Exam 11: Decision Making With a Strategic Emphasis

For the past 12 years, the Blue Company has produced the small electric motors that fit into its main product line of dental drilling equipment. As material costs have steadily increased, the controller of the company is reviewing the decision to continue to make the small motors and has identified the following facts: (1) The equipment used to manufacture the electric motors has a net book value (NBV) of $150,000. (2) The space now occupied by the electric motor manufacturing department could be used to eliminate the need for storage space now being rented by the company. (3) Comparable units can be purchased from an outside supplier for $59.75. (4) Four of those who work in the electric motor manufacturing department would be terminated and given eight weeks' severance pay. (5) A $10,000 unsecured note payable is still outstanding on the equipment used in the manufacturing process. Which of the items above are relevant to the controller's decision analysis (i.e., to make vs. buy the motors)?

Diamond Company has three product lines, A, B, and C. The following financial information is available: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, pre-tax operating income for the firm will likely:

A cost is not relevant for decision making if it:

The decision to keep or drop products or services involves strategic consideration of all the following except:

All the following are characteristic of relevant costs except:

The best way to allocate scare resources to attain a specific objective, such as the maximization of operating income, is to use:

Luther Company, located in Largeville, Kansas, is a retailer of durable, light-weight luggage products known for their high-quality and innovation.Recently, the firm conducted a relevant cost analysis of one of its product lines that has only two products, Kryptonite and Meteoerite.The sales for Meteorite are decreasing and the purchase costs are increasing.The firm is considering dropping Meteorite products and only selling Kryptonite.Luther Company allocates fixed costs to products on the basis of sales revenue.When the president of Luther saw the income statement, he agreed that Meteorite should be dropped.If this is done, sales of Kryptonite are expected to increase by 15% next year; the firm's cost structure will remain the same. Required: 1.Find the expected change in annual operating income by dropping Meteorite and selling only Kryptonite. 2.What strategic factors should be considered?

Carter Inc. produces two products, A and B. Pertinent per-unit data follow:There is insufficient labor capacity in the plant to meet the combined demand for both products. Both products are produced through the same production departments. The fixed factory overhead rate is $10 per DLH. Assume that there are no avoidable fixed factory overhead costs. Required: 1. Calculate the unit contribution margin for each of the two products. 2. Determine which product should be produced in priority, given the labor constraint, and explain why.

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 Regis Company purchases the plugs but does not rent the unused facility, the company would:

In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient capacity, which one of the following would not be relevant to the decision?

Costs relevant to a make-versus-buy decision typically include variable manufacturing costs as well as:

Walman Corp. manufactures products X, Y, and Z from a joint production process. Joint costs are allocated to products based on relative sales values of the products at the split-off point. Additional information is as follows:Based solely on a relevant cost analysis, which of the three products should be processed by Walman beyond the split-off point?

Done on a regular basis, relevant cost pricing in "special-order decisions" can erode normal pricing policies and lead to:

Zippy Company has a product that it currently sells in the market for $50 per unit. Zippy has developed a new feature that, if added to the existing product, will allow Zippy to receive a price of $65 per unit. The total cost of adding this new feature is $26,000 and Zippy expects to sell 1,600 units in the coming year. What is the net effect on next-year's operating income of adding the feature to the product?

In a "make-or-buy" decision:

Zap Video Inc. produces two basic types of video games, Clash and Slash. Pertinent data follow (DLH = direct labor hour):There is insufficient labor capacity in the plant to meet the combined demand for both Clash and Slash. Both products are produced through the same production departments. The contribution margin per unit for Clash is:

When deciding whether to discontinue a segment of a business, managers should focus on:

Quinta Inc. manufactures machine parts for aircraft engines. The CEO is considering an offer from a subcontractor who would provide 2,800 units of product QR128 for a price of $190,000. If Quinta does not purchase these parts from the subcontractor it must produce them in-house with the following costs:If Quinta produces part QR128, there would also be incremental fixed costs of $13,000 per period. Should Quinta Inc. accept the offer from the subcontractor?

Operating at or near full capacity will require a firm considering a "special sales order" to potentially recognize the:

When deciding to purchase a new cutting machine or continue using an existing machine, the following costs are all relevant except the: