Deck 11: Decision Making and Relevant Information

Question 1

Boyd Tool Company is a tool manufacturer. Production capacity is 3,000 units per month; however, they are considering alternative ways to increase capacity to 3,500 units. One of the alternatives involves purchasing new equipment. In this alternative, there are two choices: machine A will provide increased capacity of 4,000 units per month, with unit costs of $14 at capacity; and, machine B will increase capacity to 3,600 units per month with unit costs of $15 at capacity. Both machines are adequate since Boyd's does not intend to go beyond the 3,500 units per month level for the foreseeable future.
Relevant information for this decision includes

A) whether other costs will change solely due to a capacity increase.
B) the different unit cost of production between the two machine at their capacity levels.
C) Boyd's planned capacity utilization.
D) excess capacity of either machine.
E) the different unit cost of production between the two machines at Boyd's planned capacity levels.

Answer 1

the different unit cost of production between the two machines at Boyd's planned capacity levels.

Question 2

Koch Brothers purchased a new production machine for $200,000. It is capable of producing 400,000 units over its useful life, thus the manufacturer's salesperson claimed the unit cost would only be $0.50. Koch's own engineers recommended that the company acquire a machine that would have a unit cost of production of no more than $0.48 (with a $0.03 variance). A competitor of the vendor, who also was trying to sell Koch some equipment, claimed that the $0.50 is understated by $0.04 per unit. The total anticipated demand over the asset's useful life is 300,000 units.
Relevant information includes

A) the $0.50 unit cost.
B) the fact that the $0.50 falls below the $0.48 + $0.03 variance.
C) the unit cost at Koch's planned capacity utilization.
D) being able to produce at excess capacity.
E) the different unit costs of production between the two vendors' machines.

Answer 2

the unit cost at Koch's planned capacity utilization.

Question 3

Scott is the new manager of the credit card department of a large bank. One of his first changes, directed by the president, was to reorganize the activities of the department. He is reluctant to start the reorganization without including a comprehensive report from accounting about the current costs of operations and possible costs of changes.
Required:
Explain how the decision process model can assist the manager and discuss the steps in the decision process model that might be taken to ensure an orderly decision process.

Answer 3

The accounting information can assist the manager by helping him understand the actual costs of operating the department. Costs would probably need to be categorized as fixed and variable to help the manager understand how costs behave when changes take place.
The steps that should be taken include:
1. Identify the problem and uncertainties.
2. Obtain information.
3. Make predictions about the future.
4. Make decisions by choosing among the alternatives.
5. Implement the decision, evaluate the performance, and learn.
Feedback can affect future predictions, the prediction method used, the decision model, or the implementation. Careful monitoring aids in fine-tuning the new system and ensuring that all necessary activities are being properly performed.

Question 4

Chalet Ski & Patio manufactures a product that has two parts, X and Y. It is currently considering two alternative proposals related to parts X and Y.
The first proposal is for buying part Y. This would free up some of the plant space for the manufacture of more of part X and assembly of the final product. The product vice-president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed.
The second proposal is for buying new equipment for the production of part Y. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero.
Required:
Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently.
a. Sales revenue of the product.
b. Variable costs of assembling final products.
c. Direct manufacturing materials, part X.
d. Direct manufacturing materials, part Y.
e. Direct manufacturing labour, part X.
f. Direct manufacturing labour, part Y.
g. Variable manufacturing overhead, part X.
h. Variable manufacturing overhead, part Y.
i. Cost of old equipment for manufacturing Y.
j. Cost of new equipment for manufacturing Y.
k. Variable selling and administrative costs.

Question 5

Comics Plus has a current production level of 200,000 comics per month. Unit costs at this level are:
Current monthly sales are 180,000 units. Printers Ltd. has contacted Comics Plus about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/distributing costs would not be incurred on the special order.
What is Comics Plus' change in profits if the order is accepted?

A) $6,000 increase
B) $6,000 decrease
C) $7,500 increase
D) $9,000 increase
E) $3,000 increase

Question 6

Northern Glass Manufacturing has a current production level of 200,000 glass jars per month. Unit costs at this level are:
Current monthly sales are 180,000 units. Canadian Hardware Ltd. has contacted Northern Glass Manufacturing about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/distributing costs would not be incurred on the special order.
What is Comics Plus' change in profits if the order is accepted?

A) $4,800 increase
B) $4,800 decrease
C) $1,800 decrease
D) $300 decrease
E) $1,200 increase

Question 7

First Image has a plant capacity of 80,000 units per month. Unit costs at capacity are:
Current monthly sales are 78,000 units at $12.60 each. Computer Output Management has contacted First Image about purchasing 2,000 units at $12.00 each. Current sales would not be affected by the special order. What is First Image's change in profits if the order is accepted?

A) $7,400 increase
B) $8,600 increase
C) $4,400 increase
D) $2,600 decrease
E) $3,600 decrease

Question 8

Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are:


Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?

A) $400 increase in operating profits
B) $400 decrease in operating profits
C) $1,800 increase in operating profits
D) $1,800 decrease in operating profits
E) $1,500 increase in operating profits

Question 9

Omark Corporation currently manufactures a subassembly for its main product. The variable costs per unit are $48, in addition to a $6 charge based on estimated selling expenses.
R-Corp has contacted Omark with an offer to sell them 5,000 of the subassemblies for $44.00 each. Omark will eliminate $50,000 of fixed overhead if it accepts the proposal.
What is increase or decrease in profit from accepting the offer?

A) $50,000 increase
B) $100,000 increase
C) $170,000 increase
D) $50,000 decrease
E) $70,000 increase

Question 10

When considering a project that will require production using otherwise idle resources, which of the following are TRUE?

A) Avoidable fixed costs are irrelevant.
B) Only the variable costs of the project are relevant.
C) Only financial factors should be considered.
D) The project should not be undertaken if total revenue from the project is less than the total costs of production.
E) In the short run, even if revenue is less than the total costs of production, the project could help the company's overall operating income.

Question 11

Snapper Tool Company has a production capacity of 3,000 units per month, but current production is only 2,500 units. Total manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Levy offers to purchase 500 units at $76 each for the next five months. Should Snapper accept the one-time-only special order if only absorption-costing data are available?

A) Yes, good customer relations are essential.
B) No, the company will only break even.
C) No, since only the employees will benefit.
D) Yes, since operating profits will most likely increase.
E) Yes, because breaking even is better than having idle capacity.

Question 12

Clearwater Company operates a wine outlet in a tourist area. One litre bottles sell for $12. Daily fixed costs are $3,000, and variable costs are $6 per litre. An average of 750 litres are sold each day. Clearwater has a capacity of 800 litres per day.
Required:
a. Determine the average cost per bottle.
b. A bus loaded with 40 senior citizens stops by at closing time and the tour director offers Clearwater $300 for 40 litres. Clearwater refuses, saying they would lose $2.50 on each litre. Is Clearwater correct about the $2.50? Why or why not?
c. A fund-raising organization has offered Clearwater a one-year contract to buy 300 litres a day for $7.50 each. Should they accept the offer? Why or why not?

Question 13

Axle and Wheel Manufacturing is approached by a European customer to fill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers:


Axle and Wheel Manufacturing has excess capacity.
Required:
a. What is the full cost of the product per unit?
b. What is the contribution margin per unit?
c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?
d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time-only special order?
e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not?

Question 14

Parker and Spitzer Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers:


Parker and Spitzer Manufacturing has excess capacity.
Required:
a. What is the full cost of the product per unit?
b. What is the contribution margin per unit?
c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?
d. For Parker and Spitzer Manufacturing, what is the minimum acceptable price of this one-time-only special order?
e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of 200 per unit? Why or why not?

Question 15

Silver Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:


Silver Lake Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
Required:
a. For Silver Lake Cabinets, what is the minimum acceptable price of this one-time-only special order?
b. Other than price, what other items should Silver Lake Cabinets consider before accepting this one-time-only special order?
c. How would the analysis differ if there was limited capacity?

Question 16

A company has two manufacturing facilities: one in Alberta that produces a bulk chemical that it sells to many different retailers, and one facility in Ontario that is dedicated to producing a specialty chemical for one client only. The annual profit from the single client is $150,000; and, the profit from the other facility's sales is $1,500,000, after allocating combined fixed costs based on units produced. Another company has offered to lease the Ontario facilities for $250,000.
Which of the following is TRUE?

A) The $250,000 is an opportunity cost of continuing to use the Ontario plant.
B) The company incurred a $250,000 opportunity cost for the past years, but this was not recorded on its books.
C) The company needs to determine the contribution margin for each product before making any decision.
D) Incremental revenues exceed total costs if the plant is rented.
E) Incremental costs exceed incremental revenues if the plant is rented.

Question 17

Answer the following question(s) using the information below.
Central Medical Supply Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000; the market value would then be $136,000. However, Tripac offered to purchase the obsolete equipment as is for $88,000.

-Central Medical Supply Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000; the market value would then be $136,000. However, Tripac offered to purchase the obsolete equipment as is for $88,000.
What are the relevant figures above for management in their decision?

A) ($240,000 + $64,000); ($88,000 - 0)
B) ($240,000 + $64,000); ($88,000 - 240,000)
C) ($240,000 + $64,000); ($88,000 + 240,000)
D) ($136,000 - $64,000); ($88,000 - 0)
E) ($136,000 - $64,000); ($88,000 - 240,000)

Question 18

Lynn Valley Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:
Reliance Corp has contacted Lynn Valley with an offer to sell them 5,000 of the subassemblies for $44.00 each. Lynn Valley will eliminate $50,000 of fixed overhead if it accepts the proposal.
Should Omark make or buy the subassemblies? What is the difference between the two alternatives?

A) buy; savings = $20,000
B) buy; savings = $50,000
C) make; savings = $60,000
D) make; savings = $10,000
E) buy; savings = $10,000

Question 19

Last year, a sailboard company produced two types of boards: a regular board for multi-purpose sailing; and, a special trick board used by experts for competitions. The regular board sells for $750 and the competition board sells for $1,350. The variable production costs are $250 and $400 respectively, and the company has $400,000 in fixed costs overall. Marketing staff have determined that the company should specialize in the competition boards only, and sell the regular boards, if at all, under a different brand name. Last year the company made a profit, selling twice as many regular boards as competition boards, resulting in a fixed cost allocation of $5.00 per board. It takes 6 hours of direct labour to make a regular board and 12 hours to make a competition board. The company worked at full capacity of 19,500 direct labour hours last year.
Based on the above information only, which product or mix of products, should the company choose? Assume that any and all production can be sold.

A) the regular board only, as it takes fewer direct labour hours to build
B) both, as the company made a profit last year using this strategy
C) the competition board only, as it has a higher contribution margin
D) Any combination is equivalent, based on the contribution margin times the number of boards that could be sold.
E) the regular board only, as it has the highest contribution margin per direct labour hour

Question 20

A local accounting firm has offered to do all the billings and collections of a general practitioner. The annual fee will be $12,000. The service will replace the part-time bookkeeper who works for $12 an hour, 10 hours a week. Because outsourcing accounting activities will take place away from the office, the doctor estimates that she will have one additional hour a week to see patients. Normally she sees four patients an hour with an average visit fee of $100. The office is open 50 weeks a year. Since the computer service will maintain all records in its office, the doctor will no longer need to rent storage space for the office files. The storage space rents for $150 a month.
Required:Determine whether or not the doctor should accept the offer to use the computer service.

Question 21

Car Parts Company manufactures a part for use in its production of automobiles. The costs per unit when 10,000 items are produced are:


Auto Company has offered to sell to Car Parts Company 10,000 units of the part for $60. The plant facilities could be used to manufacture another part at a savings of $90,000 if Car Parts accepts the offer. In addition, $10 per unit of fixed manufacturing overhead on the original part would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Car Parts Company? By how much?

Question 22

Clinton Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $100 per month. The other existing equipment will be used for additional production of product A. One employee earning $200 per month can be terminated if product B production is dropped. Clinton's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows:

Required:
Prepare an incremental analysis to determine the financial effect of dropping product B.

Question 23

Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:


Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?

Question 24

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:


Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lewis Auto Company? By how much?

Question 25

A cafe specializes in short order meals; and, morning and afternoon snack breaks. It is open from 9:00 am until 4:00 pm. An office manager in a nearby high rise office building offers the owner a contract to provide her 50 employees with afternoon snack breaks for $2.00 each. Each employee would receive a drink and a snack item. The shop has an hourly capacity of 50 customers. The owner estimates that the variable costs of the afternoon breaks would be $1.20 each. Currently the afternoon service, starting at 2:00, is running at only 50 percent capacity, although the morning and noon activities are near capacity. At the present level of operations each meal/snack served is allocated a fixed cost of $0.25.
Required:
a. What nonfinancial factors should be considered by the owner?
b. Given your concerns listed in part a. and quantitative analysis, should the offer be accepted? Why or why not?

Question 26

Collier Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $1.50 and $1.80, respectively. Normal production is 200,000 wheels per year.
A supplier offers to make the wheels at a price of $4 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $42,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.
Required:
a. Prepare an incremental analysis for the decision to make or buy the wheels.
b. Should Collier Bicycles buy the wheels from the outside supplier? Justify your answer.

Question 27

Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year.
A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.
Required:
a. Prepare an incremental analysis for the decision to make or buy the wheels.
b. Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.

Question 28

Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy the motors from Jinx Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following costs per unit:

If Southwestern buys the motors from Jinx, 30% of the fixed manufacturing overhead applied will be avoided.
Required:
a. Should the company make or buy the motors?
b. What additional qualitative factors should Southwestern consider in deciding whether or not to make or buy the motors?

Question 29

Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced each year with production costs as follows:


Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23 is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.
Required:
a. Describe avoidable costs. What amount of the WB23 production costs is avoidable?
b. Should Quiett Truck outsource WB23? Why or why not?
c. What qualitative factors should Quiett Truck consider before outsourcing any of the parts it currently manufactures?

Question 30

A florist produces table settings for weddings. Based on an annual volume of 10,000 units it incurs $100,000 in fixed manufacturing costs. Variable costs per unit are $16 for direct materials, $3 for direct manufacturing labour, and $14 for variable factory overhead.
Another company has offered to supply empty baskets for the settings for $8, with a minimum annual order of 5,000 units. If the florist accepts the offer, it will be able to reduce variable labour and overhead costs by 50 percent. The materials for the empty baskets will cost $4 if the florist assembles them.
Required:
a. Determine if they should make or assemble the empty baskets.
b. Should they make or assemble the empty baskets if they could rent the space that the basket assembly requires for $16,000 per year to another company?

Question 31

Lovejoy's Cake Shop makes three types of cakes: White, Chocolate, and Swirl on one assembly line that has a limit of 400 labour-hours per week. Lovejoy can sell all the cakes it can make under current operating capacity. Manufacturing information per cake for each product is as follows:

Required:
Determine the total weekly contribution margin when all labour-hours are allotted to the product with the highest:
a. Unit selling price.
b. Unit contribution margin.
c. Contribution per labour-hour.

Question 32

John Hatelak, a sales representative for a manufacturing equipment company, has decided to spend less time traveling. He is going to spend only 172 hours per month with his customers. To do this he will have to give up some of his clients. The following information is from his last full month's sales activities.
Required:
a. What should be his customer mix in order to maximize his sales commissions?
b. What will be his income at the best possible customer mix?

Question 33

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications.

-Four employees will have to spend three nights in Quebec City, the hotel bill has been negotiated in advance for $1,800

A) Irrelevant Costs
B) Opportunity Cost
C) Opportunity, Irrelevant Costs
D) Sunk Costs
E) Relevant Costs
F) Sunk, Irrelevant Costs

Question 34

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications.

-All staff members receive $1,000 per diem for travel

A) Irrelevant Costs
B) Opportunity Cost
C) Opportunity, Irrelevant Costs
D) Sunk Costs
E) Relevant Costs
F) Sunk, Irrelevant Costs

Question 35

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications.

-Current year's amortization of the firm's computer system is $15,000

A) Irrelevant Costs
B) Opportunity Cost
C) Opportunity, Irrelevant Costs
D) Sunk Costs
E) Relevant Costs
F) Sunk, Irrelevant Costs

Question 36

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications.

-Round-trip transportation for each staff member is $500

A) Irrelevant Costs
B) Opportunity Cost
C) Opportunity, Irrelevant Costs
D) Sunk Costs
E) Relevant Costs
F) Sunk, Irrelevant Costs

Question 37

The firm has a $2,000 maintenance contract on its telecommunication system for the current year

A) Irrelevant Costs
B) Opportunity Cost
C) Opportunity, Irrelevant Costs
D) Sunk Costs
E) Relevant Costs
F) Sunk, Irrelevant Costs

Question 38

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications.

-The firm's variable overhead is $50 per client hour

A) Irrelevant Costs
B) Opportunity Cost
C) Opportunity, Irrelevant Costs
D) Sunk Costs
E) Relevant Costs
F) Sunk, Irrelevant Costs

Question 39

A client in another province needs immediate help in solving a personnel training problem in the shipping department. Match each activity on the basis of its relationship with this consulting engagement. Items may have multiple classifications.

-Last year the firm paid $4,000 to make improvements in its 5-year leasehold on its offices

A) Irrelevant Costs
B) Opportunity Cost
C) Opportunity, Irrelevant Costs
D) Sunk Costs
E) Relevant Costs
F) Sunk, Irrelevant Costs

Question 40

Which of the following is NOT a key step in managing bottleneck resources?

A) Recognize that the bottleneck resource determines throughput contribution of the plant as a whole.
B) Search and find the bottleneck resource by identifying resources with large quantities of inventory waiting to be worked on.
C) Keep the bottleneck operation busy and subordinate all nonbottleneck resources to the bottleneck resource.
D) Reduce the number of employees who work in the bottleneck area.
E) Take action to increase bottleneck efficiency and capacity.

Question 41

Which of the following sets of sentences has two statements which are TRUE?

A) Poor quality is more costly at a bottleneck workstation than it is at a nonbottleneck workstation. The cost of poor quality at a bottleneck workstation is the cost of materials in waiting.
B) Throughput contribution increases only by increasing bottleneck output. Throughput contribution is not increased when nonbottleneck output is increased.
C) The cost of poor quality at a nonbottleneck operation is the cost of materials wasted. Increasing idle time at the bottleneck operation helps relieve the delays at the nonbottleneck operations.
D) The cost of poor quality at a bottleneck operation is the cost of materials wasted. Increasing idle time at the nonbottleneck operation helps relieve the delays at the bottleneck operations.
E) Throughput contribution increases only by decreasing bottleneck output. Throughput contribution is not increased when nonbottleneck output is increased.

Question 42

The Glass Shop, a manufacturer of large windows, is experiencing a bottleneck in its plant. Setup time at one of its workstations has been identified as the culprit. A manager has proposed a plan to reduce setup time at a cost of $72,000. The change will result in 8,000 additional windows. The selling price per window is $18, direct labour costs are $3 per window, and the cost of direct materials is $5 per window. Assume all units produced can be sold. The change will result in an increase in the throughput contribution of

A) $104,000.
B) $80,000.
C) $32,000.
D) $8,000.
E) $120,000.

Question 43

Palmateer Industries makes an electronic component in two departments, Machining and Assembly. The capacity per month is 30,000 units in the Machining Department and 20,000 in the Assembly Department. The only variable cost of the product is the direct material of $100 per unit. All direct material cost is incurred in the Machining Department. All other costs of operating the two departments are fixed costs. Palmateer can sell as many units of this electronic component as it produces at a selling price of $300 per unit.
Required:
Assuming any defective unites produced in either department must be scrapped:
a. Compute the loss that occurs if a defective unit is produced in the Machining Department.
b. Compute the loss that occurs if a defective unit is produced in the Assembly Department.
c. How do your answers in parts (a) and (b) relate to the theory of constraints? Explain.

Question 44

Brix, Inc., prepares frozen food for fast-food restaurants. It has two workstations, cooking and assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased in recent months to 2,800 dozen units, management is considering adding another cooking station or else having the cooks start to work earlier.
The monthly cost of operating the cooking station one more hour each day is $2,400. The cost of adding another cooking station would add an average of $10 per hour.
The current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either the extra hour or the new cooking station would increase production by 20 dozen a day, with a long-run increase of 80 dozen units in finished goods inventory to 280 dozen.
Required:
a. What is the total production per month if the change is made?
b. What is the current monthly contribution margin, and the expected monthly product contribution for both of the possible changes? Assume long-run production equals sales.
c. What course of action would you recommend?

Question 45

Aunt Lydia's Cookies, Inc., prepares frozen gourmet cookies for shipment to upscale grocery stores as well as mailing to web and catalog customers. The company has two workstations, cooking and distribution. The cooking station is limited by the cooking time of the food. Distribution is limited by the speed of the workers. Distribution normally waits on food from cooking. Because the demand has increased in recent months to 4,000 dozen cookies, management is considering adding another oven in the cooking station or else having the cooks start to work earlier. The cost of adding another oven in the cooking station would add an average of $8 per hour. The monthly cost of operating the cooking station one more hour each day is $1,500.
The current operating hours total eight hours a day, 24 days a month. The contribution margin of the finished products is currently $2 per dozen. Inventory carrying costs average $0.50 per dozen per month. Either the extra hour or the new oven at the cooking station would increase production by 50 dozen a day, with a long-run increase of 100 dozen units in finished goods inventory to 500 dozen.
Required:
a. What is the total production per month if the change is made?
b. What is the current monthly contribution margin, and the expected monthly product contribution for both of the possible changes? Assume long-run production equals sales.
c. What course of action would you recommend?

Question 46

Electrical Engineering Equipment Ltd. purchased a machine for $100,000; current accumulated amortization totals $40,000. Management is contemplating the purchase of a new machine for $120,000. Current disposal of the old machine would cost $65,000.
What is the correct category for each item?

A) Irrelevant: $120,000 of new machine, $40,000 accumulated amortization;
Relevant: $100,000 cost of old machine, $65,000 of disposal of old machine, $5,000 gain on sale
B) Irrelevant: $100,000 cost of old machine, $40,000 accumulated amortization;
Relevant: $120,000 cost of new machine, $5,000 gain on sale, $65,000 disposal of old machine
C) Irrelevant: $120,000 cost of new machine, $65,000 disposal of old machine;
Relevant: $100,000 cost of old machine, $60,000 book value of old machine, $5,000 gain on sale
D) Irrelevant: $100,000 cost of old machine, $60,000 book value of old machine;
Relevant: $120,000 cost of new machine, $65,000 disposal of old machine, $5,000 gain on sale
E) Irrelevant: $100,000 cost of old machine, $40,000 accumulated amortization, $5,000 gain on sale; Relevant: $120,000 cost of new machine, $65,000 disposal of old machine

Question 47

Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:
?
Required:
a. What costs are sunk?
b. What costs are relevant?
c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?

Question 48

Hasselhoff Camera is considering eliminating Model EOS1 from its camera line because of losses over the past quarter. The past three months of information for model EOS1 is summarized below:


Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model EOS1 that has no resale value.
Should Hasselhoff Camera eliminate Model EOS1 from its product line? Why or why not?

Question 49

The management accountant for the Awesome Candy Company has prepared the following income statement for the most current year:

* The company pays for the entire space and allocates based on sq. metres used.
a. Do you recommend discontinuing the Other Candy product line? Why or why not?
b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount?

Question 50

The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year:

* The company pays for the entire space and allocates based on sq. metres used.
Required:
a. Do you recommend discontinuing the Other Candy product line? Why or why not?
b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount?

Question 51

Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Products' production capacity, which is limited by available machine-hours and direct manufacturing labour hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits. Direct manufacturing labour is limited to 1,600 hours a month and machine hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labour and 8 machine hours. Special keyboards require 34 labour hours and 20 machine hours.
Select the appropriate linear programming objective and constraint functions designed to maximize Computer Products total contribution margin. Let R represent Regular keyboards and S represent Special keyboards.

A)

B)

C)

D)

E)

Question 52

Jamboree Manufacturing Ltd. produces two products, steel and wood beams. Steel beams have a unit contribution margin of $400, and wood beams have a unit contribution margin of $300. The demand for steel beams exceeds their production capacity, which is limited by available direct labour and machine hours. The maximum demand for wood beams is 60 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits.
Direct manufacturing labour is limited to 2,700 hours a week and 900 hours is all that the company's outdated machines can run a week. The steel beams require 180 hours of labour and 90 machine hours. Wood beams require 270 labour hours and 60 machine hours.
Required:
Formulate the linear programming objective function and constraints necessary to determine the optimal product mix.

Question 53

Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand for steel beams exceeds Local Steel Construction Company's production capacity, which is limited by available direct labour and machine-hours. The maximum demand for wood beams is 90 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits.
Direct manufacturing labour is limited to 3,000 hours a week and 1,000 hours is all that the company's outdated machines can run a week. The steel beams require 120 hours of labour and 60 machine-hours. Wood beams require 150 labour hours and 120 machine-hours.
Required:
Formulate the objective function and constraints necessary to determine the optimal product mix.

Question 54

Kando Manufacturing Ltd. produces two products, lawn mowers and power washers. Lawn mowers have a unit contribution margin of $75, and power washers have a unit contribution margin of $55. The demand for lawn mowers exceeds their production capacity, which is limited by available direct labour and machine hours. The maximum demand for power washers is 300 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits.
Direct manufacturing labour is limited to 600 hours a week and 400 hours is all that the company's outdated machines can run a week. The lawn mowers require 1.5 hours of labour and 1 machine hour. Power washers require 2.5 labour hours and 2 machine hours.
Required:
Formulate the linear programming objective function and constraints necessary to determine the optimal product mix.