Ch 11 pt 2

Preston Industries, Inc. currently manufactures part QX100, which is used in several products produced by the company. Monthly production costs for 10,000 units of QX100 are as follows: Direct materials$80,000Direct labor$20,000Variable overhead costs$50,000Fixed overhead costs$40,000Total manufacturing costs$190,000 Accounting has estimated that 20% of the fixed overhead costs currently assigned to QX100 would not be needed if the company chose to purchase the part from an outside supplier. Preston currently has the option of purchasing the part from an outside supplier at $16.00 per unit. Based solely on a short-run financial analysis, the maximum price that Preston should be willing to pay the outside vendor for each unit of QX100 is: $10.00 $11.00 $15.00 $15.80 $16.00

$15.80

Preston Industries, Inc. currently manufactures part QX100, which is used in several products produced by the company. Monthly production costs for 10,000 units of QX100 are as follows: Direct materials$80,000Direct labor$20,000Variable overhead costs$50,000Fixed overhead costs$40,000Total manufacturing costs$190,000 Accounting has estimated that 20% of the fixed overhead costs currently assigned to QX100 would not be needed if the company chose to purchase the part from an outside supplier. Preston currently has the option of purchasing the part from an outside supplier at $16.00 per unit. If the company accepts the offer from the outside supplier, the monthly avoidable costs (that is, costs that would no longer be incurred) would be: $32,000 $82,000 $158,000 $190,000 $110,000

$158,000

The Tee Box is a golf shop inside the clubhouse of a North Carolina golf course. Derek Dunlop, owner of the Tee Box, is deciding how much shelf space to devote to each of four different golf ball types. Derek has a maximum front shelf space of 15 feet to devote to golf balls. He wants a minimum of three feet and a maximum of seven feet of front shelf space for each golf ball type. Appropriate per-case data on the four ball types follow: DistanceSpinStraightDurableSales price per case$24.20$22.90$23.60$21.10Variable costs per case15.8016.2016.8015.10Cases sold per foot of front shelf space per day32 26 25 38 The daily contribution per foot of front shelf space for Straight is: $190.00 $140.00 $120.00 $130.00 $170.00

$170.00

Triad Children's Center (TCC), a non-profit organization, uses relevant cost analysis to determine whether new services are desirable. TCC is looking at adding a new educational program for grade school children who are having difficulty with their reading and math skills. The following relevant costs are expected if the program is accepted: Costs (per year) Program Director salary$39,000Part-time Assistants$28,000Variable cost per child$900 TCC estimates that a maximum of 40 children will participate in this program in the first year. If TCC decides to implement this program, funding will be received from the City Chamber of Commerce ($50,000) and a local Private University Endowment Fund ($35,000). Calculate the expected surplus or deficit from operations given the above information. $28,000 surplus. $10,000 surplus. $17,000 deficit. $18,000 deficit. Some amount other than those listed here.

$18,000 deficit.

Zippy Company has a product that it currently sells in the market for $50 per unit. Zippy has developed a new feature that, if added to the existing product, will allow Zippy to receive a price of $65 per unit. The total cost of adding this new feature is $26,000 and Zippy expects to sell 1,600 units in the coming year. What is the net effect on next-year's operating income of adding the feature to the product? $2,000 increase in operating income. $3,000 decrease in operating income. $3,500 increase in operating income. $4,000 decrease in operating income. $2,000 decrease in operating income.

$2,000 decrease in operating income.

A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can either be disposed for $5,000 cash and replaced with a similar truck costing $27,000, or it can be rebuilt for $20,000 and be brand new as far as operating characteristics and looks are concerned. The preferred decision alternative provides a net cost savings of: $2,000. $5,000. $7,000. $12,000. Some amount other than these choices.

$2,000.

A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. The truck can either be disposed for $5,000 cash and replaced with a similar truck costing $27,000, or rebuilt for $20,000 and be "new" as far as operating characteristics and looks are concerned. The net relevant cost of the replacing option is: $5,000. $20,000. $22,000. $25,000. $27,000.

$22,000.

