Exam 9: Short Run Decision Analysis

Which of the following statements about incremental analysis is false?

On November 15, 20xx, 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?

Products Green, Red, and White have unit contribution margins of $6.50, $12, and $10, respectively, and require 2, 4, and 3 direct labor hours per unit, respectively. If demand currently is far exceeding supply, on which product should the company concentrate its efforts?

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

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

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

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?

The term incremental cost refers to

If the incremental costs are greater than the incremental revenue, the product should not be processed further and should be sold at the split-off point.

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

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

Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside supplier has offered to supply the components to Anderson at $66 per unit. Anderson's production costs are as follows: Direct materials \ 8 Direct labor 32 Variable overhead 12 Fixed overhead(based on normal capacity) 34 If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated. What is the relevant cost to produce one unit?

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 $5,900. 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

Products Uno, Dos, Tres, and Quatro have contribution margins of $2, $3, $4, and $5, respectively, and require 1.5, 2, 2.5, and 3 machine hours per unit, respectively. Assuming that all units produced could be sold and that total machine hours per month are limited, on which product should the company concentrate its efforts?

Relevant costs in a sell or process-further decision include

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

The difference in total costs between two alternatives is referred to as the

Special orders should only be considered if unused capacity exists.

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 Nunber of Boards Selling Price per Board Tncremental Cost to Process Further At Split-Off After Additional Processing A 2,000 \ 8 \ 12 \ 7,000 B 1,000 16 20 6,000 500 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?

The common costs shared by two or more products before they are split off are called joint costs.