CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION

TRUE/FALSE 1. A decision model is a formal method for making a choice, frequently involving both quantitative and qualitative analyses. Answer: Terms to Learn: 2. True Difficulty: 1 Objective: decision model, quantitative factors, qualitative factors 1

Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions. Answer: False Difficulty: 2 Objective: 1 Terms to Learn: relevant costs istorical costs may be helpful in making future predictions, but are not relevant costs for decision making.

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The amount paid to purchase tools last month is an e"ample of a sunk cost. Answer: Terms to Learn: True sunk costs Difficulty: 2 Objective: 2

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For decision making, differential costs assist in choosing bet$een alternatives. Answer: Terms to Learn: True Difficulty: differential cost 1 Objective: 2

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For a particular decision, differential revenues and differential costs are al$ays relevant. Answer: Terms to Learn: True Difficulty: 1 differential cost, differential revenue Objective: 2

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A cost may be relevant for one decision, but not relevant for a different decision. Answer: Terms to Learn: True Difficulty: relevant costs 2 Objective: 2

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)evenues that remain the same for t$o alternatives being e"amined are relevant revenues. Answer: False Difficulty: 1 Objective: 2 Terms to Learn: relevant revenues )evenues that remain the same bet$een t$o alternatives are irrelevant for that decision since they do not differ bet$een alternatives.

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+unk costs are past costs that are unavoidable. Answer: Terms to Learn: True sunk costs Difficulty: 1 Objective: 2

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The cost of a machine purchased last year $ill be irrelevant in a decision for ne"t year. Answer: Terms to Learn: True Difficulty: 2 sunk costs, relevant costs Objective: 2

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A sunk cost can never be relevant. Answer: Terms to Learn: True Difficulty: 2 sunk costs, relevant costs Objective: 2

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.uantitative factors are al$ays e"pressed in numerical terms. Answer: Terms to Learn: True Difficulty: quantitative factors 2 Objective: !

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.ualitative factors are outcomes that are measured in numerical terms, such as the costs of direct labor. Answer: False Difficulty: 1 Objective: ! Terms to Learn: qualitative factors Quantitative factors are outcomes that are measured in numerical terms, such as the costs of direct labor.

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/f a manufacturer chooses to continue purchasing direct materials from a supplier because of the ongoing relationship that has developed over the years, the decision is based on qualitative factors. Answer: Terms to Learn: True Difficulty: qualitative factors 2 Objective: !

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)elevant revenues and relevant costs are the only information managers need to select among alternatives. Answer: False Difficulty: ! Objective: ! Terms to Learn: relevant revenues, relevant costs, qualitative factors .ualitative factors, as $ell as relevant revenues and relevant costs need to be considered $hen selecting among alternatives.

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Full costs of a product are relevant for one'time'only special order pricing decisions. Answer: False Difficulty: 2 Objective: ! Terms to Learn: full costs of the product, one'time'only special order, relevant costs /ncremental costs of a product are relevant for one'time'only special order pricing decisions.

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Full costs of a product include variable costs, but not fi"ed costs. Answer: False Difficulty: 1 Objective: ! Terms to Learn: full costs of the product Full costs of a product include variable and fi"ed costs for all business functions in the value chain.

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For one'time'only special orders, variable costs may be relevant but not fi"ed costs. Answer: Terms to Learn: True Difficulty: 2 Objective: one'time'only special order, relevant costs !

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The price quoted for a one'time'only special order may be less than the price for a long'term customer. Answer: Terms to Learn: True Difficulty: 2 one'time'only special order Objective: !

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0id prices and costs that are relevant for regular orders are the same costs that are relevant for one'time'only special orders. Answer: False Difficulty: 2 Objective: ! Terms to Learn: one'time'only special order, relevant costs +ince long'term costs are relevant for regular orders and short'term costs are relevant for one'time'only special orders, the relevant costs differ.

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.ualitative factors, because they are not measured numerically, are unimportant in the decision'making process. Answer: False Difficulty: 2 Objective: ! Terms to Learn: qualitative factors .ualitative factors are important in the decision'making process even though they cannot be measured numerically.

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/n a one'time special order situation, if the price offered by the potential buyer is less than the absorption cost per unit, then the producer should not accept the special offer. Answer: False Difficulty: ! Objective: ! Terms to Learn: one'time'only special order, full costs of the product /n a one'time special order situation, if the price offered by the buyer is less than the absorption cost per unit, the special order may still be profitable since absorption costs include allocated fi"ed manufacturing overhead.

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An incremental product cost is generally a fi"ed cost. Answer: False Difficulty: 1 Terms to Learn: incremental cost An incremental product cost is generally a variable cost. Objective: #

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/f 1ption 1 costs 21-- and 1ption 2 costs 2*-, then the differential cost is 21*-. Answer: False Difficulty: 1 Objective: # Terms to Learn: differential cost /f 1ption 1 costs 21-- and 1ption 2 costs 2*-, then the differential cost is 22-.

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3roducing another 1-,--- units may increase the fi"ed cost of rent. Answer: True Difficulty: ! Objective: Terms to Learn: incremental cost True, if additional capacity must be added to accommodate the additional production needs. #

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Absorption cost per unit is the best product cost to use for one'time'only special order decisions. Answer: False Difficulty: 2 Objective: # Terms to Learn: full costs of the product, one'time'only special order 4ariable cost per unit is the best cost to use for one'time'only special order decisions.

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+ometimes qualitative factors are the most important factors in make'or'buy decisions. Answer: Terms to Learn: True Difficulty: qualitative factors 2 Objective: #

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/f a company is deciding $hether to outsource a part, the reliability of the supplier is an important factor to consider. Answer: Terms to Learn: True Difficulty: 2 outsourcing, make'or'buy decision Objective: #

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1utsourcing is risk free to the manufacturer because the supplier no$ has the responsibility of producing the part. Answer: False Difficulty: 2 Objective: # Terms to Learn: outsourcing, make'or'buy decision 1utsourcing has risks since the manufacturer is dependent on the supplier for a quality product, delivered in a timely manner, for a reasonable price.

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5hen a firm ma"imi6es profits it $ill simultaneously minimi6e opportunity costs. Answer: Terms to Learn: True Difficulty: opportunity cost ! Objective: %

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/n a make'or'buy decision $hen there are alternative uses for capacity, the opportunity cost of idle capacity is relevant. Answer: Terms to Learn: True Difficulty: ! Objective: make'or'buy decision, outsourcing, opportunity cost %

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5hen opportunity costs e"ist, they are al$ays relevant. Answer: Terms to Learn: True Difficulty: ! opportunity cost, relevant costs Objective: %

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5hen capacity is constrained, relevant costs equal incremental costs plus opportunity costs. Answer: Terms to Learn: True Difficulty: 2 Objective: % constraint, relevant costs, incremental cost, opportunity cost

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/f the 21(,--- spent to purchase inventory could be invested and earn interest of 21,---, then the opportunity cost of holding inventory is 21(,---. Answer: False Difficulty: 2 Terms to Learn: opportunity cost The opportunity cost of holding inventory is 21,---. Objective: %

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The choice is not really $hether to make or buy, but rather ho$ to best use available production capacity. Answer: Terms to Learn: True Difficulty: 1 make'or'buy decision, constraint Objective: %

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1pportunity costs never appear in a company7s accounting records since they are foregone costs and not actual costs. Answer: Terms to Learn: True Difficulty: opportunity cost 2 Objective: %

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For short'run product'mi" decisions, managers should focus on minimi6ing total fi"ed costs. Answer: False Difficulty: 2 Objective: & Terms to Learn: decision model For short'run product mi" decisions, managers should focus on maximizing total contribution margin.

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For short'run product'mi" decisions, ma"imi6ing contribution margin $ill also result in ma"imi6ing operating income. Answer: Terms to Learn: True Difficulty: decision model 2 Objective: &

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)egardless of the restraining resource, managers should produce more of the product $ith the greatest contribution margin per unit to ma"imi6e profits. Answer: False Difficulty: 2 Objective: & Terms to Learn: decision model, constraint To ma"imi6e profits, managers should produce more of the product $ith the greatest contribution margin per unit of the constraining resource.

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5hen there are scarce resources, the firm should attempt to ma"imi6e the contribution margin per unit of the scarce resource. Answer: Terms to Learn: True constraint Difficulty: 2 Objective: &

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8anagement should focus on per unit costs $hen deciding $hether to discontinue a product or not. Answer: False Difficulty: 2 Objective: ( Terms to Learn: full costs of the product 8anagement should focus on total costs $hen deciding $hether to discontinue a product or not.

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Avoidable variable and fi"ed costs should be evaluated $hen deciding $hether to discontinue a product, product line, business segment, or customer. Answer: Terms to Learn: True Difficulty: differential cost 2 Objective: (

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9epreciation allocated to a product line is a relevant cost $hen deciding to discontinue that product. Answer: False Difficulty: 2 Terms to Learn: relevant costs 9epreciation is a sunk cost and never relevant. Objective: (

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A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can no$ be allocated over four products rather than only three. Answer: False Difficulty: ! Objective: ( Terms to Learn: relevant costs /t appears that corporate costs $ill not change in total, and therefore they are not relevant costs for deciding $hether to add a fourth product.

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All variable costs are relevant and all fi"ed costs are irrelevant. Answer: False Difficulty: 2 Objective: ( Terms to Learn: relevant costs All variable costs are not necessarily relevant and all fi"ed costs are not necessarily irrelevant.

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/n a decision as to $hether or not to drop a product, fi"ed costs that have been allocated to that product are al$ays relevant. Answer: False Difficulty: 2 Objective: ( Terms to Learn: relevant costs /n a decision as to $hether or not to drop a product, fi"ed costs that have been allocated to that product are generally not relevant.

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5hen replacing an old machine $ith a ne$ machine, the purchase price of the ne$ machine is a relevant cost. Answer: Terms to Learn: True Difficulty: relevant costs 1 Objective: *

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5hen replacing an old machine $ith a ne$ machine, the book value of the old machine is a relevant cost. Answer: False Difficulty: 1 Objective: * Terms to Learn: relevant costs The original price of the old machine is a past cost and therefore an irrelevant cost.

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)eplacing an old machine $ill increase operating income in the long run, but not for this year. A manager may choose not to replace the machine if performance evaluations are based on performance over a single year. Answer: Terms to Learn: True Difficulty: decision model 2 Objective: ,

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8anagers tend to favor alternatives that make their o$n performance look better. Answer: Terms to Learn: True Difficulty: decision model 2 Objective: ,

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:inear programming is a tool that ma"imi6es total contribution margin of a mi" of products $ith multiple constraints. Answer: Terms to Learn: True Difficulty: 1 linear programming ;:3< Objective: A

MULTIPLE CHOICE %1. Feedback regarding previous actions may affect: a. future predictions b. implementation of the decision c. the decision model d. All of these ans$ers are correct. Answer: Terms to Learn: d Difficulty: decision model 2 Objective: 1

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3lace the follo$ing steps from the five'step decision process in order: A = 8ake predictions about future costs 0 = >valuate performance to provide feedback ? = /mplement the decision 9 = ?hoose an alternative a. 9?A0 b. ?9A0 c. A9?0 d. 9?0A Answer: Terms to Learn: c Difficulty: decision model 2 Objective: 1

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The formal process of choosing bet$een alternatives is kno$n as a;n<: a. relevant model b. decision model c. alternative model d. prediction model Answer: Terms to Learn: b Difficulty: decision model 1 Objective: 1

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)uggles ?ircuit ?ompany manufactures circuit boards for other firms. 8anagement is attempting to search for $ays to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor ne"t year. @sing the information belo$ regarding current operations and the ne$ proposal, $hich of the follo$ing decisions should management acceptA )equired machine operators 8aterials'handling $orkers >mployee average pay ours $orked per employee a. b. c. d. Currently % 1.2% 2* per hour 2,1-Proposed #.% 1.2% 2, per hour 2,---

9o not change the production floor. )earrange the production floor. >ither, because it makes no difference to the employees. /t doesnBt matter because the costs incurred $ill remain the same. 1

Answer: b Difficulty: 2 Objective: Terms to Learn: decision model ?urrent operations: % $orkers " 2,1-- hours " 2*.-- = 2*#,--3roposal: #.% $orkers " 2,--- hours " 2,.-- = 2*1,---

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T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ %% AC9 %&: :e0lanc :ighting manufactures small flashlights and is considering raising the price by %- cents a unit for the coming year. 5ith a %-'cent price increase, demand is e"pected to fall by !,--- units. Currently Projected 9emand 2-,--- units 1(,--- units +elling price 2#.%2%.-/ncremental cost per unit 2!.-2!.-%%. /f the price increase is implemented, operating profit is proEected to: a. increase by 2#,--b. decrease by 2#,--c. increase by 2&,--d. decrease by 2#,%-Answer: a Difficulty: 2 Objective: Terms to Learn: decision model F1(,--- " ;2% G 2!<H G F2-,--- " ;2#.%- G 2!.--<H = increase of 2#,--%&. 5ould you recommend the %-'cent price increaseA a. Co, because demand decreased. b. Co, because the selling price increases. c Ies, because contribution margin per unit increases. d. Ies, because operating profits increase. Answer: Terms to Learn: %(. d Difficulty: decision model 2 Objective: 1 1

5hen using the five'step decision process, $hich one of the follo$ing steps should be done lastA a. 1btain information b. ?hoose an alternative c. >valuation and feedback d. /mplementing the decision Answer: Terms to Learn: c Difficulty: decision model 2 Objective: 1

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5hen using the five'step decision process, $hich one of the follo$ing steps should be done firstA a. 1btain information b. ?hoose an alternative c. >valuation and feedback d. /mplementing the decision Answer: Terms to Learn: a Difficulty: decision model 2 Objective: 1

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For decision making, a listing of the relevant costs: a. $ill help the decision maker concentrate on the pertinent data b. $ill only include future costs c. $ill only include costs that differ among alternatives d. All of these ans$ers are correct. Answer: Terms to Learn: d Difficulty: relevant costs 2 Objective: 2

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+unk costs: a. are relevant b. are differential c. have future implications d. are ignored $hen evaluating alternatives Answer: Terms to Learn: d Difficulty: 1 relevant costs, sunk costs Objective: 2

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A computer system installed last year is an e"ample of a;n<: a. sunk cost b. relevant cost c. differential cost d. avoidable cost Answer: Terms to Learn: a sunk costs Difficulty: 1 Objective: 2

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?osts that ?ACC1T be changed by any decision made no$ or in the future are: a. fi"ed costs b. indirect costs c. avoidable costs d. sunk costs Answer: Terms to Learn: d sunk costs Difficulty: 1 Objective: 2

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/n evaluating different alternatives, it is useful to concentrate on: a. variable costs b. fi"ed costs c. total costs d. relevant costs Answer: Terms to Learn: d Difficulty: relevant costs 1 Objective: 2

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5hich of the follo$ing costs al$ays differ among future alternativesA a. fi"ed costs b. historical costs c. relevant costs d. variable costs Answer: Terms to Learn: c Difficulty: relevant costs 1 Objective: 2

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5hich of the follo$ing costs are never relevant in the decision'making processA a. fi"ed costs b. historical costs c. relevant costs d. variable costs Answer: Terms to Learn: b Difficulty: relevant costs 1 Objective: 2

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ && AC9 &(: Jim7s %'year'old Deo 3ri6m requires repairs estimated at 2!,--- to make it road$orthy again. is friend, Julie, suggested that he should buy a %'year'old used onda ?ivic instead for 2!,--- cash. Julie estimated the follo$ing costs for the t$o cars: Acquisition cost )epairs Annual operating costs ;Das, maintenance, insurance< &&. Geo Pri ! 21%,--2 !,--2 2,2*Hond" Ci#ic 2!,--K 22,1--

The cost C1T relevant for this decision is the: a. acquisition cost of the Deo 3ri6m b. acquisition cost of the onda ?ivic c. repairs to the Deo 3ri6m d. annual operating costs of the onda ?ivic Answer: Terms to Learn: a Difficulty: relevant costs 2 Objective: 2

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5hat should Jim doA 5hat are his savings in the first yearA a. 0uy the onda ?ivicL 2,,(*b. Fi" the Deo 3ri6mL 2%,%1* c. 0uy the onda ?ivicL 21*d. Fi" the Deo 3ri6mL 2%,2*Answer: c Difficulty: 2 Objective: 2 Terms to Learn: relevant costs Deo ;2!,--- M 22,2*-< G onda ;2!,--- M 22,1--< = 21*- cost savings $ith the onda option

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A relevant revenue is a revenue that is a;n<: a. past revenue b. future revenue c. in'hand revenue d. earned revenue Answer: Terms to Learn: b Difficulty: relevant revenues 2 Objective: 2

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.uantitative factors: a. include financial information, but not nonfinancial information b. can be e"pressed in monetary terms c. are al$ays relevant $hen making decisions d. include employee morale Answer: Terms to Learn: b Difficulty: quantitative factors 2 Objective: !

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.ualitative factors: a. generally are easily measured in quantitative terms b. are generally irrelevant for decision making c. may include either financial or nonfinancial information d. include customer satisfaction Answer: Terms to Learn: d Difficulty: qualitative factors 2 Objective: !

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istorical costs are helpful: a. for making future predictions b. for decision making c. because they are quantitative d. Cone of these ans$ers is correct. Answer: Terms to Learn: a Difficulty: relevant costs 2 Objective: !

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5hen making decisions: a. quantitative factors are the most important b. qualitative factors are the most important c. appropriate $eight must be given to both quantitative and qualitative factors d. both quantitative and qualitative factors are unimportant Answer: Terms to Learn: c Difficulty: 2 qualitative factors, quantitative factors Objective: !

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>mployee morale at 9os +antos, /nc., is very high. This type of information is kno$n as a: a. qualitative factor b. quantitative factor c. nonmeasurable factor d. financial factor Answer: Terms to Learn: a Difficulty: qualitative factors 1 Objective: !

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)oberto o$ns a small body shop. is maEor costs include labor, parts, and rent. /n the decision'making process, these costs are considered to be: a. fi"ed b. qualitative factors c. quantitative factors d. variable Answer: Terms to Learn: c Difficulty: qualitative factors 1 Objective: !

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1ne'time'only special orders should only be accepted if: a. incremental revenues e"ceed incremental costs b. differential revenues e"ceed variable costs c. incremental revenues e"ceed fi"ed costs d. total revenues e"ceed total costs Answer: Terms to Learn: a Difficulty: ! Objective: one'time'only special order, incremental revenue !

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5hen deciding to accept a one'time'only special order from a $holesaler, management should do all of the follo$ing >N?>3T: a. analy6e product costs b. consider the special order7s impact on future prices of their products c. determine $hether e"cess capacity is available d. verify past design costs for the product Answer: Terms to Learn: d Difficulty: ! one'time'only special order Objective: !

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5hen there is e"cess capacity, it makes sense to accept a one'time'only special order for less than the current selling price $hen: a. incremental revenues e"ceed incremental costs b. additional fi"ed costs must be incurred to accommodate the order c. the company placing the order is in the same market segment as your current customers d. it never makes sense Answer: Terms to Learn: revenue a Difficulty: ! Objective: ! one'time'only special order, incremental cost, incremental

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ (* T )1@D *1: 5elch 8anufacturing is approached by a >uropean customer to fulfill a one'time'only special order for a product similar to one offered to domestic customers. 5elch 8anufacturing has e"cess capacity. The follo$ing per unit data apply for sales to regular customers: Variable costs 9irect materials 2#9irect labor 28anufacturing support !% 8arketing costs 1% !ixe" costs 8anufacturing support #% 8arketing costs 1% Total costs 1(8arkup ;%-O< *% Targeted selling price 22%% (*. 5hat is the full cost of the product per unitA a. 211b. 21(c. 22%% d. 2*% Answer: Terms to Learn: b Difficulty: full costs of the product ! Objective: !

2#- M 22- M 2!% M 21% M 2#% M 21% = 21(-

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5hat is the contribution margin per unitA a. 2*% b. 211c. 21#% d. 22%% Answer: Terms to Learn: c Difficulty: ! one'time'only special order Objective: !

22%% G ;2#- M 22- M 2!% M 21%< = 21#%

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For 5elch 8anufacturing, $hat is the minimum acceptable price of this special orderA a. 211b. 21#% c. 21(d. 22%% Answer: Terms to Learn: a Difficulty: ! one'time'only special order Objective: !

2#- M 22- M 2!% M 21% = 211-

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5hat is the change in operating profits if the one'time'only special order for 1,--units is accepted for 21*- a unit by 5elchA a. 2(-,--- increase in operating profits b. 21-,--- increase in operating profits c. 21-,--- decrease in operating profits d. 2(%,--- decrease in operating profits Answer: Terms to Learn: a Difficulty: ! one'time'only special order Objective: !

21*- G ;2#- M 22- M 2!% M 21%< = 2(-L 1,--- " 2(- = 2(-,--- increase

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)at6laff ?ompany has a current production level of 2-,--- units per month. @nit costs at this level are: 9irect materials 9irect labor 4ariable overhead Fi"ed overhead 8arketing ' fi"ed 8arketingPdistribution ' variable 2-.2% -.#-.1% -.2-.2-.#-

?urrent monthly sales are 1*,--- units. Jim ?ompany has contacted )at6laff ?ompany about purchasing 1,%-- units at 22.-- each. ?urrent sales $ould not be affected by the one'time'only special order, and variable marketingPdistribution costs $ould not be incurred on the special order. 5hat is )at6laff ?ompany7s change in operating profits if the special order is acceptedA a. 2#-- increase in operating profits b. 2#-- decrease in operating profits c. 21,*-- increase in operating profits d. 21,*-- decrease in operating profits Answer: c Difficulty: ! Terms to Learn: one'time'only special order 8anufacturing cost per unit = 2-.2% M 2-.#- M 2-.1% = 2-.*1,%-- " ;22.-- G 2-.*-< = 21,*-- increase *!. Objective: !

0lack Tool ?ompany has a production capacity of 1,%-- units per month, but current production is only 1,2%- units. The manufacturing costs are 2&- per unit and marketing costs are 21& per unit. 9oug all offers to purchase 2%- units at 2(& each for the ne"t five months. +hould 0lack accept the one'time'only special order if only absorption'costing data are availableA a. Ies, good customer relations are essential. b. Co, the company $ill only break even. c. Co, since only the employees $ill benefit. d. Ies, since operating profits $ill most likely increase. Answer: d Difficulty: ! Objective: ! Terms to Learn: one'time'only special order +ince the 2&- absorption cost per unit is most likely not all variable costs and since the entire 21& per unit of marketing costs may not be incurred, operating profits $ill most likely increase.

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T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ *# T )1@D *&: Drant7s Qitchens is approached by 8s. Tammy 5ang, a ne$ customer, to fulfill a large one'time'only special order for a product similar to one offered to regular customers. The follo$ing per unit data apply for sales to regular customers: 9irect materials 9irect labor 4ariable manufacturing support Fi"ed manufacturing support Total manufacturing costs 8arkup ;&-O< Targeted selling price 2#%% !-#% 1-,-%#21##-

Drant7s Qitchens has e"cess capacity. 8s. 5ang $ants the cabinets in cherry rather than oak, so direct material costs $ill increase by 2!- per unit. *#. For Drant7s Qitchens, $hat is the minimum acceptable price of this one'time'only special orderA a. 2*!b. 2,!c. 2(*% d. 21,##Answer: a Difficulty: 2 Terms to Learn: one'time'only special order 2#%% M 2!-- M 2#% M 2!- = 2*!*%. Objective: !

1ther than price, $hat other items should Drant7s Qitchens consider before accepting this one'time'only special orderA a. reaction of shareholders b. reaction of e"isting customers to the lo$er price offered to 8s. 5ang c. demand for cherry cabinets d. price is the only consideration. Answer: Terms to Learn: b Difficulty: 2 Objective: one'time'only special order, qualitative factors !

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/f 8s. 5ang $anted a long'term commitment for supplying this product, this analysis: a. $ould definitely be different b. may be different c. $ould not be different d. does not contain enough information to determine if there $ould be a difference Answer: Terms to Learn: a Difficulty: 2 one'time'only special order Objective: !

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An e"ample of a quantitative factor for the decision'making process is: a. customer satisfaction b. employee morale c. product quality d. manufacturing overhead Answer: Terms to Learn: d Difficulty: quantitative factors 1 Objective: !

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/f there $as limited capacity, all of the follo$ing amounts $ould change >N?>3T: a. opportunity costs b. differential costs c. variable costs d. the minimum acceptable price Answer: Terms to Learn: c constraint Difficulty: ! Objective: %

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ *, AC9 ,-: Corth$oods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be 2,- per table, consisting of *-O variable costs and 2-O fi"ed costs. The company has surplus capacity available. /t is Corth$oods7 policy to add a %-O markup to full costs. *,. Corth$oods is invited to bid on a one'time'only special order to supply 1-- rustic tables. 5hat is the lo$est price Corth$oods should bid on this special orderA a. 2&,!-b. 2(,2-c. 2,,--d. 21!,%-Answer: b Difficulty: 2 Terms to Learn: one'time'only special order 2,- " *-O " 1-- tables = 2(,2-,-. Objective: !

A large hotel chain is currently e"panding and has decided to decorate all ne$ hotels using the rustic style. Corth$oods /ncorporated is invited to submit a bid to the hotel chain. 5hat is the lo$est price per unit Corth$oods should bid on this long'term orderA a. 2&! b. 2(2 c. 2,d. 21!% Answer: d Difficulty: 2 Terms to Learn: one'time'only special order 2,- M ;2,- " %-O< = 21!% Objective: !

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?ochran ?orporation has a plant capacity of 1--,--- units per month. @nit costs at capacity are: 9irect materials 2#.-9irect labor &.-4ariable overhead !.-Fi"ed overhead 1.-8arketing K fi"ed (.-8arketingPdistribution K variable !.&?urrent monthly sales are ,%,--- units at 2!-.-- each. +u6ie, /nc., has contacted ?ochran ?orporation about purchasing 2,--- units at 22#.-- each. ?urrent sales $ould not be affected by the one'time'only special order. 5hat is ?ochran7s change in operating profits if the one'time'only special order is acceptedA a. 21#,*-- increase b. 21(,2-- increase c. 222,--- increase d. 2!!,2-- increase Answer: a Difficulty: ! Terms to Learn: one'time'only special order ;2#.-- M 2&.-- M 2!.-- M 2!.&-< = 21&.&;22#.-- G 21&.&-< " 2,--- = 21#,*-- increase Objective: !

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The sum of all the costs incurred in a particular business function ;for e"ample, marketing< is called the: a. business function cost b. full product cost c. gross product cost d. multiproduct cost Answer: Terms to Learn: a Difficulty: business function costs 1 Objective: !

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The sum of all costs incurred in all business functions in the value chain ;product design, manufacturing, marketing, and customer service, for e"ample< is kno$n as the: a. business cost b. full product cost c. gross product cost d. multiproduct cost Answer: Terms to Learn: b Difficulty: full costs of the product 1 Objective: !

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An e"ample of a qualitative factor for the decision'making process is: a. customer satisfaction b. units sold c. material cost d. labor hours incurred Answer: Terms to Learn: a Difficulty: qualitative factors 2 Objective: !

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3roblems that should be avoided $hen identifying relevant costs include all of the follo$ing >N?>3T: a. assuming all variable costs are relevant b. assuming all fi"ed costs are irrelevant c. using unit costs that do not separate variable and fi"ed components d. using total costs that separate variable and fi"ed components Answer: Terms to Learn: d Difficulty: relevant costs 2 Objective: #

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The 0>+T $ay to avoid misidentification of relevant costs is to focus on: a. e"pected future costs that differ among the alternatives b. historical costs c. unit fi"ed costs d. total unit costs Answer: Terms to Learn: a Difficulty: relevant costs 2 Objective: #

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Factors used to decide $hether to outsource a part include: a. the supplier7s cost of direct materials b. if the supplier is reliable c. the original cost of equipment currently used for production of that part d. past design costs used to develop the current composition of the part Answer: Terms to Learn: b Difficulty: 2 outsourcing, make'or'buy decision Objective: #

,*.

)elevant costs of a make'or'buy decision include all of the follo$ing >N?>3T: a. fi"ed salaries that $ill not be incurred if the part is outsourced b. current direct material costs of the part c. special machinery for the part that has no resale value d. material'handling costs that can be eliminated Answer: Terms to Learn: c Difficulty: ! Objective: relevant costs, outsourcing, make'or'buy decision #

11'21

,,.

5hich of follo$ing are risks of outsourcing the production of a partA a. unpredictable quality b. unreliable delivery c. unscheduled price increases d. All of these ans$ers are correct. Answer: Terms to Learn: d Difficulty: 1 outsourcing, make'or'buy decision Objective: #

1--. 5hich of the follo$ing minimi6e the risks of outsourcingA a. the use of short'term contracts that specify price b. the responsibility for on'time delivery is no$ the responsibility of the supplier c. building close relationships $ith the supplier d. All of these ans$ers are correct. Answer: Terms to Learn: c Difficulty: ! outsourcing, make'or'buy decision Objective: #

1-1. The cost to produce 3art A $as 21- per unit in 2-N! and in 2-N# it has increased to 211 per unit. /n 2-N#, +upplier NIR has offered to supply 3art A for 2, per unit. For the make'or'buy decision: a. incremental revenues are 22 per unit b. incremental costs are 21 per unit c. net relevant costs are 21 per unit d. differential costs are 22 per unit Answer: Terms to Learn: d Difficulty: 2 outsourcing, make'or'buy decision Objective: #

1-2. 5hen evaluating a make'or'buy decision, $hich of the follo$ing does C1T need to be consideredA a. alternative uses of the production capacity b. the original cost of the production equipment c. the quality of the supplierBs product d. the reliability of the supplierBs delivery schedule Answer: Terms to Learn: b Difficulty: 2 outsourcing, make'or'buy decision Objective: #

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1-!. For make'or'buy decisions, a supplierBs ability to deliver the item on a timely basis is considered a;n<: a. qualitative factor b. relevant cost c. differential factor d. opportunity cost Answer: Terms to Learn: a Difficulty: 1 outsourcing, make'or'buy decision Objective: #

1-#. The incremental costs of producing one more unit of product include all of the follo$ing >N?>3T: a. direct materials b. direct labor c. variable overhead costs d. fi"ed overhead costs Answer: Terms to Learn: d Difficulty: incremental cost 2 Objective: #

1-%. 9irect materials 2#-, direct labor 21-, variable overhead costs 2!-, and fi"ed overhead costs 22-. /n the short term, the incremental cost of one unit is: a. 2!b. 2%c. 2*d. 21-Answer: Terms to Learn: c Difficulty: incremental cost 2 Objective: #

1-&. @nit cost data can 81+T mislead decisions by: a. not computing fi"ed overhead costs b. computing labor and materials costs only c. computing administrative costs d. not computing unit costs at the same output level Answer: Terms to Learn: d Difficulty: full costs of the product 1 Objective: #

1-(. +chmidt +e$ing ?ompany incorporates the services of 9ebBs +e$ing. +chmidt purchases pre'cut dresses from 9ebBs. This is primarily kno$n as: a. insourcing b. outsourcing c. relevant costing d. sunk costing Answer: Terms to Learn: b Difficulty: outsourcing 1 Objective: #

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1-*. 3earce +ign ?ompany manufactures signs from direct materials to the finished product. This is considered: a. insourcing b. outsourcing c. relevant costing d. sunk costing Answer: Terms to Learn: a insourcing Difficulty: 1 Objective: #

1-,. 5hich of the follo$ing $ould C1T be considered in a make'or'buy decisionA a. fi"ed costs that $ill no longer be incurred b. variable costs of production c. potential rental income from space occupied by the production area d. unchanged supervisory costs Answer: Terms to Learn: d Difficulty: make'or'buy decision 2 Objective: #

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 11- T )1@D 112: Qonrade7s >ngine ?ompany manufactures part T>#%& used in several of its engine models. 8onthly production costs for 1,--- units are as follo$s: 9irect materials 9irect labor 4ariable overhead costs Fi"ed overhead costs Total costs 2 #-,--1-,--!-,--2-,--21--,---

/t is estimated that 1-O of the fi"ed overhead costs assigned to T>#%& $ill no longer be incurred if the company purchases T>#%& from the outside supplier. Qonrade7s >ngine ?ompany has the option of purchasing the part from an outside supplier at 2*% per unit. 11-. /f Qonrade7s >ngine ?ompany accepts the offer from the outside supplier, the monthly avoidable costs ;costs that $ill no longer be incurred< total: a. 2 *2,--b. 2 ,*,--c. 2 %-,--d. 21--,--Answer: a Difficulty: 2 Terms to Learn: make'or'buy decision, outsourcing 2#-,--- M 21-,--- M 2!-,--- M ;22-,--- " 1-O< = 2*2,--Objective: #

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111. /f Qonrade7s >ngine ?ompany purchases 1,--- T>#%& parts from the outside supplier per month, then its monthly operating income $ill: a. increase by 22,--b. increase by 2*-,--c. decrease by 2!,--d. decrease by 2*%,--Answer: c Difficulty: 2 Objective: Terms to Learn: make'or'buy decision, outsourcing Avoidable costs 2*2,--- G ;2*% " 1,--- units< = decrease of 2!,--#

112. The maximum price that Qonrade7s >ngine ?ompany should be $illing to pay the outside supplier is: a. 2*- per T>#%& part b. 2*2 per T>#%& part c. 2,* per T>#%& part d. 21-- per T>#%& part Answer: b Difficulty: 2 Terms to Learn: make'or'buy decision, outsourcing Avoidable costs 2*2,--- P 1,--- units = 2*2 per part Objective: #

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 11! AC9 11#: +chmidt ?orporation produces a part that is used in the manufacture of one of its products. The costs associated $ith the production of 1-,--- units of this part are as follo$s: 9irect materials 9irect labor 4ariable factory overhead Fi"ed factory overhead Total costs 2 #%,--&%,--!-,--(-,--221-,---

1f the fi"ed factory overhead costs, 2!-,--- is avoidable.

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11!. 3hil ?ompany has offered to sell 1-,--- units of the same part to +chmidt ?orporation for 21* per unit. Assuming there is no other use for the facilities, +chmidt should: a. make the part, as this $ould save 2! per unit b. buy the part, as this $ould save 2! per unit c. buy the part, as this $ould save the company 2!-,--d. make the part, as this $ould save 21 per unit Answer: d Difficulty: ! Objective: # Terms to Learn: make'or'buy decision, outsourcing Avoidable costs total 21(-,--- = 2#%,--- M 2&%,--- M 2!-,--- M 2!-,---. 21* G ;21(-,---P1-,---< = 21 11#. Assuming no other use of their facilities, the highest price that +chmidt should be $illing to pay for 1-,--- units of the part is: a. 221-,--b. 21#-,--c. 21(-,--d. 21*-,--Answer: c Difficulty: ! Terms to Learn: make'or'buy decision, outsourcing 2#%,--- M 2&%,--- M 2!-,--- M 2!-,--- = 21(-,--Objective: #

11%. )elevant costs in a make'or'buy decision of a part include: a. setup overhead for the manufacture of the product using the outsourced part b. currently used manufacturing capacity that has alternative uses c. annual plant insurance costs that $ill remain the same d. corporate office costs that $ill be allocated differently Answer: Terms to Learn: b Difficulty: ! Objective: make'or'buy decision, outsourcing, relevant costs %

11&. /f orsley ?orporation doesnBt use one of its limited resources in the best possible $ay, the lost contribution to income could be called a;n<: a. variable cost b. fi"ed cost c. opportunity cost d. sunk cost Answer: Terms to Learn: c Difficulty: opportunity cost 1 Objective: %

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11(. 5hen a firm has constrained capacity as opposed to surplus capacity, opportunity costs $ill be: a. lo$er b. the same c. greater d. variable Answer: Terms to Learn: c Difficulty: 2 opportunity cost, constraint Objective: %

11*. 1pportunity costs: a. result in a cash outlay b. only are considered $hen selecting among alternatives c. are recorded in the accounting records d. should be ma"imi6ed for the best decision Answer: Terms to Learn: b Difficulty: opportunity cost 2 Objective: %

11,. 1pportunity cost;s<: a. of a resource $ith e"cess capacity is 6ero b. should be ma"imi6ed by organi6ations c. are recorded as an e"pense in the accounting records d. are most important to financial accountants Answer: Terms to Learn: a Difficulty: opportunity cost 2 Objective: %

12-. For make'or'buy decisions, relevant costs include: a. direct material costs plus direct labor costs b. incremental costs plus opportunity costs c. differential costs plus fi"ed costs d. incremental costs plus differential costs Answer: Terms to Learn: cost b Difficulty: ! Objective: % make'or'buy decision, outsourcing, opportunity cost, incremental

121. The opportunity cost of holding significant inventory includes: a. the interest forgone on an alternative investment b. additional insurance costs c. additional storage costs d. All of these ans$ers are correct. Answer: Terms to Learn: a Difficulty: opportunity cost 2 Objective: %

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T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 122 AC9 12!: +tephans ?orporation currently manufactures a subassembly for its main product. The costs per unit are as follo$s: 9irect materials 9irect labor 4ariable overhead Fi"ed overhead Total 2 1.-1-.-%.-*.-22#.--

0ill ?ompany has contacted +tephans $ith an offer to sell them %,--- of the subassemblies for 222.-- each. +tephans $ill eliminate 22%,--- of fi"ed overhead if it accepts the proposal. 122. 5hat are the relevant costs for +tephansA a. 21#-,--b. 212%,--c. 21-%,--d. 2*-,--Answer: c Difficulty: 2 Terms to Learn: make'or'buy decision, outsourcing F;21 M 21- M 2%< " %,--- M 22%,---H = 21-%,--Objective: %

12!. +hould +tephans make or buy the subassembliesA 5hat is the difference bet$een the t$o alternativesA a. 0uyL savings = 22-,--b. 0uyL savings = 2%-,--c. 8akeL savings = 2&-,--d. 8akeL savings = 2%,--Answer: d Difficulty: ! Objective: % Terms to Learn: make'or'buy decision, outsourcing ?ost to buy: %,--- " 222 = 211-,--?ost to make: 211-,--- G F;21 M 21- M 2%< " %,--- M 22%,---H = 2%,---L make the subassemblies

11'2*

12#. A recent college graduate has the choice of buying a ne$ auto for 22-,--- or investing the money for four years $ith a &O e"pected annual rate of return. /f the graduate decides to purchase the auto, the 0>+T estimate of the opportunity cost of that decision is: a. 21,2-b. 2#,*-c. 22-,--d. 6ero since there is no opportunity cost for this decision Answer: b Difficulty: 2 Objective: Terms to Learn: opportunity cost 22-,--- " &O " # years = 2#,*-- cost of the opportunity not chosen. %

12%. A supplier offers to make 3art A for 2(-. Jansen ?ompany has relevant costs of 2*a unit to manufacture 3art A. /f there is e"cess capacity, the opportunity cost of buying 3art A from the supplier is: a. b. 21-,--c. 2(-,--d. indeterminable Answer: Terms to Learn: a Difficulty: 2 Objective: make'or'buy decision, outsourcing, opportunity cost %

12&. Jensen ?ompany has relevant costs of 2*- per unit to manufacture 3art A. A current supplier offers to make 3art A for 2(- per unit. /f capacity is constrained, the opportunity cost of buying 3art A from the supplier is: a. b. 21-,--c. 2(-,--d. indeterminable Answer: d Difficulty: 2 Objective: % Terms to Learn: make'or'buy decision, outsourcing, opportunity cost /nformation regarding alternative uses for the capacity $ould determine the opportunity cost. 12(. 9etermining $hich products should be produced $hen the plant is operating at full capacity is referred to as: a. an outsourcing analysis b. production scheduling analysis c. a product'mi" decision d. a short'run focus decision Answer: Terms to Learn: c Difficulty: product'mi" decisions 1 Objective: &

11'2,

12*. 3roduct mi" decisions: a. have a long'run focus b. help determine ho$ to ma"imi6e operating profits c. focus on selling price per unit d. All of these ans$ers are correct. Answer: Terms to Learn: b Difficulty: product'mi" decisions 2 Objective: &

12,. ?onstraints may include: a. the availability of direct materials in manufacturing b. linear square feet of display space for a retailer c. direct labor in the service industry d. All of these ans$ers are correct. Answer: Terms to Learn: d constraint Difficulty: 1 Objective: &

1!-. For determining the best mi" of products, the one $ith the :>A+T amount of influence is: a. the market price of the products b. corporate office costs allocated to each product c. the use of capacity resources d. contribution margins Answer: Terms to Learn: b Difficulty: ! constraint, product'mi" decisions Objective: &

1!1. /n product'mi" decisions: a. al$ays focus on ma"imi6ing total contribution margin b. focus on the product $ith the greatest contribution margin per machine'hour c. focus on the full costs of the product d. never focus on the short'term, but include only long'term considerations Answer: Terms to Learn: a Difficulty: product'mi" decisions ! Objective: &

11'!-

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1!2 T )1@D 1!&: 0raun7s 0rakes manufactures three different product lines, 8odel N, 8odel I, and 8odel R. ?onsiderable market demand e"ists for all models. The follo$ing per unit data apply: Model $ & +elling price 9irect materials 9irect labor ;212 per hour< 4ariable support costs ;2# per machine'hour< Fi"ed support costs 2%& 12 # 1Model % 2&& 12 * 1Model 2(& 2# * 1-

1!2. 5hich model has the greatest contribution margin per unitA a. 8odel N b. 8odel I c. 8odel R d. 8odels N and I Answer: Terms to Learn: 8odel N 8odel I 8odel R b Difficulty: 2 product'mi" decisions 2%- G 2& G 212 G 2# = 22* 2&- G 2& G 212 G 2* = 2!# highest 2(- v 2& G 22# G 2* = 2!2 Objective: &

1!!. 5hich model has the greatest contribution margin per machine'hourA a. 8odel N b. 8odel I c. 8odel R d. 8odels I and R Answer: Terms to Learn: 8odel N 8odel I 8odel R a Difficulty: 2 product'mi" decisions, constraint 2%- G 2& G 212 G 2# = 22* highest 2&- G 2& G 212 G 2* = 2!# 2(- v 2& G 22# G 2* = 2!2 Objective: &

11'!1

1!#. /f there is e"cess capacity, $hich model is the most profitable to produceA a. 8odel N b. 8odel I c. 8odel R d. 8odels N and I Answer: b Difficulty: ! Objective: Terms to Learn: product'mi" decisions 8odel I since it has the greatest contribution margin per unit 8odel N 2%- G 2& G 212 G 2# = 22* 8odel I 2&- G 2& G 212 G 2* = 2!# highest 8odel R 2(- v 2& G 22# G 2* = 2!2 &

