Exam 11: Decision Making With a Strategic Emphasis

The firm of Miller, Lombardi, and York was recently formed by the merger of two companies providing accounting services.York's business was providing personal financial planning, while Miller and Lombardi conducted audits of small governmental units and provided tax-planning and preparation for several commercial firms.The combined firm has leased new offices and acquired several microcomputers that are used by the professional staff in each area of service.However, in the short run the firm does not have the financial resources to acquire computers for all of its professional staff. The expertise of the professional staff can be divided into three distinct areas that match the services provided by the firm, i.e., tax preparation and tax planning, insurance and investments, and auditing.However, since the merger, the new firm has had to turn away business in all three areas of service.One of the problems is that while the total number of staff seems adequate, the staff members are not completely interchangeable.Limited financial resources do not permit hiring any new staff in the near future, and therefore, the supply of staff is restricted in each area. Rick Oliva has been assigned the responsibility of allocating staff and computers to the various engagements.The management has given Oliva the objective of maximizing revenues in a manner consistent with maintaining a high level of professional service in each of the areas of service.Management's time is billed at $200 per hour and staff's time is billed at $140 per hour for those with experience, and $100 per hour for inexperienced staff.Pam Wren, a member of the staff, recently completed a course in managerial accounting at the local university.She suggested to Oliva, based on material covered in the course she took, that he use linear programming to assign the appropriate staff and computers to the various engagements. Required: 1.Identify and discuss the assumptions underlying the linear programming model. 2.Explain the reasons why linear programming would be appropriate for Miller, Lombardi, and York to use in making staff assignments. 3.Identify and discuss the data that would be needed to develop a linear programming model for Miller, Lombardi, and York. 4.Discuss objectives other than revenue maximization that Rick Oliva should consider before making staff allocations.

Copeland Inc. produces product X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade (i.e., further process) the product to become Xylene. The following information has been gathered: (1) Selling price per pound of X-547. (2) Variable manufacturing costs of the upgrade process. (3) Avoidable fixed costs of the upgrade process. (4) Selling price per pound of Xylene. (5) Joint manufacturing costs to produce X-547. Which of the items should be reviewed when making the upgrade decision?

In a manufacturing environment, the short-term profit-maximizing decision would be to:

Diamond Company has three product lines, A, B, and C. The following financial information is available:If Product Line C is discontinued and the manufacturing space formerly devoted to this line is rented for $6,000 per year, pre-tax operating income for the company will likely:

Motor Corp.manufactures machine parts for boat engines.The CEO, James Hamilton, was considering an offer from a subcontractor who would provide 3,000 units of product AB100 for Hamilton for a price of $230,000.If Motor Corp.does not purchase these parts from the subcontractor it must produce them in-house with the following per-unit costs: In addition to the above costs, if Hamilton produces part AB100, he would also have a retooling and design cost of $10,000.Should Motor Corp.accept the offer from the subcontractor?

Fixed costs will often be irrelevant for short-term decision making because they:

Triad Children's Center (TCC), a non-profit organization, uses relevant cost analysis to determine whether new services are desirable. TCC is looking at adding a new educational program for grade school children who are having difficulty with their reading and math skills. The following relevant costs are expected if the program is accepted:TCC estimates that a maximum of 40 children will participate in this program in the first year. If TCC decides to implement this program, funding will be received from the City Chamber of Commerce ($50,000) and a local Private University Endowment Fund ($35,000). Calculate the expected surplus or deficit from operations given the above information.

Which of the following statements regarding a joint production process is not true?

Preston Industries, Inc. currently manufactures part QX100, which is used in several products produced by the company. Monthly production costs for 10,000 units of QX100 are as follows:Accounting has estimated that 20% of the fixed overhead costs currently assigned to QX100 would not be needed if the company chose to purchase the part from an outside supplier. Preston currently has the option of purchasing the part from an outside supplier at $16.00 per unit. If the company accepts the offer from the outside supplier, the monthly avoidable costs (that is, costs that would no longer be incurred) would be:

"Special sales orders," as this term is used in Chapter 11:

Lyman Company has the opportunity to increase annual credit sales $100,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 15 percent of credit sales. The company's manufacturing and selling expenses are projected at 70% of sales, and its effective income tax rate is 40%. If Lyman accepts this sales opportunity, its after-tax profits would increase by an estimated:

The Sand Cruiser is a takeout food store at a popular beachside resort. Teresa Texton, owner of the Sand Cruiser, was deciding how much refrigerator space to devote to four different beverages. Appropriate data on the four beverages follow:The contribution per foot of shelf space per day for Limeade is:

ABC, Inc. is considering whether to repair a five-year-old fork lift or to purchase a used one as a replacement. The company estimates that it would take $3,000 to repair the existing fork lift, which is the same amount needed to purchase the used fork lift. Cost-related information for both assets is as follows:

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

Lester-Smith Company manufactures three wood construction components: wood trusses, wood floor joists, and beams.The plant is operating at full capacity.It can produce 200 trusses, 1,000 joists, and 600 beams per month and sells everything it produces.The monthly revenues and expenses for the three products are Required: 1.The firm makes wood trusses mainly to satisfy certain customers by offering a full line of wood components.Lately, it has had a problem making a profit on the trusses and is considering buying them from another manufacturer at $55 a truss.Based solely on a short-term financial analysis, should the firm buy these trusses or continue to make its own? (Show calculations.) 2.Lester-Smith has an opportunity to produce an additional 400 beams for a customer at a price of $100 each.If it accepts this special order, the firm cannot produce trusses because the plant will be operating at full capacity.Should the firm accept this special order? (Show calculations.)

Manders Manufacturing Corporation uses the following model to determine an optimal short-term product mix for its two products, metal (M) and scrap metal (S): Max Z = $30M + $70S Where: 3M + 2S ≤ 15 2M + 4S ≤ 18 The two inequality functions in the above set of items represent:

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 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 analyze the two decision alternatives by comparing the variable cost of manufacturing the parts:

One of the behavioral problems with relevant cost analysis is a possible overemphasis on:

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

Motor Corp.manufactures machine parts for boat engines.The CEO, James Hamilton, was considering an offer from a subcontractor who would provide 3,000 units of product AB100 for Hamilton for a price of $230,000.If Motor Corp.does not purchase these parts from the subcontractor it must produce them in-house with the following per-unit costs: In addition to the above costs, if Hamilton produces part AB100, he would also have a retooling and design cost of $10,000.Calculate the relevant costs of producing 3,000 units of product AB100.