Exam 9: Short Run Decision Analysis

A sell or process-further decision is a decision about whether to sell a joint product at the split-off point or sell it after further processing.

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

Candidates for outsourcing would include

While performing an incremental analysis for outsourcing decision, information such as depreciation and other fixed costs are not relevant.

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

On November 25, 20xx, 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?

In manufacturing companies, a common decision facing managers is whether to make or buy some or all of the parts used in product assembly.

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

Sunk costs are omitted from decision analysis

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

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 Current production and sales(units) 105,000 158,000 \ 5,000 Machine hours per unit 10 \ 13 Selling price per unit \ 63.00 \ 48.00 \ 84.00 Unit variable cost \ 33.00 \ 26.00 \ 49.00 Unit variable 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.

Facts that are the same for each alternative are not relevant for management decision making.

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?

Contribution margin information is not relevant for

Sand Canyon Enterprises is analyzing its sales mix to find out if it is maximizing its profits. The company produces three similar items: X, Y, and Z. 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: Y Z Current production and sales (units) 105,000 158,000 95,000 Machine hours per unit 10 5 13 Selling price per unit \ 63 \ 48 \ 84 Unit variable cost \ 33 \ 26 \ 49 Unit variable selling cost \ 17 \ 13 \ 16 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.

Which of the following typically would be considered an incremental cost?

Only large corporations benefit from capital investment analysis.

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

Fixed costs are irrelevant in make-or-buy decisions.

The idea behind incremental analysis is to review decision data that differ between alternatives; information that is the same for all alternatives is considered irrelevant to the decision process.