Exam 11: Decision Making and Relevant Information

Pat, a pizzeria manager, replaced the convection oven just six months ago.Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses.Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased.Selected information about the two ovens is given below: Required: a.What costs are sunk? b.What costs are relevant? c.What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven? d.What other items should Pat, as manager of the Pizzeria, consider when making this decision?

Sunk costs

Answer the following question(s)using the information below.John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy again.His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $6,000 cash.Sherry estimated the following costs for the two cars: -Companies periodically confront decisions about discontinuing or adding branches or business segments.In order to determine the best course of action, a ________ should be performed in order to make the optimal decision.

An example of an outsourcing process is when a computer company purchases keyboards from another company instead of producing the components internally.

The purpose of evaluating performance in the decision process is to provide feedback.

Answer the following question(s)using the information below.Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.Welch Manufacturing has excess capacity.The following per unit data apply for sales to regular customers: -What is the full cost of the product per unit?

Doggie Dinner, Inc., currently manufactures three different types of scientifically balanced dog food.The firm is considering eliminating one of the three products.What factors should be taken into account in making this decision?

Kando Manufacturing Ltd.produces two products, lawn mowers and power washers.Lawn mowers have a unit contribution margin of $75, and power washers have a unit contribution margin of $55.The demand for lawn mowers exceeds their production capacity, which is limited by available direct labour and machine hours.The maximum demand for power washers is 300 per week.Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits.Direct manufacturing labour is limited to 600 hours a week and 400 hours is all that the company's outdated machines can run a week.The lawn mowers require 1.5 hours of labour and 1 machine hour.Power washers require 2.5 labour hours and 2 machine hours.Required: Formulate the linear programming objective function and constraints necessary to determine the optimal product mix.

Ratzlaff Company has a current production level of 20,000 units per month.Unit costs at this level are: Current monthly sales are 18,000 units.Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each.Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order.What is Ratzlaff Company's change in operating profits if the special order is accepted?

Answer the following question(s)using the information below.Quick Shop Printing has two workstations, cutting and pasting.The cutting station is limited by the speed of operating the cutting machine.Pasting is limited by the speed of the workers.Pasting normally waits on work from cutting.Each department works an eight-hour day.If cutting begins work two hours earlier than pasting each day, the two departments generally finish their work at about the same time.Not only does this eliminate the bottleneck, but it increases finished units produced each day by 80 units.All units produced can be sold.The cost of operating the cutting department two more hours each day is $800.The contribution margin of the finished products is $3 each.Inventory carrying costs are $0.20 per unit per day. -Which of the following is NOT a key step in managing bottleneck resources?

A client in another province needs immediate help in solving a personnel training problem in the shipping department.Match each activity on the basis of its relationship with this consulting engagement.Items may have multiple classifications. A)Relevant Costs B)Sunk, Irrelevant Costs C)Opportunity, Irrelevant Costs D)Opportunity Cost E)Irrelevant Costs F)Sunk Costs -All staff members receive $1,000 per diem for travel

When a firm has a bottleneck machine, a good way to manage the bottleneck is to make sure that prior machines produce more units for the bottleneck machine to increase its throughput.

Answer the following question(s)using the information below.Central Medical Supply Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment.The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000; the market value would then be $136,000.However, Tripac offered to purchase the obsolete equipment as is for $88,000. -What is the opportunity cost associated with the adaptation of the equipment to another line of testing equipment assuming Central accepts Tripac's offer?

A decision model is a formal method of making a choice that uses only quantitative analyses.

Answer the following question(s)using the information below.Speedy Dress Manufacturing has two workstations, cutting and finishing.The cutting station is limited by the speed of operating the cutting machine.Finishing is limited by the speed of the workers.Finishing normally waits for work from cutting.Each department works an eight-hour day.If cutting begins work two hours earlier than finishing each day, the two departments generally finish their work at about the same time.Not only does this eliminate the bottleneck, but also it increases finished units produced each day by 160 units.All units produced can be sold even though the change increases inventory stock by 20% from 400 units.The cost of operating the cutting department two more hours each day is $1,600.The contribution margin of the finished products is $6 each.Inventory carrying costs are $0.40 per unit per day. -The Glass Shop, a manufacturer of large 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 $72,000.The change will result in 8,000 additional windows.The selling price per window is $18, direct labour costs are $3 per window, and the cost of direct materials is $5 per window.Assume all units produced can be sold.The change will result in an increase in the throughput contribution of

John Hatelak, a sales representative for a manufacturing equipment company, has decided to spend less time traveling.He is going to spend only 172 hours per month with his customers.To do this he will have to give up some of his clients.The following information is from his last full month's sales activities. Required: a.What should be his customer mix in order to maximize his sales commissions? b.What will be his income at the best possible customer mix?

Clearwater Company operates a wine outlet in a tourist area.One litre bottles sell for $12.Daily fixed costs are $3,000, and variable costs are $6 per litre.An average of 750 litres are sold each day.Clearwater has a capacity of 800 litres per day.Required: a.Determine the average cost per bottle. b.A bus loaded with 40 senior citizens stops by at closing time and the tour director offers Clearwater $300 for 40 litres.Clearwater refuses, saying they would lose $2.50 on each litre.Is Clearwater correct about the $2.50? Why or why not? c.A fund-raising organization has offered Clearwater a one-year contract to buy 300 litres a day for $7.50 each.Should they accept the offer? Why or why not?

The Gameshop manufactures specialized board games.Management is attempting to search for ways to reduce costs and is considering two alternatives for an upcoming project of special games that must be delivered to the customer in 12 months' time.Management agreed to the special project job as they have an idle plant that is scheduled for demolition 18 months from now, and either alternative will easily meet the delivery deadline.Alternative 1 requires 10 machine operators and 2.5 individuals to handle direct materials.Employee pay averages $17.50 per hour and will increase to $18.50 at the mid-point (July 1)of next year.Each employee currently works 2,500 hours but will decrease to 2,400 hours if Alternative 2 is implemented.The second proposal only requires 8.5 workers.Which of the following items of information are relevant to this decision?

Snapper Tool Company has a production capacity of 3,000 units per month, but current production is only 2,500 units.Total manufacturing costs are $60 per unit and marketing costs are $16 per unit.Doug Levy offers to purchase 500 units at $76 each for the next five months.Should Snapper accept the one-time-only special order if only absorption-costing data are available?

The theory of constraints analyzes fixed costs and considers short-run costs to be variable costs.