Exam 14: Decision Making: Relevant Costs and Benefits

A company that is operating at full capacity should emphasize those products and services that have the:

The City of Columbus should not consider the purchase price of its old vehicle when making the decision to replace it with a more cost effective new vehicle.

Capacity restrictions often change the way that managers make decisions. For example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding which new products to carry? How would this differ, say, from a concert promoter that desires to bring a rock group to an arena-type facility?

In early July, Mike Gottfried purchased a $70 ticket to the December 15 game of the Chicago Titans. (The Titans belong to the Midwest Football League and play their games outdoors on the shore of Lake Michigan.) Parking for the game was expected to cost approximately $22, and Gottfried would probably spend another $15 for a souvenir program and food. It is now December 14. The Titans were having a miserable season and the temperature was expected to peak at 5 degrees on game day. Mike therefore decided to skip the game and took his wife to the movies, with tickets and dinner costing $50. The sunk cost associated with this decision situation is:

Information is said to be useful in decision making if it possesses three characteristics. Required: A. List the three characteristics of useful information. B. Frequently, there is a conflict between two of the characteristics requested in part "A." Briefly explain what this conflict is. C. What distinguishes relevant from irrelevant information?

Flowers Company is operating at capacity and wants to add a new service to its expanding business. The new service should be added as long as service revenues exceed the sum of variable costs and fixed costs.

Consider the following costs and decision-making situations: I. The cost of existing inventory, in a keep vs. disposal decision. II. The cost of special electrical wiring, in an equipment acquisition decision. III. The salary of a supervisor who will be transferred elsewhere in the organization, in a department-closure decision. Which of the above costs is (are) relevant to the decision situation noted?

The term "opportunity cost" is best defined as:

Which of the following characteristics would best explain the use of probabilities and expected values in a decision analysis?

Susan is contemplating a job offer with an advertising agency where she will make $54,000 in her first year of employment. Alternatively, Susan can begin to work in her father's business where she will earn an annual salary of $38,000. If Susan decides to work with her father, the opportunity cost would be:

Sophisticates' Corner sells clothing, shoes, and accessories at a suburban location near Boston. Information for the just concluded calendar year follows. Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Sophisticates' Corner will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed. Required: Determine whether the shoe department should be closed.

Snyder, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows. Sales \ 190,000 Less: Cost of Goods Sold Gross Margin Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company's income will:

Linear programming would be used by decision makers when there are:

Johnstone Company makes two products: Carpet Kleen and Floor Deodorizer. Operating information from the previous year follows. Carpet Kleen Floor Deodorizer Units produced and sold 5,000 4,000 Machine hours used 5,000 2,000 Sales price per unit \ 7 \ 10 Variable cost per unit \ 4 \ 8 Fixed costs of $20,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed costs would remain the same. Assuming there is unlimited demand for both products and Johnson has 10,000 machine hours available, how many units of each product should be produced and sold? Carpet Kleen Floor Deodorizer A. 0 units 0 units B. 0 units 20,000 units C. 5,000 units 10,000 units D. 8,000 units 4,000 units E. 10,000 units 0 units

George Jettson builds custom homes in Cincinnati. Jettson was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows: Jettson adds a 25% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $118,000 ($472,000 × 25%), producing a bid price of $590,000. Assume that 60% of construction overhead is fixed. Required: A. Suppose that business is presently very slow, and the client countered with an offer on this home of $455,000. Should Jettson accept the client's offer? Why? B. If Jettson has more business than he can handle, how much should he be willing to accept for the home? Why?

Smythe Manufacturing has 27,000 labor hours available for producing X and Y. Consider the following information: Product X Product Y Required labor time per unit (hours) 2 3 Maximum demand (units) 6,000 8,000 Contribution margin per unit \ 5.00 \ 6.00 Contribution margin per labor hour \ 2.50 \ 2.00 If Smythe follows proper managerial accounting practices, how many units of Product Y should it produce?

When using a graphical solution to a linear programming problem, the optimal solution will lie in an area commonly known as the:

A technique that is useful in exploring what would happen if a key decision prediction or assumption proved wrong is termed:

The Shoe Department at the El Paso Department Store is being considered for closure. The following information relates to shoe activity: Sales revenue \3 50,000 Variable costs: Cost of goods sold 280,000 Sales commissions 30,000 Fixed operating costs 90,000 If 70% of the fixed operating costs are avoidable, should the Shoe Department be closed?

Coastal Airlines has a significant presence at the San Jose International Airport and therefore operates the Emerald Club, which is across from gate 36 in terminal 1. The Emerald Club provides food and business services for the company's frequent flyers. Consider the following selected costs of Club operation: 1) Receptionist and supervisory salaries 2) Catering 3) Terminal depreciation (based on square footage) 4) Airport fees (computed as a percentage of club revenue) 5) Allocated Coastal administrative overhead Management is exploring whether to close the club and expand the seating area for gate 36. Which of the preceding expenses would the airline classify as unavoidable?