Maxwell Manufacturing is contemplating the purchase of a new machine to replace a machine that has been in use for seven years. The old machine has a net book value (NBV) of $50,000 and still has five years of useful life remaining. The old machine has a current market value of $5,000, but is expected to have no market value after five years. The variable operating costs and depreciation expenses (straight-line basis) are $135,000 per year. The new machine will cost $90,000, has an estimated useful life of five years with zero disposal value after five years, and an annual operating expense of $118,000 (including straight-line depreciation). Considering the five years in total and ignoring the time value of money and income taxes, what is the difference in total relevant costs for the two decision alternatives (keep vs. replace)? $0. $25,000. $35,000. $40,000. $50,000.

$40,000.

The Car Lot is a New York car dealership located in a highly visible area along a prominent highway. Fred Barns, owner of The Car Lot, is trying to decide how much front-row space along the highway to devote to each of four different car models. Fred has a maximum front-row space of 200 feet to devote to the four car models. He wants a minimum of 20 feet and a maximum of 80 feet of front-row space for each car model. Appropriate data on the four car models follow: ConvertibleTruckSedanSUVSales price per unit$40,000$30,000$60,000$25,000Variable costs per unit32,00023,00045,00016,000UNITS sold per 10 feet of front-row space per month1018625 The convertible model's monthly contribution per 10 feet of front-row space is: $70,000. $60,000. $90,000. $80,000. $30,000.

$80,000.

Copeland Inc. produces product X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade (i.e., further process) the product to become Xylene. The following information has been gathered: (1) Selling price per pound of X-547. (2) Variable manufacturing costs of the upgrade process. (3) Avoidable fixed costs of the upgrade process. (4) Selling price per pound of Xylene. (5) Joint manufacturing costs to produce X-547. Which of the items should be reviewed when making the upgrade decision?

1, 2, 3, and 4

Harrington Corporation produces three products, A, B, and C. Pertinent information on these products is as follows: ProductSelling Price per UnitVariable Cost per UnitFixed Costper UnitDL Hoursper UnitA (Anchor bolts)$4.00 $1.00 $2.00 2 B (Bearings)$3.50 $0.50 $2.00 2 C (Castings)$6.00 $2.00 $3.00 3 There are 150 direct labor hours available. Machine-hour capacity allows 100 anchor bolts, only; 50 bearings, only; 40 casters, only; or any combination of the three that does not exceed the capacity. The direct labor hour constraint for Harrington's linear programming model is: A + B + C ≤ 150. Min Z = 2A + 2B + 3C. Max Z = 2A + 2B + 3C − 150. 100A + 50B + 40C ≤ 1,050. 2A + 2B + 3C ≤ 150.

2A + 2B + 3C ≤ 150.

The Multi Resource Company manufactures two lines of washing machines, Regular and Deluxe. The contribution margin per unit of a Regular model is $110 and for Deluxe Model is $175. The company has two departments, Assembly and Testing. The Regular Model requires 3 hours to assemble, while a Deluxe Model requires 4 hours. The total time available in Assembly is 12,000 hours. In the Testing Department, it requires 2.5 hours to test a Regular Model and 1.5 hours to test a Deluxe Model. A total of 6,000 hours of testing time is available. Based on this information, the optimum production plan for Multi Resource is: 2,400 Regular Models 3,000 Deluxe Models 1,091 Regular Models and 2,182 Deluxe Models 4,000 Deluxe Models 4,000 Regular Models

3,000 Deluxe Models

Keego Enterprises manufactures two products, boat wax and car wax, in two departments, Mixing and Packaging. The Mixing Department has 800 hours per month available while the Packaging Department has 1,200 hours per month available. Production of the two products cannot exceed 36,000 pounds. Data on the two products follow: ProductContribution Margin (per 100 pounds)Hours per 100 Pounds of Output: Mixing (M)Hours per 100 Pounds of Output: Packaging (P)Boat wax (B)$200 5.0 3.6 Car wax (C)$150 2.4 6.0 The Mixing Department (M) constraint for the Keego linear program would be (where B and C are expressed in 100-pound units of output): 2.4M + 6P ≤ 36,000. 5B + 2.4C ≥ 800. 5B + 2.4C ≤ 800. 5B + 2.4C = 800. 7.4M + 9.6P ≤ 36,000.

5B + 2.4C ≤ 800.

