Exam 10: Relevant Information for Decision Making

Boston Bakers Boston Bakers is trying to decide whether it should keep its existing bread-making machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 10,000 \ 25,000 Accumulated depreciation 6,000 0 Annual cash operating costs 9,500 5,000 Current salvage value of old machine 2,500 Salvage value in 10 years 650 1,200 Remaininglife 12 yrs 12yrs Refer to Boston Bakers.The $10,000 cost of the original machine represents a(n)

Wightman Industries has two sales territories-East and West.Financial information for the two territories is presented below:

	East	West
Sales	$980,000	$750,000
Direct costs:
Variable	(343,000)	(225,000)
Fixed	(450,000)	(325,000)
Allocated common costs	(275,000)	(175,000)
Net income (loss)	$(88,000)	$ 25,000

Because the company is in a start-up stage,corporate management feels that the East sales territory is creating too much of a cash drain on the company and it should be eliminated.If the East territory is discontinued,one sales manager (whose salary is $40,000 per year)will be relocated to the West territory.By how much would Wightman's income change if the East territory is eliminated?

Why is depreciation expense irrelevant to most managerial decisions,even when it is a future cost?

Brazosport Pipe Corporation The capital budgeting committee of the Brazosport Pipe Corporation is evaluating the possibility of replacing its old pipe-bending machine with a more advanced model.Information on the existing machine and the new model follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 200,000 \ 400,000 Market value now 8,000 Market value in year 5 0 20,000 Anmual cash operating costs 40,000 10,000 Remaininglife 5 yrs 5yrs Refer to Brazosport Pipe Corporation.If the company buys the new machine and disposes of the existing machine,corporate profit over the five-year life of the new machine will be ____ than the profit that would have been generated had the existing machine been retained for five years.

In an outsourcing decision,unavoidable fixed costs are irrelevant.

Albuquerque Corporation makes and sells the "Desert Icon",a wall hanging depicting a magical cactus plant.The Desert Icons are sold at specialty shops for $50 each.The capacity of the plant is 15,000 Icons.Costs to manufacture and sell each wall hanging are as follows: Direct material                        $\$5.00$ Direct1abor                              6.00 Variable overhead                   8.00 Fixed overhead                       10.00 Variable selling costs              2.50 Albuquerque Corporation has been approached by a Utah company about purchasing 2,500 Desert Icons.The company is currently making and selling 15,000 per year.The Utah company wants to attach its own state label,which increases costs by $.50 each.No selling expenses would be incurred on this order.The corporation believes that it must make an additional $1 on each Desert Icon to accept this offer. a. What is the opportunity cost per unit of selling to the Utah company? b. What is the minimum sellingprice that shmuld be set?

Collins Company uses 12,000 units of a part in its production process.The costs to make a part are: direct material,$15;direct labor,$27;variable overhead,$15;and applied fixed overhead,$32.Eichholtz has received a quote of $60 from a potential supplier for this part.If Collins buys the part,75 percent of the applied fixed overhead would continue.Collins Company would be better off by

The excess of revenues over direct variable expenses and avoidable fixed expenses is referred to as _____.

Southern Digital,Inc. The Southern Digital,Inc.produces a high-quality computer chip.Unit production costs (based on capacity production of 100,000 units per year)follow: Direct material                               $50 Directlabor                                      20 Overhead(20% variable)                10 Other information: Sales price                                      100 SG\&A costs(40% variable)            15 Refer to Southern Digital,Inc.Assume,for this question only,that the Memory Division is producing and selling at capacity.What is the minimum selling price that the division would consider on a "special order" of 1,000 chips on which no variable period costs would be incurred?

The ____ prohibits companies from pricing products at different amounts unless these differences reflect differences in the cost to manufacture,sell,or distribute the products.

In a special order decision,the sales price should be sufficient to cover a job's variable costs,incremental fixed costs,and generate a profit.

Lewis Company has only 25,000 hours of machine time each month to manufacture its two products.Product X has a contribution margin of $50,and Product Y has a contribution margin of $64.Product X requires 5 hours of machine time,and Product Y requires 8 hours of machine time.If Lewis Company wants to dedicate 80 percent of its machine time to the product that will provide the most income,the company will have a total contribution margin of

Define and discuss outsourcing.

Which of the following is the least likely to be a relevant item in deciding whether to replace an old machine?

For a particular product in high demand,a company decreases the sales price and increases the sales commission.These changes will not increase

Brazosport Pipe Corporation The capital budgeting committee of the Brazosport Pipe Corporation is evaluating the possibility of replacing its old pipe-bending machine with a more advanced model.Information on the existing machine and the new model follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 200,000 \ 400,000 Market value now 8,000 Market value in year 5 0 20,000 Anmual cash operating costs 40,000 10,000 Remaininglife 5 yrs 5yrs Refer to Brazosport Pipe Corporation.The major opportunity cost associated with the continued use of the existing machine is

Beauty Tools Corporation makes and sells brushes and combs.It can sell all of either product it can make.The following data are pertinent to each respective product:

	Brushes	Combs
Units of output per machine hour	8	20
Selling price per unit	$12.00	$4.00
Product cost per unit
Direct material	$1.00	$1.20
Direct labor	2.00	0.10
Variable overhead	0.50	0.05

Total fixed overhead is $380,000. The company has 40,000 machine hours available for production.What sales mix will maximize profits?

Goodall Corporation is working at full production capacity producing 10,000 units of a unique product,RST.Manufacturing costs per unit for RST follow: Direct material                                              $\$ 2$ Direct manufactuing labor                            3 Manufacturing overhead                                $\underline{5}$                                                                     $\underline{\$10}$ The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed costs of $30,000 (at full capacity of 10,000 units). The non-manufacturing costs, all variable, are $4 per unit, and the selling price is $20 per unit. A customer, Hendricks Company, has asked Goodall to produce 2,000 units of a modification of RST to be called XYZ. XYZ would require the same manufacturing processes as RST. Hendricks Company has offered to share equally the non-manufacturing costs with Goodall. XYZ will sell at $15 per unit. Required: a. What is the opportunity cost to Goodall of producing the 2,000 units of XYZ (assume that no overtime is worked)? b. The Winters Company has offered to produce 2,000 units of RST for Goodall, so Goodall can accept the Hendricks offer. Winters Company would charge Goodall $14 per unit for the RST. Should Goodall accept the Winters Company offer? c. Suppose Goodall had been working at less than full capacity producing 8,000 units of RST at the time the XYZ offer was made. What is the minimum price Goodall should accept for XYZ under these conditions (ignoring the $15 price mentioned previously)?

When multiple products are produced and sold,a change in the sales price of one product may cause a change in the sales mix of the firm.

Segment margin measures a segment's contribution to the coverage of indirect expenses.