Exam 27: Short Run Decision Analysis

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?

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

An old machine that originally cost $9,500 thus far has accumulated depreciation of $1,900. The remaining useful life is four years, with no salvage value at the end of its useful life. A new machine is now available that costs $8,500, with a useful life of five years and no residual value. The old machine could be sold now for $4,200. The annual cash operating costs for the old machine are $5,000, but for the new machine they would be only $2,500. Gross revenue from the products would be $12,000 annually for either machine. The company should

The point where joint products or services become separable and identifiable is known as split-off point.

Which of the following statements about incremental analysis is false?

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

"Variable costs are relevant and fixed costs are irrelevant." Explain why you agree or disagree with this statement.

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

Qualitative data as well as quantitative data are useful in the decision process.

Incremental analysis identifies both the benefits and the drawbacks of each alternative.

Competition, social issues, and timeliness are examples of qualitative factors.

Managers rely strictly on financial information when faced with decisions.

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

The cost of a previously purchased machine is an example of a sunk cost.

What two criteria must be met for information to be considered relevant to decision making?

The normal selling price of our product is $42 per unit. The costs of production are direct materials, $8; direct labor, $6; variable overhead, $7; and fixed overhead, $4 (based on normal capacity). The company has received a special order for 11,900 units at a unit sales price of $23. There is ample unused capacity to fill the order and $1 per unit will be incurred for additional freight costs. If the order is accepted, operating income will

During 2010, America, Inc., produced, among other products, 9,500 cameras, incurring the following unit costs: $5 in direct materials, $3 in direct labor, $2 in variable overhead, $4 in fixed overhead, $0.50 in variable selling and administrative expenses, and $1 in fixed selling and administrative expenses. An outsider had offered to produce the cameras for $12 each. Assuming that the factory space would have been idle otherwise, acceptance of the outside offer would have

A segment margin is a segment's sales revenue minus its direct costs.

Cost information for short-run decision making focuses on

Accountants assign joint costs to products or services while calculating the cost of goods sold because joint costs are also relevant. The most beneficial projects are the ones with the lowest net present value.