Harrington Corporation produces three products, A, B, and C. Pertinent information on these products is as follows: ProductSelling Price per UnitVariable Cost per UnitFixed Costper UnitDL Hoursper UnitA (Anchor bolts)$4.00 $1.00 $2.00 2 B (Bearings)$3.50 $0.50 $2.00 2 C (Castings)$6.00 $2.00 $3.00 3 There are 150 direct labor hours available. Machine-hour capacity allows 100 anchor bolts, only; 50 bearings, only; 40 casters, only; or any combination of the three that does not exceed the capacity. The machine-hour constraint for Harrington's linear programming model is: The same as the labor-hour constraint. A + 2B + 2.5C ≤ 100. Indeterminable from the data given. A + B + C ≤ 190. 100A + 50B + 40C ≤ 19,000.

A + 2B + 2.5C ≤ 100.

In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient capacity, which one of the following would not be relevant to the decision?

Absorption (that is, full product) cost.

In a sell-or-process-further decision, joint production costs:

Are irrelevant to the decision.

Costs relevant to a make-versus-buy decision typically include variable manufacturing costs as well as:

Avoidable fixed costs.

Relevant (i.e., differential) cost analysis:

Considers all variable and fixed future costs that change with each decision alternative.

United Industries manufactures three products in its highly automated factory. The products are all popular, with demand far exceeding the company's ability to supply the marketplace (as measured in machine hours). To maximize (short-term) operating income, management should focus on each product's:

Contribution per machine hour.

Which one of the following is most relevant to an equipment-replacement decision (assume no tax effects) used in a trade or business?

Current disposal (salvage) value of the old equipment.

Diamond Company has three product lines, A, B, and C. The following financial information is available: ItemProduct Line A Product Line B Product Line CSales$30,000 $45,000 $12,000 Variable costs$18,000 $24,000 $7,500 Contribution margin$12,000 $21,000 $4,500 Fixed costs: Avoidable$4,500 $9,000 $3,000 Unavoidable$3,000 $4,500 $2,000 Pre-tax operating income$4,500 $7,500 $(500) Diamond is thinking of dropping Product Line C because it is reporting an operating loss. Assuming the company drops Product Line C and does not replace it, pre-tax operating income for the firm will likely: Be unchanged Increase by $1,200 Increase by $1,500 Decrease by $1,500 Decrease by $2,700

Decrease by $1,500

Sensitivity analysis in linear programming is used to:

Determine whether and how the optimal decision would change in response to changes in the parameters in the model.

Relevant costs for a make-or-buy decision for a component part include all the following except:

Fixed overhead currently being allocated to the part.

Diamond Company has three product lines, A, B, and C. The following financial information is available: ItemProduct Line A Product Line B Product Line CSales$30,000 $45,000 $12,000 Variable costs$18,000 $24,000 $7,500 Contribution margin$12,000 $21,000 $4,500 Fixed costs: Avoidable$4,500 $9,000 $3,000 Unavoidable$3,000 $4,500 $2,000 Pre-tax operating income$4,500 $7,500 $(500) If Product Line C is discontinued and the manufacturing space formerly devoted to this line is rented for $6,000 per year, pre-tax operating income for the company will likely: Be unchanged—the two effects cancel each other out. Increase by $3,300. Increase by $4,500. Increase by $7,200. Increase by some other amount.

Increase by $4,500.

Which of the following costs would be relevant in short-term decision making (evaluating "special sales orders," make-vs.-buy decisions, etc.)?

Incremental fixed costs.

A company's approach to a make-or-buy decision:

Involves an analysis of avoidable costs.

The best way to allocate scare resources to attain a specific objective, such as the maximization of operating income, is to use:

Linear programming (i.e., constrained optimization analysis).

Manders Manufacturing Corporation uses the following model to determine an optimal short-term product mix for its two products, metal (M) and scrap metal (S): Max Z = $30M + $70S Where: 3M + 2S ≤ 15 2M + 4S ≤ 18 The above mathematical functions together constitute a(n):

Linear programming model.

Southern Company packages and sells nuts in cans. Pecans, cashews, Brazil nuts, hazelnuts, and peanuts are packaged individually as well in combinations and mixtures. Southern wants to package the nuts so that it can maximize its operating profit while considering market demand. In addition, there are limited supplies for some types of nuts. The technique that Southern should employ to address this decision problem is:

Linear programming.

