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Exam 6: Relevant Information for Special Decisions

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Question 71

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Chase Business College offers the following computer continuing education courses: $\begin{array} { | l | l| r | l r | l r | } \hline & \text { Course A } & { \text { Course B } } & { \text { Course C } } \\\hline \text { Total student fees } & \$ 90 & \$ 150 & \$ 120 \\\hline \text { Variable costs } & \$ 40 & \$ 60 & \$ 50 \\\hline \text { Course length } & 2 \text { hours } & 5 \text { hours } & \text { 4 hours } \\\hline\end{array}$ Required: 1)Assuming the college has limited computer lab time available,which course should it first select to offer? 2)How many sections of each course should be offered if the college has paid for 100 hours of computer lab time in a nearby convention center and that the demand for each course is as follows: A,20 sections;B,15 sections;and C,10 sections. 3)Compute the profit from the three courses assuming the college paid $1,000 for the 100 hours of computer lab time and it offers the sections you recommended in Requirement 2.

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1)Course A should be given priority beca...

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Question 72

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Which of the following items is qualitative?

A) Cost of new machine
B) Depreciation of existing machine
C) Book value of the existing machine
D) Degree to which the new machine can be integrated with existing machinery

E) B) and D)
F) All of the above

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Question 73

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Select the term from the list provided that best matches each of the following descriptions.Put the number of the term in the column for Your Answer.

The Mendez Company is trying to decide whether to replace a packing machine that it uses to pack salsa into individual serving size packages.The following information is provided: $\begin{array}{|l|lr|}\hline \text { Current machine: }\\\hline \text { Original cost } & \$ & 26,000 \\\hline \text { Ac cumulate d depreciation } & & 16,000 \\\hline \text { Annual operating costs } & & 4,000 \\\hline \text { Current salvage value } & & 4,000 \\\hline \text { Salvage value at the end of five years } & & 1,000\\\hline \\\hline \text { New machine: }\\\hline \text { Cost } & \$ & 16,000 \\\hline \text { Annual operating costs } & & 1,000 \\\hline \text { Salvage value at the end of five years } & & 1,000\\\hline\end{array}$ Required: 1)Compute the increase or decrease in total net income over the five-year period if the company chooses to buy the new machine. 2)Compute the impact on the company's net income in the first year if the current machine is replaced.Do not take depreciation into account. 3)Under what circumstances might a manager not take the action that is in the best interest of the firm in the long run?

All of the following are examples of product-level costs except:

Select the correct statement regarding relevant costs and revenues.

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants.During 2013the current year,the division produced 10,000 pots and incurred the following costs: $\begin{array}{|l|r|}\hline \text { Unit-level materials costs }(10,000 @ \$ 15) & \$ 150,000 \\\hline \text { Unit-level labor costs (10,000@ \$20)} & 200,000 \\\hline \text { Unit-level overhead costs }(10,000 @ \$ 16) & 160,000 \\\hline \text { Depreciation expenses on equipment* } & 12,000 \\\hline \text { Other manufacturing overhead } & 36,000 \\\hline\end{array}$ *The equipment was purchased last year 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 equipment is not used to produce ceramic pots,it can be leased for $8,000 per year. **Includes supervisors' salaries and rent for manufacturing plant. Required: 1)Assume Evergreen Industries uses a cost plus pricing strategy.What price should be charged for the ceramic pot product if the division sets its price 40 percent above the unit product cost? 2)A potential overseas customer who would not compete with the division's existing customers would like to purchase 1,000 ceramic pots but is not willing to pay the regular price.At what selling price would the division be indifferent about accepting the special order? 3)Suppose the division has the opportunity to purchase the ceramic pot from another manufacturer for $60.The supplier is willing to hold sufficient inventories to meet Evergreen's demand.Should the division outsource its ceramic pots? Why or why not?

Which of the following statements is incorrect?

The management practice that increases profitability through the management of bottlenecks is known as:

Select the correct statement regarding quantitative and qualitative information.

Only variable costs are relevant for decision making.

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

Alex brought his lunch today but now a co-worker has asked him to go to the deli across the street.Select the correct statement from the following.

The costs and revenues associated with two alternatives are listed below: $\begin{array} { | l | r | r | } \hline & \text { Altemative 1 } & \text { Alternative 2 } \\\hline \text { Projected revenue } & \$ 100,000 & \$ 125,000 \\\hline \text { Unit-level costs } & 20,000 & 30,000 \\\hline \text { Batch-level costs } & 20,000 & 25,000 \\\hline \text { Product-level costs } & 15,000 & 15,000 \\\hline \text { Facility-level costs } & 10,000 & 10,000 \\\hline\end{array}$ Which alternative should be selected based on this information?

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department.If the fishing department is closed,the store manager's position will not be affected,but if the entire store is closed,the manager will be terminated.Which of the following lessons should be learned from this example?

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

Anton Valve Company produces a mechanical valve used in water systems.Three years ago the company introduced an electronic version of the valve.Sales of the mechanical model have steadily declined,and the company will report a loss on the product this year as follows: $\begin{array}{|l|r|}\hline \text { Sales revenue } & \$ \quad 200,000 \\\hline \text { Less costs: } & \\\hline \text { Unit-level manufacturing costs } & \$ \quad 157,500 \\\hline \text { Batch-level costs } & 2,500 \\\hline \text { Product-level costs } & 5,000 \\\hline \text { Facility-level costs } & 30,000 \\\hline \text { Allocated corporate costs } & \underline { 11,500 }\\\hline \text { Total costs } & \underline { \$\quad 206,500} \\\hline \text { Net loss } & \underline { \$ \quad(6,500) }\\\hline\end{array}$ If production of the mechanical valve is discontinued,product-level costs will be eliminated but facility level and corporate costs would not be affected. Required: 1)Prepare a quantitative analysis that indicates whether the valve should be discontinued. 2)What qualitative factors should be considered in this decision?

The practice of relaxing constraints is likely to increase a business's profitability.

Sunk costs: