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?

Anchor Sign Company manufactures signs from direct materials to the finished product. This is an example of which of the following?

Management accountants help managers identify what information is relevant and what information can be ignored.

For make-or-buy decisions, relevant costs include

Norton's Mufflers manufactures three different product lines: Model X, Model Y, and, Model Z. Considerable market demand exists for all models. The following per unit data apply: Required: a. For each model, compute the contribution margin per unit. b. For each model, compute the contribution margin per machine-hour. c. If there is excess capacity, which model is the most profitable to produce? Why? d. If there is a machine breakdown, which model is the most profitable to produce? Why? e. How can Norton encourage her sales people to promote the more profitable model?

Are relevant revenues and relevant costs the only information needed by managers to select among alternatives? Explain using examples.

Quantitative factors are always expressed in financial terms.

Linear programming is a tool that maximizes total contribution margin of a mix of products with multiple constraints.

Answer the following question(s) using the information below. Konrade's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows: It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Konrade's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit. -The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is

Chalet Ski & Patio manufactures a product that has two parts, X and Y. It is currently considering two alternative proposals related to parts X and Y. The first proposal is for buying part Y. This would free up some of the plant space for the manufacture of more of part X and assembly of the final product. The product vice-president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed. The second proposal is for buying new equipment for the production of part Y. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero. Required: Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently. a. Sales revenue of the product. b. Variable costs of assembling final products. c. Direct manufacturing materials, part X. d. Direct manufacturing materials, part Y. e. Direct manufacturing labour, part X. f. Direct manufacturing labour, part Y. g. Variable manufacturing overhead, part X. h. Variable manufacturing overhead, part Y. i. Cost of old equipment for manufacturing Y. j. Cost of new equipment for manufacturing Y. k. Variable selling and administrative costs.

Answer the following question(s) using the information below. Day Star collected the following information: Day Star can sell 25,000 units per year, at $80 each. The company also has an offer from a subsidiary to rent its plant facilities for $2,000,000. The fixed overhead will be incurred in each alternative, but there will be a savings of $150,000 in the fixed costs under the renting alternative. -Audio Labs collected the following information on the cost of producing 20,000 speaker units: Cartunes has offered to sell Audio 10,000 speakers for $56.00 each. Should Audio Labs make or buy the parts if the facilities remain idle when speakers are purchased?

Answer the following question(s) using the information below. Day Star collected the following information: Day Star can sell 25,000 units per year, at $80 each. The company also has an offer from a subsidiary to rent its plant facilities for $2,000,000. The fixed overhead will be incurred in each alternative, but there will be a savings of $150,000 in the fixed costs under the renting alternative. -Based on the above information only, should Day Star make or buy the product or rent its facilities out?

An item's book value is the historical cost plus accumulated amortization.

Comics Plus has a current production level of 200,000 comics per month. Unit costs at this level are: Current monthly sales are 180,000 units. Printers Ltd. has contacted Comics Plus about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/ distributing costs would not be incurred on the special order. What is Comics Plus' change in profits if the order is accepted?

Lovejoy's Cake Shop makes three types of cakes: White, Chocolate, and, Swirl on one assembly line that has a limit of 400 labour-hours per week. Lovejoy can sell all the cakes it can make under current operating capacity. Manufacturing information per cake for each product is as follows: Required: Determine the total weekly contribution margin when all labour-hours are allotted to the product with the highest: a. Unit selling price. b. Unit contribution margin. c. Contribution per labour-hour.

Omark Corporation currently manufactures a subassembly for its main product. The variable costs per unit are $48, in addition to a $6 charge based on estimated selling expenses. R-Corp has contacted Omark with an offer to sell them 5,000 of the subassemblies for $44.00 each. Omark will eliminate $50,000 of fixed overhead if it accepts the proposal. What is increase or decrease in profit from accepting the offer?

Which of the following is False concerning relevant costs and relevant revenues?

A decision as to whether to insource or outsource is a(n)

All fixed costs are irrelevant in relevant-cost analysis.

If the $17,000 spent to purchase inventory could be invested and earn interest of $1,000, then the opportunity cost of holding inventory is $17,000.