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Exam 6: Relevant Information for Special Decisions

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Question 41

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The Mighty Music Company produces and sells a desktop speaker for $100.The company has the capacity to produce 50,000 speakers each period.At capacity,the costs assigned to each unit are as follows: $\begin{array}{lrr}\text { Unit level costs } & \$ 45 \\\text { Product level costs } & \$ 15 \\\text { Facility level costs } & \$ 5\end{array}$ The company has received a special order for 500 speakers.If this order is accepted,the company will have to spend $15,000 on additional costs.Assuming that no sales to regular customers will be lost if the order is accepted,at what selling price will the company be indifferent between accepting and rejecting the special order?

A) $95
B) $45
C) $75
D) $60

E) A) and D)
F) A) and C)

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Question 42

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Indicate whether each of the following statements is true or false.

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Question 43

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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: $\begin{array}{ll}\text { Unit-level material cost } & \$3 \\\text { Unit-level labor cost } & \$2 \\\text { Unit-level overhead } & \$1 \\\text { Batch-level set-up cost (5,000 units per batch) } & \$ 25,000 \\\text { Product-level supervisory salaries } & \$ 37,500 \\\text { Allocated facility-level costs } & \$ 20,000\end{array}$ 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:

Indicate whether each of the following statements is true or false.

Select the term from the list provided that best matches each of the following descriptions.

The Clock Builder makes grandfather clock kits that it sells to hobbyists who then assemble and finish the clocks.The company has the capacity to make 5,000 of the kits,and its current volume is 3,000 kits.The costs of a clock kit are $300 for unit-level materials,$200 for unit-level labor,and $150 for an allocation of facility-level overhead.The normal selling price is $950.The Clock Builder has received a special order for 600 clock kits at a price of $600 each. Required: Should The Clock Builder accept the special order? Support your answer with appropriate computations.

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

Indicate whether each of the following statements about outsourcing decisions is true or false.

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) :

Which costs are relevant for equipment replacement decisions?

Select the correct statement regarding relevant revenues.

What is a segment elimination decision? Under what conditions should a company decide to eliminate a segment?

Groove Music Company produces compact discs of background music for restaurants and other retail shops.Its disc recording machines are capable of producing 50 discs per hour.The unit-related cost of producing the discs is $2.00.The discs sell for $10.00 each.Mood Music Co.has asked the company to produce 10,000 copies of a disc for $9.00.Groove Music estimates that for this special order the unit-related cost of producing the disc will be $4.00 and that,due to the unique nature of the recording,its machines will only be able to produce 20 discs per hour.Groove Music has a total of 5,000 machine hours of capacity.In addition,to accept the special order,Groove Music will have to lease an additional special-purpose machine that will cost $6,500. Required: Assume that existing demand for Groove Music's compact discs is 200,000 units and that the special order has to be either taken in full or rejected.Prepare an analysis that indicates whether or not the special order should be accepted.

Stephenson Company is trying to decide which one of two contracts it will accept.The costs and revenues associated with each are listed below: $\begin{array}{lrr}&\text { Contract X}&\text { Contract Z}\\\text { Contract Revenue } & \$ 200,000 & \$ 260,000 \\\text { Materials } & 10,000& 10,000 \\\text { Labor } & 88,000& 120,000 \\\text { Depreciation on Equipment } & 8,000 & 10,000 \\\text { Cost Incurred for Consulting Advice } & 1,500 & 1,500 \\\text { Allocated Portion of Overhead } & 5,000 & 3,000\end{array}$ The equipment was purchased last year and has no resale value.Which of these amounts is relevant for the selection of one contract over another?

Ethan paid $3 for a bottle of ThirstAid.Later,while on a hiking trip,he was offered $8 for the ThirstAid.Select the correct statement from the following:

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 whether to accept or reject the special order?

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: $\begin{array} { l r } \text { Unit-level material cost } & \$ 300,000 \\\text { Unit-level labor cost } & 240,000 \\\text { Unit-level overhead } & 75,000 \\\text { Batch-level setup costs (500 units per batch) } & 16,000 \\\text { Product-level costs } & 20,000 \\\text { Allocated facility-level costs } & 25,000\end{array}$ 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 company that is subject to the effect of a scarce resource should concentrate on providing products or services that give the greatest contribution margin per unit of product or service.

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: $\begin{array}{lrr}\text { Current machine: }\\ \text {Original cost } &\$26,000\\ \text { Accumulated depreciation } &16,000\\ \text {Annual operating costs } &4,000\\ \text {Current salvage value } &4,000\\ \text {Salvage value at the end of five vears } &1,000\\\\\text { New machine: }\\ \text { Cost } &\$16,000\\ \text { Annual operating costs} &1,000\\ \text { Salvage value at the end of five years} &1,000\\\end{array}$ 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: