Exam 11: Decision Making With a Strategic Emphasis

Which one of the following is most relevant to an equipment-replacement decision (assume no tax effects) used in a trade or business?

HJM Auto Parts makes a muffler/pipe assembly for a cost of $45 each ($10 fixed and $35 variable) and then sells it for $68.The opportunity exists to modify this assembly (to a more fuel efficient model) for additional direct materials and labor cost of $5 per unit.The new muffler/pipe model is expected to sell for $80.00 each.Variable selling and distribution costs would be the same at $10 per unit.Projected sales volume is 60,000 units per year for the new model, the same level of sales as for the current assembly.Labor resources are very tight at present but machine capacity is underutilized. Required: 1.Should HJM modify the existing assembly? 2.What would be the increase/decrease in profit if HJM modifies the assembly? 3.How will the labor constraint affect the decision?

When a decision is made in an organization, it is selected from a group of alternative courses of action (i.e., decision alternatives). The loss associated with not choosing a given decision alternative is referred to as a(n):

Joe Green Enterprises has met all production requirements for the current month and has an opportunity to produce additional units of product with its excess capacity.Unit selling prices and costs for three models of one of its product lines are as follows: Variable overhead is charged to products on the basis of direct labor dollars, and fixed overhead is charged to products on the basis of machine hours. Required: 1.If Joe Green Enterprises has excess machine capacity and can add more labor as needed (that is, neither machine capacity nor labor is a constraint), the excess production capacity should be devoted to producing which product or products? (Show calculations.) 2.If Joe Green Enterprises has excess machine capacity but a limited amount of labor time, the production capacity should be devoted to producing which product or products?

Employee morale and social responsibility represent two examples of:

Which one of the following issues would least likely be addressed during the regular review of product profitability?

In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to this short-run decision is:

In a sell-or-process-further decision, joint production costs:

The Robinson-Patman Act, administered by the U.S. Federal Trade Commission, addresses pricing that could substantially damage the level of competition in an industry. This type of pricing is called:

The Car Lot is a New York car dealership located in a highly visible area along a prominent highway.Fred Barns, owner of The Car Lot, was deciding how much front-row space along the highway to devote to four different car models.Fred had a maximum front-row space of 200 feet to devote to the four car models.He wanted a minimum of twenty feet and a maximum of eighty feet of front-row space for each car model.Appropriate data on the four car models follow: The convertible model's monthly contribution per 10 feet of front-row space is calculated to be:

Harrington Corporation produces three products, A, B, and C. Pertinent information on these products is as follows:The objective function for a linear program to maximize contribution margin from the set of three products is:

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: Teresa had a maximum front shelf space of fourteen feet to devote to the four beverages.She wanted a minimum of two feet and a maximum of seven feet of front shelf for each beverage.The contribution margin per case for Limeade is:

Old Vine Vineyard produces premium wine.Its success in the industry is due to its quality, although all of its customers, wine shops and specialty grocery stores, are very cost conscious and negotiate for price cuts on all large orders.Noting that the wine industry is becoming increasingly competitive, Old Vine is looking for a way to meet the challenge.It is negotiating with Eastern Seasons, a regional specialty grocery store, to purchase a large order of wine.Old Vine is currently producing at under-capacity and would like to keep its production facilities, gaining better economies of scale by increasing production.Eastern Seasons has agreed to a large order but only at a price of $39 per bottle.The special order can be purchased in one batch with available capacity.Old Vine prepared these data: Next month's operating information (per unit, for 10,000 bottles, made in 10 batches of 1,000 each): No variable marketing costs are associated with this order, but Old Vine has spent $2,500 during the past two months trying to get Eastern Seasons to purchase the special order. Required: 1.How much will the special order change Old Vine's total operating income? 2.How much would the special order change Old Vine's total operating income if Old Vine is operating at full capacity and would lose the sale of the 2,000 bottles to regular customers? 3.How might the special order fit into Old Vine's competitive strategy?

In deciding whether to drop or keep a product line, all the following are relevant to the decision except:

Harrington Corporation produces three products, A, B, and C. Pertinent information on these products is as follows:There are 150 direct labor hours available. Machine-hour capacity allows 100 anchor bolts, only; 50 bearings, only; 40 casters, only; or any combination of the three that does not exceed the capacity. The machine-hour constraint for Harrington's linear programming model 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:A cost that is not relevant for this asset-replacement decision is:

Regis Company manufactures plugs at a cost of $36 per unit, which includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually (as part of a larger product it produces). Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead cost will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in net savings annually. To achieve this goal, the minimum annual rent on the facility must be:

Plainfield Company manufactures part G for use in its production cycle.The costs per unit for 10,000 units of part G are as follows: Verona Company has offered to sell Plainfield 10,000 units of part G for $30 per unit.If Plainfield accepts Verona's offer, the released facilities could be used to save $45,000 in relevant costs in the manufacture of part H.In addition, $5 per unit of the fixed overhead applied to part G would be totally eliminated.What alternative is more desirable and by what amount?

A small company makes only two products (X and Y), with the following production constraints representing two machines and their maximum availability: 2X + 3Y ≤ 18 2X + Y ≤ 10 X ≥ 0, Y ≥ 0 where: X = units of the first product, Y = units of the second product If the profit equation is Z = $4X + $2Y, the maximum possible profit is:

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: