Exam 11: Decision Making and Relevant Information

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.

Axle and Wheel Manufacturing is approached by a European customer to fill 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: Axle and Wheel 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 Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not?

Electrical Engineering Equipment Ltd. purchased a machine for $100,000; current accumulated amortization totals $40,000. Management is contemplating the purchase of a new machine for $120,000. Current disposal of the old machine would cost $65,000. What is the correct category for each item?

Why is the book value of old equipment irrelevant to the equipment replacement decision?

Hackerott Camera is considering eliminating Model AE1 from its camera line because of losses over the past quarter. The past three months of information for model AE1 is summarized below: Manufacturing costs: Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE1 that has no resale value. Should Hackerott Camera eliminate Model AE1 from its product line? Why or why not?

Boyd Tool Company is a tool manufacturer. Production capacity is 3,000 units per month; however, they are considering alternative ways to increase capacity to 3,500 units. One of the alternatives involves purchasing new equipment. In this alternative, there are two choices: machine A will provide increased capacity of 4,000 units per month, with unit costs of $14 at capacity; and, machine B will increase capacity to 3,600 units per month with unit costs of $15 at capacity. Both machines are adequate since Boyd's does not intend to go beyond the 3,500 units per month level for the foreseeable future. Relevant information for this decision includes

The sum of all costs incurred in all business functions in the value chain (marketing, customer service, product design, and manufacturing, for example) is known as

Business function costs consist of all variable costs associated with a particular business function in the value chain.

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 sum of all the costs incurred in a particular business function (for example, marketing) is called

Answer the following question(s) using the information below. Grant's Kitchens is approached by Ms. Tammy Wang, 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: Grant's Kitchens has excess capacity. Ms. Wang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit. -Other than price, what other item should Grant's Kitchens consider before accepting this one-time-only special order?

The opportunity cost of holding significant inventory includes

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?

Opportunity cost is the contribution to income that is recognized through the use of limited resources available in the best alternative.

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 40% 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.

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 change in operating profits if the one-time-only special order for 1,000 units is accepted for $180 a unit by Welch?

Explain what revenues and costs are relevant when choosing among alternatives.

When opportunity costs exist, they are always relevant.

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. -Lynn Valley Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Reliance Corp has contacted Lynn Valley with an offer to sell them 5,000 of the subassemblies for $44.00 each. Lynn Valley will eliminate $50,000 of fixed overhead if it accepts the proposal. Should Omark make or buy the subassemblies? What is the difference between the two alternatives?

Which of the following anticipated future costs always differ among alternative courses of actions?