Chapter 13
ABC Lumber spent $500 cutting down a tree which resulted in 40 pieces of unfinished lumber that sell for $20.00 each and 100 bags of sawdust that sell for $1.00 each. For $8.00, an unfinished piece of lumber can be processed into a piece of finished lumber that sells for $35.00. For $0.75, a bag of sawdust can be processed into a Presto Log that sell for $1.25. Based on this information, ______.
- the pieces of unfinished lumber should be processed into finished lumber - the bags of sawdust should be sold without additional processing
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?
Buy — $20,000 advantage.
When considering decision alternatives, only relevant costs are included when using the _____ cost approach
Differential
When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) ____.
Constraint
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.
When considering accepting a special order, ______.
- normal sales must not be affected - there must be idle capacity
A cost that can be eliminated by choosing one alternative over another is a(n) ________ cost.
avoidable
The capacity of a bottleneck can be effectively increased by ______.
- subcontracting some of the processing that would be done in that area - investing in additional machinery at the bottleneck - focusing business process improvement efforts on the bottleneck
Product DGH has a monthly demand of 7,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 5,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 2,000 direct labor hours available, the company should produce _______ units of Product DGH and ______ units of Product RBG.
Blank 1: 1,500 Blank 2: 5,000
Managers may choose to retain an unprofitable product line because it ______.
- it attracts customers - it helps sell other products
A company must make a volume trade-off decision when they ______.
- must trade off units of one product for units of another - do not have enough capacity to satisfy all product demand
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials and labor $45; Factory overhead $20; Selling and administrative $15. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What effect would accepting the special order have on Goodstone's net operating income?
$70,000 increase
Deciding what to do with a joint product at the split-off point is a ______ decision.
sell or process further
When making a decision, qualitative differences between alternatives ______ be ignored.
should not
Irrelevant costs include ______.
sunk costs future costs that do not differ between alternatives
If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is _____.
the segment margin from the best alternative use of the resource
A company is considering buying a component part that they currently make using some existing equipment. Relevant costs to this sourcing decision include ______.
variable overhead outside purchase price
Less dependence on suppliers is an advantage of ______.
Vertical integration
Which term refers to a company that is involved in more than one activity in the value chain?
Vertical integration
When a company is involved in more than one activity in the entire value chain, it is _____ _____
Vertically integrated
When demand for products exceeds the production capacity, a(n) _____ _____ - _____ decision must be made.
Volume trade off
Potential advantages of dropping a product line or other segment include
an overall increase in net operating income avoiding more fixed costs than the company loses in contribution margin
Average costs ______.
are often misleading contain sunk costs
The machine or process that is limiting overall output is a(n) ______.
bottleneck
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should ______.
continue to make the part — $60,000 advantage
A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in _______
contribution margin
If some products must be cut back because of a constraint, produce the products with the highest ______.
contribution margin per unit of constrained resource
Effectively managing an organization's constraints is a key to increased ______.
profits
The reduction in resale value of an asset through use or over time is called _______ or ________ depreciation.
real economic
When a manager increases the capacity of the bottleneck, it is called ______ or elevating the constraint.
relaxing
It is profitable to continue processing a joint product after the split-off point, so long as the incremental ______ from such processing exceeds the incremental processing cost incurred after the split-off point
revenue
Which of the following techniques describe how a bottleneck should be managed?
- Focus business process improvement efforts on the bottleneck. - Find ways to increase the capacity of the bottleneck. - Ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups.
Which of the following are ways to increase the capacity of a bottleneck?
- Reducing defective units - Shifting workers to the process that is the bottleneck
Isolating relevant costs is desirable because ______.
critical information may be overlooked with the total cost approach all information needed for the total cost approach is rarely available irrelevant costs may be used incorrectly in the analysis
To effectively deal with a constraint ______.
- improvements should focus on the constraint - efforts should be focused on the weakest link
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor time, the contribution margin per unit of constraint for Product XYZ is $ ______ per minute.
3
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for Product ______.
ABC
Which of the following attempts to match the sunk cost of an asset with the periods that benefit from that cost?
Accounting depreciation only
Product DGH has a monthly demand of 5,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 4,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 1,500 direct labor hours available, the company should produce ______ units of Product DGH and _____ units of Product RBG.
Blank 1: 1,000 Blank 2: 4,000
When dealing with a constrained resource, managers should focus their attention on managing the ______.
Bottleneck
A limited resource of some type that restricts the company's ability to satisfy demand is a(n) ______.
Constraint
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
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______ ______
Income statement
The present trend appears to be towards ______ vertical integration.
Less
A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.
Make or buy
Space being used that would otherwise be idle has a(n) _____ cost of zero.
Opportunity
Which of the following involves increasing the capacity of a bottleneck?
Relaxing the constraint
Deciding what to do with a joint product at the split-off point is a(n) _____or____ _____ decision.
Sell Process further
Allocated common costs are ______ avoidable and/or relevant to a decision.
Sometimes
A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) ______ decision.
Special order
A set of activities ranging from development to production to after-sales service is called ______.
The value chain
To increase the strength of a chain, efforts should be concentrated on strengthening ______.
The weakest link
Activities ranging from development to production to after-sales service are called a(n) _____ _____
Value chain
A future cost that is not the same between any two alternatives is known as a(n) _______, incremental, or avoidable cost.
differential
To maximize total contribution margin when a constrained resource exists, produce the products with the ______.
highest contribution margin per unit of the constrained resource
Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will _____.
increase by $11,000
An increase in cost between two alternatives is a(n) _________ cost.
incremental
A joint product should be processed after split-off if the ______
incremental revenue after split-off exceeds the incremental processing cost after split-off
When a product is past the split-off point, but is not yet a finished product, it is called a(n) _____ product.
intermediate
In order to prevent confusion and keep attention focused on critical information, it is desirable to_____.
isolate relevant costs from irrelevant costs
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 the _____ products can be recognized as separate products.
joint
Two or more products that are produced from a common input are known as _____ products.
joint
Two or more products produced from a common input are called ______.
joint products
A decision to carry out one of the activities in the value chain internally, rather than to purchase externally from a supplier, is called a(n) ______ or ______ decision.
make or buy
Joint costs incurred prior to the split-off point are ______ relevant in decisions regarding what to do from the split-off point forward.
never
Allocated common costs are ______.
only relevant to decisions if they are avoidable
