Exam 27: Short Run Decision Analysis

The Dropinsky Company's management wants to determine if Division Y should be eliminated. The following data are available (in thousands). a. Assuming all direct fixed costs of Division Y are avoidable, what would be the change in operating income if Division Y were eliminated? b. Assuming one-half of the direct fixed costs of Division Y are avoidable, what would be the change in operating income if Division Y were eliminated?

Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual production activities related to this part are as follows: Direct materials, $24,000 Direct labor, $60,000 Variable overhead, $54,000 Fixed overhead, $84,000 Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor were to accept the offer, some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000. Moreover, $4 per unit of the fixed overhead applied to the part would be totally eliminated. In the decision to make or buy the part, what is the relevant fixed overhead?

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 Selline Price per Baard Incremental Cast to Pracess Further After At Split-Off Additional Pracessing A 2,000 \ 8 \ 12 \ 7,000 B 1,000 16 20 6,000 C 500 25 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?

Sunk costs can be recovered.

Estimated future costs that differ between alternative courses of action are termed __________ costs in management decision analysis.

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

Sand Canyon Enterprises is analyzing its sales mix to find out if it is maximizing its profits. The company produces three similar items: X, Y, and Z. All three of these products are made with the same equipment, and maximum productive capacity measured in machine hours is now being used. Product line statistics are as follows: Y Z Current production and sales (units) 105,000 158,000 95,000 Machine hours per unit 10 5 13 Selling price per urit \ 63 \ 48 \ 84 Unit variable cost \ 33 \ 26 \ 49 Unit variable selling cost \ 17 \ 13 \ 16 Determine whether the existing sales mix is the most profitable one possible. If your answer is no, offer your suggestion to improve the sales mix. Round answers to two decimal places.

The term incremental cost refers to

A special order should be accepted only if it maximizes operating income.

The objective of segment profitability decisions is to identify the segments that have a negative segment margin so that managers can drop them or take corrective actions.

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

Contribution margin information is not relevant for

Avoidable costs are important for

All of the following are relevant in a sell or process-further decision except

Special order decisions are the decisions about whether to accept or reject special orders at prices above the normal market prices.

Sunk costs are omitted from decision analysis

Outsourcing is the use of suppliers outside the organization to perform services or produce goods that cannot be performed or produced internally.

Irrelevant costs are costs that are

The point at which products are separated in a joint production process is the

Incremental analysis is a technique used not only by businesses but also by individuals to solve daily problems.