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Exam 7: Incremental Analysis for Short-Term Decision Making

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Question 71

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Deer currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $12. Deer currently produces 80,000 subcomponents at the following manufacturing costs: a. If Deer has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier? b. If Deer has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier? c. Now assume Deer would avoid $120,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?

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a. $80,000 less profit if buying outside...

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Question 72

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Which of the following types of decisions involves deciding whether to eliminate a particular division or segment of the business?

A) Special-order
B) Make-or-buy
C) Continue-or-discontinue
D) Sell-or-process further

E) B) and D)
F) A) and B)

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Question 73

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It costs Elmwood, Inc. $78 per unit to manufacture 1,000 units per month of a product that it can sell for $90 each. Alternatively, Elmwood could sell the units at an earlier stage of processing, which would save $36 per unit. Elmwood could sell the simpler product for $60 each. How would selling the simpler product affect Elmwood's profit?

Violet has received a special order for 100 units of its product. The product normally sells for $2,000 and has the following manufacturing costs: Assume that Violet has sufficient capacity to fill the order without harming normal production and sales. What minimum price should Violet charge to achieve a $25,000 incremental profit?

Henry Sweet Co. currently makes 6" candy sticks that it sells for $0.20 each. Henry can make 12" candy sticks out of two 6" candy sticks by melting them together, which costs an additional $0.03 per 12" stick. Henry can sell the 12" sticks for $0.45. Henry has enough capacity to make 10,000 6" candy sticks per month, and enough demand to sell all the candy sticks it can manufacture, whether 6" or 12". Should Henry sell 6" or 12" candy sticks, and how much additional profit will its decision bring in per month?