Short Run Decision Making
Patterson, Inc. produces 10,000 units of a particular product per month. Given the following information, calculate the product's target selling price using the absorption approach to cost-plus pricing. Variable Product Cost $9/unit Variable Selling Cost $3/unit Fixed MOH $80,000/month Fixed Administrative Costs $20,000/month Markup Percentage 60%
$27.20 Absorption cost unit product cost = $9 + ($80,000 ÷ 10,000) = $17 Target selling price = (1 + 0.6) × $17 = $27.20
Using the following information, calculate the target cost per sewing machine. Amount to be Invested $1,500,000 Desired Profit Percentage 20% Selling Price Per Sewing Machine $40 Projected Unit Sales 25,000
$28.00 (($40 × 25,000) - (0.2 × $1,500,000)) ÷ 25,000 = $28.00
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 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 The revenue per tire is $70 and the cost is $63 (direct materials, direct labor, variable overhead and inspection fee of $10 ($100,000/10,000) tires), so each tire will generate $7 in net operating income or $70,000 total.
The degree to which a change in price affects unit sales of a product or service is the ______ ______ of ______.
Blank 1: price Blank 2: elasticity Blank 3: demand
The reduction in resale value of an asset through use or over time is called ______ or ______ depreciation
Blank 1: real Blank 2: economic
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.
Blank 1: revenue, income, revenues, or benefit
Deciding what to do with a joint product at the split-off point is a(n) ______ or ______ ______ decision
Blank 1: sell Blank 2: process Blank 3: further
A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) ______ ______ decision
Blank 1: special or specialty Blank 2: order
When estimating the cost of taking a 300 mile trip, the average cost per mile × 300 is the best way to evaluate the total cost.
False
Which of the following techniques describe how a bottleneck should be managed?
Find ways to increase the capacity of the bottleneck. Focus business process improvement efforts on the bottleneck. Ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups.
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______.
Income Statement
As it applies to sell or process further decisions, which term refers to a product that is in the process of being made?
Intermediate product
Which of the following are ways to increase the capacity of a bottleneck?
Investing in additional machines at the bottleneck Shifting workers from processes that are not bottlenecks to the process that is the bottleneck
When is it profitable to continue processing a joint product after the split-off point?
It is profitable when the incremental revenue exceeds the incremental processing cost.
Which of the following may be an advantage of making a part rather than buying it?
Less dependence on outside suppliers A smoother flow of parts and materials for production
A product's economic value to the customer is based on the ______ value and the ______ value.
Reference ; Differentiation
Which of the following involves increasing the capacity of a bottleneck?
Relaxing the constraint
When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) ______ cost.
Relevant
Optimal selling prices can be calculated using Microsoft Excel ______.
Solver
Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.
Sunk
Irrelevant costs include ______.
Sunk costs Future costs that do not differ between alternatives
Which of the following should not be included in the analysis when making a decision?
Sunk costs Non-differential future costs
Which of the following are ways in which to calculate the benefit of selecting one alternative over another?
The difference between the net operating income for the two alternatives. An analysis that just looks at the relevant costs and benefits. An analysis that looks at all costs and benefits and identifies those that are differential.
A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?
alternative uses for the equipment salvage value
Opportunity costs should ______ be included in a make or buy analysis.
always
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
A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.
avoidable
Synonyms for differential costs include ______ cost.
avoidable incremental
When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost.
avoidable incremental
A cost that can be eliminated by choosing one alternative over another is a(n) ______ cost
avoidable or relevant
When dealing with a constrained resource, managers should focus their attention on managing the ______.
bottleneck
Customers and competitors play important roles in determining a company's price ______.
ceiling
The highest price customers are willing to pay is called the price ______
ceiling
A limited resource of some type that restricts the company's ability to satisfy demand is a(n) ______.
constraint
Anything that prevents you from getting more of what you want is a(n) ______
constraint
The lowest price a company can charge and still make incremental profits on the sale is the price ______.
floor
The capacity of a bottleneck can be effectively increased by ______.
focusing business process improvement efforts on the bottleneck subcontracting some of the processing that would be done in that area
A product's differentiation value can arise by enabling customers to ______ the best available alternative.
generate more sales and contribution margin than realize greater cost savings than
Managers may choose to retain an unprofitable product line because it ______.
helps sell other products attracts customers
In general, the less sensitive customers are to price, the _____ the optimal selling price will be.
higher
To maximize total contribution margin when a constrained resource exists, produce the products with the ______.
highest contribution margin per unit of the constrained resource
To effectively deal with a constraint ______.
improvements should focus on the constraint efforts should be focused on the weakest link
A company's price floor is determined by ______.
incremental costs
A joint product should be processed after split-off if the ______.
incremental revenue after split-off exceeds the incremental processing cost after split-off
Generally speaking, managers should set higher prices when demand is:
inelastic
If a price change has little effect on unit sales, the demand is considered to be ______.
inelastic
Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.
irrelevant
When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ______ cost.
irrelevant
The costs incurred up to the split-off point in a process in which two or more products are produced from a common input are known as ______ costs.
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
If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.
keep
The present trend appears to be towards ______ vertical integration.
less
In general, the more sensitive customers are to price, the ______ the optimal selling price will be.
lower
A decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier is a ______ decision.
make or buy
When a product has an established ______ price, customers will not pay more for it and there is no reason for a supplier to charge less.
market
Differential costs and benefits that should be considered in a decision ______.
may be qualitative or quantitative
If a cost is traced to a segment using activity-based costing, it ______.
may or may not be an avoidable cost of the segment
Steps in the absorption costing approach are ______.
multiply unit product cost by 1 + markup percentage determine markup percentage on absorption cost calculate unit product costs
Joint costs incurred prior to the split-off point are ______ relevant in decisions regarding what to do from the split-off point forward.
never
When considering accepting a special order, ______.
normal sales must not be affected there must be idle capacity
Allocated common costs are ______.
only relevant to decisions if they are avoidable
The potential benefit given up when selecting one alternative over another is a(n) ______ cost.
opportunity
Space being used that would otherwise be idle has a(n) ______ cost of zero
opportunity or relevant
When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored.
original cost of the car
Product markup is generally expressed as a(n) ______ of cost.
percentage or %
The costs provided by a well-designed activity-based costing system are ______ relevant to a decision.
potentially
Responsibility for designing a product that can be made for no more than the target cost is given to the ______.
product development team
Effectively managing an organization's constraints is a key to increased ______.
profits
Competitors have an important effect on a company's pricing decisions because they provide ______ prices that influence the price elasticity of demand.
reference
Costs and benefits that always differ between alternatives are ______ costs and benefits.
relevant
Differential revenue is an example of a(n) ______ benefit.
relevant
When making a decision only ______ costs and benefits should to be included in the analysis.
relevant
When planning a trip and deciding to drive your car or take the train, gasoline is a(n) ______ cost.
relevant
The absorption costing approach to cost-plus pricing ______.
relies on forecasted unit sales assumes that customers will pay whatever price the company decides to charge
Deciding what to do with a joint product at the split-off point is a ______ decision.
sell or process further
The formula used to calculate markup percentage on absorption cost includes ______.
selling and administrative expenses required ROI multiplied by investment unit product cost multiplied by unit sales
Factors in determining the markup percentage using the absorption costing approach to cost-plus pricing include: ______.
selling, general, and administrative expenses absorption costing unit product cost adequate return on investment
When making a decision, qualitative differences between alternatives ______ be ignored.
should not
Allocated common costs are ______ avoidable and/or relevant to a decision.
sometimes
A one-time order that is not considered part of the company's normal ongoing business is called a ______ order.
special
The point in the manufacturing process at which joint products can be recognized as separate products is called the ______ point.
split-off
The process of determining the maximum allowable cost for a product and developing a profitable prototype is called ______.
target costing
When making a decision, only relevant items are included in the analysis of the alternatives when using ______.
the differential cost approach only
The target costing approach was developed because ______.
the market really determines prices most of a product's cost is determined in the design stage
When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.
the total cost approach only
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
When a product has an established market price ______.
there is no reason for suppliers to charge less than the established price consumers will not pay more than the established price
Activities ranging from development to production to after-sales service are called a(n) ______ ______
value chain
Establishing selling prices based on the economic worth of benefits their goods and services provide to customers is the basis of ______.
value-based pricing
Less dependence on suppliers is an advantage of ______.
vertical integration
When should a special order be accepted?
when the incremental revenue from the special order exceeds the incremental costs of the order
The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer.
will always
When a company applies a predetermined markup to a cost base to determine the selling price, it is using ______-______ pricing.
Blank 1: cost Blank 2: plus
It is assumed under the ______ ______ approach that customers are required to buy a product at whatever price the seller deems appropriate.
Blank 1: absorption Blank 2: costing
The machine or process that is limiting overall output is called a(n) ______
Blank 1: bottleneck or constraint
When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) ______.
Blank 1: constraint or bottleneck
The market is instrumental in determining a product's price through the laws of ______ and ______.
Blank 1: supply Blank 2: demand
The product development team is given the responsibility of designing a product so that it can be made for no more than the ______ ______.
Blank 1: target Blank 2: cost
The product development team is given the responsibility of designing a product so that it can be made for no more than the______ ______.
Blank 1: target Blank 2: cost
The process of determining the maximum allowable cost for a product and developing a profitable prototype is called ______ ______
Blank 1: target Blank 2: costing
When considering decision alternatives, both relevant and irrelevant costs are included when using the ______ ______ approach
Blank 1: total Blank 2: cost
Companies establish selling prices based on the economic worth of benefits their goods and services provide to customers when using ______ - ______ pricing
Blank 1: value Blank 2: based
When a company is involved in more than one activity in the entire value chain, it is ______ ______
Blank 1: vertically Blank 2: integrated
When demand for products exceeds the production capacity, a(n) ______ ______ - ______ decision must be made.
Blank 1: volume Blank 2: trade Blank 3: off
Costs that have no impact on future cash flows and are irrelevant to decisions are ______ costs.
sunk
The first step in decision making is to ______.
define the alternatives
The formula to calculate the target cost includes ______.
desired profit per unit anticipated selling price
Focusing on future costs and benefits that are not the same between alternatives is ______.
differential analysis
The key to effective decision making is ______.
differential analysis
Enabling customers to realize greater cost savings than the best alternative available raises a product's ______ value
differentiation
A company must make a volume trade-off decision when they ______.
do not have enough capacity to satisfy the demand for all of its products must trade off units of one product for units of another due to limited production capacity
The price of a customer's best available alternative plus the value of what differentiates the product from that alternative is the product's ______.
economic value to the customer
A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.
fixed
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
A product's markup is the difference between its selling ______ and its ______
Blank 1: price Blank 2: cost or costs
If a product costs $500 and the company applies a 50% markup on cost, the selling price of the product will be ______.
$750
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised, the number of units that must be sold to keep the profits unchanged is ______.
131,250
Based on the following information for Prices Are Low, Inc., calculate the markup percentage on absorption cost. Required ROI 30% Total Investment $500,000 Selling, GAE $75,000 Absorption Costing Unit Product Cost $30 Unit Sales 50,000
15% ((0.3 × $500,000) + $75,000) ÷ ($30 × 50,000) = 0.15 or 15%
Calculate the return on investment based on the following information. Sales $200,000 NOI $80,000 Net Assets 1/1/20 $350,000 Net Assets 12/31/20 $490,000
19% $80,000 ÷ (($350,000 + $490,000) ÷ 2) = 0.19 or 19%
Martinez, Inc. produces 8,000 units of a particular product per month. Given the following information, the product's target selling price using the absorption approach to cost-plus pricing. is $______ Variable Product Cost $9/unit Variable Selling Cost $3/unit Fixed MOH $80,000/month Fixed Administrative Costs $20,000/month Markup Percentage 50%
19.95
If a product costs $150 and the company applies a 40% markup on cost, the selling price of the product will be $ ______
210
DSA, Inc. has a total of $200,000 of operating assets. They sell 50,000 units per year of a single product. Unit product cost is $30. Selling and administrative expenses are $15,000 fixed and $7 per unit variable. Calculate the mark-up percentage on absorption cost given a required ROI of 18%.
26.7% [(18% × $200,000) + ($7 × 50,000 + $15,000)] ÷ ($30 × 50,000) = 26.7%
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 hours, the contribution margin per unit of constraint for Product XYZ is $______ per minute
3 or three
The Yoga Corporation has sales of $325,000, net operating income of $175,000 and average net assets of $500,000. The corporation's return on investment (ROI) is ______%
35
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
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
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
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. The total buy price = 20,000 x $18 or $360,000. cost to make equals (20,000 x $15) + $80,000 forgone opportunity or $380,000. there is a $20,000 advantage to buying the part.
Which of the following is an advantage of buying a part instead of making it?
Economies of scale can result in higher quality and lower costs from suppliers.
Depreciation of existing assets is relevant to decisions.
False
Given a reference value of $5,500 and a differential value of $3,200, the value-based price will be greater than $3,200 and less than $5,500.
False
If a company prices all of its products above the price floor, they will always make a profit.
False
In a sell or process decision, either all joint products must be processed or all must be sold.
False
In the absorption approach to cost-plus pricing, the cost base is the variable costing unit product cost.
False
There is never a justifiable reason to keep an unprofitable product line.
