Exam 11: Decision Making and Relevant Information

Under the opportunity-cost approach, the relevant cost of any alternative is the incremental of the alternative plus the opportunity cost of the profit foregone from choosing the alternative.

Fairhaven Company needs 1,000 motors in its manufacture of boats. It can buy the motors from Asian Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following costs per unit: If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied will not be avoided. Required: a.Should the company make or buy the motors? b.What additional factors should Southwestern consider in deciding whether or NOT to make or buy the motors?

When using the five-step decision process, which one of the following steps should be done first?

A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated decor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers. Identify for the restaurant management a.those costs that are relevant to this decision, b.those costs that are not differential, c.and qualitative considerations.

A decision model is an informal method for making a choice, using simpler methods like surveying.

What are opportunity costs? Explain why opportunity costs are not recorded in financial accounting systems.

Canary's Products Inc. manufactures three different product lines, Basic, Better, and Best. Considerable market demand exists for all models. The following per unit data apply: a.For each model, compute the contribution margin per unit. b.For each model, compute the contribution margin per machine-hour. c.If there is excess capacity, which model is the most profitable to produce? Why? d.If there is a machine breakdown, which model is the most profitable to produce? Why? e.How can Canary encourage its sales people to promote the more profitable model?

Which of the following is true of relevant information?

Based on the theory of constraints, investments equal ________.

In a one-time special order situation, if the price offered by the buyer is less than the absorption cost per unit, the special order may still be profitable since absorption costs include allocated fixed manufacturing overhead.

Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are: Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about purchasing 2,500 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Zephram's change in operating profits if the one-time-only special order is accepted?

Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply: Which model has the greatest contribution margin per unit?

________ is relevant in a decision to replace equipment.

When capacity is constrained, the relevant revenues and costs of any alternative equal the incremental future revenues and costs plus the opportunity cost.

For short-run product-mix decisions, managers should focus on minimizing total fixed costs.

Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers: For Crandle Manufacturers Inc., what is the minimum acceptable price of this special order?

Swan Manufacturing is approached by a 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: Swan Manufacturing has excess capacity. Required: a.What is the full cost of the product per unit if the marketing costs is $3,000? 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 Swan 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 $5,400 per unit? Why or why not?

The management accountant for Giada's Book Store has prepared the following income statement for the most current year: If the travel book line had been discontinued, corporate profits for the current year would have decreased by ________.

With a constraining resource, managers should choose the product with the ________.

In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product.