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Exam 13: Relevant Information for Special Decisions

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Question 1

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The Mansfield Company manufactures and sells two lines of fishing rods. During the most recent accounting period, the Pro line and the Novice line sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below: Based on this information, the company should:

A) Eliminate the Novice line because it is operating at a loss.
B) Keep the Novice line because it contributes $40,000 to total profitability.
C) Keep the Novice line because it contributes $55,000 to total profitability.
D) It is impossible to determine with the given information.

E) All of the above
F) None of the above

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Question 2

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Sunk costs are sometimes relevant for decision-making purposes.

A) True
B) False

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Question 3

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Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows: $\begin{array} { | l | c | } \hline \text { Material cost } & \$ 5 \text { per unit } \\\hline \text { Labor cost } & \$ 4 \text { per unit } \\\hline \text { Overhead } & \$ 1 \text { per unit } \\\hline \text { Batch-level set-up costs for the year } & \$ 5,000 \\\hline \text { Product-level manager's salary } & \$ 18,000 \\\hline \text { Allocated facility-level costs } & \$ 12,000 \\\hline\end{array}$ An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idled factory space for $1,000 per month but will not terminate the product manager. Required: 1) Which items are not relevant to this outsourcing decision? 2) Identify any opportunity costs associated with this decision. 3) Prepare a quantitative analysis that indicates whether the component should be outsourced.

Which of the following statements is true?

All of the following statements describe qualities of relevance except:

Indicate whether each of the following statements is true or false. 1. Relevant costs are frequently called avoidable costs. 2. Variable costs almost always are relevant to a decision, and fixed costs almost always are not relevant. 3. A variable cost is relevant to a decision only when it differs among the alternatives under consideration. 4. The benefit not received from an alternative not selected is an opportunity cost. 5. Opportunity costs are not relevant in decision making, but they can be used in evaluation of management performance.

Indicate whether each of the following statements about outsourcing decisions is true or false. 1. An outsourcing decision involves a purchase offer from a customer at a lower-than-normal selling price. 2. Outsourcing would increase a company's level of vertical integration. 3. To evaluate an outsourcing decision, a manager should compare the avoidable cost of making an item to the cost of buying it. 4. The decision to outsource a particular product is not affected by the amount of the product needed. 5. Reliability of the supplier is a critical issue in an outsourcing decision.

Outsourcing reduces the extent of a company's vertical integration.

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.

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

The book value of equipment generally is one of the most important factors to consider in deciding to replace the equipment.

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?

Ann is trying to decide which one of two job offers she will accept. Several items are presented below: $\begin{array} { | l | r | r | } \hline & \text { Job Offer A } & \text { Job Offer B } \\\hline \text { (1) Base salary } & \$ 50,000 & \$ 50,000 \\\hline\text { (2) Overtime compensation } & \text { Comp. time } & \text { Hourly rate } \\\hline\text { (3) Moving allowance } & \$ 3,000 & \$ 3,000 \\\hline\text { (4) Signing bonus } & \$ 2,000 & \$ 9 \\\hline\text { (5) Job search costs incurred } & \$ 300 & \$ 500 \\\hline\end{array}$ Select the items that are irrelevant to Ann's decision.

Select the correct statement regarding quantitative and qualitative information.

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?

Select the incorrect statement regarding relevant costs and revenues.

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: $\begin{array} {| l |l| } \hline \text { Unit level costs } & \$ 45 \\\hline \text { Product level costs } & \$ 15 \\\hline \text { Facility level costs } & \$ 5 \\\hline\end{array}$ 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?

The Page Turner Publishing Company is trying to decide whether or not to accept a special order for its latest blockbuster. In making this decision, which level of costs will most likely be relevant to the decision?

Engineering design costs are generally referred to as: