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Exam 6: Relevant Information for Special Decisions

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Question 21

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Outdoor Living Company has just received a special order for 500 hammocks.Outdoor Living has sufficient idle capacity to accept the order.Accepting the order will increase Outdoor Living's variable manufacturing costs.Variable selling and administrative costs would be unaffected.What is the minimum price that Outdoor Living should accept for the special order?

A) A price equivalent to the hammock's variable manufacturing cost per unit
B) A price equivalent to the hammock's unit contribution margin
C) The same price that Outdoor Living charges its existing customers
D) None of the above.

E) A) and C)
F) None of the above

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Question 22

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Which of the following costs is an example of a product-level cost?

A) Machine setup costs
B) Patent filing costs
C) Materials and labor costs
D) Shipping and handling costs

E) None of the above
F) A) and B)

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Question 23

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Select the incorrect statement concerning opportunity costs.

How would you determine whether a particular cost is unit-level or batch-level? Use as an example: product inspection costs.

All of the following statements describe qualities of relevance except:

A business segment should be eliminated if the revenue generated by the segment exceeds only its fixed costs.

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants.During the current year,the division produced 10,000 pots and incurred the following costs: $\begin{array}{|l|r|}\hline \text { Unit-level materials costs }(10,000 @ ~ \$ 15) & \$ 150,000 \\\hline \text { Unit-level labor costs }(10,000 @ \$ 20) & 200,000 \\\hline \text { Unit-level overhead costs }(10,000 @ \$ 16) & 160,000 \\\hline \text { Depreciation expenses on equipment* } & 30,000 \\\hline \text { Other manufacturing overhead** } & 36,000\\\hline\end{array}$ *The equipment was purchased for $150,000 and has a current book value of $120,000,remaining useful life of four years,and a zero salvage value.If the company does not use the equipment,it can be leased for $8,000 per year. **Includes supervisors' salaries and rent for manufacturing plant. Required: The division is considering replacing the equipment used to manufacture its ceramic pots.Replacement equipment can be purchased at a price of $200,000.The new equipment,which is expected to last 4 years and have a salvage value of $20,000,will reduce unit-level labor costs by 25 percent.Assuming the division desires to maintain its production and sales at 10,000 ceramic pots per year,prepare a schedule that shows the relevant cost of operating the existing equipment versus the cost of operating the new equipment.Should the existing equipment be replaced? Why or why not?

Outdoor Living Company has just received a special order for 500 hammocks.Outdoor Living has sufficient idle capacity to accept the order.Accepting the order will increase Outdoor Living's variable manufacturing costs.Which type of cost is considered a sunk cost to Outdoor Living's decision of whether to accept or reject the special order?

Fixed costs are relevant for decision making if they vary between the alternatives and are future-oriented.

Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date.The same equipment would cost $800,000 to replace.What is the total amount of sunk cost in this decision?

Bland Company makes three different products,Products A,B,and C,for which the company has accumulated the following information: $\begin{array}{c}\begin{array}{|l|}\hline\\\hline \text {Selling pric e per unit}\\\hline \text {Variable cost per unit}\\\hline \text {Number of direct labor hours per unit}\\\hline \text {Market demand}\\\hline \end{array}\begin{array}{l|}\hline\text { Product } A\\\hline \$ 1,000 \\\hline \$ 60 \\\hline1\\\hline 10,000 \text { units }\\\hline \end{array}\begin{array}{l|}\hline\text { Product B }\\\hline \$ 160 \\\hline\$ 90 \\\hline2\\\hline8,000 \text { units }\\\hline \end{array}\begin{array}{l|}\hline\text { Product C } \\\hline\$ 200 \\\hline \$ 120 \\\hline 2.5 \\\hline 4,000 \text { units } \\\hline \end{array}\end{array}$ Selling price for Product A is 100

Farris Company reported the following information for its two products: $\begin{array}{|l|c|c|}\hline & \text { Product } \mathrm{X} & \text { Product Y } \\\hline \text { Selling price per unit } & \$ 25 & \$ 35 \\\hline \text { Variable cost per unit } & 15 & 20 \\\hline\end{array}$ Due to labor constraints,demand for each of the products is greater than its supply.Product X requires 1 hour of labor to produce and product Y requires 3 hours of labor to produce.Which of the following statements is

Chavez Company is considering purchasing new equipment or overhauling its existing equipment.The manager has gathered the following information: $\begin{array}{|l|lr|}\hline \text { Current machinery. }\\\hline \text { Original cost } & \$ & 50,000 \\\hline \text { Acccumulate d depreciation } & & 40,000 \\\hline \text { Anmul operating costs } & & 5,000 \\\hline \text { Current market value } & & 1,500 \\\hline \text { Salvage value at the end of five ye ars } & & - \\\text { Cost of ove thauling machinery. } & & \\\hline \text { Cost of overhaul } & \$ & 12,000 \\\hline \text { Arrual operating costs after overhauling } & & 2,000 \\\hline \text { Salvage value at the end of five ye ars } & & - \\\hline \text { New machinery. } & & \\\hline \text { Cost } & \$ & 56,000 \\\hline \text { Anrmal operating costs } & & 1,000\\\hline \text { Salvage value at the end of five ye ars }&&-\\\hline\end{array}$ Required: 1)Identify the sunk costs associated with this decision. 2)Compute the increase or decrease in total income over the five-year period if the company chooses to buy the new equipment. 3)Compute the increase or decrease in total income over the five-year period if the company chooses to overhaul its existing machinery. 4)What is your recommendation for this decision?

Facility-level costs are not involved in decisions to eliminate a segment of a business.

Bates Golf Supply produces a golf bag that sells for $220.Although the company's production capacity is 5,000 bags per year,only 4,000 bags are currently being produced and sold.The production costs for 4,000 bags are as follows: $\begin{array}{|l|r|}\hline \text { Unit-level material cost }& \$ \quad 300,000\\\hline \text { Unit-level labor cost } & 240,000 \\\hline \text { Unit-level overhead } & 75,000 \\\hline \text { Batch-level setup costs ( } 500 \text { units per batch) } & 16,000 \\\hline \text { Product-level costs } & 20,000 \\\hline \text { Allocated facility-level costs } & 25,000\\\hline\end{array}$ Golf Mart Stores has offered to purchase 1,000 golf bags as a one-time special purchase at a price of $170 per bag. Required: 1)Prepare a quantitative analysis that indicates whether the special order should be accepted. 2)What qualitative factors should be considered in this special order decision?

A potential danger from outsourcing is that a company may become too dependent on the supplier.

How can a manager's time horizon affect his/her decision making?

Smith Company makes three different products,each of which must pass through one very expensive machine.Assuming that availability of machine time is limited to 4,000 hours per year,which is less than the 5,000 hours demanded,how should the company decide which product to make?

Outdoor Living Company has just received a special order for 500 hammocks.Outdoor Living has sufficient idle capacity to accept the order.Accepting the order will increase Outdoor Living's total variable manufacturing costs.Which type of cost is considered relevant to Outdoor Living's decision of whether to accept or reject the special order?

Jack currently works for a law firm full time and earns $60,000 a year.He is thinking of quitting his job to pursue a medical degree.Medical school will cost him $100,000 per year.If Jack quits his job and goes to medical school,the salary he currently earns would be considered what type of cost?