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Exam 10: Decision Making and Relevant Information

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Question 21

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Jensen Company has relevant costs of $80 per unit to manufacture Part A.A current supplier offers to make Part A for $70 per unit.If capacity is constrained,the opportunity cost of buying Part A from the supplier is:

A) $70 000.
B) 0.
C) $10 000.
D) indeterminable.

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Question 22

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Answer the following questions using the information below: Bright Lights Company manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year.With a 50-cent price increase,demand is expected to fall by 3000 units. $\begin{array} { l r r } & \text { Currently } & \text { Projected } \\\text { Demand } & 20000 \text { units } & 18000 \text { units } \\\text { Selling price } & \$ 4.50 & \$ 5.00 \\\text { Incremental cost per unit } & \$ 3.00 & \$ 3.00\end{array}$ -Would you recommend the 50-cent price increase?

A) Yes,because contribution margin per unit increases.
B) No,because the selling price increases.
C) No,because demand decreased.
D) Yes,because operating profits increase.

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Question 23

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Doggie Dinner Ltd currently manufactures three different types of scientifically balanced dog food.The firm is considering eliminating one of the three products.What factors should be taken into account in making this decision? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Answer the following questions using the information below: Northwoods manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $100 per table,consisting of 80% variable costs and 20% fixed costs.The company has surplus capacity available.It is Northwoods' policy to add a 50% mark-up to full costs. -A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.Northwoods Incorporated is invited to submit a bid to the hotel chain.What is the lowest price per unit Northwoods should bid on this long-term order?

For short-run product-mix decisions,managers should focus on minimising total fixed costs.

TOC considers a short-run time period and assumes that operating costs are fixed costs.

Molly Inc.is considering eliminating one of its product lines.The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance.What financial effects occur if the product line is discontinued?

Answer the following questions using the information below: Grant's Cakes is approached by Ms Tammy Wang,a new customer,to fulfil a large one-time-only special order for a product similar to one offered to regular customers.The following per unit data apply for sales to regular customers: $\begin{array} { l r } \text { Direct materials } & \$ 455 \\\text { Direct labour } & 300 \\\text { Variable manufacturing support } & 45 \\\text { Fixed manufacturing support } & 100 \\\text { Total manufacturing costs } & 900 \\\text { Mark-up (60\%) } & \underline { 540 } \\\text { Targeted selling price } & \$ 1440\end{array}$ Grant's Kitchens has excess capacity.Ms Wang wants layered cream cheese pound cakes rather than plain pound cakes,so direct material costs will increase by $30 per unit. -For Grant's Cakes,what is the minimum acceptable price of this one-time-only special order?

Discontinuing unprofitable products will increase profitability:

Answer the following questions using the information below: Rockhampton Company has three products,X,Y and Z.The following information is available: $\begin{array} { l r r r } & \text { Product X } & \text { Product Y } & \text { Product Z } \\\text { Sales } & \$ 60000 & \$ 90000 & \$ 24000 \\\text { Variable costs } & \underline { 36000 } & \underline { 48000 } & \underline { 15000 } \\\text { Contribution margin } & 24000 & 42000 & 9000 \\\text { Fixed costs: } & & & \\\quad \text { Avoidable } & 9000 & 18000 & 6000 \\\quad \text { Unavoidable } & \underline { 6000 } & \underline { 9000 } & \underline { 5400 } \\\text { Operating profit } & \underline { \$ 9000 } & \$ 15000 & \$ ( 2400 ) \end{array}$ -Rockhampton Company is thinking of dropping Product Z because it is reporting a loss.Assuming Rockhampton drops Product Z and does not replace it,operating profit will:

Answer the following questions using the information below: Stephans Corporation currently manufactures a subassembly for its main product.The costs per unit are as follows: $\begin{array} { l r } \text { Direct materials } & \$ 1.00 \\\text { Direct labour } & 10.00 \\\text { Variable overhead } & 5.00 \\\text { Fixed overhead } & \underline { 8.00 } \\\quad \text { Total } & \underline{\$ 24.00} \\\end{array}$ Bill Company has contacted Stephans with an offer to sell them 5000 of the subassemblies for $22.00 each.Stephans will eliminate $25 000 of fixed overhead if it accepts the proposal. -Should Stephans make or buy the subassemblies? What is the difference between the two alternatives?

Answer the following questions using the information below: Casper's Engine Company manufactures part TE456 used in several of its engine models.Monthly production costs for 1000 units are as follows: $\begin{array} { l r } \text { Direct materials } & \$ 40000 \\\text { Direct labour } & 10000 \\\text { Variable overhead costs } & 30000 \\\text { Fixed overhead costs } & \underline{ 20000 }\\\quad \text { Total costs } & \underline{ \$ 100000} \\\end{array}$ It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier.Casper's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit. -The maximum price that Casper's Engine Company should be willing to pay the outside supplier is:

Which of the following describes 'outsourcing'?

Are relevant revenues and relevant costs the only information needed by managers to select among alternatives? Explain using examples. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Which of the following reflects the opportunity cost of holding significant inventory?

Relevant-cost analysis generally emphasises qualitative factors that can be expressed in financial terms.

The sum of all costs (variable and fixed) in a particular business function of the value chain,such as manufacturing costs or marketing costs,are called ________ costs.

If Ruapehu Inc.doesn't use one of its limited resources in the best possible way,the lost contribution to income could be called a(n) :

Answer the following questions using the information below: Darwin's Rockers manufactures two models,Deluxe and Super Deluxe.Weekly demand is estimated to be 100 units of the Deluxe Model and 70 units of the Super Deluxe Model.The following per unit data apply: $\begin{array} { l c c } & \text { Deluxe } & \text { Sumer Deluxe } \\\text { Contribution margin per unit } & \$ 18 & \$ 20 \\\text { Number of machine-hours required } & 3 & 4\end{array}$ -The contribution per machine-hour is:

Answer the following questions using the information below: Rockhampton Company has three products,X,Y and Z.The following information is available: $\begin{array} { l r r r } & \text { Product X } & \text { Product Y } & \text { Product Z } \\\text { Sales } & \$ 60000 & \$ 90000 & \$ 24000 \\\text { Variable costs } & \underline { 36000 } & \underline { 48000 } & \underline { 15000 } \\\text { Contribution margin } & 24000 & 42000 & 9000 \\\text { Fixed costs: } & & & \\\quad \text { Avoidable } & 9000 & 18000 & 6000 \\\quad \text { Unavoidable } & \underline { 6000 } & \underline { 9000 } & \underline { 5400 } \\\text { Operating profit } & \underline { \$ 9000 } & \$ 15000 & \$ ( 2400 ) \end{array}$ -Assuming Product Z is discontinued and the space formerly used to produce Product Z is rented for $12 000 per year,operating profit will: