Exam 11: Decision Making and Relevant Information

In a manufacturing operation, the bottleneck machine sets the pace for all non-bottleneck machines.

Quantitative factors are always expressed in financial terms.

When replacing an old machine with a new machine, the purchase price of the old machine is a relevant cost.

Answer the following question(s)using the information below.Schmidt Corporation produces a part that is used in the manufacture of one of its products.The costs associated with the production of 10,000 units of this part are as follows: Of the fixed factory overhead costs, $30,000 is avoidable. -Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $18 per unit.Assuming there is no other use for the facilities, Schmidt should

U-Crack-Me-Up Windows, a manufacturer of windows, is experiencing a bottleneck in its plant.Setup time at one of its workstations has been identified as the culprit.A manager has proposed a plan to reduce setup time at a cost of $54,000.The change will result in 800 additional windows.The selling price per window is $180, direct labour costs are $60 per window, and the cost of direct materials is $95 per window.Assume all units produced can be sold.Required: Determine the change in both contribution margin and throughput contribution from making the investment.Should the investment be made? Justify your answer.

A computer system installed last year is an example of a(n)

Answer the following question(s)using the information below.Jim's 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it road worthy again.His friend, Julie, suggested that he should buy a 5-year-old used Honda Civic instead for $3,000 cash.Julie estimated the following costs for the two cars: -What should Jim do? What are his savings in the first year?

Aunt Lydia's Cookies, Inc., prepares frozen gourmet cookies for shipment to upscale grocery stores as well as mailing to web and catalog customers.The company has two workstations, cooking and distribution.The cooking station is limited by the cooking time of the food.Distribution is limited by the speed of the workers.Distribution normally waits on food from cooking.Because the demand has increased in recent months to 4,000 dozen cookies, management is considering adding another oven in the cooking station or else having the cooks start to work earlier.The cost of adding another oven in the cooking station would add an average of $8 per hour.The monthly cost of operating the cooking station one more hour each day is $1,500.The current operating hours total eight hours a day, 24 days a month.The contribution margin of the finished products is currently $2 per dozen.Inventory carrying costs average $0.50 per dozen per month.Either the extra hour or the new oven at the cooking station would increase production by 50 dozen a day, with a long-run increase of 100 dozen units in finished goods inventory to 500 dozen.Required: a.What is the total production per month if the change is made? c.What course of action would you recommend?

The objective of the theory of constraints is to increase throughput contribution while decreasing investments and operating costs.

A cafe specializes in short order meals; and, morning and afternoon snack breaks.It is open from 9:00 am until 4:00 pm.An office manager in a nearby high rise office building offers the owner a contract to provide her 50 employees with afternoon snack breaks for $2.00 each.Each employee would receive a drink and a snack item.The shop has an hourly capacity of 50 customers.The owner estimates that the variable costs of the afternoon breaks would be $1.20 each.Currently the afternoon service, starting at 2:00, is running at only 50 percent capacity, although the morning and noon activities are near capacity.At the present level of operations each meal/snack served is allocated a fixed cost of $0.25.Required: a.What nonfinancial factors should be considered by the owner? b.Given your concerns listed in part a.and quantitative analysis, should the offer be accepted? Why or why not?

Each item included in the relevant-cost analysis should differ according to the alternative being considered and be an expected future revenue or cost.

Sarasota Bicycles has been manufacturing its own wheels for its bikes.The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost.The direct materials and direct labour cost per unit to make the wheels are $3.00 and $3.60 respectively.Normal production is 200,000 wheels per year.A supplier offers to make the wheels at a price of $8 each.If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.Required: a.Prepare an incremental analysis for the decision to make or buy the wheels. b.Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.

Car Parts Company manufactures a part for use in its production of automobiles.The costs per unit when 10,000 items are produced are: Auto Company has offered to sell to Car Parts Company 10,000 units of the part for $60.The plant facilities could be used to manufacture another part at a savings of $90,000 if Car Parts accepts the offer.In addition, $10 per unit of fixed manufacturing overhead on the original part would be eliminated.Required: a.What is the relevant per unit cost for the original part? b.Which alternative is best for Car Parts Company? By how much?

A student is considering whether to finish their university program in four consecutive years, or take a year off and work for some extra cash.Required: a.Identify at least two revenues or costs that are relevant to making this decision.Explain why each is relevant. b.Identify at least two costs that would be considered sunk costs for this decision. c.Comment on at least one qualitative consideration for this decision.