Exam 11: Decision Making With a Strategic Emphasis

The cost described in situations III and V above are:

To make a decision whether to accept or reject a special sales order, managers need critical information about all the following except:

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

Committed or "sunk" costs are generally:

In view of the labor shortage, which of the two products is most profitable, and how much is the contribution margin, per direct labor hour?

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:

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

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?

Opportunity costs are:

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

Relevant costs for a make-or-buy decision for a component part include all of the following EXCEPT:

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 direct labor hour. Required: 1. Calculate the unit contribution margin for each product. 2. Determine which product should be produced in priority, given the labor constraint, and explain why.arter Inc. produces two products, A and

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?

The contribution margin per machine hour is calculated as:

Kingston Company, which needs 10,000 units of a certain part to be used in its production cycle, can make or buy the part. If Kingston buys the part from Utica Company, Kingston could not use the released facilities in another manufacturing activity within the coming year. 60% of the fixed overhead applied will continue regardless of which decision is made. The following information is available: Cost to Kingston to make the part: In deciding whether to make or buy the part, Kingston's total relevant costs to make the part are:

In the situation where a firm produces multiple products and the firm has a single resource constraint (e.g., machine hours), the most profitable use of available capacity (machine hours) requires that we assess:

The Crown Company must decide whether to make or buy part 128PC. Although Crown's idle equipment could be used to produce up to 10,000 units of the part, the company presently needs only 7,000 units. The following shows the estimated cost of making part 128PC. Reuten Company will sell part 128PC to the Crown Company for $20 per unit. Required: Determine whether Crown should make or buy the part, and explain why.

You just bought a new car for $125,000. Before you had time to get insurance, the car was wrecked. Weird Wally offers to take it off your hands for $10,000. You can then purchase a similar model for $128,000. A body-shop with an excellent reputation offers to rebuild it for $90,000 and loan you a similar model while the vehicle is being rebuilt. Once rebuilt, the body-shop claims, it will run like a new car and nobody will be able to tell the difference. What would you do from a financial point of view?

A useful device for solving production problems involving multiple products and limited resources is:

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. (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 is still outstanding on the equipment used in the manufacturing process. Which of the items above are relevant to the controller's decision analysis?