Exam 7: Differential Cost Analysis for Operating Decisions

The theory of constraints identifies bottlenecks and possible disruption that threatens throughput.When disruptions are hard to pinpoint or eliminate,managers may utilize which of the following techniques?

Just-in-time is

Waldo Mining Company currently is operating at less than 50% of practical capacity.The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon.The sales price per ton is $3 and the variable cost per ton is $2.Fixed costs per month total $10,000. Management is concerned that a further drop in sales volume will generate a loss and,accordingly,is considering the temporary suspension of operations until demand in the metals market rebounds and prices once again rise.Management has implemented a cost reduction program over the past year that has been successful in reducing costs to the point that suspension of operations appears to be the only viable alternative.Management estimates that suspension of operations would reduce fixed costs from $10,000 to $4,000 per month. REQUIRED: Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed?

When using differential analysis to determine when to add or drop parts of operations,if the differential revenue from the sale of a product is less than the differential costs required to provide the product for sale,then

Customer profitability analysis.ChoiceBank's management is evaluating the profitability of providing special checking accounts to new businesses that start in its town.The company's financial analysts have developed the following cost information: On average,each account generates $180 per year in fees and interest.After inquiring whether the costs above are all differential,you learn that the $200,000 per year cost to acquire accounts includes $30,000 of advertising that ChoiceBank would have done with or without the new accounts.The remainder of the $200,000 costs are differential.Further,you learn that $10 of the $150 to process and service accounts are general office costs allocated to these accounts,which are incurred whether or not the bank has the new accounts.The bank has an average of 7,000 new business commercial accounts each year. Required: Should ChoiceBank continue to offer these promotional new business accounts?

What costs can be justified when managers initially set prices to cover the costs plus a profit and then subsequently adjusts the prices to reflect market conditions?

Explain the relation between costs and prices.

Which statement is true concerning target pricing?

The objective of the theory of constraints is to maximize throughput contribution while minimizing investments and operating costs.The theory of constraints assumes a short-run time horizon.How is this accomplished?

Which of the following is a valid assumption of the theory of constraints?

Explain the differential principle and how to identify costs for differential analysis.

Identify the use of economic order quantity model.

Compare and contrast the terms relevant costs and non-relevant costs as used in decision making.

What is the difference between short-run and long-run pricing decisions?

Pete's Sports Products makes caps and uniforms.It can sell all of either product it can make.The relevant data for these two products follows: Total fixed overhead is $240,000.The company has 100,000 machine hours available for production.The company should select which product to maximize operating profits?

A cost or revenue is _________ if the change results in a difference between alternatives.

Linear programming

Explain the theory of constraints.

Customer costs generally fall under several categories.Which is not one of these categories?

Which statement is true concerning target costing?