Exam 11: Decision Making and Relevant Information

Answer the following questions using the information below: Piels 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: Direct materials \ 90,000 Direct labor 130,000 Variable factory overhead 60,000 Fixed factory overhead 140,000 Total costs \ 420,000 Of the fixed factory overhead costs, $60,000 is avoidable. -Assuming no other use of their facilities,the highest price that Piels should be willing to pay for 10,000 units of the part is ________.

In a make-or-buy decision when there are alternative uses for capacity,the opportunity cost of idle capacity is relevant.

Answer the following questions using the information below: Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply: Standard Premium Contribution margin per unit \ 18 \ 20 Number of machine-hours required 3 4 -If there are 600 machine-hours available per week,how many rockers of each model should Jim Helmer produce to maximize profits?

How can Lisa Dynondo encourage her salespeople to promote the more profitable model?

Answer the following questions using the information below: Dynondo's Brakes 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 \ 50 \ 60 \ 70 Direct materials 6 6 6 Direct labor ( \ 12 per hour) 12 12 24 Variable support costs ( \ 4 per machine-hour) 4 8 8 Fixed support costs 10 10 10 -If there is a machine breakdown,which model is the most profitable to produce?

If a company is deciding whether to outsource a part,the quality of the parts manufactured is an important factor to consider.

Capacity constraints include ________.

Quiett Truck manufactures part WB23 used in several of its truck models.10,000 units are produced each year with production costs as follows: Direct materials \ 45,000 Direct manufacturing labor 15,000 Variable support costs 35,000 Fixed support costs 25,000 Total costs \1 20,000 Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit.If WB23 is outsourced,40% of the fixed costs cannot be immediately converted to other uses. a.Describe avoidable costs.What amount of the WB23 production costs is avoidable? b.Should Quiett Truck outsource WB23? Why or why not? c.What other items should Quiett Truck consider before outsourcing any of the parts it currently manufactures?

Which of the following is true of an opportunity cost?

Why is the depreciation of an old equipment irrelevant to decision making?

Which of the following is true of relevant information?

Answer the following questions using the information below: Contrafic Lighting manufactures small flashlights and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units. Current Projected Demand 75,000 units 68,000 units Selling price \ 8.50 \ 9.25 Incremental cost per unit \ 4.80 \ 4.80 -When using the five-step decision process,which one of the following steps should be done last?

Sunk costs are ________.

The opportunity cost of holding significant inventory includes ________.

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 revenue is revenue that is a(n)________.

Rambo Company has three products,A,B,and C.The following information is available: $\begin{array}{lrrr}&\text { Product A }&\text { Product B }&\text { Product C }\\\text { Sales } & \$ 60,000 & \$ 90,000 & \$ 24,000 \\\text { Variable costs } & 36,000 & 48,000 & 15,000 \\\text { Contribution margin } & 24,000 & 42,000 & 9,000 \\\text { Fixed costs: } & & &\\\text { Avoidable } & 6,000 & 15,000 & 4,000 \\\text { Unavoidable } & 7,000 & 9,000 & 5,400 \\\text { Operating income } & \$ 11,000 & \$ 18,000 & \$(400)\end{array}$ Rambo Company is thinking of dropping Product C because it is reporting a loss.Assuming Rambo drops Product C and does NOT replace it,operating income will ________.

Sunk costs are irrelevant to decision making.

Which of the following is an appropriate step when identifying relevant costs to make a business decision?

Parker and Spitzer 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.The following per unit data apply for sales to regular customers: Direct materials \ 1,782 Direct labor 810 Variable manufacturing support 1,296 Fixed manufacturing support 2,808 Total manufacturing costs 6,696 Markup (50\%) 3,348 Targeted æelling price \ 10,044 Parker and Spitzer Manufacturing has excess capacity. Required: a.What is the full cost of the product per unit if the marketing costs is $3,000? 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 Parker and Spitzer Manufacturing,what is the minimum acceptable price of this one-time-only special order? e.For this one-time-only special order,should Parker and Spitzer Manufacturing consider a price of $5,400 per unit? Why or why not?

Marketing costs will be an irrelevant cost in the decision making of a one-time-only special order.