False
Which of the following best describes the price elasticity of demand?
This is the degree to which a change in price affects the unit sales of a product.
Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information. True false question.
True
Which term refers to a company that is involved in more than one activity in the value chain?
Vertical integration
When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.
Zero
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 ______. Variable manufacturing cost Cost $12 Per Unit Total $240,000 Supervisor salary Cost $3 Per Unit Total $60,000 Depreciation Cost $1 Per Unit Total $20,000 Allocated fixed overhead Cost $7 Per Unit Total $140,000 If the part is purchased, the supervisor position would be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. Should the company buy the part or continue to make it?
continue to make — $60,000 advantage. ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make X 20,000 units).
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
When a constraint exists, companies need to focus on maximizing ______.
contribution margin per unit of constraint
Applying a predetermined markup percentage to a cost base to determine the selling price is called ______.
cost-plus pricing
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 calculate the optimal selling price using Microsoft Excel's Solver requires ______.
current unit sales percentage change in selling price current selling price
ABC Lumber spent $1,000 cutting down a tree. The result was 40 pieces of unfinished lumber that sell for $20.00 each and 100 bags of sawdust that sell for $1.00 each. If the unfinished pieces of lumber are processed into finished lumber at a cost of $8.00 each, they will sell for $35.00. A bag of sawdust can be processed into Presto Logs that sell for $1.25 at a cost of $0.75 per bag. Which of the following statements are true concerning whether the unfinished pieces of lumber should be processed into finished lumber and whether the sawdust should be processed into Presto Logs?
The pieces of unfinished lumber should be processed. The sawdust should be sold as is without being processed into Presto Logs.
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. The company will lose $84,000 in contribution margin ($170,000 - $86,000). If $95,000 of the fixed costs are avoidable, net income will increase by $11,000.
When there is a constrained resource, the best way to increase profits is to ______.
increase the capacity of the bottleneck
Anticipated selling price - Desired profit = ______ ______
Blank 1: Target Blank 2: cost
Which of the following attempts to match the sunk cost of an asset with the periods that benefit from that cost?
Accounting depreciation only
Which of the following can make a product line look less profitable than it really is?
Allocated common fixed costs
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $6.75 per bottle which is expected to decrease sales by 5%. If the price is raised, the number of units that must be sold to keep the profits unchanged is ______
Blank 1: 140,000
Using the following information, the target cost per widget is $______ Amount to be Invested $2,000,000 Desired Profit Percentage 25% Selling Price Per Sewing Machine $30 Projected Unit Sales 50,000
Blank 1: 20
Given a reference value of $3,500 and a differential value of $4,200, the value-based price will be greater than or equal to $ ______ and less than or equal to $ ______
Blank 1: 3,500 Blank 2: 7,700
Given a reference value of $3,500 and a differential value of $4,200, the value-based price will be greater than or equal to $______ and less than or equal to $______.
Blank 1: 3,500 Blank 2: 7,700
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 Factory overhead 20 Selling and administrative 15 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 5,000 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. If Goodstone accepts this order, net income will ______ by a total of $______
Blank 1: decrease Blank 2: 15,000
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised profits are expected to ______ by $ ______ per year
Blank 1: decrease Blank 2: 45,000
When considering decision alternatives, only relevant costs are included when using the ______ ______ approach
Blank 1: differential Blank 2: cost
If price changes significantly impact product sales, demand for the product is said to be ______. If the change in price does not greatly impact sales, demand is ______
Blank 1: elastic Blank 2: inelastic
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______ ______
Blank 1: income Blank 2: statements
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $6.75 per bottle which is expected to decrease sales by 5%. If the price is raised profits are expected to ______ by $ ______ per year
Blank 1: increase Blank 2: 9,375
When a product is past the split-off point, but is not yet a finished product, it is called a(n) ______ product.
Blank 1: intermediate
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.
Blank 1: joint
The split-off point is the point in the manufacturing process at which the ______ products can be recognized as separate products.
Blank 1: joint
A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier, is called a(n) ______ or ______ decision
Blank 1: make Blank 2: buy, outsource, or outsourcing
Opportunity costs are not found in accounting records because they are not relevant to decisions.
False
Some decisions only have one alternative.
False
Because they provide reference prices that influence the price elasticity of demand, ______ have an important effect on a company's pricing decisions.
competitors
Pricing all a company's products above the price floor does not guarantee a profit because all ______ costs may not be covered.
fixed
When making a volume-trade off decision, managers should ignore ______.
fixed costs
