Exam 27: Short Run Decision Analysis

If the incremental costs of processing further is greater than the incremental revenue, the decision to process the product or service further is justified.

Red Rock Enterprises is analyzing its sales mix to find out if it is maximizing its profits. The company produces three similar items: Alpha, Beta, and Gamma. 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: Alpha Beta Gamma Curent production and sales (units) 105,000 158,000 95,000 Machine haus per unit 10 5 13 Selling price per unit \ 63.00 \ 48.00 \ 84.00 Unit variable cost \ 33.00 \ 26.00 \ 49.00 Unit varaable selling cost \ 20.00 \ 16.00 \ 19.00 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.

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

Many of the decisions that managers make does not affect their organization's activities in the short run.

Identify each of the following as quantitative or qualitative factors in the decision making of a tax preparation firm: a. Timeliness ____________________ b. Number of clients _____________________ c. Competition from other firms ____________________ d. Cost of computer time _____________________ e. Service quality _____________________

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

In choosing among alternatives, managers are guided by historical cost information.

The fixed costs that are traceable to the segments are called common costs.

Outsourcing production or operating activities will help in improving the cash flow by reducing investment in physical assets.

Relevant costs in a sell or process-further decision include

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. What should Taylor's decision be, and what is the total cost savings that would result?

The decision analysis, which uses incremental analysis to identify the relevant costs and revenues, consists of two steps.

On November 25, 2010, Marquez Golf Co. received a special order for 5,000 three-wood golf club sets. These golf clubs will be marketed in Japan. Ito Imports, Inc., the purchasing company, wants the clubs bulk packaged and is willing to pay $55 per set for the clubs. The president of Marquez Golf Co. has gathered the following product costing information about the set of woods being discussed: direct materials (wood), $600 per 100 sets; direct materials (metal shafts), $1,000 per 100 sets; and direct materials (grips), $150 per 100 sets. Direct labor is $20 per set. Variable manufacturing costs are $12 per set, and fixed manufacturing costs are 20 percent of direct labor dollars. Variable selling expenses are $10 per set, and variable shipping costs are $7 per set. Fixed general and administrative costs are figured at 30 percent of direct labor dollars. Bulk shipping costs will total $11,000, thus eliminating both variable selling and variable shipping costs from consideration. The company did not expect this order and will reach planned production capacity for the year. However, there is enough plant capacity for the special order. Round answers to two decimal places. a. Prepare an analysis for the president to use in deciding whether to accept or reject the offer by Ito Imports, Inc. What decision should be made? b. What is the lowest possible price Marquez Golf Co. could charge per set of woods and still make a $9,000 profit on this order?

Segment profitability analysis includes the preparation of a segmented income statement.

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 What should Norran's decision be, and what is the total cost savings that would result?

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

Qualitative factors used by decision makers include all of the following except

Candidates for outsourcing would include

Opportunity costs are irrelevant costs.

On November 15, 2010, The Cooper Co. received a special order for 6,000 three-wood golf club sets. These golf clubs will be marketed in Asia. Seto Imports, Inc., the purchasing company, wants the clubs bulk packaged and is willing to pay $72 per set for the clubs. The president of The Cooper Co. has gathered the following product costing information about the set of woods being discussed: direct materials (wood), $900 per 100 sets; direct materials (metal shafts), $1,200 per 100 sets; and direct materials (grips), $200 per 100 sets. Direct labor is $27 per set. Variable manufacturing costs are $19 per set, and fixed manufacturing costs are 20 percent of direct labor dollars. Variable selling expenses are $14 per set, and variable shipping costs are $9 per set. Fixed general and administrative costs are figured at 30 percent of direct labor dollars. Bulk shipping costs will total $10,000, thus eliminating both variable selling and variable shipping costs from consideration. The company did not expect this order and will reach planned production capacity for the year. However, there is enough plant capacity for the special order. Round answers to two decimal places. a. Prepare an analysis for the president to use in deciding whether to accept or reject the offer by Seto Imports, Inc. What decision should be made? b. What is the lowest possible price The Cooper Co. could charge per set of woods and still make a $12,000 profit on this order?