Exam 11: Decision Making With a Strategic Emphasis

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?

Free

(Essay)

4.8/5

(30)

Question 1

Correct Answer:

Verified

Please see Feedback for answers.
Explanation: Feedback: (1)Additional relevant cost to modify the assembly = $5 each;Additional revenue = $80 - $68 = $12.00 each;Based on the additional profit of $7 ($12 - $5)per assembly,the company should add the modification.
(2)The increase in profit is $7 x 60,000 units/year = $420,000
(3)Since the labor resource is tight,and since there is an additional relevant materials and labor cost of $5,this implies that the modification will require additional labor time.HJM should be sure that it can continue to produce at the level of 60,000 units if it goes to the modified assembly.Also,since machine capacity is underutilized,the company might consider updating machines,using less labor intensive machinery.However,this would increase the cost of the modification,and a profit of $7 each might not be realized.Also,the firm should look for ways to add labor resources,which would make it possible to add products.The company should consider the strength of the new market and if other products could be modified using the same equipment,the investment in new machinery could be justified.

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 costs:

Free

(Essay)

4.8/5

(29)

Question 2

Correct Answer:

Verified

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.
Please see Feedback for answers.
Explanation: Feedback:

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 contribution margin per sedan is calculated to be:

Free

(Multiple Choice)

4.9/5

(41)

Question 3

Correct Answer:

Verified

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 sub contractor 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:

(Essay)

4.9/5

(34)

Question 4

Value streams are useful in decision-making because:

(Multiple Choice)

4.9/5

(28)

Question 5

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:

(Multiple Choice)

4.7/5

(33)

Question 6

A boat,costing $108,000 and uninsured,was wrecked the very first day it was used.It can either be disposed of for $11,000 cash and be replaced with a similar boat costing $110,000,or rebuilt for $98,000 and be brand new as far as operating characteristics and looks are concerned.The total relevant cost of replacing the boat is:

(Multiple Choice)

4.9/5

(44)

Question 7

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

(Multiple Choice)

4.9/5

(39)

Question 8

One of the key management functions is to perform a regular review of product profitability.Which question(s)below would not be asked when performing the analysis?

(Multiple Choice)

4.8/5

(43)

Question 9

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

(Multiple Choice)

4.7/5

(40)

Question 10

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:

(Essay)

4.8/5

(44)

Question 11

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 Distance is calculated to be:

(Multiple Choice)

4.8/5

(39)

Question 12

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 truck model's monthly contribution per 10 feet of front-row space is calculated to be

(Multiple Choice)

4.7/5

(45)

Question 13

Smith Co. ,maker of high-quality eyewear,incurs fixed costs of $18 and variable costs of $36 in making one unit of its matrix line of sunglasses.Smith Co.'s major supplier has offered to make all 100,000 matrix sunglasses for $44 each.If Smith accepts the offer of the supplier,Smith will save $4 per unit in fixed costs.Based on this information,should Smith Co.make or buy the sunglasses and how much will they save?

(Multiple Choice)

4.8/5

(28)

Question 14

Committed,or "sunk" costs are generally:

(Multiple Choice)

4.7/5

(44)

Question 15

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 Blue 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 book value 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 decision that the controller has to make?

(Multiple Choice)

4.8/5

(31)

Question 16

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?

(Multiple Choice)

4.9/5

(33)

Question 17

Carter Inc.produces two products,A and B.Pertinent 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 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. Please see Feedback for answers.

(Essay)

4.9/5

(30)

Question 18

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 Spin is calculated to be:

(Multiple Choice)

4.8/5

(43)

Question 19

Over the past three decades,the cost structure for a typical manufacturing firm has shifted dramatically from labor and material as the primary costs in the 1970s,with overhead now the major cost category in the 2000s.What are the implications of this cost structure shift for strategic relevant cost analysis?

(Essay)

4.8/5

(44)

Question 20

Showing 1 - 20 of 103

Value streams are useful in decision-making because:

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:

One of the key management functions is to perform a regular review of product profitability.Which question(s)below would not be asked when performing the analysis?

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

Committed,or "sunk" costs are generally:

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Profit Planning: Cost-Volume-Profit Analysis

Strategy and the Master Budget

Strategy and the Analysis of Capital Investments

Cost Planning for the Product Life Cycle: Target Costing,Theory of Constraints,and Strategic Pricing

Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource- Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Strategic Performance Measurement: Investment Centers

Management Compensation, Business Analysis, and Business Valuation

Filters