Exam 11: Decision Making and Relevant Information

Parker and Spitzer 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. The following per unit data apply for sales to regular customers: Parker and Spitzer Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Parker and Spitzer Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of $200 per unit? Why or why not?

Clinton Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 405 as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $100 per month. The other existing equipment will be used for additional production of product A. One employee earning $200 per month can be terminated if product B production is dropped. Clinton's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows: Required: Prepare an incremental analysis to determine the financial effect of dropping product B.

For decision making, differential costs assist in choosing between alternatives.

Should Stephans make or buy the subassemblies? What is the difference between the two alternatives?

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?

For machine-replacement decisions, depreciation is a cost that is:

Answer the following questions using the information below: Heck's Kitchens is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Heck's Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $50 per unit. -For Heck's Kitchens, what is the minimum acceptable price of this one-time-only special order?

When deciding whether to discontinue a segment of a business, managers should focus on:

Relevant revenues and relevant costs are the only information managers need to select among alternatives.

The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year: a. Do you recommend discontinuing the Other Candy product line? Why or why not? b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount?

Problems that should be avoided when identifying relevant costs include all of the following EXCEPT:

If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:

How many of each product should be produced per month using the short-run profit maximizing strategy?

Answer the following questions using the information below: Schwimmer Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 6,000 units. -If the price increase is implemented, operating profit is projected to:

Answer the following questions using the information below: Rambo Company has three products, A, B, and C. The following information is available: -Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:

Under what conditions might a manufacturing firm sell a product for less than its long-term price? Why?

Place the following steps from the five-step decision process in order:

Molly, Inc. is considering eliminating one of its product lines. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. What financial effects occur if the product line is discontinued?

Employee morale at Dos Santos, Inc., is very high. This type of information is known as a:

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?