Exam 11: Decision Making With a Strategic Emphasis

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?

In a joint production process, joint product costs are:

Value streams are useful in decision-making because:

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?

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: In addition to the above costs, if Quinta produces part QR128, there would also be a retooling and design cost of $13,000. Should Quinta Inc. accept the offer from the subcontractor?

The Blade Division of Dana Company produces hardened steel blades. Approximately one-third of the Blade Division's output is sold to the Lawn Products Division of Dana; the remainder is sold to outside customers. The Blade Division's estimated sales and cost data for the year ending June 30 are as follows: The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an outside supplier at a cost of $1.25 per unit on a continual basis. Assume that the Blade Division cannot sell any additional products to outside customers. Based solely on short-term financial considerations, should Dana allow its Lawn Products Division to purchase the blades from the outside supplier, and why?

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?

The direct labor-hour constraint for Harrington's linear program is:

The above mathematical functions together constitute a(n):

Which one of the following is correct for determining relevant costs for decision-making?

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?

Which one of the following is most relevant to a manufacturing equipment-replacement decision?

The objective function for the linear program Keego would use to determine the optimum monthly product mix would be:

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:

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

The contribution margin per unit for Clash is:

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.

Sensitivity analysis in linear programming is used to:

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

Determination of the optimum short-term product mix needs to include an analysis of: