SmartBook Assignment Learnsmart Chapter 4

Bob's Bakery has a nearly unlimited demand for his cakes and pies. Each cake requires 2 direct labor hours and provides a contribution margin of $90. Each pie requires 1/4 labor hour and provides a contribution margin of $15. Bob has a total of 100 labor hours available each month and his fixed costs are $1,500. Calculate the maximum operating profit Bob can earn each month.

$4,500 Reason: Bob needs to focus on contribution margin per direct labor hour which is $45 for cakes ($90/2) and $60 for pies ($15 x 4). If Bob allocates all 100 hours to pies, his contribution margin will equal $6,000 and his net profit will be $4,500 ($6,000 - $1,500).

Which of the following statements are correct? Pricing is a static optimization of profits during periods of low demand. Fixed costs are generally irrelevant in short-term pricing decisions. The differential approach indicates the minimum acceptable price for a product. Following the differential approach in the short run may lead to underpricing in the long run. The differential approach to pricing works well for pricing regular products.

- the differential approach indicates the minimum acceptable price for a product. - fixed costs are generally irrelevant in short-term pricing decisions - following the differential approach in the short run may lead to under pricing in the long run

When considering the differential costs versus total costs approach, the ______.

-total cost approach provides information regarding total resources required-differential format can be derived from the total format

A constraining resource in which the work to be performed limits production is called a(n)

Bottleneck

Which of the following statements is true? A product line should always be kept if its contribution margin is positive. In some companies, dropping a product line is equivalent to closing a business unit. Fixed costs are never relevant in a product line decision. When determining whether to keep or drop a product line, financial issues are always the most important consideration.

In some companies, dropping a product line is equivalent to closing a business unit.

Which of the following statements is true? Companies can only be charged with price fixing for domestic sales. Price fixing is illegal in almost all developing countries. Informal or unspoken agreements to fix prices may be considered illegal. OPEC is a prime example of an organization that uses price fixing. The idea behind price fixing is to set prices at a level lower than equilibrium prices in competitive markets.

Informal or unspoken agreements to fix prices may be considered illegal. OPEC is a prime example of an organization that uses price fixing.

Determine if a Special Order for 500 Units @ $10 each should be accepted given the following: Sales (10,000 units @ $14 each) = $140,000 Variable Costs (10,000 units @ $8 each) = $80,000 Total Contribution Margin = $60,000 Allocated Fixed Costs = $20,000 Operating Profit = $40,000

be accepted because the profit will be $2 per unit ($1,000 total). Reason: $10 selling price - $8 variable cost = $2 profit x 500 units = $1,000.

An operation where the work required limits production is a(n) ______.

bottleneck

Jacki's Jewels has a limited number of skilled direct labor hours to make necklaces and bracelets. Each necklace has a contribution margin of $175 and requires 1 hour of labor. Each bracelet has a contribution margin of $100 and requires 1/2 hour of labor. In order to maximize contribution margin, Jacki should first use labor hours to make

bracelets

given the following, determine if a buy price for 3,000 units @ $4.00 per unit should be accepted or if the company should continue to make the 3,000 units. Direct materials ($1.00 per unit) = $3,000 Labor ($1.60 per unit) = $4,800 Variable overhead ($1.10 per unit) = $3,300 Fixed Overhead = $1,500 Common costs = $2,000 If the company buys the component, all of the variable costs and fixed overhead costs are differential. None of the common costs will be eliminated if the component is purchased. Based on price, the company should (make/buy) _________ the component at a net total advantage of $________.

buy, $600

When a company has a limited number of machine hours available each month, the limitation is known as a(n)

constraint

When a company is unable to produce as much as demanded due to limited resources they are facing a(n) ______.

constraint

Sanders, Inc. makes two products. Due to a limited availability of skilled labor hours, demand for the products exceeds production capability. In deciding how to allocate resources, Sanders' measure of profitability should be ______.

contribution margin per direct labor hour

Larson, Inc. makes two products. Due to a limited number of available machine hours, demand for the products exceeds production capability. When allocating resources, Larson's measure of profitability should be ______.

contribution margin per machine hour

Comparing alternative actions with the status quo in order to make decisions is the focus of ______.

differential analysis

The process of estimating revenues and costs of alternative actions and comparing them to the status quo is called

differential analysis

When a Company Exports its Product to Consumers in Another Country at an Export Price Below the Domestic Price, ________ has Occurred

dumping

Using full costs for pricing decisions can be justified when a firm

enters into a contract with a governmental agency to supply a product enters into a long-term contractual relationship to supply a product

True or false: Differential costs are not impacted by the time period being analyzed.

false

True or false: In both the short and long run, the differential approach leads to the correct pricing decision.

false

When considering a special order, ______.

fixed costs may be irrelevant

When setting prices, most firms rely on ______.

full cost information

Environmental regulations that require firms to "take back" and dispose of products have increased the importance of ______ costing.

life-cycle

Pricing a product in a market where there is considerable leeway in setting prices is an example of a(n)______ -_______ pricing decision.

long-run

Given the following information, if the company is offered a buy price for 5,000 units @ $8.00 per unit, the company should ______. Direct materials ($3.00 per unit) $15,000 Labor ($2.40 per unit) $12,000 Variable overhead ($1.20 per unit) $6,000 Fixed overhead $10,000 Common costs $4,000 If the company buys the units, all of the variable costs are differential as is $1.00 per unit of fixed overhead. None of the common costs will be eliminated if the units are purchased.

make the component because they will save $2,000 Reason: Variable costs $33,000 ($15,000 + $12,000 + $6,000) + $5,000 fixed costs* = $38,000 differential cost vs. $40,000 to buy or a $2,000 savings to continue to make the product. *$5,000 of the fixed cost is not differential.

A diner is deciding whether to use its own ingredients to prepare meals or purchase frozen prepared items from a supplier. This is an example of a (n) ______.

make-or-buy decision

A product life cycle ______ span(s) several years.

may

Price discrimination ______ illegal.

may be

Differential costs ______.

may be approximated by full costs in the long run

In determining whether to drop a product line or close a business unit, nonfinancial considerations ______.

may outweigh the financial issues

For convenience the short run is considered to be ______.

one year

A company is considering whether to continue to make a component or buy it from an outside supplier. Because the company has no alternative use of the manufacturing facilities that are currently used to make the product, the _____________ cost associated with the decision is zero

opportunity

Utility companies often engage in __________-__________ pricing in providing services at high demand levels.

peak-load

Setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it is ______.

peak-load pricing

Driving competitors out of the market by setting prices low is the intent of

predatory pricing

Setting prices below cost with the intent of driving competitors out of business is ______.

predatory pricing

Selling identical goods or services to different customers at different prices is ______.

price discrimination

When airlines sell tickets to customers who stay over Saturday night for less than tickets to customers who fly on Saturday, they are engaging in

price discrimination

The agreement among business competitors to set prices at a particular level is ______.

price fixing

The time from initial research and development to the time when customer support is withdrawn is called the

product life cycle

Given the following, a special order for 100 units @ $5 each will result in a (profit/loss) _____________ of $______ from the special order. Sales (2,000 units @ $9 each) = $18,000 Variable costs (2,000 units @ $4 each) = $8,000 Total Contribution margin = $18,000 - $8,000 = $10,000 Allocated fixed costs = $4,000 Operating profit = $10,000-$4,000 = $6,000

profit; $100

Decision horizons over which capacity will be unchanged are referred to by the term

short run

Product choices are generally considered to be ______ decisions.

short-run

Given the following, determine if a buy price for 2,000 units @ $5.00 per unit should be accepted or if the company should continue to make the 2,000 units. Direct materials ($1.25 per unit) = $2,500 Labor ($2.00 per unit) = $4,000 Variable overhead ($1.00 per unit) = $2,000 Fixed overhead =$1,000 Common costs = $500 If the company buys the units, all of the variable costs are differential. None of the fixed overhead or common costs are differential. None of the fixed overhead or common costs will be eliminated if the units are purchased. However, if the units are purchased the facilities that are no longer used will be used for another purpose which will provide a differential contribution of $2,500.

should buy the component because they will save $1,000 Reason: Variable costs ($2,500 + $4,000 + $2,000) = $8,500 + $2,500 opportunity cost = $11,000 vs. $10,000 to buy (2,000 units x $5.00).

If a company is not operating at full capacity, accepting a(n) ____________ ______________ from a customer will not affect other sales and is usually a short-run occurrence.

special order

Costs incurred in the past that cannot be changed and are never relevant are called

sunk costs

Using "price-based costing" instead of "cost-based pricing" is the concept of

target costing

The estimated price that potential customers are willing to pay for a product or service is the ______.

target price

In a make-or-buy decision, if a company has an alternative use of the facilities currently used to make the product, the opportunity cost of using the facility to continue to make the product is ______.

the differential contribution from the alternative use

The terms full cost or full product cost describe a product's cost that includes both ______ and a share of the organization's fixed costs.

the variable costs of producing and selling the product

The full-cost fallacy occurs when decision makers

think that fixed costs are variable

Sales dollars minus direct materials costs and other variable costs such as energy and piecework labor equals

throughput contribution

Sales dollars minus direct materials costs and other variable costs such as energy and piecework labor equals ______.

throughput contribution

The theory of constraints focuses on ______.

throughput contribution minimizing investments

An advantage of the ______ format is that, first, all the information is available so it is easy to derive the differential format if desired.

total

A company is considering whether to continue to make a component or buy it from an outside supplier. If they buy the component the manufacturing facility currently being used will be idle. If the company has no alternative use of the facility, the opportunity cost associated with this decision is ______.

zero

Given variable manufacturing costs of $1.25 per unit, direct fixed overhead of $3,000 and a cost to outsource of $1.50 per unit, the company will be indifferent to make or buy (in terms of cost) at a volume of ____________ units.

