Exam 11: Decision Making and Relevant Information

Hasselhoff Camera is considering eliminating Model EOS1 from its camera line because of losses over the past quarter. The past three months of information for model EOS1 is summarized below: Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model EOS1 that has no resale value. Should Hasselhoff Camera eliminate Model EOS1 from its product line? Why or why not?

Lovejoy's Cake Shop makes three types of cakes: White, Chocolate, and Swirl on one assembly line that has a limit of 400 labour-hours per week. Lovejoy can sell all the cakes it can make under current operating capacity. Manufacturing information per cake for each product is as follows: Required: Determine the total weekly contribution margin when all labour-hours are allotted to the product with the highest: a. Unit selling price. b. Unit contribution margin. c. Contribution per labour-hour.

Answer the following question(s) using the information below. Central Medical Supply Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000; the market value would then be $136,000. However, Tripac offered to purchase the obsolete equipment as is for $88,000. -Central Medical Supply Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000; the market value would then be $136,000. However, Tripac offered to purchase the obsolete equipment as is for $88,000. What are the relevant figures above for management in their decision?

Boyd Tool Company is a tool manufacturer. Production capacity is 3,000 units per month; however, they are considering alternative ways to increase capacity to 3,500 units. One of the alternatives involves purchasing new equipment. In this alternative, there are two choices: machine A will provide increased capacity of 4,000 units per month, with unit costs of $14 at capacity; and, machine B will increase capacity to 3,600 units per month with unit costs of $15 at capacity. Both machines are adequate since Boyd's does not intend to go beyond the 3,500 units per month level for the foreseeable future. Relevant information for this decision includes

The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year: * The company pays for the entire space and allocates based on sq. metres used. Required: a. Do you recommend discontinuing the Other Candy product line? Why or why not? b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount?

Scott is the new manager of the credit card department of a large bank. One of his first changes, directed by the president, was to reorganize the activities of the department. He is reluctant to start the reorganization without including a comprehensive report from accounting about the current costs of operations and possible costs of changes. Required: Explain how the decision process model can assist the manager and discuss the steps in the decision process model that might be taken to ensure an orderly decision process.

Chalet Ski & Patio manufactures a product that has two parts, X and Y. It is currently considering two alternative proposals related to parts X and Y. The first proposal is for buying part Y. This would free up some of the plant space for the manufacture of more of part X and assembly of the final product. The product vice-president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed. The second proposal is for buying new equipment for the production of part Y. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero. Required: Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently. a. Sales revenue of the product. b. Variable costs of assembling final products. c. Direct manufacturing materials, part X. d. Direct manufacturing materials, part Y. e. Direct manufacturing labour, part X. f. Direct manufacturing labour, part Y. g. Variable manufacturing overhead, part X. h. Variable manufacturing overhead, part Y. i. Cost of old equipment for manufacturing Y. j. Cost of new equipment for manufacturing Y. k. Variable selling and administrative costs.

A cafe specializes in short order meals; and, morning and afternoon snack breaks. It is open from 9:00 am until 4:00 pm. An office manager in a nearby high rise office building offers the owner a contract to provide her 50 employees with afternoon snack breaks for $2.00 each. Each employee would receive a drink and a snack item. The shop has an hourly capacity of 50 customers. The owner estimates that the variable costs of the afternoon breaks would be $1.20 each. Currently the afternoon service, starting at 2:00, is running at only 50 percent capacity, although the morning and noon activities are near capacity. At the present level of operations each meal/snack served is allocated a fixed cost of $0.25. Required: a. What nonfinancial factors should be considered by the owner? b. Given your concerns listed in part a. and quantitative analysis, should the offer be accepted? Why or why not?

Northern Glass Manufacturing has a current production level of 200,000 glass jars per month. Unit costs at this level are: Current monthly sales are 180,000 units. Canadian Hardware Ltd. has contacted Northern Glass Manufacturing about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/distributing costs would not be incurred on the special order. What is Comics Plus' change in profits if the order is accepted?

Brix, Inc., prepares frozen food for fast-food restaurants. It has two workstations, cooking and assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased in recent months to 2,800 dozen units, management is considering adding another cooking station or else having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour each day is $2,400. The cost of adding another cooking station would add an average of $10 per hour. The current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either the extra hour or the new cooking station would increase production by 20 dozen a day, with a long-run increase of 80 dozen units in finished goods inventory to 280 dozen. Required: a. What is the total production per month if the change is made? b. What is the current monthly contribution margin, and the expected monthly product contribution for both of the possible changes? Assume long-run production equals sales. c. What course of action would you recommend?

Which of the following sets of sentences has two statements which are TRUE?

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications. -The firm's variable overhead is $50 per client hour

Koch Brothers purchased a new production machine for $200,000. It is capable of producing 400,000 units over its useful life, thus the manufacturer's salesperson claimed the unit cost would only be $0.50. Koch's own engineers recommended that the company acquire a machine that would have a unit cost of production of no more than $0.48 (with a $0.03 variance). A competitor of the vendor, who also was trying to sell Koch some equipment, claimed that the $0.50 is understated by $0.04 per unit. The total anticipated demand over the asset's useful life is 300,000 units. Relevant information includes

A local accounting firm has offered to do all the billings and collections of a general practitioner. The annual fee will be $12,000. The service will replace the part-time bookkeeper who works for $12 an hour, 10 hours a week. Because outsourcing accounting activities will take place away from the office, the doctor estimates that she will have one additional hour a week to see patients. Normally she sees four patients an hour with an average visit fee of $100. The office is open 50 weeks a year. Since the computer service will maintain all records in its office, the doctor will no longer need to rent storage space for the office files. The storage space rents for $150 a month. Required:Determine whether or not the doctor should accept the offer to use the computer service.

Collier Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $1.50 and $1.80, respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $4 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $42,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products. Required: a. Prepare an incremental analysis for the decision to make or buy the wheels. b. Should Collier Bicycles buy the wheels from the outside supplier? Justify your answer.

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications. -All staff members receive $1,000 per diem for travel

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications. -Current year's amortization of the firm's computer system is $15,000

The Glass Shop, a manufacturer of large windows, is experiencing a bottleneck in its plant. Setup time at one of its workstations has been identified as the culprit. A manager has proposed a plan to reduce setup time at a cost of $72,000. The change will result in 8,000 additional windows. The selling price per window is $18, direct labour costs are $3 per window, and the cost of direct materials is $5 per window. Assume all units produced can be sold. The change will result in an increase in the throughput contribution of

Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced each year with production costs as follows: Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23 is outsourced, 40% of the fixed costs cannot be immediately converted to other uses. Required: a. Describe avoidable costs. What amount of the WB23 production costs is avoidable? b. Should Quiett Truck outsource WB23? Why or why not? c. What qualitative factors should Quiett Truck consider before outsourcing any of the parts it currently manufactures?

Clinton Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $100 per month. The other existing equipment will be used for additional production of product A. One employee earning $200 per month can be terminated if product B production is dropped. Clinton's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows: Required: Prepare an incremental analysis to determine the financial effect of dropping product B.