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Exam 6: Relevant Information for Special Decisions

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Question 51

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Omega Company reported the following information for the company's two products: Assume that 75,000 machine hours are available; product X takes 4 machine hours to produce, and product Y takes 2 machine hours to produce. The company can sell all it can make of either product. Which of the following statements is true? $\begin{array}{|l|r|r|}\hline &{\text { Product X }} &{\text { Product Y }} \\\hline \text { Selling price per unit } & \$ 35 & \$ 25 \\\hline \text { Variable cost per unit } & 20 & 15 \\\hline\end{array}$

A) Product Y should be produced because more of it can be produced.
B) Product Y should be produced because it will produce greater total profit.
C) Product X should be produced because it provides a greater contribution margin.
D) Both products provide the same total profit.

E) B) and D)
F) A) and B)

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Question 52

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For many managerial decisions (such as outsourcing and special order decisions), unit-level costs are avoidable costs.

A) True
B) False

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Question 53

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Fixed costs are relevant for decision making if they vary between the alternatives and are future-oriented.

If managers' performance is evaluated solely on the current year's profitability, managers are likely to make decisions that lead to the company's long-term profitability.

Which of the following statements is true?

Facility-level costs are not involved in decisions to eliminate a segment of a business.

Grady Corporation is evaluating two decision alternatives. Alternative One has costs of $2,000 and revenues of $3,000 while Alternative Two has costs of $3,200 and revenues of $4,000. The amount of differential revenue is $1,000.

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

Although opportunity costs are not recorded in the financial records, they nevertheless are useful for decision making.

Pilot Motors Corporation is an automobile manufacturer. The company produces its own motors, tires, and other automobile parts. Pilot has the opportunity to purchase tires from another manufacturer instead of producing the tires in its own facility. This type of decision is typically known as a(n) :

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be: $\begin{array} { | l | l | } \hline \text { Unit-level material cost } & \$ 3 \\\hline \text { Unit-level labor cost } & \$ 2 \\\hline \text { Unit-level overhead } & \$ 1 \\\hline \text { Batch-level set-up cost ( } 5,000 \text { units per batch) } & \$ 25,000 \\\hline \text { Product-level supervisory salaries } & \$ 37,500 \\\hline \text { Allocated facility-level costs } & \$ 20,000 \\\hline\end{array}$

An alternative under consideration involves incurring $50 in costs to generate $60 in revenue. The differential revenue for this alternative is $10.

Talladega Company manufactures an electric clock radio. The company expects production of 5,000 units this year. Currently, Talladega produces the clock used in the product. Talladega has received an offer from Daytona, Inc., to supply the clock. If Talladega discontinues production of the clock, the company will be able to eliminate its product-level costs because no other products along the same line are produced by the company. However, due to its concern for quality, the company will have to inspect each clock. Various costs and items are described below: Required: For each item in the table, place a check mark or X in the column that best describes the item in the context of the described outsourcing decision. A cost varies if the amount of the cost or the incurrence of the cost differs between the two alternatives: continuing to make the clocks or purchasing the clocks from Daytona.

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

Select the incorrect statement regarding sunk costs.

The Mendez Company is trying to decide whether to replace a packing machine that it uses to pack salsa into individual serving size packages. The following information is provided: Required: 1) Compute the increase or decrease in total net income over the five-year period if the company chooses to buy the new machine.2) Compute the impact on the company's net income in the first year if the current machine is replaced. Do not take depreciation into account.3) Under what circumstances might a manager not take the action that is in the best interest of the firm in the long run? $\begin{array}{lr}\text { Current machine: }\\\text { Original cost } & \$ 26,000 \\\text { Accumulated depreciation } & 16,000 \\ \text { Annual operating costs } & 4,000 \\ \text { Current salvage value } & 4,000 \\ \text { Salvage value at the end of five years } & 1,000\\\\\text { New machine: }\\\text { Cost } & \$ 16,000 \\\text { Annual operating costs } & 1,000 \\\text { Salvage value at the end of five years } & 1,000\end{array}$

ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results: If the company stops providing Service 2:

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

Which of the following is a true statement regarding product-level costs?

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?