Exam 14: Decision Making: Relevant Costs and Benefits

Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Traceable variable and fixed operating costs total $80,000 and $25,000, respectively, in addition to $18,000 of corporate administrative overhead allocated from Stanley. If Maddox were to use the outside consultant, fixed operating costs would be reduced by 70%. The irrelevant costs in Maddox's outsourcing decision total:

CompuTronics, a manufacturer of computer peripherals, has excess capacity. The company's Utah plant has the following per-unit cost structure for item no. 89: Variable manufacturing \ 40 Fixed manufacturing 15 Variable selling 8 Fixed selling 11 Traceable fixed administrative 4 Allocated administrative 2 The traceable fixed administrative cost was incurred at the Utah plant; in contrast, the allocated administrative cost represents a "fair share" of CompuTronics' corporate overhead. Utah has been presented with a special order of 5,000 units of item no. 89 on which no selling cost will be incurred. The proper relevant cost in deciding whether to accept this special order would be:

Which of the following costs should be used when choosing between two decision alternatives? Relevant Sunk Opportunity Cost Cost Cost A. No Yes Yes B. Yes Yes Yes C. Yes Yes Yo D. Yes No Yes E. No No Yes

The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision?

Factors in a decision problem that cannot be expressed in numerical terms are:

Which of the following statements regarding costs and decision making is correct?

Papa Friedo's Pizza store no. 16 has fallen on hard times and is about to be closed. The following figures are available for the period just ended: Sales \ 205,000 Cost of sales 67,900 Building occupancy costs: Rent 36,500 Utilities 15,000 Supplies used 5,600 Wages 77,700 Miscellaneous 2,400 Allocated corporate overhead 16,800 All employees except the store manager would be discharged. The manager, who earns $27,000 annually, would be transferred to store no. 19 in a neighboring suburb. Additionally, no. 16's furnishings and equipment are fully depreciated and would be removed and transported to Papa Friedo's warehouse at a cost of $2,800. Required: A. What is store no. 16's reported loss for the period just ended? B. Should the store be closed? Why? C. Would Papa Friedo's likely lose all $205,000 of sales revenue if store no. 16 were closed? Explain.

Phanatix, Inc. produces a variety of products that carry the logos of teams in the Southern Football League (SFL). The company recently paid the league $85,000 for the rights to market a popular player jersey and immediately began production. The following information is available: Number of jerseys manufactured: 25,000 Cost of jerseys manufactured: $625,000 Amount of manufacturing costs paid to-date: $410,000 Number of jerseys sold to-date: 0 Estimated future marketing costs: $330,000 Anticipated selling price per jersey: $42 The SFL is about to file a lawsuit to stop jersey sales and is demanding another $50,000 from Phanatix for the manufacturing rights. Conversations with Phanatix's attorneys indicate that the league has a strong case and is likely to win the suit. If this situation arises, Phanatix will be unable to recover any amounts paid to the SFL. Required: Phanatix's sales department anticipates very strong demand and a sellout of all jerseys manufactured. A. Determine the overall profitability of the jersey product line if Phanatix settles the disagreement with the SFL and the anticipated sellout occurs. B. Should the company pay the additional $50,000 demanded by the league or should the jersey program be dropped? Show computations to support your answer.

Sunk costs and opportunity costs are inherent in decision making. Required: A. Define the terms "sunk cost" and "opportunity cost." B. How are sunk costs treated when making decisions? C. "Information about sunk costs can be found in the financial statements and accounting records; however, information about opportunity costs is omitted." Do you agree with this statement? Explain.

A special order generally should be accepted if: