Exam 25: Short-Run Decision Analysis and Capital Budgeting

What are the two steps in the analysis of a sales mix decision?

Special orders should be considered only when entire capacity of an organization is used.

Taylor Inc.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: 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 for Taylor Inc.?

An advantage of the net present value method is that it considers the time value of money.

The accounting rate of return is calculated by dividing the project's investment by its net income.

Which of the following is not an appropriate method used in evaluating proposed capital investments?

The most beneficial projects are the ones with the highest net present value.

What criteria must be met for accepting any capital expenditure proposal with respect to minimum rate of return on investment?

San Joaquin Manufacturing Company specializes in the production of precision tools.Management is in the process of selecting a new drill press.The press under consideration will cost $180,000 plus necessary installation charges of $25,000.Past experience indicates that the press will last for ten years and should have a residual value at the end of that period of about $15,000.Expected annual cash revenues from the press should average $66,000,and related cash operating costs should be around $30,000.Management has decided on a minimum desired before-tax rate of return of 12 percent. Present value multipliers: a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the drill press.Support your answer. b.If management had decided on a minimum desired before-tax rate of return of 14 percent,should the drill press be purchased? Show all computations to support your answer.

When are sunk costs are omitted from decision analysis?

The payback period method of evaluating proposed capital investment does not take into account the time value of money.

An organization with several branches and a highly developed system for capital investment analysis,would require that all proposals should go through preliminary screening.

Decisions to install new equipment,replace old equipment,and purchase or construct a new building are examples of

Sunk costs are irrelevant for decision making.

Net present value method and accounting rate of return method are the two important decision variables used in the evaluation of proposals.

The proposals that will either meet company strategic goals or produce the minimum rate of return will not be reviewed in the process.

The accounting rate-of-return method is difficult to comprehend and apply.

In a proposal to increase the production of clock radios,the sales managers of Rinaldo Electronics reported the total additional cost required to meet the increased production level.The increase in total cost is known as the

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

Which of the following techniques is most useful for a special order decision?