Exam 4: Relevant Information for Decision Making

Opportunity costs are often relevant in make or buy decisions.

Accuracy of cost estimates is one of the uncertainties in this type of decision: I. Special order II. Make or buy III. Product emphasis

The general rule is to discontinue a service when its total fixed costs are less than its avoidable fixed costs.

Managers should generally consider opportunity costs both in "keep or drop" and in "make or buy" decisions. Which of the following is an opportunity cost they should consider in both situations?

"Whether delivery timeliness is an important factor" is an example of a

Which of the following is an opportunity cost associated with dropping a business segment?

When deciding whether to outsource or insource a product or service, managers consider:

What is the opportunity cost of making a component part in a factory given no alternative use of the capacity?

If a firm has no extra capacity and a customer asks for a special order, what price is acceptable (assuming there are no relevant qualitative factors)?

When an organization faces multiple constraints for multiple products, what kind of quantitative analysis needs to be performed?

The general rule is to discontinue a product line when its total profit margin is greater than its avoidable fixed cost.

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. Using only the information provided above, Horton could make several types of decisions. Possible decisions include: I. Keep or drop II. Product emphasis III. Special order IV. Constrained resources

In a linear programming problem, slack resources are the same as:

Average costs are appropriate to use when deciding whether to keep a product or product line.

The shadow price of a slack variable in a linear programming solution that maximizes the total contribution margin reflects:

A company manufactures chips used in the production of computers. The chips can be purchased for $50 each from an outside vendor. It costs the manufacturer $60 a chip to produce them, of which 25% is fixed overhead cost. What are the relevant costs for this decision? Based on these costs, which option should the company choose? Relevant Costs (Purchase and Manufacture) Decision a) \ 50 and \ 45 Manufacture b) \ 50 and \ 45 Purchase c) \ 45 and \ 40 Purchase d) \ 45 and \ 40 Manufacture

When resources are constrained, managers should emphasize products and services that maximize the contribution margin per unit of constrained resource.

Special order decisions are long-term decisions that may need to include the time value of money.

General decision rules associated with outsourcing decisions assume the organization's goal is to:

Assume the following cost data: Per-unit costs: Direct material \ 6 Direct labour \ 4 Variable overhead \ 2 Variable selling \ 4 Fixed overhead \ 300 Fixed selling \ 400 A special order for 100 units is received. The buyer wants his name stamped on each unit. This will increase labour costs by $0.25 per unit and cost $300 for the stamping machine. What price must be charged to earn $300 on the special order?