Exam 7: Incremental Analysis for Short-Term Decision Making

Cranberry has received a special order for 100 units of its product at a special price of $2,100. The product normally sells for $2,800 and has the following manufacturing costs: Assume that Cranberry has sufficient capacity to fill the order without harming normal production and sales. If Cranberry accepts the order, what effect will the order have on the company's short-term profit?

An opportunity cost is the foregone benefit of choosing to do one thing instead of another

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. If you enroll in the community class, you will be unable to work at your regular job on weekends for the eight weekend days when the class meets. If you typically earn $500 per weekend shift, which option would you choose (considering enrollment cost and opportunity cost)?

Avocado has received a special order for 2,000 units of its product at a special price. The product normally sells for $400 and has the following manufacturing costs: Assume that Avocado has sufficient capacity to fill the order. What special order price should Avocado charge to make a $20,000 incremental profit?

Marcy has received a special order for 2,000 units of its product at a special price of $60. The product normally sells for $80 and has the following manufacturing costs: Assume that Marcy has sufficient capacity to fill the order without harming normal production and sales and all fixed overhead is unavoidable. a. If Marcy accepts the order, what effect will the order have on the company's short-term profit? b. What minimum price should Marcy charge to achieve a $20,000 incremental profit? c. Now assume Marcy is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Marcy accepts the order, what effect will the order have on the company's short-term profit?

Costs that change across decision alternatives are:

An avoidable cost is one that has already been spent

Maple Inc. manufactures a product that costs $45 per unit plus $50,000 in fixed costs each month. Maple currently sells 5,000 of these units per month for $60 each. If Maple leased a machine for $30,000 a month, it could add features to the product that would allow it to increase the selling price. It would cost an additional $10 per unit to add these features. How much would Maple have to charge for the product with additional features to make it worthwhile to lease the machine?

You wish to take an Excel course. (Step 1 of the decision-making process.) You may enroll at one within your school or you may take a community class at the local library. (Step 2 of the decision-making process.) You've gathered the following information to aid in your decision-making process. This information illustrates which step in the decision-making process?

Legacy Company currently produces three products from a joint process. The joint process has total costs of $1,200,000 per month. All three products, A, B & C, are immediately saleable as they come out of the joint process. Alternatively, any of the products could continue on with additional processing and be sold as a more complete product. The following information is available: a. Should Product A be sold immediately or sold after processing further? How much will the decision affect profit? b. Should Product B be sold immediately or sold after processing further? How much will the decision affect profit? c. Should Product C be sold immediately or sold after processing further? How much will the decision affect profit?

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. What is the maximum price Olive Corp should pay the outside supplier?

Bancroft currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $240. Bancroft currently produces 20,000 subcomponents at the following manufacturing costs: a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier? b. If Bancroft has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier? c. Now assume Bancroft would avoid $640,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?

The foregone benefit of choosing one alternative over another is measured by:

Which of the following types of decisions involves deciding whether to sell a product as is or continue to refine it so that it can be sold at a higher price?

Peach has received a special order for 10,000 units of its product. The product normally sells for $20 and has the following manufacturing costs: Assume that Peach has sufficient capacity to fill the order. What price should Peach charge to make a $10,000 incremental profit?

Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the previous year: What would Clay's profit margin be if the Laurel division was dropped and all fixed costs are unavoidable?

Almond has received a special order for 6,000 units of its product at a special price of $90. The product normally sells for $120 and has the following manufacturing costs: Assume that Almond has sufficient capacity to fill the order. If Almond accepts the order, what effect will the order have on the company's short-term profit?

Which of the following statements is false?

What is the term for the most constrained resource?

The first step in the managerial decision making process is to: