Exam 11: Decision Making and Relevant Information

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?

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

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

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

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?

The variation in total costs between two alternatives is known as

Decisions on product mix involving multiple products,should be based on which of the following?

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.

The gain or loss on the disposal of a machine is a relevant factor when considering replacing the machine if tax is a consideration.

The only cost of poor quality at a nonbottleneck operation is the cost of the materials wasted.

For short-term pricing decisions,what costs are relevant when there is available surplus capacity? When there is no available surplus capacity?

Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is

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

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?

Ignoring tax consequences,how should the gain or loss on disposal of an old machine be treated in an equipment replacement decision?

Koch Brothers purchased a new production machine for $200,000.It is capable of producing 400,000 units over its useful life,thus the manufacturer's salesperson claimed the unit cost would only be $0.50.Koch's own engineers recommended that the company acquire a machine that would have a unit cost of production of no more than $0.48 (with a $0.03 variance).A competitor of the vendor,who also was trying to sell Koch some equipment,claimed that the $0.50 is understated by $0.04 per unit.The total anticipated demand over the asset's useful life is 300,000 units. Relevant information includes

Which of the following represents a qualitative factor?

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. -For Grant's Kitchens,what is the minimum acceptable price of this one-time-only special order?

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?

All variable costs are relevant in relevant-cost analysis.