1!%. /f there is a machine breakdo$n, $hich model is the most profitable to produceA a. 8odel N b. 8odel I c. 8odel R d. 8odels I and R Answer: a Difficulty: ! Objective: Terms to Learn: product'mi" decisions, constraint 8odel N since it has the greatest contribution margin per machine'hour 8odel N 2%- G 2& G 212 G 2# = 22* highest 8odel I 2&- G 2& G 212 G 2* = 2!# 8odel R 2(- v 2& G 22# G 2* = 2!2 1!&. &

o$ can :isa 0raun encourage her salespeople to promote the more profitable modelA a. 3ut all sales persons on salary. b. 3rovide higher sales commissions for higher priced items. c. 3rovide higher sales commissions for items $ith the greatest contribution margin per constrained resource. d. 0oth b and c are correct. Answer: Terms to Learn: c Difficulty: 2 product'mi" decisions, constraint Objective: &

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1!( T )1@D 1!,: elmer7s )ockers manufactures t$o models, +tandard and 3remium. 5eekly demand is estimated to be 1-- units of the +tandard 8odel and (- units of the 3remium 8odel. The follo$ing per unit data apply: ?ontribution margin per unit Cumber of machine'hours required St"nd"rd 21* ! Pre!iu! 22#

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1!(. The contribution per machine'hour is: a. 21* for +tandard, 22- for 3remium b. 2%# for +tandard, 2*- for 3remium c. 21% for +tandard, 21& for 3remium d. 2& for +tandard, 2% for 3remium Answer: d Difficulty: 2 Terms to Learn: product'mi" decisions, constraint +tandard 21* P ! = 2&L 3remium 22- P # = 2% Objective: &

1!*. /f there are #,& machine'hours available per $eek, ho$ many rockers of each model should Jim elmer produce to ma"imi6e profitsA a. 1-- units of +tandard and #, units of 3remium b. (2 units of +tandard and (- units of 3remium c. 1-- units of +tandard and (- units of 3remium d. *% units of +tandard and &- units of 3remium Answer: a Difficulty: 2 Objective: & Terms to Learn: product'mi" decisions, constraint +tandard ;1-- units " !mh< M 3remium ;#, units " # mh< = #,& machine'hours of the constrained resource 1!,. /f there are &-- machine'hours available per $eek, ho$ many rockers of each model should Jim elmer produce to ma"imi6e profitsA a. 1-- units of +tandard and #, units of 3remium b. (2 units of +tandard and (- units of 3remium c. 1-- units of +tandard and (- units of 3remium d. *% units of +tandard and &- units of 3remium Answer: c Difficulty: 2 Objective: & Terms to Learn: product'mi" decisions, constraint +tandard ;1-- units " !mh< M 3remium ;(- units " # mh< = %*- machine'hours for the current demand T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1#- T )1@D 1#2: )aines ?ompany manufactures three si6es of kitchen appliances: small, medium, and large. 3roduct information is provided belo$. S!"ll Mediu! L"r'e @nit selling price 21%22%2%-@nit costs: 4ariable manufacturing ;&-< ;12-< ;2--< Fi"ed manufacturing ;#-< ;%-< ;12-< 4ariable selling and administrative ;!-< ;!-< ;!-< @nit profit 2 22 %21%9emand in units 8achine'hours per unit 1-212#1-1--

11'!!

The ma"imum machine'hours available are &,--- per $eek. 1#-. 5hat is the contribution margin per machine'hour for a large chairA a. 2%.-b. 2!.-c. 22.(d. 21.*Answer: c Difficulty: 2 Terms to Learn: product'mi" decisions, constraint 2%-- G 22-- G 2!- = 22(22(- P 1-- = 22.(Objective: &

1#1. 5hich of the three product models should be produced first if management incorporates a short'run profit ma"imi6ing strategyA a. small chairs b. medium chairs c. large chairs d. either medium or large chairs Answer: Terms to Learn: +mall 8edium :arge 1#2. a Difficulty: 2 Objective: product'mi" decisions, constraint ;21%- G 2&- G 2!-< = 2&- P 2- = 2!.-- highest ;22%- G 212- G 2!-< = 21-- P #- = 22.%;2%-- G 22-- G 2!-< = 22(- P 1-- = 22.(&

o$ many of each product should be produced per month using the short'run profit ma"imi6ing strategyA a. b. c. d. S!"ll 1-1-1-Mediu! 121-2L"r'e 12 ##&

Answer: b Difficulty: ! Objective: Terms to Learn: product'mi" decisions, constraint +mall ;1-- " 2-< M :arge ;#- " 1--< = &,--- total machine'hours

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1#!. 5hen deciding $hether to discontinue a segment of a business, managers should focus on: a. equipment used by that segment that could become idle b. reallocation of corporate costs c. ho$ total costs differ among alternatives d. operating income per unit of the discontinued segment Answer: Terms to Learn: c Difficulty: ! differential revenue, differential cost Objective: (

1##. 5hen deciding $hether to discontinue a segment of a business, relevant costs include all of the follo$ing >N?>3T: a. fi"ed supervision costs that can be eliminated b. variable marketing costs per unit of product sold c. cost of goods sold d. future administrative costs that $ill continue Answer: Terms to Learn: d Difficulty: relevant costs 2 Objective: (

1#%. 9iscontinuing unprofitable products $ill increase profitability: a. if the resources no longer required by the discontinued product can be eliminated b. if capacity constraints are adEusted c. automatically d. $hen a large portion of the fi"ed costs are unavoidable Answer: Terms to Learn: a Difficulty: 2 relevant revenues, relevant costs Objective: (

1#&. ?amera ?orner is considering eliminating 8odel A>2 from its camera line because of losses over the past quarter. The past three months of information for 8odel A>2 are summari6ed belo$: +ales ;1,--- units< 8anufacturing costs: 9irect materials 9irect labor ;21% per hour< 1verhead 1perating loss 2!--,--1%-,--&-,--1--,--;21-,---<

1verhead costs are (-O variable and the remaining !-O is depreciation of special equipment for model A>2 that has no resale value.

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/f 8odel A>2 is dropped from the product line, operating income $ill: a. increase by 21-,--b. decrease by 22-,--c. increase by 2!-,--d. decrease by 21-,--Answer: b Difficulty: ! Objective: ( Terms to Learn: relevant revenues, relevant costs 2!--,--- G 21%-,--- G 2&-,--- G 2(-,--- = 22-,--- This product contributes 22-,--- to$ard corporate profits, therefore, discontinuing this product $ill decrease operating income by 22-,---. T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1#( AC9 1#*: The management accountant for 8artha7s 0ook +tore has prepared the follo$ing income statement for the most current year: Coo()oo( Tr"#el *oo( Cl"ssics Tot"l +ales 2&-,--21--,--2#-,--22--,--?ost of goods sold !&,--&%,--2-,--121,--?ontribution margin 2#,--!%,--2-,--(,,--1rder and delivery processing 1*,--21,--*,--#(,--)ent ;per sq. foot used< 2,--1,--!,--&,--Allocated corporate costs (,--(,--(,--21,--?orporate profit 2 ;!,---< 2 &,--2 2,--2 %,--1#(. /f the cookbook product line had been discontinued prior to this year, the company $ould have reported: a. greater corporate profits b. the same amount of corporate profits c. less corporate profits d. resulting profits cannot be determined Answer: c Difficulty: ! Objective: ( Terms to Learn: relevant revenues, relevant costs 2&-,--- G 2!&,--- G 21*,--- G 22,--- = 2#,--The cookbook product line contributed 2#,--- to$ard corporate profits. 5ithout the cookbooks, corporate profits $ould be 2#,--- less than currently reported. 1#*. /f the travel book line had been discontinued, corporate profits for the current year $ould have decreased by: a. 2!%,--b. 21#,--c. 21!,--d. 2&,--Answer: c Difficulty: ! Terms to Learn: relevant revenues, relevant costs 21--,--- G 2&%,--- G 221,--- G 21,--- = 21!,--11'!& Objective: (

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1#, AC9 1%-: 9enly ?ompany has three products, A, 0, and ?. The follo$ing information is available: +ales 4ariable costs ?ontribution margin Fi"ed costs: Avoidable @navoidable 1perating income Product A 2&-,--!&,--2#,--,,--&,--2 ,,--Product * 2,-,--#*,--#2,--1*,--,,--21%,--Product C 22#,--1%,--,,--&,--%,#-2 ;2,#--<

1#,. 9enly ?ompany is thinking of dropping 3roduct ? because it is reporting a loss. Assuming 9enly drops 3roduct ? and does not replace it, operating income $ill: a. increase by 22,#-b. increase by 2!,--c. decrease by 2!,--d. decrease by 2%,#-Answer: c Difficulty: ! Objective: ( Terms to Learn: relevant revenues, relevant costs 22#,--- G 21%,--- G 2&,--- = 2!,---. 3roduct ? contributes 2!,--- to$ard corporate profits. 5ithout 3roduct ?, operating income $ould be 2!,--- less than currently reported. 1%-. Assuming 3roduct ? is discontinued and the space formerly used to produce 3roduct ? is rented for 212,--- per year, operating income $ill: a. increase by 2&,&-b. increase by 2,,--c. increase by 212,--d. increase by 21#,#-Answer: b Difficulty: ! Objective: Terms to Learn: relevant revenues, relevant costs, opportunity cost 212,--- G 2!,--- = 2,,--(

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1%1 AC9 1%2: 8elodee7s 3reserves currently makes Eams and Eellies and a variety of decorative Ears used for packaging. An outside supplier has offered to supply all of the needed decorative Ears. For this make'or'buy decision, a cost analysis revealed the follo$ing avoidable unit costs for the decorative Ears:

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9irect materials 9irect labor @nit'related support costs 0atch'related support costs 3roduct'sustaining support costs Facility'sustaining support costs Total cost per Ear 1%1. The relevant cost per Ear is: a. 2-.2* per Ear b. 2-.!* per Ear c. 2-.(2 per Ear d. 21.-- per Ear

2-.2% -.-! -.1-.12 -.22 -.2* 21.--

Answer: d Difficulty: 2 Terms to Learn: relevant costs All avoidable costs are relevant for this decision.

