Exam 11: Decision Making With a Strategic Emphasis

Sunk costs:

In deciding whether to accept or a reject a special sales order, which of the following costs are likely relevant to the decision?

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

If the company accepts the offer from the outside supplier, the monthly avoidable costs (costs that would no longer be incurred) would be:

When a firm has surplus capacity as opposed to constrained capacity (i.e., resource constraints), relevant costs for decision-making (e.g., determining short-term product mix) will be:

The Crown Company must decide whether to make or buy part 128PC. Although Crown's idle equipment could be used to produce up to 10,000 units of the part, the company presently needs only 7,000 units. The following shows the estimated cost of making part 128PC. Reuten Company will sell part 128PC to the Crown Company for $20 per unit. Required: Determine whether Crown should make or buy the part, and explain why.

The Tee Box is a golf shop inside the clubhouse of a North Carolina golf course. Derek Dunlop, owner of the Tee Box, was deciding how much shelf space to devote to four different golf ball types. Derek had a maximum front shelf space of fifteen feet to devote to the four golf ball types. He wanted a minimum of three feet and a maximum of seven feet of front shelf for each golf ball type. Appropriate data on the four ball types follow: The daily contribution per foot of front shelf space for Straight is calculated to be:

Winona Johnson is the president of Johnson Mfg., which manufactures coats. She is trying to decide whether to make 3,000 Type III coats or purchase them from a subcontractor to fill a rush special order that she just received. There are no marketing costs on the special order. Acceptance of the special order would not necessitate any premium pay for overtime work or additional fixed costs. Johnson Mfg. has supplied the following data: Required: 1. At what purchase price per unit would Ms. Johnson be indifferent as to whether her firm manufactured the coats or they were purchased from a subcontractor? 2. What qualitative factors might influence Ms. Johnson's decision regarding manufacturing the coats or purchasing them?

A boat, costing $108,000 and uninsured, was wrecked the very first day it was used. It can either be disposed of for $11,000 cash and be replaced with a similar boat costing $110,000, or rebuilt for $98,000 and be brand new as far as operating characteristics and looks are concerned. A relevant cost analysis of the decision to replace the boat shows:

When there is limited capacity, the minimum acceptable price for a special sales order will equal the _______________ from the product that is sacrificed plus the variable costs of the ordered product.

Diamond is thinking of dropping Product Line C because it is reporting an operating loss. Assuming the company drops Product Line C and does not replace it, operating income for the firm will:

You just bought a new car for $125,000. Before you had time to get insurance, the car was wrecked. Weird Wally offers to take it off your hands for $10,000. You can then purchase a similar model for $128,000. A body-shop with an excellent reputation offers to rebuild it for $90,000 and loan you a similar model while the vehicle is being rebuilt. Once rebuilt, the body-shop claims, it will run like a new car and nobody will be able to tell the difference. What would you do from a financial point of view?

The mathematical tool used to determine the optimum short-term product (or service) mix is:

In the situation where a firm produces multiple products and the firm has a single resource constraint (e.g., machine hours), the most profitable use of available capacity (machine hours) requires that we assess:

When using relevant cost analysis, it is a common mistake for untrained managers to include in their analysis all the following except:

To make a decision whether to accept or reject a special sales order, managers need critical information about all the following except:

A company owns equipment that is used to manufacture important parts for its production process. Because the equipment is repeatedly breaking down, the company plans to sell the equipment for $10,000 and to select one of the following alternatives: (1) acquire new equipment for $80,000 and continue to manufacture the part at the same variable cost, or (2) purchase the parts from an outside company at $4 per part. In the short run the company should quantitatively analyze the alternatives by comparing the variable cost of manufacturing the parts:

The maximum price that Preston should be willing to pay the outside vendor for each unit of QX100 is:

The contribution margin per unit for Clash is:

Smith Co., maker of high-quality eyewear, incurs fixed costs of $18 and variable costs of $36 in making one unit of its matrix line of sunglasses. Smith Co.'s major supplier has offered to make all 100,000 matrix sunglasses for $44 each. If Smith accepts the offer of the supplier, Smith will save $4 per unit in fixed costs. Based on this information, should Smith Co. make or buy the sunglasses and how much will be saved?