alternatives is called relevant or_____ revenue. (Enter only one word per blank.)

Blank 1: differential

Costs incurred to support an entire company are called _____ -level costs. (Enter only one word per blank.)

Blank 1: facility

Upper-level management should establish policies and procedures that motivate subordinates to perform in ways that maximize -term profitability.

Blank 1: long

The practice of enticing clients with a low price and then increasing prices once clients are dependent is called ______ -ball pricing. (Enter only one word.)

Blank 1: low

Buying goods and services from other companies rather than producing them internally is commonly called ______ . (Enter only one word per blank.)

Blank 1: outsourcing

Managers should base equipment replacement decisions on analysis rather than physical deterioration. (Enter only one word.)

Blank 1: profitability or profit

The fact that some customers prefer one stop shopping and may stop buying items from Segment A if Segment B is eliminated is an example of a(n) _____ factor that should be considered in making the segment elimination decision. (Enter only one word per blank.)

Blank 1: qualitative

Information that is future oriented and differs among the alternatives is _____ . (Enter only one word.)

Blank 1: relevant

Differential ______ are expected future sales that vary between the alternatives under consideration. (Enter only one word.)

Blank 1: revenues or revenue

Historical costs are frequently called _____ costs because they cannot be changed and are not relevant for making current decisions. (Enter only one word per blank.)

Blank 1: sunk

Costs incurred each time a company generates one individual item of product are called _____ -level costs. (Enter only one word per blank.)

Blank 1: unit

Companies that have control over the full range of activities from acquiring raw materials to distributing goods and services use _____ _____ . (Enter only one word per blank.)

Blank 1: vertical Blank 2: integration

Select all that apply Which of the following are not qualitative characteristics that should be considered in an outsourcing decision?

Cost savings Increased profits

Which of the following is a qualitative characteristic of a special order decision?

Current customers demanding a price reduction

Which of the following is a product-level cost?

Engineering design costs

Fixed costs are always avoidable if a product is eliminated.

False

Information must be exact to be relevant.

False

True or false: Only variable costs are relevant to decision making.

False

True or false: Qualitative characteristics are never as important as quantitative characteristics when making special order decisions.

False

True or false: The product with the highest contribution margin will always be the most profitable.

False

Select all that apply Which of the following can be considered relevant costs? (Select all that apply.)

Fixed costs Variable costs

Chris Co. produces surfboards. A customer has offered Chris Co. $400 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $350 per unit and batch-level costs of $5,500. Chris Co. also incurred $70,000 of product-level costs to design the board and $10,000 of facility-level costs. Based on your quantitative analysis, should Chris Co. accept the special order?

No

Premier Co. is currently producing 10,000 park benches annually. A supplier has offered to produce the bench for $500 per bench. Premier Co. incurs unit-level costs of $490 per unit. Premier also spends $50,000 on product design each year and incurs $100,000 of facility-level costs. Based on your quantitative analysis, should Premier Co. outsource the benches?

No, Premier Co. should not outsource park benches because outsourcing will decrease profit by $50,000.

Premium Co. produces park benches. A customer has offered Premium Co. $800 per unit for 100 units. To fill the order, Premium would incur unit-level costs of $600 per unit and batch-level costs of $15,000. Premium Co. also incurred $20,000 of product-level costs to design the bench and $200,000 of facility-level costs. Premium Co. can rent out its excess capacity for $12,000 if it does not accept the special order. Based on your quantitative analysis, should Premium Co. accept the special order? What is the effect on profit?

No, Premium Co. should not accept the special order because it will decrease profit by $7,000. Reason: The differential costs for the special order include the unit level cost. batch level cost, and the opportunity cost for the special order. The unit level costs would be $600 * 100 units= $60,000. The batch level cost would be $15,000. The opportunity cost is $12,000 due to the potential leasing opportunity. Therefore, total differential cost is $87,000. The differential revenue is $800 * 100 units= $80,000. Since the differential cost exceeds the differential revenue the special order should not be accepted.

Chris Co. is considering replacing an old machine. The old machine was purchased for $100,000 and has a book value of $40,000 and should last four more years. Chris Co. believes that it can sell the old machine for $20,000. The new machine cost $80,000 and will have a 4-year life and a $10,000 salvage value. Currently, it cost $20,000 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 50%. Based on quantitative analysis, calculate the relevant costs and indicate if Chris Co. should replace the old machine?

No, because the relevant cost of the new machine is $10,000 more than the old machine.

Chris Co. produces surfboards. A customer has offered Chris Co. $400 per unit for 100 units. To fill the order, Chris would incur unit-level costs of $350 per unit and batch-level costs of $5,500. Chris Co. also incurred $70,000 of product-level costs to design the board and $10,000 of facility-level costs. Chris Co. can rent out its excess capacity for $2,000 if it does not accept the special order. Based on your quantitative analysis, should Chris Co. accept the special order? What is the effect on profit?

No, profit decreases by $2,500.

Select all that apply Which of the following are qualitative characteristics that should be considered in an outsourcing decision?

Reliability of the supplier. Employee displacement Difficulty in reestablishing internal production Existing employee morale and loyalty

Which of the following is a batch-level cost?

Shipping cost of sending 100 units

True or false: Information can be relevant in one context and irrelevant in another context.

True

True or false: Whether or not information is relevant depends on the context.

True

Select all that apply Which of the following could be a bottleneck? (Select all that apply.)

Warehouse space Raw materials Skilled labor

Wilson Co. produces tennis rackets. A customer has offered Wilson Co. $400 a unit for 200 units. To fill the order, Wilson would incur unit-level costs of $300 a unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and $100,000 of facility-level costs. Based on your quantitative analysis, should Wilson Co. accept the special order?

Yes

Chris Co. is considering replacing an old machine. The old machine was purchased for $100,000 and has a book value of $40,000 and should last four more years. Chris Co. believes that it can sell the old machine for $50,000. The new machine cost $80,000 and will have a 4-year life and a $10,000 salvage value. Currently, it cost $20,000 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 50%. Based on quantitative analysis, calculate the relevant costs and indicate if Chris Co. should replace the old machine?

Yes, because the relevant cost of the new machine is $20,000 less than the cost of the old machine.

Chris Co. is considering replacing an old machine. The old machine was purchased for $100,000 and has a book value of $40,000 and should last four more years. Chris Co. believes that it can sell the old machine for $20,000. The new machine costs $70,000 and will have a 4-year life and a $30,000 salvage value. Currently, it cost $20,000 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 50%. Based on quantitative analysis, calculate the relevant costs and indicate if Chris Co. should replace the old machine?

Yes, because the relevant cost of the new machine is $20,000 less than the old machine.

Costs that can be eliminated by making specific choices are called ______ costs.

avoidable

For many managerial decisions (such as outsourcing and special order decisions), unit-level costs are

avoidable costs

Costs incurred each time a company generates a set quantity of goods produced at one time are called

batch-level costs.

Outsourcing involves a decision about whether to ______.

buy goods and services from other companies or produce them internally

Factors that limit a business's ability to satisfy the demand for its product are called ______.

constraints

Revenue that differs among two alternatives is called

differential revenue.

Costs incurred to support an entire company are called

facility-level costs.

Theory of constraints (TOC) is a management practice of ______.

identifying and eliminating bottlenecks

Unit-level costs are

incurred each time a company generates one individual item of product.

Select all that apply A bottleneck (Select all that apply.)

limits a company's ability to satisfy demands for its products. limits a company's ability to produce products. increases the chance customers will turn to competition for the product.

The practice of enticing clients with a low price and then increasing prices once clients are dependent is called ______ pricing.

low-ball

Qualitative information about a segment elimination decision is relevant when it

makes a difference in the decision and it differs among alternatives.

The primary disadvantage of a short-term performance goal is short-term goals ______.

may jeopardize long-term performance

Cost information

may or may not be relevant, depending on the context.

Focusing on long-term performance

may sacrifice performance in the short-run.

Select all that apply When making an outsourcing decision _____ costs should be considered.

product-level unit-level batch-level

Costs incurred to support specific goods or services are called

product-level costs.

Equipment replacement decisions should be made based on ______.

profitability analysis

Information that is future oriented and differs among the alternatives is known as ______ information.

relevant

In decision-making, relevant information is

relevant but not necessarily exact.

Historical costs are called

sunk costs.

Select all that apply It can be more profitable to sell a product with a lower contribution margin if (Select all that apply.)

there is considerably higher demand for the product with a lower contribution margin. constraints are present related to the business's ability to satisfy demand for its product.

Select all that apply Managers could be motivated to maximize short-term profitability instead of long-term profitability based on

threats of punishment for missing short-term goals. reward systems for meeting short-term goals.

Select all that apply When making a special order decision ______ costs should be considered.

unit-level batch-level

If a product is eliminated ______ costs will be avoided.

variable

Companies that have control over the full range of activities from acquiring raw materials to distributing goods and services use ______.

vertical integration

Sunk costs ______.

were incurred in the past and are not relevant