Exam 24: Short Run Decision Analysis

Avoidable costs are important for

Which of the following could not be a relevant cost in deciding whether or not to eliminate a producing department?

Products Green,Red,and White have unit contribution margins of $6.50,$12,and $10,respectively,and require 2,4,and 3 direct labor hours per unit,respectively.If demand currently is far exceeding supply,on which product should the company concentrate its efforts?

The purpose of incremental analysis is to find the alternative

The Big Bear Lumber Company is trying to decide whether to sell or process further rough-sawn lumber.The joint cost of producing the rough-sawn lumber is $10,500.The following data are available: Lumber Type Number of Boards Selling Price per Board Incremental Cost to Process Further At Split-Off After Additional Processing A 2,000 \ 8 \ 12 \ 7,000 B 1,000 \ 8 20 6,000 C 500 16 30 1,000 a. What is the incremental effect, increase or (decrease), on operating income of processing the lumber further? b. Which type of lumber should be processed further?

Joint costs that are incurred before the split-off point should be ignored while making a decision to sell or process a product further.

In manufacturing companies,a common decision facing managers is whether to make or buy some or all of the parts used in product assembly.

If the incremental costs are greater than the incremental revenue,the product should not be processed further and should be sold at the split-off point.

Managers rely strictly on financial information when faced with decisions.

Courtney Sinclaire is trying to rent a new bicycle.She has narrowed her choices to two lease arrangements,each with unique characteristics.Bike Superior would rent for $220 per year,and Bike Deluxe's annual rent would be $250.Bike Superior would need a new seat costing $35 and new racing tires costing $95.The old seat and tires could be sold for $30.Bike Deluxe is fully equipped but would need to be painted at a cost of $110.Maintenance and upkeep on both bikes would average $60 per year. a. Identify the relevant data in this problem. b. Prepare an incremental analysis for Courtney to aid her in this decision. c. What decision should Courtney make?

Many management decisions are unique and hence incompatible with strict rules,steps,or timetables.

When resources like direct material,labor or time are scarce,the goal is to minimize the contribution margin per unit of scarce resource.

The costs incurred beyond the split-off point are called

Outsourcing production or operating activities does not help in reducing a company's investment in physical assets and human resources.

The difference in total costs between two alternatives is referred to as the

Lispell Co.manufactures in-line skates that sell for $128 a pair.The company is currently operating at capacity,2,000 pairs.A special order from a foreign distributor for 400 pairs of skates at $120 a pair has just been received.In order to accept this order,Lispell Co.would have to give up 400 pairs of its regular sales.However,there would be no sales commission incurred on the order.Shown below are the current costs of operation: Direct materials \ 48 Direct labor 12 Variable overhead 4 Fixed overhead 5(\ 10,000\div2,000 pairs) Variable selling and administrative 8 (sales commissions) Fixed selling and administrative 4(\ 8,000\div2,000 pairs) a. What costs are relevant to this decision? b. Provide an incremental analysis to be used in determining whether or not the order should be accepted. c. Are there any qualitative considerations that need to be addressed? Explain.

There is no limit on the availability of resources such as machine time,labor hours.

Avoidable costs are the direct variable costs and direct fixed costs traceable to the segments.

Only large corporations benefit from capital investment analysis.

The Norran Company needs 15,000 units of a certain part to use in its production cycle.If Norran buys the part from Waterloo Company instead of making it,Norran could not use the released facilities in another activity; thus,all of the fixed overhead applied will continue regardless of what decision is made.Accounting records provide the following data: Cost to Norran to make the part: Direct materials,$3 Direct labor,$12 Variable overhead,$13 Fixed overhead applied,$8 Cost to buy the part from the Waterloo Company,$27 In deciding whether to make or buy the part,Norran's total relevant costs to make the part are