Exam 11: Decision Making and Relevant Information

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

The sum of all the costs incurred in a particular function,such as marketing,is called the ________.

Explain why sunk costs are not considered relevant when choosing among alternatives with example.

In a decision as to whether or not to drop a product,fixed costs that have been allocated to that product are generally not relevant.

Ralph'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: Model X Model Y Model Z Selling price \ 160 \ 180 \ 200 Direct materials 60 60 60 Direct labor ( \ 20 per hour) 30 30 40 Variable support costs (\ 10 per machine-hour) 10 20 20 Fixed support costs 40 40 40 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 Ralph encourage her sales people to promote the more profitable model?

Loft Lake Cabinets is approached by Ms.Jenny Zhang,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: Direct materials \ 50.00 Direct labor 62.50 Variable manufacturing support 30.00 Fixed manufacturing support 37.50 Total manufacturing costs 180.00 Markup (60\%) 108.00 Targeted §elling price \ 288.00 Loft Lake Cabinets has excess capacity.Ms.Zhang wants the cabinets in cherry rather than oak,so direct material costs will increase by $15 per unit. Required: a.For Loft Lake Cabinets,what is the minimum acceptable price of this one-time-only special order? b.Other than price,what other items should Loft Lake Cabinets consider before accepting this one-time-only special order? c.How would the analysis differ if there was limited capacity?

Answer the following questions 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: Trail Blazer Grand Cherokee Acquisition cost \ 25,000 \ 6,000 Repairs \ 6,000 - Annual operating costs (Gas, maintenance, insurance) \ 2,280 \ 2,100 -A relevant cost is a cost that is a(n)________.

Decisions about whether a producer of goods or services will insource or outsource are also called make-or-buy decisions.

A recent college graduate has the choice of buying a new car for $33,500 or investing the money for four years with an 8% expected annual rate of return.He has an investment of $40,000 in equities and bonds which yields 6% expected annual rate of return.If the graduate decides to purchase the car,the best estimate of the opportunity cost of that decision is ________.

An incremental product cost is generally a fixed cost.

Revenues that remain the same for two alternatives being examined are relevant revenues.

Variable cost per unit is the best product cost to use for one-time-only special order decisions.

Performance evaluation focuses on responsibility centers for a specific period,not on projects or individual items of equipment over their useful lives.

Zephyr Energies,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?

Answer the following questions using the information below: Genent's Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars: Direct materials \ 0.50 Direct labor 0.06 Unit-related support costs 0.20 Batch-related support costs 0.24 Product-sustaining support costs 0.44 Facility-sustaining support costs 0.56 Total cost per jar \ 2.00 -Which of the following is an irrelevant cost?

In linear programming,the goals of management are expressed in ________.

A decision model is an informal method for making a choice,using simpler methods like surveying.

The theory of constraints is more useful for the long-run management of costs since it takes a long-run perspective and focuses on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities.

Answer the following questions using the information below: Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials \ 45.00 Direct labor 35.00 Variable overhead 33.00 Fixed overhead 30.00 Total \1 43.00 Crayola Technologies Inc. has contacted Rubium with an offer to sell 5,000 of the subassemblies for $135.00 each. Rubium will eliminate $85,000 of fixed overhead if it accepts the proposal. -What are the relevant costs for Rubium?

Product-mix decisions usually have only a short-run focus because they typically arise in the context of capacity constraints that can be relaxed in the long run.