Exam 11: Decision Making and Relevant Information

When considering a project that will require production using otherwise idle resources, which of the following are TRUE?

Sarasota 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 $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 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 Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.

Electrical Engineering Equipment Ltd. purchased a machine for $100,000; current accumulated amortization totals $40,000. Management is contemplating the purchase of a new machine for $120,000. Current disposal of the old machine would cost $65,000. What is the correct category for each item?

First Image has a plant capacity of 80,000 units per month. Unit costs at capacity are: Current monthly sales are 78,000 units at $12.60 each. Computer Output Management has contacted First Image about purchasing 2,000 units at $12.00 each. Current sales would not be affected by the special order. What is First Image's change in profits if the order is accepted?

Axle and Wheel Manufacturing is approached by a European customer to fill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Axle and Wheel Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not?

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are: Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Lewis Auto Company? By how much?

Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Products' production capacity, which is limited by available machine-hours and direct manufacturing labour hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits. Direct manufacturing labour is limited to 1,600 hours a month and machine hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labour and 8 machine hours. Special keyboards require 34 labour hours and 20 machine hours. Select the appropriate linear programming objective and constraint functions designed to maximize Computer Products total contribution margin. Let R represent Regular keyboards and S represent Special keyboards.

Parker and Spitzer Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Parker and Spitzer Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Parker and Spitzer Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of 200 per unit? Why or why not?

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. -Last year the firm paid $4,000 to make improvements in its 5-year leasehold on its offices

A company has two manufacturing facilities: one in Alberta that produces a bulk chemical that it sells to many different retailers, and one facility in Ontario that is dedicated to producing a specialty chemical for one client only. The annual profit from the single client is $150,000; and, the profit from the other facility's sales is $1,500,000, after allocating combined fixed costs based on units produced. Another company has offered to lease the Ontario facilities for $250,000. Which of the following is TRUE?

Palmateer Industries makes an electronic component in two departments, Machining and Assembly. The capacity per month is 30,000 units in the Machining Department and 20,000 in the Assembly Department. The only variable cost of the product is the direct material of $100 per unit. All direct material cost is incurred in the Machining Department. All other costs of operating the two departments are fixed costs. Palmateer can sell as many units of this electronic component as it produces at a selling price of $300 per unit. Required: Assuming any defective unites produced in either department must be scrapped: a. Compute the loss that occurs if a defective unit is produced in the Machining Department. b. Compute the loss that occurs if a defective unit is produced in the Assembly Department. c. How do your answers in parts (a) and (b) relate to the theory of constraints? Explain.

John Hatelak, a sales representative for a manufacturing equipment company, has decided to spend less time traveling. He is going to spend only 172 hours per month with his customers. To do this he will have to give up some of his clients. The following information is from his last full month's sales activities. Required: a. What should be his customer mix in order to maximize his sales commissions? b. What will be his income at the best possible customer mix?

Kando Manufacturing Ltd. produces two products, lawn mowers and power washers. Lawn mowers have a unit contribution margin of $75, and power washers have a unit contribution margin of $55. The demand for lawn mowers exceeds their production capacity, which is limited by available direct labour and machine hours. The maximum demand for power washers is 300 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits. Direct manufacturing labour is limited to 600 hours a week and 400 hours is all that the company's outdated machines can run a week. The lawn mowers require 1.5 hours of labour and 1 machine hour. Power washers require 2.5 labour hours and 2 machine hours. Required: Formulate the linear programming objective function and constraints necessary to determine the optimal product mix.

The management accountant for the Awesome Candy 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. 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?