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Exam 6: Relevant Information for Special Decisions

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Question 61

Multiple Choice

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All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in house. Which of the following is not likely to be relevant?

A) The impact on employee morale
B) The book value of equipment used in making the component
C) The importance of vertical integration to the company
D) The reliability of the supplier

E) B) and D)
F) B) and C)

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Question 62

Multiple Choice

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Rachel is deciding whether to remain in the home she has lived in for the past ten years, which is located very near her work, or to move into a newer home that is located in the suburbs further from her job. The old house was purchased for $160,000 and has a market value of $220,000. The new home can be purchased for $285,000. Which of the following is not relevant to Rachel's decision?

A) Driving distance to work
B) Cost of the old house
C) Market value of the old house
D) Cost of the new house

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

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Question 63

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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.

Chavez Company is considering purchasing new equipment or overhauling its existing equipment. The manager has gathered the following information: $\begin{array}{lr}\text { Current machinery. }\\\text { Original cost } & \$ 5,000 \\ \text { Acccumulate d depreciation } & 40,000 \\\text { Anmul operating costs } & 5,000 \\ \text { Current market value } & 1,500\\\text { Salvage value at the end of five years }&-\\\text { Cost of ove thauling machinery. }\\\text { Cost of overhaul }&\$12,000\\\text { Anrmal operating costs after overhauling }&2,000\\\text { Salvage value at the end of five years }&-\\\text { New machinery. }\\\text { Cost }&\$56,000\\\text { Anmul operating costs }&1,000\\\text { Salvage value at the end of five years }&-\end{array}$ 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?

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.

Mary must decide between two alternatives for the weekend: babysitting or yard work. If she babysits, she will receive $40 and will incur $15 in transportation costs. If she does yard work, she will receive $40 and will incur $3 in lawn mower gas and oil costs and $5 in transportation costs. The payment she would receive for the jobs is relevant in deciding which alternative to select.

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?

The practice of buying goods and services from other companies is commonly known as vertical integration.

Gibbs Corporation makes indoor gas fireplaces. A standard fireplace includes unit-level materials, labor, and overhead costs. In addition, the company incurs product-level engineering and advertising costs. The sales staff is paid a 5% commission on each fireplace sold. A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs' selling price. Which of the following costs would be relevant to this special order decision?

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: What are the incremental (differential) costs of the Western Tour? $\begin{array}{|l|r|r|}\hline&\text { Eastern Tour}&\text { Western Tour }\\\hline \text { Projected revenue } & \$ 14,000 & \$ 18,000 \\\hline \text { Variable costs } & 2,000 & 10,000 \\\hline \text { Fixed costs } & 6,000 & 6,000 \\\hline \text { Profit } & \$ 6,000 & \$ 2,000\\\hline\end{array}$

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

Classifying costs into one of four hierarchical levels can facilitate the identification of relevant costs. Place an "X" in the appropriate column to classify the following costs as Unit-level, Batch-level, Product-level, and Facility level. $\begin{array} { | l | c | c | c | c | } \hline { \text { Description of Cost } } & \text { Unit- } & \text { Batch- } & \text { Product- } & \text { Facility- } \\\hline & \text { Level } & \text { Level } & \text { Level } & \text { Level } \\\hline \text { Administrative costs } & & & & \\\hline \text { Assembly labor } & & & & \\\hline \text { Equipment setup costs } & & & & \\\hline \text { Engineering design } & & & & \\\hline \text { Inspection costs } & & & & \\\hline \text { Direct materials cost } & & & & \\\hline \text { Materials handling cost } & & & & \\\hline \text { Personnel administration and training } & & & & \\\hline \text { Plant manager's salary } & & & & \\\hline \text { Product manager's salary } & & & & \\\hline\end{array}$

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

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?

Select the incorrect statement regarding relevant costs and revenues.

Terrain Tents makes backpacking tents. It has the capacity to produce 10,000 tents per year and currently is producing and selling 7,000 tents. Normal selling price for a tent is $450. Unit-level costs are $90 for direct materials, $220 for direct labor, and $15 for other manufacturing costs. Facility-level costs of $110 are allocated to each tent. Terrain has received a special order for 2,500 tents at $320 each.Required: Should Terrain accept the special order? Support your answer with appropriate computations.

How can managers manage (that is, reduce the impact of) constraints?

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

Harris Company currently produces a component that it uses in making some of its products. Harris has calculated the following costs for making the part: $\begin{array} { | l | r | } \hline \text { Unit-level costs } & \\\hline \text { Materials } & \$ 20 \\\hline \text { Labor } & 28 \\\hline \text { Overhead } & 2 \\\hline \text { Allocated facility-level costs } & 10 \\\hline \text { Total cost } & \$ 60 \\\hline\end{array}$ Harris is considering outsourcing the component. A supplier has offered to sell the component to Harris for $52 each. Harris needs 8,000 units each year.Required: Should Harris outsource the component? Support your answer with appropriate computations.

Chase Business College offers the following computer continuing education courses: $\begin{array}{|l|l|l|l|}\hline & \text { Course A } &{\text { Course B }} &{\text { Course C }} \\\hline \text { Total student fees } & \$ 90 & \$ 150 & \$ 120 \\\hline \text { Variable costs } & \$ 40 & \$ 60 & \$ 50 \\\hline \text { Course length } & 2 \text { hours } & 5 \text { hours } & \text { 4 hours } \\\hline\end{array}$ 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.