Exam 6: Decision Making in the Short Term

One way businesses may manage demand is:

Handi-Tool Company manufactures and sells lawn and garden tools. Handi manufactures three kinds of pruning shears: Snip-It, Deluxe Clipper, and Limb-Away. The demand for the pruning shears is highest in April. Expecting this trend to continue, Handi is interested in how to best utilize available capacity. Given the following information, what combination of pruning shears should Handi-Tool produce? a. 200,000 Snip-It; 100,000 Deluxe Clipper, 0 Limb-Away. B) 200,000 Snip-It; 60,000 Limb-Away; 0 Deluxe Clipper. C) 100,000 Deluxe Clipper; 60,000 Limb-Away; 0 Snip-It. D) 200,000 Snip-It; 100,000 Deluxe Clipper; 60,000 Limb-Away. E) 150,000 Snip-It; 75,000 Deluxe Clipper; 45,000 Limb-Away.

One reason it might be profitable for a caterer to accept a catering job for Wednesday but reject it for Saturday is because the caterer has excess capacity on Wednesdays.

In general, analysis that considers only controllable or relevant costs is less efficient when decision options differ only with respect to a few benefit and cost items.

Most short-term decisions deal with temporary gaps between:

Because potential longer-term effects could vary across short-term decision options, they might be relevant.

Little Toy Company makes and sells miniature doll houses. Little produces two kinds of houses: Standard and Deluxe. The demand for doll houses is highest in November and December. Expecting this trend to continue, Little is interested in how to best utilize available capacity. Given the following information, what combination of doll houses should Little produce? a. 8,000 Standard; 3,000 Deluxe. B) 8,000 Standard; 1,000 Deluxe. C) 5,000 Standard; 3,000 Deluxe. D) 3,636 Standard; 7,364 Deluxe. E) 3,636 Standard; 1,363 Deluxe.

Consider the following decision option data: What is the best choice?

If selling price is $25, unit contribution margin equals $15 and fixed costs are $12,000, then breakeven volume is:

Which of the following is a short-term decision that is a reaction to excess demand? a. Management makes the decision to emphasize sales in a certain market to boost poor sales. B) Management makes the decision to close a plant because of increased competition. C) Management makes the decision to buy parts rather than make them after calculating a positive opportunity cost for capacity. D) Management makes the decision to make parts rather than buy them after calculating a positive opportunity cost for capacity. E) All of the above a short-term decisions that are reactions to excess demand.

Consider the following decision option data: What is the incremental profit for Option #2?

A sunk cost is a relevant cost in decision making under the gross approach.

To maximize profit when capacity is in short supply, minimize the contribution margin per unit of capacity.

Which of the following is an example of utilizing capacity effectively?

Which of the following is not a short-term decision that is a reaction to excess capacity? a. Management makes the decision to emphasize sales in a particular market to boost poor sales. B) Management makes the decision to issue a rebate, offering customers a rebate of $0.50 for every widget sold, because inventory is too large. C) Management makes the decision to close a plant because of increased competition. D) Management accepts a special order at a reduced selling price since the order 's relevant costs will be less than the special order's sales price. E) All of the above are short-term decisions that are reactions to excess capacity.

Shickman Company makes the widgets it uses in one of its products at a cost of $8 per unit. This cost includes $2 of fixed overhead. The company needs 10,000 of these plugs annually, and Orlando Company has offered to sell them at $5 per unit. If Shickman Company purchases the plugs, the company would: a. Increase profits by $30,000. B) Decrease profits by $10,000. C) Increase profits by $10,000. D) Decrease profits by $30,000.

The Owens Company budgeted sales of 20,000 printers at $90 per unit last year. Variable manufacturing costs were budgeted at $46 per unit, and fixed manufacturing costs at $12 per unit. A special order for 1,000 printers at $72 each was received by Owens in April. There is enough plant capacity to meet these additional units without incurring any additional fixed manufacturing costs; however, the production would have to be done on an overtime basis at an estimated additional cost of $5 per printer. Acceptance of the special order would not affect Owens' normal sales and no selling expenses would be incurred. What would be increase to net operating income if the special order were accepted?

The Huffman Tire Company has 3,000 tires in its inventory which are considered obsolete. Each unit originally cost the company $35. Management is considering options to reduce these inventory levels. Units can be sold directly to car dealerships for $30 per tire as opposed to the normal selling price of $45 per tire. The other option is to offer their current customers a $10 per tire rebate on their purchase. In addition to the $10 rebate, the program would cost the company approximately $24,000 to manage. They predict that either option will rid them completely of their excess inventory. The decision to sell directly to the car dealerships over offering the rebate will result in:

The Southeast Company makes three products in one manufacturing facility. Data regarding these products are as follows: If there are only 2,000 machine hours available, which is the MOST profitable product?

Managers often use the term "real options" to denote the flexibility associated with different options and use advanced mathematical techniques to value the real options.