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Exam 6: Relevant Information for Special Decisions

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Question 51

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Sherman Manufacturing Company currently manufactures a component used in one of its products.The annual production costs for 10,000 components are as follows: $\begin{array}{lrr} \text { Material cost} &\$5\text { per unit }\\ \text { Labor cost} &\$4 \text { per unit }\\ \text {Overhead } &\$1 \text { per unit }\\ \text {Batch-level set-up costs for year } &\$ 5,000\\ \text { Product-level manager's salary } & \$ 18,000\\ \text { Allocated facility-level costs } & \$12,000\\\end{array}$ An outside company has offered to supply 10,000 units of the component for $12.50 each.If the company outsources the component,it will be able to rent out the idle factory space for $1,000 per month but will not terminate the product manager. Required: 1)Which items are not relevant to this outsourcing decision? 2)Identify any opportunity costs associated with this decision. 3)Prepare a quantitative analysis that indicates whether the component should be outsourced.

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1)Nonrelevant items: product-level costs...

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Question 52

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Outdoor Living Company has just received a special order for 500 hammocks.Outdoor Living has sufficient idle capacity to accept the order.Accepting the order will increase Outdoor Living's variable manufacturing costs.Variable selling and administrative costs would be unaffected.What is the minimum price that Outdoor Living should accept for the special order?

A) A price equivalent to the hammock's variable manufacturing cost per unit
B) A price equivalent to the hammock's unit contribution margin
C) The same price that Outdoor Living charges its existing customers
D) None of these answers are correct.

E) A) and B)
F) B) and C)

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Question 53

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The best objective when faced with limited resources is to maximize:

Western Classics Publishing Company produces updated versions of literary classics targeted for children.Its bookbinding machines are capable of producing 50 books per hour.The unit-related cost of producing books is $2.50,and Western Classics sells its books for $9.50 each.Reading Ready Publishing has asked the company to produce 10,000 copies of a book for $7.50.Western Classics estimates that unit-level costs for the new book will be $3.00,and due to the size of the book,its binding machines will only be able to produce 20 books per hour.Western Classics has a total of 5,000 machine hours of capacity.In addition,to complete the special order,Western Classics will have to purchase an additional special-purpose machine that will cost $8,000. Required: Assume that existing demand for Western Classics's children's classics is 230,000 units and that the special order has to be either taken in full or rejected.Prepare an analysis that indicates whether or not the special order should be accepted.

The book value of equipment generally is one of the most important factors to consider in deciding to replace the equipment.

The Page Turner Publishing Company is trying to decide whether to accept a special order for its latest blockbuster.In making this decision,which level of costs will most likely be relevant to the decision?

Variable costs that are proxies for long-term costs should be used to measure profitability.

Indicate whether each of the following statements is true or false.

One of the potential dangers from outsourcing is the possible occurrence of low-ball pricing.

Sunk costs are sometimes relevant for decision-making purposes.

Ann is trying to decide which one of two job offers she will accept.Several items are presented below: $\begin{array}{lcc}&\text {Job Offer A}&\text {Job Offer B}\\\text { (1) Base salary } & \$ 50,000 & \$ 50,000 \\\text { (2) Overtime compensation } & \text { Comp time } & \text { Hourly rate }\\\text {(3) Moving allowance}&\$3,000&\$3,000\\\text {(4) Signing bonus}&\$2,000&\$0\\\text {(5) Job search costs incurred}&\$300&\$500\\\end{array}$ Select the items that are irrelevant to Ann's decision.

Omega Company reported the following information for the company's two products: $\begin{array} { l c c } & \text { Product X } & \text { Product } Y \\\text { Selling price per unit } & \$ 3 5 & \$ 2 5 \\\text { Variable cost per unit } & 2 0 & 15\end{array}$ Assume that 75,000 machine hours are available; product X takes four machine hours to produce,and product Y takes two machine hours to produce.The company can sell all it can make of either product.Which of the following statements is true?

How can a manager's time horizon affect his/her decision making?

Smith Company makes three different products,each of which must pass through one very expensive machine.Assuming that availability of machine time is limited to 4,000 hours per year,which is less than the 5,000 hours demanded,how should the company decide which product to make?

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

Which of the following is a way to relax a constraint or bottleneck?

Easton Company makes and sells scooters.Easton incurred the following costs in its most recent fiscal year: $\begin{array}{c}\text { Cost Items Appearing on the Income Statement }\\\begin{array}{|l|l|}\hline\text { Materials cost ( } \$ 10 \text { per unit) } & \text { Depreciation on manufacturing equipment } \\\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \\\hline \text { Labor cost ( } \$ 4 \text { per unit) } & \text { Research and development costs } \\\hline \text { Advertising costs }(150,000 \text { per year) } & \text { Real estate taxes on factory } \\\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \\\hline\end{array}\end{array}$ Easton can currently purchase the scooters it makes from another company.If the company purchases the scooters,Easton would still continue to use its own logo,sales staff,and advertising programs.Which of the following costs would be classified as a facility-level cost?

Hancock Company manufactures and sells two lines of furniture,case goods and upholstery.During the most recent accounting period,the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below: (Do not round intermediate calculations.) $\begin{array}{lrrr}&\text { Case Goods}&\text { Upholstery }\\\text {Sales}&\$1,600,000&\$400,000\\\text {Less cost of goods sold:}\\\text { Unit-level production cost } & 1,000,000 & 240,000 \\\text { Depreciation, production equipment } & \underline{ 240,000 }& \underline{60,000} \\\text { Gross margin } & \$ 360,000 & \$ 100,000\\\text { Less operating expenses: }\\\text {Unit-level selling and administrative costs }&60,000&50,000\\\text {Corporate-level facility expenses (fixed) }& \underline{52,000}& \underline{52,000}\\ \text {Net income (loss) }& \underline{\$248,000}& \underline{\$(2,000) }\end{array}$ If unit sales for both divisions increased 10%,the company would report which of the following?

Select the correct statement regarding opportunity costs.

Chase Business College offers the following computer continuing education courses: $\begin{array}{lccccc}&\text { Course A }& \text { Course B } &\text { Course C }\\\text { Total student fees } & \$ 90 & \$ 150& \$120 \\\text { Variable costs } & \$ 40 & \$ 60 & \$ 50 \\\text { Course length } & 2 \text { hours } & 5 \text { hours } & 4 \text { hours }\end{array}$ Required: 1)Assuming the college has limited computer lab time available,which course should it first select to offer? 2)How many sections of each course should be offered if the college has paid for 100 hours of computer lab time in a nearby convention center and if the demand for each course is as follows: A,20 sections; B,15 sections; and C,10 sections. 3)Compute the profit from the three courses assuming the college paid $1,000 for the 100 hours of computer lab time and it offers the sections you recommended in Requirement 2.