Exam 11: Decision Making and Relevant Information

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?

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.

Book value of equipment is irrelevant in equipment-replacement decisions.

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: -The cost NOT relevant for this decision is the

A cafe specializes in short order meals;and,morning and afternoon snack breaks.It is open from 9:00 am until 4:00 pm.An office manager in a nearby high rise office building offers the owner a contract to provide her 50 employees with afternoon snack breaks for $2.00 each.Each employee would receive a drink and a snack item.The shop has an hourly capacity of 50 customers.The owner estimates that the variable costs of the afternoon breaks would be $1.20 each.Currently the afternoon service,starting at 2:00,is running at only 50 percent capacity,although the morning and noon activities are near capacity.At the present level of operations each meal/snack served is allocated a fixed cost of $0.25. Required: a.What nonfinancial factors should be considered by the owner? b.Given your concerns listed in part a.and quantitative analysis,should the offer be accepted? Why or why not?

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?

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. -Assuming accepting the offer creates excess facility capacity that can be used to produce 2,000 units of another product that has a unit selling price of $24,variable costs of $12,and fixed cost allocation of $3.What is the highest price that Schmidt should be willing to pay Phil Company for 10,000 units of the part?

A one-time-only special order decision

The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is

Southwestern Company needs 1,000 motors in its manufacture of automobiles.It can buy the motors from Jinx Motors for $1,250 each.Southwestern's plant can manufacture the motors for the following costs per unit: If Southwestern buys the motors from Jinx,30% of the fixed manufacturing overhead applied will be avoided. Required: a.Should the company make or buy the motors? b.What additional qualitative factors should Southwestern consider in deciding whether or not to make or buy the motors?

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: -For Welch Manufacturing,what is the minimum acceptable price of this special order?

Northern Glass Manufacturing has a current production level of 200,000 glass jars per month.Unit costs at this level are: Current monthly sales are 180,000 units.Canadian Hardware Ltd.has contacted Northern Glass Manufacturing 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?

When considering the theory of constraints,operating costs refer to all costs involved in the manufacturing process.

The theory of constraints describes methods of reducing bottlenecks by identifying and reducing fixed costs previously viewed as variable.