Exam 7: Incremental Analysis for Short-Term Decision Making

Consider the most constrained resource you have: Your time. The bottleneck is 24 hours (the amount you - and everyone else - has in any given day). After considering time spent sleeping, eating, and working, you are left with eight hours per week of extra time, which you may spend studying for the CPA exam or playing the piano. As a CPA, your potential earnings per hour are $125.00, while as a pianist your potential earnings per hour are $55.00. The variable cost per direct labor hour of your time is $25.00. a. Based on the data in the table above, how many hours should you spend studying each week? (Pretend the available hours are consecutive hours.) b. You find you retain less information the longer you study, such that the variable cost of each hour of studying actually doubles with each additional hour spent studying. Given this new information, how many hours should you spend studying each week? (Pretend the available hours are consecutive hours.)

It costs Camp, Inc. $35 per unit to manufacture 1,000 units per month of a product that it can sell for $50 each. Alternatively, Camp could process the units further into a more complex product, which would cost an additional $30 per unit. Camp could sell the more complex product for $75 each. How would processing the product further affect Camp's profit?

A special-order decision analysis should not be used if the firm is operating at full capacity

Dardon Company currently produces three products from a joint process. The joint process has total costs of $250,000 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: Which of the products should be sold immediately without further processing?

Chafford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit costs to produce the subcomponents are: Due to a labor strike, Chafford is considering purchasing the subcomponents from an outside supplier for $250 per unit. The union is demanding a 20% increase in pay for direct labor. Fixed overhead is not avoidable. How much could Chafford increase their pay before it would be more advantageous to purchase the subcomponents from the outside supplier?

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. Considering solely the enrollment cost of each alternative, which would you choose?

Ross has received a special order for 10,000 units of its product at a special price of $30. The product normally sells for $40 and has the following manufacturing costs: Assume that Ross has sufficient capacity to fill the order. If Ross accepts the order, what effect will the order have on the company's short-term profit?

Pasadena Corp. produces three products, and currently has a shortage of machine hours since one of its two machines is down - only 360 hours are available this month. The selling price, costs, labor requirements, and demand of the three products are as follows: a. In what order should Pasadena prioritize production of the products? b. How many of each product should be sold while the machine is down to maximize profit? c. What is the total contribution margin if Pasadena prioritizes production according to its limited resources?

Capitol has received a special order for 2,000 units of its product at a special price of $195. The product normally sells for $260 and has the following manufacturing costs: Assume that Capitol has sufficient capacity to fill the order without harming normal production and sales and all fixed overhead is unavoidable. a. If Capital accepts the order, what effect will the order have on the company's short-term profit? b. What minimum price should Capital charge to achieve a $65,000 incremental profit? c. Now assume Capital is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Capitol accepts the order, what effect will the order have on the company's short-term profit?

When managers make a decision, they base it strictly on the numerical analysis performed in step three of the decision making process

A special-order decision analysis should not be used to make long-term pricing decisions

Which of the following is not a step in the managerial decision-making process?

Potter has received a special order for 10,000 units of its product at a special price of $24. The product normally sells for $32 and has the following manufacturing costs: Potter is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Potter accepts the order, what effect will the order have on the company's short-term profit?

Spencer Inc. manufactures a product that costs $36 per unit plus $32,000 in fixed costs each month. Spencer currently sells 1,000 of these units per month for $80 each. If Spencer leased a machine for $8,000 a month, it could add features to the product that would allow it to sell for $120 each. It would cost an additional $12 per unit to add these features. How much would Spencer have to charge for the product with additional features to make it worthwhile to lease the machine?

Pinehurst, Inc. currently sells 20,000 units of its product per year for $200 each. Variable costs total $75 per unit. Pinehurst' manager believes that if a new machine is leased for $250,000 per year, modifications can be made to the product that will increase its retail value. These modifications will increase variable costs by $50 per unit, but Pinehurst is hoping to sell the modified units for $275 each. a. Should Pinehurst modify the units or sell them as is? How much will the decision affect profit? b. What is the least Pinehurst could charge for the modified units to make it worthwhile to modify them? c. The leasing company is willing to negotiate the price of the machine lease. What is the most Pinehurst would be willing to pay to lease the machine if they plan to charge $275 for the modified units?

Clifford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The current unit costs to produce the subcomponents are: Due to a labor strike, Clifford is considering purchasing the subcomponents from an outside supplier for $250 per unit rather than paying the 10% increase in direct labor costs demanded by the union. Fixed overhead is not avoidable. If Clifford purchases the subcomponent from the outside supplier, how much will profit differ from what it would be if it manufactured the subcomponents with the increase in direct labor cost?

If machine hours are a constraining factor, the product with the highest contribution margin per machine hour should be prioritized in production

Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. If Cotton Corp rejects the outside offer, what will be the effect on short-term profits?

It costs Hickory, Inc. $220 per unit to manufacture 1,000 units per month of a product that it can sell for $290 each. Alternatively, Hickory could sell the units at an earlier stage of processing, which would save $80 per unit. Hickory could sell the simpler product for $200 each. How would selling the simpler product affect Hickory's 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. If Olive Corp accepts the outside offer, what will be the effect on short-term profits?