The mathematical tool used to determine the optimum short-term product (or service) mix is:

Linear programming.

Regis Company manufactures plugs at a cost of $36 per unit, which includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually (as part of a larger product it produces). Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead cost will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If Regis Company purchases the plugs but does not rent the unused facility, the company would: Save $3.00 per unit. Lose $6.00 per unit. Save $2.00 per unit. Lose $3.00 per unit. Save $1.00 per unit.

Lose $3.00 per unit.

In a manufacturing environment, the short-term profit-maximizing decision would be to:

Maximize total contribution margin for units produced/sold.

Which of the following items should not be considered when evaluating a make-or-buy decision?

Net book value (NBV) of the production equipment currently used to make the item in question.

Sunk costs are

Not relevant for decision making.

When a decision is made in an organization, it is selected from a group of alternative courses of action (i.e., decision alternatives). The loss associated with not choosing a given decision alternative is referred to as a(n):

Opportunity cost.

ABC, Inc. is considering whether to repair a five-year-old fork lift or to purchase a used one as a replacement. The company estimates that it would take $3,000 to repair the existing fork lift, which is the same amount needed to purchase the used fork lift. Cost-related information for both assets is as follows: Existing Fork Lift Used Fork LiftAcquisition cost$15,000 $3,000Repairs cost$3,000 -Annual operating costs (gas, etc.)$2,280 $2,100 Under the assumption that the company would like to minimize total cost, what should the company do, and what are the total cost savings in the first year? DecisionFirst-Year Cost SavingsA)Buy the used fork lift$9,780B)Repair the existing fork lift$5,518C)Buy the used fork lift$180D)Repair the existing fork lift$5,280

Option C

Orange Computer Co. is quickly becoming a major player in the personal computer market. The company currently has multiple companies producing products that go into an Orange computer. This practice of having an outside firm provide a function for Orange Computer Co. is called:

Outsourcing.

The Robinson-Patman Act, administered by the U.S. Federal Trade Commission, addresses pricing that could substantially damage the level of competition in an industry. This type of pricing is called:

Predatory pricing.

A decision bias is an inherent tendency that leads to incorrect decisions. An example of a decision bias is failure to:

Properly identify sunk costs as irrelevant.

Employee morale and social responsibility represent two examples of:

Qualitative decision factors.

You just bought a new luxury sports car for $125,000. Before you had time to get insurance, the car was wrecked. Weird Wally offers to take it off your hands for $10,000. You can then purchase a similar model for $128,000. A body-shop (with an excellent reputation) offers to rebuild the wrecked car for $90,000 and loan you a similar model while the vehicle is being rebuilt. Once rebuilt, the body-shop claims, it will "run like a new car and nobody will be able to tell the difference." What is the preferred course of action, from a financial point of view? Rebuild to save $13,000. Rebuild to save $28,000. Rebuild to save $38,000. Sell to Weird Wally and save $7,000.

Rebuild to save $28,000.

Management accountants are frequently asked to analyze various decision situations including the following: The cost of a special device that is necessary if a special order is accepted. The cost proposed annually for the plant service for the grounds at corporate headquarters. Joint production costs incurred, to be considered in a sell-or-process-further decision. The costs associated with alternative uses of plant space, to be considered in a make/buy decision. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal decision. The costs described in situations I and IV above are examples of:

Relevant costs.

Opportunity costs are:

Relevant for decision making.

Manders Manufacturing Corporation uses the following model to determine an optimal short-term product mix for its two products, metal (M) and scrap metal (S): Max Z = $30M + $70S Where: 3M + 2S ≤ 15 2M + 4S ≤ 18 The two inequality functions in the above set of items represent:

Resource constraints.

Triad Children's Center (TCC), a non-profit organization, uses relevant cost analysis to determine whether new services are desirable. TCC is looking at adding a new educational program for grade school children who are having difficulty with their reading and math skills. The following relevant costs are expected if the program is accepted: Costs (per year) Program Director salary$39,000Part-time Assistants$28,000Variable cost per child$900 TCC estimates that a maximum of 40 children will participate in this program in the first year. If TCC decides to implement this program, funding will be received from the City Chamber of Commerce ($50,000) and a local Private University Endowment Fund ($35,000). In deciding between alternative choices for a given situation (such as the above new-program evaluation), TCC may employ a five-step decision process. Which of the following is not a recommended step in this decision-making process?

Review the completed financial audit report.

Smith Co., maker of high-quality eyewear, incurs fixed costs of $18 and variable costs of $36 in making one unit of its matrix line of sunglasses, based on current demand of 100,000 units per year. Smith Co.'s major supplier has offered to make all 100,000 matrix sunglasses for $44 each. If Smith accepts the offer of the supplier, it will save $4 per unit in fixed costs. Based solely on this information, what is the recommended decision and how much will be saved based on this decision? Smith Co. should buy the sunglasses in order to save $200,000. Smith Co. should buy the sunglasses in order to save $500,000. Smith Co. should make the sunglasses in order to save $400,000. Smith Co. should make the sunglasses in order to save $300,000.

Smith Co. should make the sunglasses in order to save $400,000.

Value streams are useful in decision-making because:

Special orders can be evaluated within the context of the value stream.

The make-or-buy (i.e., sourcing) decision can (most likely) apply to decisions regarding all the following functions or expenditures except:

Strategic management.

Management accountants are frequently asked to analyze various decision situations including the following: The cost of a special device that is necessary if a special order is accepted. The cost proposed annually for the plant service for the grounds at corporate headquarters. Joint production costs incurred, to be considered in a sell-or-process-further decision. The costs associated with alternative uses of plant space, to be considered in a make/buy decision. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal decision. The costs described in situations III and V above are examples of:

Sunk costs.

ABC, Inc. is considering whether to repair a five-year-old fork lift or to purchase a used one as a replacement. The company estimates that it would take $3,000 to repair the existing fork lift, which is the same amount needed to purchase the used fork lift. Cost-related information for both assets is as follows: Existing Fork Lift Used Fork LiftAcquisition cost$15,000 $3,000Repairs cost$3,000 -Annual operating costs (gas, etc.)$2,280 $2,100 A cost that is not relevant for this asset-replacement decision is:

The acquisition cost of the existing fork lift.

Relevant costs in a make-vs.-buy decision of a part include:

The cost of currently used manufacturing capacity that has alternative uses if the part is outsourced.

In deciding whether to drop or keep a product line, all the following are relevant to the decision except:

The level of unavoidable fixed costs.

The shadow price in a linear programming model is:

The maximum price a rational decision-maker would be willing to pay for an additional unit of the scarce resource.

When deciding whether to discontinue a segment of a business, managers should focus on:

The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment.

One of the key management functions is to perform a regular review of product profitability. Which question below would not typically be asked when performing such an analysis?

What was the product manager paid last year?

Keego Enterprises manufactures two products, boat wax (B) and car wax (C), in two departments, Mixing and Packaging. The Mixing Department (M) has 800 hours per month available while the Packaging Department (P) has 1,200 hours per month available. Production of the two products cannot exceed 36,000 pounds. Data on the two products follow: ProductContribution Margin (per 100 pounds)Hours per 100 pounds of Output: Mixing (M)Hours per 100 Pounds of Output: Packaging (P)Boat wax (B)$200 5.0 3.6 Car wax (C)$150 2.4 6.0 The objective function for the linear program Keego would use to determine the optimum monthly product mix (where B and C are expressed in 100-pound units of output) would be: Z = $150B + $200C. 2B + 1.5C ≥ 36,000. 2B + 1.5C ≤ 36,000. Z = $200B + $150C. Z = 8.6B + 8.4B.

Z = $200B + $150C.

Harrington Corporation produces three products, A, B, and C. Pertinent information on these products is as follows: ProductSelling Price per UnitVariable Cost per UnitFixed Costper UnitDL Hoursper UnitA$4.00 $1.00 $2.00 2 B$3.50 $0.50 $2.00 2 C$6.00 $2.00 $3.00 3 The objective function for a linear program to maximize contribution margin from the set of three products is: Z = $3A + $3B + $4C. Z = $3A + $2.50B + $5C. Z = $4A + $3.50B + $6C. Z = A + B + C. Z = A + $0.50B + $2C.

Z = $3A + $3B + $4C.