12,000($3,000 + $1.25x = $1.50x)($3,000 = $.25x)(x=12,000 units)

Which of the following statements are true about the theory of constraints?

Cost minimization is an important aspect of the theory of constraints. The theory of constraints focuses on bottlenecks. The theory of constraints assumes few variable costs.

Which of the following statements are correct? Determining what products or services to offer is a common managerial decision. Product choices are generally thought of as long-run decisions. Product decisions may be limited by capacity in the short-run. The choice of which products and services to offer has little or no effect on costs.

Determining what products or services to offer is a common managerial decision. Product decisions may be limited by capacity in the short-run.

Cradle to grave costing is another term for ______ costing.

Life- cycle

A company currently has two product lines and is considering dropping Product XYZ. Product ABC Product XYZ Total Sales revenue $90,000 $60,000 $150,000 Cost of goods sold (all variable) $35,000 $40,000 $75,000 Contribution margin $55,000 $20,000 $75,000 Fixed costs* $30,000 $25,000 $55,000 Operating Profit (Loss) $25,000 ($5,000) $20,000 * Of the $55,000 of total fixed costs, $30,000 is rent. Each product is allocated $15,000. The rent will continue even if the product is dropped. The rest of the fixed costs are related to each product and would be saved if the product was dropped. Should Product XYZ be dropped? Why or why not?

No, because the operating profit would be $10,000 less if Product XYZ was dropped. Reason: If XYZ is dropped, the company will lose $20,000 in contribution margin and save $10,000 in fixed costs ($25,000 - $15,000) so profits would decrease by $10,000.

Which of the following statements are true? Because opportunity costs do not represent a substantial part of a cost alternative, they can be ignored. Determining opportunity costs is typically very easy. When a benefit is forgone, it is not always possible to determine if an opportunity cost estimate is realistic. Opportunity costs are typically not reported with other accounting cost data.

Opportunity costs are typically not reported with other accounting cost data. When a benefit is forgone, it is not always possible to determine if an opportunity cost estimate is realistic.

True or false: Make or buy decisions are sensitive to volume.

True Reason: At the volume where cost to buy are equal to cost to make, the company will be indifferent (in terms of cost) as to which decision to make.

True or false: Ultimately dumping can cause the same harm to consumers that is caused by predatory pricing.

True Reason: If a foreign country dumps goods in the U.S., it could drive domestic companies out of business, which would eventually result in higher prices, much like predatory pricing.

Which of the following statements is true? Price discrimination is always illegal if it is done to segment customers into a group. Price discrimination occurs when a company exports goods at a price lower than the domestic price. Price discrimination occurs when competitors agree to set prices at a particular level. Price discrimination enables companies to sell products to customers who may not otherwise purchase them.

Price discrimination enables companies to sell products to customers who may not otherwise purchase them.

Which of the following is NOT a short-run pricing decision?

Pricing a main product in a large market

Which of the following statements is true? A company that is vertically integrated relies on outside suppliers for many critical components in the value chain. A make-or-buy decision should be based on lowest cost alone. A make-or-buy decision is almost always a simple, one-time choice. Some factors in a make-or-buy decision are not easily quantified.

Some factors in a make-or-buy decision are not easily quantified.

Which of the following statements are true? Some opportunity costs are not readily quantified. Opportunity costs are typically reported with other accounting cost data. Determining opportunity costs involves subjectivity. If opportunity costs are difficult to estimate, they should be ignored when preparing an analysis.

Some opportunity costs are not readily quantified. Determining opportunity costs involves subjectivity.

Which of the following statements are true? Multiple select question. Fixed costs are always differential. Sunk costs are never differential. Differential costs change in response to alternative courses of action. Variable costs are never differential in the short run.

Sunk costs are never differential. Differential costs change in response to alternative courses of action.

A management method for dealing with bottlenecks that focuses on determining the optimal product mix is called the

THEORY OF CONSTRAINTS

A management method that focuses on revenue and cost management when faced with bottlenecks is called the

THEORY OF CONSTRAINTS