Exam 7: Incremental Analysis for Short-Term Decision Making

Elmwood,Inc.currently sells 12,000 units of its product per year for $100 each.Variable costs total $75 per unit.Elmwood's manager believes that if a new machine is leased for $147,000 per year,modifications can be made to the product that will increase its retail value.These modifications will increase variable costs by $20 per unit,but Elmwood is hoping to sell the modified units for $130 each. a.Should Elmwood modify the units or sell them as is? How much will the decision affect profit? b.What is the least Elmwood 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 Elmwood would be willing to pay to lease the machine if they plan to charge $130 for the modified units?

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 sell for $75 each.It would cost an additional $10 per unit to add these features.How much would Maple's profit be affected if it leased the machine and added features to its product?

Pepper Corp.produces three products,and currently has a shortage of machine hours since one of its two machines is down.The selling price,costs,and machine time requirements of the three products are as follows: In what order should Pepper Corp.prioritize production of its products to maximize profit while the machine is down?

Castle Corp.produces three products,and is currently facing a labor shortage.The selling price,costs,and labor requirements of the three products are as follows: Castle has unlimited demand for all its products.Which product/s should Castle Corp produce to maximize profit during the labor shortage?

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?

A relevant cost is one that will not change depending upon which alternative is selected.

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?

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.rejects the outside offer,what will be the effect on short-term profits?

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

Henry Sweet Co.currently makes 6" candy sticks that it sells for $0.20 each.Henry can make 12" candy sticks out of two 6" candy sticks by melting them together,which costs an additional $0.03 per 12" stick.Henry can sell the 12" sticks for $0.45.Henry has enough capacity to make 10,000 6" candy sticks per month,and enough demand to sell all the candy sticks it can manufacture,whether 6" or 12".Should Henry sell 6" or 12" candy sticks,and how much additional profit will its decision bring in per month?

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

The accounting firm of Pie and Lowell is examining its client base to determine how profitable its regular clients are.Its analysis indicates that Chico,Inc.paid $116,000 in fees last year,but cost the firm $124,000 ($106,000 in billable labor,supplies,and copying,and $18,000 in allocated common fixed costs).If Pie and Lowell dropped Chico,Inc.as a client,and all fixed costs are unavoidable,how would profit be affected?

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. )

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?

Reno Corp.produces three products,and is currently facing a labor shortage - only 3,000 hours are available this month.The selling price,costs,and labor requirements of the three products are as follows: a.What is the contribution margin per unit for each product? b.What is the contribution margin per direct labor hour for each product? c.Assume Reno has unlimited demand for each product.Which product should Reno focus on producing? d.What is the total contribution margin if Reno focuses as determined in part (c)?

Underwood,Inc.manufactures two products.It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month.The table below lists the contribution margin,labor and machine time requirements,and demand for each product. What is the total contribution margin if Underwood,Inc.prioritizes production according to its limited resources?

Crystal has received a special order for 2,000 units of its product.The product normally sells for $200 and has the following manufacturing costs: Crystal is currently operating at full capacity and cannot fill the order without harming normal production and sales.What minimum price should Crystal charge to earn an incremental profit of $50,000?

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,and labor requirements of the three products are as follows: a.What is the contribution margin per unit for each product? b.What is the contribution margin per machine hour for each product? c.Assume Pasadena has unlimited demand for each product.Which product should Pasadena focus on producing?

Market Inc.has two divisions,Talbot and Heather.Following is the income statement for the past month: What would Market's profit margin be if the Talbot division was dropped and all fixed costs are unavoidable?

Underwood,Inc.manufactures two products.It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month.The table below lists the contribution margin,labor and machine time requirements,and demand for each product. How much of each product should Underwood manufacture per month?