Exam 11: Decision Making With a Strategic Emphasis

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.)

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

The opportunity cost of making a component part in a factory with no excess capacity is the:

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

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

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:

A company's approach to a make-or-buy decision:

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:

The costs described in situations 2, 3, and 5 above are:

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

A recent article in The McKinsey Quarterly, present a useful list of some of the ways that strategic decisions can go wrong because of human shortcomings: 1. Overconfidence; 2. Loss aversion; 3. Champion Bias; 4. Misaligned risk aversion; and 5. Misaligned time horizon Required: Provide a one sentence explanation for each of the five human shortcomings in decision making.

Relevant costs in a make-vs.-buy decision of a part include:

When a decision is made in an organization, it is selected from a group of alternative courses of action. The loss associated with choosing the alternative that does not maximize the benefit is the:

Maxwell Manufacturing is contemplating the purchase of a new machine to replace a machine that has been in use for seven years. The old machine has a net book value of $50,000 and still has five years of useful life remaining. The old machine has a current market value of $5,000, and would have no market value after five years. The variable operating costs and depreciation expenses (straight-line) are $135,000 per year. The new machine will cost $90,000, has an estimated useful life of five years with zero disposal value after five years, and an annual operating expense of $118,000 (including straight-line depreciation). Considering the five years in total and ignoring the time value of money and income taxes, what is the difference in total relevant decision-making costs if the old machine is replaced?

Calculate the expected surplus or deficit from operations given the above information.

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?

Given a selling price per unit of $750, what is the contribution margin per unit sold?

The major problem with relevant cost determination is that it fails to recognize the:

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.

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