Objectives: #, (

1%2. The ma"imum price that 8elodee7s 3reserves should be $illing to pay for the decorative Ears is: a. 2-.2* per Ear b. 2-.!* per Ear c. 2-.(2 per Ear d. 21.-- per Ear Answer: d Difficulty: 2 Objectives: #, ( Terms to Learn: relevant costs ?onsidering only quantitative factors, the company should not pay more than the avoidable costs of 21.-- per Ear. There may be qualitative factors that are also important. 1%!. ?osts are relevant to a particular decision if they: a. are variable costs b. are fi"ed costs c. differ across the alternatives being considered d. remain unchanged across the alternatives being considered Answer: Terms to Learn: c Difficulty: relevant costs 2 Objective: *

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1%#. 5hen deciding to lease a ne$ cutting machine or continue using the old machine, the follo$ing costs are relevant >N?>3T the: a. 2%-,--- cost of the old machine b. 22-,--- cost of the ne$ machine c. 21-,--- selling price of the old machine d. 2!,--- annual savings in operating costs if the ne$ machine is purchased Answer: Terms to Learn: a Difficulty: relevant costs 2 Objective: *

1%%. For machine'replacement decisions, depreciation is a cost that is: a. not relevant b. differential c. incremental d. variable Answer: Terms to Learn: a Difficulty: relevant costs 1 Objective: *

T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1%& T )1@D 1%*: Flo$ers For >veryone is considering replacing its e"isting delivery van $ith a ne$ one. The ne$ van can offer considerable savings in operating costs. /nformation about the e"isting van and the ne$ van follo$: E+istin' #"n ,e- #"n 1riginal cost 21--,--21*-,--Annual operating cost 2 !%,--2 2-,--Accumulated depreciation 2 &-,--K ?urrent salvage value of the e"isting van 2 #%,--K )emaining life 1- years 1- years +alvage value in 1- years 2 2 Annual depreciation 2 #,--2 1*,--1%&. +unk costs include: a. the original cost of the e"isting van b. the original cost of the ne$ van c. the current salvage value of the e"isting van d. the annual operating cost of the ne$ van Answer: Terms to Learn: a sunk costs Difficulty: 2 Objective: *

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1%(. )elevant costs for this decision include: a. the original cost of the e"isting van b. accumulated depreciation c. the current salvage value d. the salvage value in 1- years Answer: Terms to Learn: c Difficulty: relevant costs 2 Objective: *

1%*. /f Flo$ers For >veryone replaces the e"isting delivery van $ith the ne$ one, over the ne"t 1- years operating income $ill: a. decrease by 21*-,--b. increase by 21%-,--c. decrease by 21%-,--d. Cone of these ans$ers is correct. Answer: b Difficulty: ! Objective: * Terms to Learn: relevant revenues, relevant costs Ce$ van ;22-,--- " 1- years< G >"isting van ;2!%,--- " 1- years< = 21%-,--- less in operating costs, $hich results in a 21%-,--- increase in operating income. T > F1::15/CD /CF1)8AT/1C A33:/>+ T1 .@>+T/1C+ 1%, T )1@D 1&1: Frederick, /nc., is considering replacing a machine. The follo$ing data are available: Old M"c.ine 2#%,--1% 22%,--2*,--2(,--Repl"ce!ent M"c.ine 2!%,--% ' ' 2#,---

1riginal cost @seful life in years ?urrent age in years 0ook value 9isposal value no$ 9isposal value in % years Annual cash operating costs

1%,. 5hich of the data provided in the table is a sunk costA a. the annual cash operating costs of the old machine b. the annual cash operating costs of the replacement machine c. the disposal value of the old machine d. the original cost of the old machine Answer: Terms to Learn: d sunk costs Difficulty: 2 Objective: *

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1&-. For the decision to keep the old machine, the relevant costs of keeping the old machine total: a. 2&-,--b. 2!%,--c. 2#(,--d. 2(2,--Answer: b Difficulty: Terms to Learn: relevant costs 2(,--- " % = 2!%,--! Objective: *

1&1. The difference bet$een keeping the old machine and replacing the old machine is: a. 2!(,--- in favor of keeping the old machine b. 212,--- in favor of keeping the old machine c. 2!(,--- in favor of replacing the old machine d. 212,--- in favor of replacing the old machine Answer: b Difficulty: ! Objective: Terms to Learn: relevant costs Ce$ F2!%,--- M ;% " 2#,---<H G 1ld F2*,--- M ;% " 2(,---<H = 212,--1&2. The difference bet$een the original cost of an asset and the accumulated depreciation is kno$n as the: a. historical cost b. market value c. book value d. depreciable cost Answer: Terms to Learn: c Difficulty: relevant costs 1 Objective: * *

1&!. 8anagers tend to favor the alternative that makes their performance look best. Therefore, they tend to focus on: a. ho$ to implement the chosen alternative b. the measures used in the decision model c. the measures used in the performance evaluation model d. gathering the required information Answer: Terms to Learn: c Difficulty: decision model 2 Objective: ,

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1&#. /f management takes a multiple'year vie$ in the decision model and Eudges success according to the current yearBs results, a problem $ill occur in the: a. decision model b. performance evaluation model c. production evaluation model d. quantitative model Answer: Terms to Learn: b Difficulty: decision model 2 Objective: ,

1&%. Top management faces a persistent challenge to make sure that the performance evaluation model of lo$er level managers is: a. focused on short'term performance b. based solely on quantitative factors c. consistent $ith the decision model d. not consistent $ith the decision model Answer: Terms to Learn: d Difficulty: decision model 2 Objective: ,

1&&. The three steps involved in linear programming include all of the follo$ing >N?>3T: a. determining the obEective b. determining the basic relationship c. computing the optimal solution d. determining the relevant and irrelevant costs Answer: Terms to Learn: d Difficulty: 2 linear programming ;:3< Objective: ,

1&(. /n linear programming, the goals of management are e"pressed in: a. an obEective function b. constraints c. operating policies d. business functions Answer: Terms to Learn: a Difficulty: 1 linear programming ;:3< Objective: ,

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1&*. A mathematical inequality or equality that must be appeased is kno$n as a;n<: a. obEective function b. constraint c. operating policy d. business function Answer: Terms to Learn: b Difficulty: 2 linear programming ;:3<, constraint Objective: ,

1&,. ?omputer 3roducts produces t$o keyboards, )egular and +pecial. )egular keyboards have a unit contribution margin of 212*, and +pecial keyboards have a unit contribution margin of 2(2-. The demand for )egulars e"ceeds ?omputer 3roduct7s production capacity, $hich is limited by available machine'hours and direct manufacturing labor'hours. The ma"imum demand for +pecial keyboards is *- per month. 8anagement desires a product mi" that $ill ma"imi6e the contri' bution to$ard fi"ed costs and profits. 9irect manufacturing labor is limited to 1,&-- hours a month and machine'hours are limited to 1,2-- a month. The )egular keyboards require 2- hours of labor and * machine'hours. +pecial keyboards require !# labor'hours and 2- machine'hours. :et ) represent )egular keyboards and + represent +pecial keyboards. The correct set of equations for the keyboard production process is: a. 8a"imi6e: ?onstraints: :abor'hours: 8achine'hours: +pecial: )egular: b. 8a"imi6e: ?onstraints: :abor'hours: 8achine'hours: +pecial: )egular: c. 8a"imi6e: ?onstraints: :abor'hours: 8achine'hours: +pecial: 212*) M 2(2-+ 2-) M !#+ 1,&-*) M 2-+ 1,2-+ *+ ) 212*) M 2(2-+ 2-) M !#+ 1,&-*) M 2-+ 1,2-+ *+ ) 2(2-+ M 212*) 2-) M *+ 1,&-!#) M 2-+ 1,2-+ *+ -

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)egular: d. 8a"imi6e: ?onstraints: :abor'hours: 8achine'hours: +pecial: )egular: Answer: Terms to Learn:

) 212*) M 2(2-+ 2-) M !#+ 1,&-*) M 2-+ 1,2-+ *+ ) Objective: ,

a Difficulty: ! linear programming ;:3<, constraint

E$ERCISES A,/ PRO*LEMS 1(-. Fluty ?orporation manufactures a product that has t$o parts, A and 0. /t is currently considering t$o alternative proposals related to these parts. The first proposal is for buying 3art A. This $ould free up some of the plant space for the manufacture of more of 3art 0 and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. Co other changes in manufacturing $ould be needed. The second proposal is for buying ne$ equipment for the production of 3art 0. The ne$ equipment requires fe$er $orkers and uses less po$er to operate. The old equipment has a net disposal value of 6ero. Re0uired1 Tell $hether the follo$ing items are relevant or irrelevant for each proposal. Treat each proposal independently. a. b. c. d. e. f. g. h. i. E. k. Total variable manufacturing overhead, 3art A Total variable manufacturing overhead, 3art 0 ?ost of old equipment for manufacturing 3art 0 ?ost of ne$ equipment for manufacturing 3art 0 Total variable selling and administrative costs +ales revenue of the product Total variable costs of assembling final products Total direct manufacturing materials, 3art A Total direct manufacturing materials, 3art 0 Total direct manufacturing labor, 3art A Total direct manufacturing labor, 3art 0

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Ans-er: a. b. c. d. e. f. g. h. i. E. k.

#roposal $ ) ) / / ) ) ) ) ) ) )

#roposal % / ) / ) / / / / / / )

Difficulty: 2 Objective: 2 Terms to Learn relevant revenues, relevant costs 1(1. A"le and 5heel 8anufacturing is approached by a >uropean customer to fulfill a one'time'only special order for a product similar to one offered to domestic customers. The follo$ing per unit data apply for sales to regular customers: 9irect materials 9irect labor 4ariable manufacturing support Fi"ed manufacturing support Total manufacturing costs 8arkup ;%-O< Targeted selling price 2!! 1% 2# %2 12# &2 21*&

A"le and 5heel 8anufacturing has e"cess capacity. Re0uired1 a. 5hat is the full cost of the product per unitA b. 5hat is the contribution margin per unitA c. 5hich costs are relevant for making the decision regarding this one'time'only special orderA 5hyA d. For A"le and 5heel 8anufacturing, $hat is the minimum acceptable price of this one'time'only special orderA e. For this one'time'only special order, should A"le and 5heel 8anufacturing consider a price of 21-- per unitA 5hy or $hy notA

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Ans-er1 a. 212# b. 211# = +elling price 21*& G 4ariable costs ;2!! M 21% M 22#<. c. )elevant costs for decision making are those costs that differ bet$een alternatives, $hich in this situation are the incremental costs. The incremental costs total 2(2 = 4ariable costs ;2!! M 21% M 22#<. d. The minimum acceptable price is 2(2 = 4ariable costs ;2!! M 21% M 22#<, $hich are the incremental costs in the short tem. e. Ies, because this price is greater than the minimum acceptable price of this special order determined in ;d<. Difficulty: Terms to Learn: 2 Objectives: 2, ! one'time'only special order, relevant revenues, relevant costs

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1(2. +ilver :ake ?abinets is approached by 8s. Jenny Rhang, a ne$ customer, to fulfill a large one'time'only special order for a product similar to one offered to regular customers. The follo$ing per unit data apply for sales to regular customers: 9irect materials 9irect labor 4ariable manufacturing support Fi"ed manufacturing support Total manufacturing costs 8arkup ;&-O< Targeted selling price 21-12% &(% !&21& 2%(&

+ilver :ake ?abinets has e"cess capacity. 8s. Rhang $ants the cabinets in cherry rather than oak, so direct material costs $ill increase by 2!- per unit. Re0uired1 a. For +ilver :ake ?abinets, $hat is the minimum acceptable price of this one' time'only special orderA b. 1ther than price, $hat other items should +ilver :ake ?abinets consider before accepting this one'time'only special orderA c. o$ $ould the analysis differ if there $as limited capacityA Ans-er1 a. 2!1% = 4ariable costs ;21-- M 212% M 2&-< M 2!- additional cost for cherry. b. +ilver :ake ?abinets should also consider the impact on current customers $hen these customers hear that another customer $as offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price. c. ?urrently, the incremental costs total 2!1%. /f additional capacity is needed to process this order, these incremental costs $ill increase by the cost of adding capacity. Difficulty: Terms to Learn: ! Objectives: 2, !, # one'time'only special order, relevant costs

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1(!. .uiett Truck manufactures part 502! used in several of its truck models. 1-,--units are produced each year $ith production costs as follo$s: 9irect materials 9irect manufacturing labor 4ariable support costs Fi"ed support costs Total costs 2 #%,--1%,--!%,--2%,--212-,---

.uiett Truck has the option of purchasing part 502! from an outside supplier at 211.2- per unit. /f 502! is outsourced, #-O of the fi"ed costs cannot be immediately converted to other uses. Re0uired1 a. 9escribe avoidable costs. 5hat amount of the 502! production costs is avoidableA b. c. +hould .uiett Truck outsource 502!A 5hy or $hy notA 5hat other items should .uiett Truck consider before outsourcing any of the parts it currently manufacturesA

Ans-er1 a. Avoidable costs are those costs eliminated $hen a part, product, product line, or business segmented is discontinued. Avoidable production costs for 502! total 211-,---, $hich are all but the 21-,--- ;22%,--- " #-O< of fi"ed costs that cannot be immediately converted to other uses. b. 0ased on the financial considerations given, .uiett Truck should C1T outsource 502! because the 2112,--- ;1-,--- units " 211.2- per part< outsourced cost is greater than the 211-,--- reduction in annual production costs. /n other $ords, the outsourcing $ould cost .uiett Truck an additional 22,--- annually. 1ther factors to consider include the supplier7s ability to meet e"pected quality and delivery standards, and the likelihood of suppliers increasing prices of components in the future. 2 Objective: relevant costs #

c.

Difficulty: Terms to Learn:

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1(#.

+outh$estern ?ompany needs 1,--- motors in its manufacture of automobiles. /t can buy the motors from Jin" 8otors for 21,2%- each. +outh$estern7s plant can manufacture the motors for the follo$ing costs per unit: 9irect materials 9irect manufacturing labor 4ariable manufacturing overhead Fi"ed manufacturing overhead Total 2 %-2%2-!%21,!--

/f +outh$estern buys the motors from Jin", (-O of the fi"ed manufacturing overhead applied $ill not be avoided. Re0uired1 a. +hould the company make or buy the motorsA b. 5hat additional factors should +outh$estern consider in deciding $hether or not to make or buy the motorsA Ans-er1 a. &ost to buy the part: ;1,--- " 21,2%-< 21,2%-,--'elevant costs to ma(e: 4ariable costs: 9irect materials ;1,--- " 2%--< 2%--,--9irect manufacturing. labor ;1,--- " 22%-< 2%-,--4ariable manufacturing overhead ;1,--- " 22--< 2--,--Total ,%-,--Avoidable fi"ed costs: ;2!%- " 1,--- " -.!-< 1-%,--- 1,-%%,--)avings if part is manufacture" 2 1,%,--b. 8anagement should consider several qualitative factors in deciding $hether to make or buy the motors. Quality controls The companyBs ability to manufacture quality motors versus that of the supplier. Delivery ?an they make them $hen needed versus Jin" delivering them $hen neededA 'eputation 5hat is the overall reputation of Jin"A Term /s Jin" $illing to make long'term commitments for delivery of the motorsA !acilities 5hat are the opportunity costs of using the space and equipment to manufacture other itemsA

Difficulty: 2 Objective: # Terms to Learn relevant costs, qualitative factors

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1(%.

Qirkland ?ompany manufactures a part for use in its production of hats. 5hen 1-,--- items are produced, the costs per unit are: 9irect materials 9irect manufacturing labor 4ariable manufacturing overhead Fi"ed manufacturing overhead Total 2-.&!.-1.21.&2&.#-

8ike ?ompany has offered to sell to Qirkland ?ompany 1-,--- units of the part for 2&.-- per unit. The plant facilities could be used to manufacture another item at a savings of 2,,--- if Qirkland accepts the offer. /n addition, 21.-- per unit of fi"ed manufacturing overhead on the original item $ould be eliminated. Re0uired1 a. 5hat is the relevant per unit cost for the original partA b. 5hich alternative is best for Qirkland ?ompanyA 0y ho$ muchA Ans-er1 a. 9irect materials 9irect manufacturing labor 4ariable manufacturing overhead Avoidable fi"ed manufacturing. overhead Total relevant per unit costs b. 3urchase price +avings in space 9irect materials 9irect mfg. labor 4ariable overhead Fi"ed overhead saved Totals M"(e 2&,--!-,--12,--2#*,--2-.&!.-1.21.-2%.**uy E22ect o2 *uyin' 2&-,--2;&-,---< ;,,---< ,,--&,--!-,--12,--;1-,---< 1-,--2#1,--2(,---

The best alternative is to buy the part. Difficulty: 2 Objectives: #, %, & Terms to Learn make'or'buy decision

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1(&.

:e$is Auto ?ompany manufactures a part for use in its production of automobiles. 5hen 1-,--- items are produced, the costs per unit are: 9irect materials 9irect manufacturing labor 4ariable manufacturing overhead Fi"ed manufacturing overhead Total 2 12 &2# !2 212*

8onty ?ompany has offered to sell :e$is Auto ?ompany 1-,--- units of the part for 212- per unit. The plant facilities could be used to manufacture another part at a savings of 21*-,--- if :e$is Auto accepts the supplier7s offer. /n addition, 22- per unit of fi"ed manufacturing overhead on the original part $ould be eliminated. Re0uired1 a. 5hat is the relevant per unit cost for the original partA b. 5hich alternative is best for :e$is Auto ?ompanyA 0y ho$ muchA Ans-er1 a. 9irect materials 9irect manufacturing labor 4ariable manufacturing overhead Avoidable fi"ed manufacturing overhead Total relevant per unit costs b. 3urchase price +avings in space 9irect materials 9irect manufacturing labor 4ariable overhead Fi"ed overhead saved Totals M"(e 212-,--&--,--2#-,--2,&-,--212 &2# 2211& *uy E22ect o2 *uyin' 21,2--,--2;1,2--,---< ;1*-,---< 1*-,--12-,--&--,--2#-,--;2--,---< 2--,--2*2-,--21#-,---

The best alternative is to buy the part. Difficulty: 2 Objectives: #, %, & Terms to Learn make'or'buy decision

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1((. Corton7s 8ufflers manufactures three different product lines, 8odel N, 8odel I, and 8odel R. ?onsiderable market demand e"ists for all models. The follo$ing per unit data apply: Model $ Model % Model & +elling price 2*2,21-9irect materials !!!9irect labor ;21- per hour< 1% 1% 24ariable support costs ;2% per machine'hour< % 11Fi"ed support costs 222Re0uired1 a. For each model, compute the contribution margin per unit. b. For each model, compute the contribution margin per machine'hour. c. /f there is e"cess capacity, $hich model is the most profitable to produceA 5hyA d. /f there is a machine breakdo$n, $hich model is the most profitable to produceA 5hyA e. o$ can Corton encourage her sales people to promote the more profitable modelA Ans-er1 a. The contribution margin per unit is: 2!- for 8odel N ;2*- G 2!- G 21% G 2%<, 2!% for 8odel I ;2,- G 2!- G 21% G 21-<, and 2#- for 8odel R ;21-- G 2!- G 22- G 21-<. b. The contribution margin per machine'hour is 2!- for 8odel N ;2!- contribution margin P 1.- machine'hour per unit<, 21(.%- for 8odel I ;2!% P 2.-<, and 22- for 8odel R ;2#- P 2.-<. c. 5hen there is e"cess capacity, 8odel I is the most profitable because it has the greatest contribution margin per unit. d. 5hen there are machine'hour capacity constraints, 8odel N is the most profitable because it has the greatest contribution margin per constrained resource. e. To encourage sales persons to promote specific products, Corton may $ant to provide marketing incentives such as higher sales commissions for products contributing the most to profits. Corton may also $ant to educate salespeople about the effects of constrained resources. Difficulty: Terms to Learn: ! Objective: & product'mi" decisions, constraint

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1(*.

ackerott ?amera is considering eliminating 8odel A>1 from its camera line because of losses over the past quarter. The past three months of information for model A>1 is summari6ed belo$: +ales ;1,--- units< 8anufacturing costs: 9irect materials 9irect labor ;21% per hour< +upport 1perating loss 22%-,--1#-,--!-,--1--,--;22-,---<

+upport costs are (-O variable and the remaining !-O is depreciation of special equipment for model A>1 that has no resale value. Re0uired1 +hould ackerott ?amera eliminate 8odel A>1 from its product lineA 5hy or $hy notA Ans-er1 Co, ackerott ?amera should not eliminate 8odel A>1 from its product line because it contributes 21-,--- to$ard fi"ed costs and profits. +ales ;1,--- units< 8anufacturing costs: 9irect materials 9irect labor 4ariable support ;21--,--- " (-O< ?ontribution margin Difficulty: Terms to Learn: 2 Objective: product'mi" decisions ( 22%-,--1#-,--!-,--(-,--21-,---

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1(,. The management accountant for the ?hocolate +7more ?ompany has prepared the follo$ing income statement for the most current year: C.ocol"te +ales 2#-,--?ost of goods sold 2&,--?ontribution margin 1#,--9elivery and ordering costs 2,--)ent ;per sq. foot used< !,--Allocated corporate costs %,--?orporate profit 2#,--a. Ot.er C"ndy 22%,--1%,--1-,--!,--!,--%,--2;1,---< Fud'e 2!%,--1,,--1&,--2,--2,--%,--2(,--Tot"l 21--,--&-,--#-,--(,--*,--1%,--21-,---

Re0uired1 9o you recommend discontinuing the 1ther ?andy product lineA 5hy or $hy notA b. /f the ?hocolate product line had been discontinued, corporate profits for the current year $ould have decreased by $hat amountA Ans-er1 a. Co, / $ould not recommend discontinuing the 1ther ?andy product line because this product line contributes 2#,--- to$ards corporate costs and profits. 22%,--- G 21%,--- G 2!,--- G 2!,--- = 2#,--5ithout the 1ther ?andy product line, corporate profits $ould be 2#,--- less than currently reported. b. /f the ?hocolate product line $ere discontinued, corporate profits $ould immediately decrease by 2,,---. 2#-,--- G 22&,--- G 22,--- G 2!,--- = 2,,--! Objective: product'mi" decisions (

Difficulty: Terms to Learn:

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1*-. 3at, a 3i66eria manager, replaced the convection oven Eust si" months ago. Today, Turbo 1vens 8anufacturing announced the availability of a ne$ convection oven that cooks more quickly $ith lo$er operating e"penses. 3at is considering the purchase of this faster, lo$er'operating cost convection oven to replace the e"isting one they recently purchased. +elected information about the t$o ovens is given belo$: 1riginal cost Accumulated depreciation ?urrent salvage value )emaining life Annual operating e"penses 9isposal value in % years E+istin' 2&-,--2 %,--2#-,--% years 21-,--2 ,e- Tur)o O#en 2%-,--K K % years 2 (,%-2 -

Re0uired1 a. 5hat costs are sunkA b. 5hat costs are relevantA c. 5hat are the net cash flo$s over the ne"t % years assuming the 3i66eria purchases the ne$ convection ovenA d. 5hat other items should 3at, as manager of the 3i66eria, consider $hen making this decisionA Ans-er1 a. +unk costs include the original cost of the e"isting convection oven and the accompanying accumulated depreciation. b. )elevant costs include: Acquisition cost of the ne$ Turbo oven ?urrent disposal value of the e"isting convection oven Annual operating e"penses for the e"isting and the ne$ Turbo oven Cet cash flo$s over % years $ith the ne$ Turbo oven: &ash inflow: 9ecrease in annual operating e"penses ;22,%-- " %< +ale of the e"isting oven &ash outflow: Acquisition of the ne$ Turbo oven *et cash inflow +outflow, 2 12,%-#-,--;%-,---< 2 2,%--

c.

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d.

1ther items the manager should consider $hen making this decision include: The Turbo oven7s reliability and efficiency is still unkno$n since it is a brand'ne$ product. /f the Turbo oven bakes faster as it claims, the 3i66eria may be able to increase sales due to the quicker baking time. After purchasing another oven Eust si" months prior, top management should consider the Turbo oven option, but instead may question the decision'making ability of 3at, the current manager. 2 Objective: * relevant costs, sunk costs

Difficulty: Terms to Learn: 1*1.

:ocal +teel ?onstruction ?ompany produces t$o products, steel and $ood beams. +teel beams have a unit contribution margin of 22--, and $ood beams have a unit contribution margin of 21%-. The demand for steel beams e"ceeds :ocal +teel ?onstruction ?ompanyBs production capacity, $hich is limited by available direct labor and machine'hours. The ma"imum demand for $ood beams is ,- per $eek. 8anagement desires that the product mi" should ma"imi6e the $eekly contribution to$ard fi"ed costs and profits. 9irect manufacturing labor is limited to !,--- hours a $eek and 1,--- hours is all that the companyBs outdated machines can run a $eek. The steel beams require 12- hours of labor and &- machine'hours. 5ood beams require 1%- labor hours and 12- machine'hours. Re0uired1 Formulate the obEective function and constraints necessary to determine the optimal product mi". Ans-er1 + = steel beams 8a"imi6e: ?onstraints: 5 = $ood beams 22--+ M 21%-5 :abor hours: 8achine'hours: 5ood beams: +teel beams: 12-+ M1%-5 S !,--&-+ M 12-5 S 1,--5 S ,5T+T-

Difficulty: 2 Objective: A Terms to Learn: linear programming ;:3<

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CRITICAL THI,3I,G 1*2. The te"tbook discusses a five'step decision process. 0riefly e"plain each of the five steps. Ans-er1 The five step decision process is ;a< obtain information, ;b< make predictions, ;c< choose an alternative, ;d< implement the decision, and ;e< evaluate performance to provide feedback. 1btaining information involves collecting all data pertinent to the decision situation, both quantitative and qualitative, and determining $hich information is relevant to the decision, and determining $hich alternatives are being considered. 8aking predictions involves using the information obtained above and attempting to predict $hat the future costs and benefits $ill be for each of the various alternatives. ?hoosing an alternative involves comparing the predicted benefits of each alternative $ith each of the predicted costs ;as $ell as other non'quantitative factors<, and selecting an alternative that ma"imi6es the difference bet$een the e"pected benefits and the e"pected costs. /mplementing the decision involves actually doing the alternative selected above and making all the necessary changes in operations to support the decision. >valuating the performance of the decision involves learning from the results of the decision and seeing $hich predictions $ere accurate and determining ho$ to avoid any difficulties encountered in either the decision'process or the implementation. Difficulty: Terms to Learn: 2 Objective: decision model 1

1*!. >"plain $hat revenues and costs are relevant $hen choosing among alternatives. Ans-er1 Future amounts that differ among alternatives are considered relevant. Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. Difficulty: Terms to Learn: 2 Objective: 2 relevant costs, relevant revenues

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1*#. >"plain $hy sunk costs are not considered relevant $hen choosing among alternatives. Ans-er1 Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. +unk costs by definition are those costs that have already been committed, cannot be changed, and $ill never differ among alternatives. Difficulty: Terms to Learn: 2 Objective: 2 sunk costs, relevant costs

1*%. Assume you are a sophomore in college and are committed to earning an undergraduate degree. Iour current decision is $hether to finish college in four consecutive years or take a year off and $ork for some e"tra cash. a. /dentify at least t$o revenues or costs that are relevant to making this decision. >"plain $hy each is relevant. b. /dentify at least t$o costs that $ould be considered sunk costs for this decision. c. ?omment on at least one qualitative consideration for this decision. Ans-er1 a. )elevant revenuesPcosts are those that differ bet$een the alternatives of continuing $ith college or taking a year off from college and $orking. )elevant costs for continuing your college education $ithout a break include: 1. >arnings lost ne"t year due to the hours you are not able to $ork because of classes and home$ork. 2. As a result of graduating a year earlier, higher $ages $ill be earned a year earlier as $ell. b. +unk costs for this decision include: 1. Amounts paid for college tuition and books during the past t$o years. 2. Amounts committed for college tuition and books for the remaining t$o years. A qualitative consideration $ould include having different activities and priorities than your friends $ho are students, graduating later than students $ho started college the same time you did, and retaining information over the year off from school. 2 Objectives: 2, ! relevant costs, opportunity cost, qualitative factors

c.

Difficulty: Terms to Learn:

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1*&. A restaurant is deciding $hether it $ants to update its image or not. /t currently has a co6y appeal $ith an outdated dUcor that is still in good condition, menus and carpet that need to be replaced any$ay, and loyal customers. /dentify for the restaurant management a. those costs that are relevant to this decision, b. those costs that are not differential, c. and qualitative considerations. Ans-er1 For the decision of $hether to update the restaurant7s image: a. )elevant costs include a one'time cost of the renovation for the updated image, and a change in future sales $hich includes an increase in sales due to the updated image, decrease in sales due to loss of that co6y appeal, and loss of sales due to being closed or having a limited serving area during renovation. b. c. ?osts that are not differential include replacing the menus and the carpet since they need to be replaced $hether the image is updated or not. .ualitative considerations include $hether the restaurant $ill lose that co6y appeal it currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and ne$ customers may not be the type of customer they $ant to attract. 2 Objectives: 2, ! relevant costs, qualitative factors, differential cost

Difficulty: Terms to Learn:

1*(. Are relevant revenues and relevant costs the only information needed by managers to select among alternativesA >"plain using e"amples. Ans-er1 Co, relevant revenues and costs provide a financial analysis but do not take into consideration qualitative implications. /n a make'or'buy decision, e"amples of qualitative issues include the supplier7s ability to meet e"pected quality and delivery standards, and the likelihood that suppliers increase prices of the components in the future. Difficulty: Terms to Learn: 2 Objective: ! relevant costs, relevant revenues

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1**. @nder $hat conditions might a manufacturing firm sell a product for less than its long'term priceA 5hyA Ans-er1 The price for a short'term order may be less than the price offered to a long'term customer. /f a firm has e"cess capacity that is sitting idle, it is more profitable for the firm to accept a special order for a price belo$ the long'run price than it is to let the capacity sit idle. /n addition, the firm may use this strategy for market penetration and to obtain greater market share. Difficulty: Terms to Learn: 2 Objective: ! one'time'only special order

1*,. For short'term pricing decisions, $hat costs are relevant $hen there is available surplus capacityA 5hen there is no available surplus capacityA Ans-er1 For both situations the relevant costs are the future incremental costs. o$ever, $hen there is limited capacity the incremental costs $ill be greater because they $ill include the costs of adding capacity or the opportunity costs of alternative manufacturing choices. Difficulty: Terms to Learn: 1,-. 2 Objective: % one'time'only special order, incremental cost

o$ does a manager go about choosing $hich of three products to produce and sell $hen each product uses a single machine $ith a limited capacityA Ans-er1 8anagement should attempt to ma"imi6e output from the machine $hich is the limited resource. This involves ma"imi6ing the contribution margin per unit of the scarce resource. First of all, management needs to determine the contribution margin of each of the three products. Then, the time that it takes to produce a unit of each of the three products should be determined. Then, a contribution margin per machine hour can be calculated. The first product that should be produced is the one $ith the highest contribution margin per machine hour. Difficulty: Terms to Learn: 2 Objective: & product'mi" decisions, incremental cost

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1,1. 9oggie 9inner, /nc., currently manufactures three different types of scientifically balanced dog food. The firm is considering eliminating one of the three products. 5hat factors should be taken into account in making this decisionA Ans-er1 /n deciding $hether or not to eliminate a product, the firm should determine if costs that can be eliminated $ill e"ceed the revenues that $ill be lost. The firm needs to classify the costs into those costs $hich $ill be eliminated and therefore are relevant, and $hich costs $ill continue even if the product is deleted. ?osts that often continue are those costs $hich have been allocated rather than incurred directly by the product. The firm must also look to see if any other products may be harmed by the elimination of the product. 8aybe the products are complements, and loss of one sale $ill result in loss of another. The firm should consider $hether another productBs sales might increase if the product is deleted, $hich could be an opportunity to earn more contribution from another area. ?an the firm use the space freed up for some other purpose that could generate additional inflo$s, $hich is an opportunity costA The firm must also look at ho$ its reputation among its customers for selling a full line of products might be damaged as a result of this decision. Difficulty: Terms to Learn: 1,2. 2 Objective: product'mi" decisions (

o$ can conflicts arise bet$een the decision model and the performance evaluation model used to evaluate managersA 3rovide an e"ample of this type of conflict. Ans-er1 +ince managers $ill act in their self interest, they $ill make decisions that make their o$n performance look best. At times, this does not lead to the best decision for the firm. An e"ample of this situation might include evaluating a managers performance on short'term results, $hen the firm $ould like decisions made that $ould ma"imi6e long term performance. Difficulty: Terms to Learn: 2 Objective: decision model ,

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