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Exam 6: Relevant Information for Special Decisions

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Question 41

True/False

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One of the potential dangers from outsourcing is the possible occurrence of low-ball pricing.

A) True
B) False

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Question 42

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Scholastic Tours is trying to decide which one of two tours it will introduce.The costs and revenues associated with each alternative are listed below: $\begin{array}{c}\begin{array}{|l|}\hline \\\hline \text {Projected revenue}\\\hline \text {Variable costs}\\\hline \text {Fixed costs}\\\hline \text {Profit}\\\hline \end{array}\begin{array}{rr}\hline \text { Eastern Tour }\\\hline \$ \quad 14,000 \\\hline 2,000 \\\hline 6,000 \\\hline \$ \quad 6,000 \\ \hline \end{array}\begin{array}{|l|}\hline \text { Western Tour }\\\hline \$ \quad 18,000 \\\hline 10,000 \\\hline 6,000 \\\hline \$ \quad 2,000\\\hline \end{array}\end{array}$ What are the incremental (differential) costs of the Western Tour?

A) $4,000
B) $6,000
C) $8,000
D) None of the above.

E) A) and B)
F) A) and C)

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Question 43

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Discuss why qualitative characteristics must be considered when making decisions such as special orders,outsourcing,elimination and replacement decisions and scarce resource allocation decisions.Give examples.

Relevant costs are frequently called unavoidable costs.

For many managerial decisions (such as outsourcing and special order decisions),unit-level costs are avoidable costs.

Expected future revenues that differ among the alternatives under consideration are often referred to as:

Which of the following is a way to relax a constraint or bottleneck?

Pilot Motors Corporation is an automobile manufacturer.The company produces its own motors,tires,and other automobile parts.Pilot has the opportunity to purchase tires from another manufacturer instead of producing the tires in its own facility.This type of decision is typically known as a(n) :

For an equipment replacement decision,what costs are relevant,and what costs are not relevant?

Costs that are not related to any specific product,batch,or unit of production are referred to as facility-level costs.

For decision-making purposes,qualitative factors are relevant if they differ among the alternatives and relate to the future.

Hancock Company manufactures and sells two lines of furniture,case goods and upholstery.During the most recent accounting period,the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below (Do not round intermediate calculations. ) : $\begin{array}{c}\begin{array}{|l|}\hline\\\hline \text { Sales}\\\hline \text { Less cost of goods sold:}\\\hline \text { Unit-level production cost}\\\hline \text { Depreciation, production equipment}\\\hline \text { Gross margin}\\\hline \text { Less operating expenses:}\\\hline \text { Unit-level selling and admin. Costs}\\\hline \text { Corporate-level facility expenses (fixe d) }\\\hline \text { Net income (loss) }\\\hline \end{array}\begin{array}{ll|}\hline \text { Case Goods}\\\hline \$ 1,600,000 \\\hline\\\hline1,000,000 \\\hline 240,000 \\ \hline \$ \quad 360,000\\\hline\\\hline60,000 \\ \hline52,000 \\ \hline \$ 248,000 \\ \hline \end{array}\begin{array}{ll|}\hline \text {Upholstery}\\\hline\$ 400,000 \\\hline\\\hline240,000 \\ \hline60,000 \\ \hline \$ \quad 100,000\\\hline\\\hline50,000 \\\hline 52,000 \\ \hline\$ \quad(2,000) \\\hline \end{array} \end{array}$ If unit sales for both divisions increased 10%,the company would report which of the following? The word "Costs" should not be capitalized mid-way down.Also,change "admin." to: Administrative The cell should read: Unit-level selling and administrative costs

Although opportunity costs are not recorded in the financial records,they nevertheless are useful for decision making.

If managers' performance is evaluated solely on the current year's profitability,managers are likely to make decisions that lead to the company's long-term profitability.

Benitez Company currently outsources a relay switch that is a component in one of its products.The switches cost $20 each.The company is considering making the switches internally at the following projected annual production costs: $\begin{array} { | l |l l | } \hline \text { Unit-level material cost } & \$ & 3 \\\hline \text { Unit-level labor cost } & \$ & 2 \\\hline \text { Unit-level overhead } & \$ & 1 \\\hline \text { Batch-level set-up cost ( } 5,000 \text { units per batch) } & \$ 25,000 \\\hline \text { Product-level supervisory salaries } & \$ 37,500 \\\hline \text { Allocated facility-level costs } & \$ 20,000 \\\hline\end{array}$ The company expects an annual need for 5,000 switches.If the company makes the product,it will have to utilize factory space currently being leased to another company for $1,500 a month.If the company decides to make the parts,total costs will be:

What are constraints? Provide an example.

Relevant costs are often referred to as:

Which of the following is not a possible alternate term for costs that can be eliminated by taking a specified course of action?

Select the incorrect statement regarding relevant costs and revenues.

Bates Company plans to add a new item to its line of consumer product offerings.Two possible products are under consideration.Each unit of Product A costs $6 to produce and has a contribution margin of $3,while each unit of Product B costs $12 and has a contribution margin of $4.What is the differential revenue for this decision?