Exam 4: Relevant Information for Decision Making

Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of LittleBlast were produced and sold. Following are average prices and costs for last month: BiqBlast LittleBlast Selling price \ 100 \ 200 Direct materials (25) (75) Direct labour (15) (35) Variable overhead (5) (30) Product line fixed costs (10) (40) Corporate fixed costs (25) (25) Average margin per unit \2 0 \5 The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped. The following qualitative factors are relevant to Horton's decision: I. Would dropping one product affect the sales of the other product? II. Are all product line fixed costs completely avoidable? III. Would layoffs affect other workers' morale?

Managers relax constraints by: I. Using constrained resources more effectively II. Increasing available resources III. Emphasizing the product with the highest contribution margin per unit

The effect of production practices on the environment is an example of a qualitative factor to be considered in a nonroutine operating decision.

In the decision to drop a product line, fixed costs are often classified as:

Variable costs are important for which type of relevant cost decisions? I. Special order II. Outsourcing III. Keep or drop a product

Nonroutine operating decisions involve primarily decisions about long-term strategic plans.

The accessibility and timeliness of information can affect decision quality in nonroutine situations.

An order from a new customer always constitutes a special order.

Amsat Company has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available: Unit Variable Units Product Unit Price cost per Hour \ 400 \ 200 8 300 150 22 600 250 8 200 100 20 Which product should be emphasized last?

Sebastian is a manager at DLL Restaurant. He is considering accepting a special order from a neighbourhood homeless shelter for 150 Thanksgiving meals. Which of the following is a relevant qualitative factor he should consider?

In an outsourcing decision, fixed costs are:

Rapid growth may require a company to outsource certain products or services.

Under the general decision rule for relaxing a constraint, managers are willing to pay:

Vicade has 1,000 commercial video game machines in inventory produced at a cost of $400 each (60% variable and 40% fixed). The machines were to have been sold for $1,000 each. However, the machines currently contain a minor malfunction reducing their selling price to $150 each. The company could correct the malfunction at a variable cost of $250 each and then sell the machines for $550 each. If the games are reworked, what will be the contribution per unit from doing so?

Hillary Corporation has its own cafeteria with the following annual costs: Food \ 200,000 Labour 150,000 Overhead Total The overhead is 40% fixed. Of the fixed overhead, $50,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and that Hillary will continue to pay her salary, the maximum cost Hillary is willing to pay an outside firm to replace the cafeteria services is:

Callow Company has considerable excess manufacturing capacity. A special job order's cost sheet includes the following allocated manufacturing overhead costs: Fixed costs \ 42,000 Variable costs 66,000 The fixed costs include a normal $7,400 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $15,500. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

The general rule is to discontinue a segment of the business when its total contribution margin does not cover avoidable fixed costs.

Nonroutine operating decisions differ from routine operating decisions in that nonroutine decisions:

The general rule for special orders is:

When resources are constrained, managers are most likely to use the following method to develop decision making information: