Exam 11: Relevant Costs for Decision Making

If a service organisation is at capacity, it would not accept a special order for service.

The managers of Lucky Tiger Ltd. are considering dropping one of their product lines. The product line typically has the following revenue and costs: $\begin{array}{lr}\text { Sales } & \$ 100,000 \\\text { Variable costs } & \underline{80,000} \\\quad \text { Contribution margin } & 20,000 \\\text { Fixed costs } &\underline{ 25,000} \\\quad \text { Operating loss } &\underline{ \underline{\$(5,000)}}\end{array}$ If the product line is discontinued, $5,000 of the fixed costs would be avoided. Also, the freed-up capacity would generate $5,000 of additional contribution margin from the expansion of other product lines. If Lucky Tiger discontinues the product line, the effect on overall profit will be:

Existing fixed costs that can be avoided through outsourcing are relevant to the decision making process.

In deciding whether to outsource a product, which of the following is an irrelevant cost?

Which of the following is not an example of a qualitative factor?

The general rule for special orders is:

Whether product quality will be maintained is a key consideration in:

The possibility that existing customers will expect lower prices is a qualitative factor that managers should consider in:

Collage Ltd is closing one of its divisions. Operating data on this division follows: Sales \ 120,000 Variable costs 46,000 Overhead 60,000 Overhead consists of $50,000 in salary and $10,000 for rent and insurance. The salary is for the production manager, who will continue to work for Collage even if the division is closed. Rent and insurance that will cease if the division is closed is an:

Managers relax constraints by: I $\quad$ Using constrained resources more effectively II $\quad$ Increasing available resources III $\quad$ Reducing demand

Because estimates are used when allocating joint costs there is potential for inaccuracies.

Split off point is the point at which joint products are sold.

Relevant costs/revenues are those that arise in the future and vary with the action taken.

A fixed cost that remains when a product or segment is dropped is called an unavoidable fixed cost.

The shadow price of a slack variable in a linear programming solution that maximises the total contribution margin reflects:

Reconnect Ltd has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available: Product Unit Price Unit Variable Cost Units Per Hour HX \ 200 \ 100 8 CL \ 300 \ 150 20 KB \ 300 \ 125 15 JP \ 100 \ 70 50 Which product should be emphasised last?

A company will only incur an opportunity cost for a special order when:

Duxeva produces two products named BigBlast and LittleBlast. Last month 2,000 units of BigBlast and 4,000 units of the LittleBlast were produced and sold. Following are average prices and costs for last month: $\begin{array}{lcc}&\underline{\text { BigBlast }}&\underline{\text { LittleBlast }}\\\text { Selling price } & \$ 100 & \$ 200 \\\text { Direct materials } & (25) & (75) \\\text { Direct labor } & (15) & (35) \\\text { Variable overhead } & (5) & (30) \\\text { Product line fixed costs } & (10) & (40) \\\text { Corporate fixed costs } &\underline{ (25) }&\underline{ (25) }\\\quad \text { Average margin per unit } &\underline{\underline{ \$ 20 }}& \underline{\underline{\$(5)}}\end{array}$ The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped. Using only the information provided above, Duxeva could make several types of decisions. Possible decisions include: I $\quad$ Special order II $\quad$ Product emphasis III $\quad$ Keep or drop IV $\quad$ Constrained resources

Sensitivity analysis can be used to determine how quantitative results would change due to changes in the inputs.

For manufacturers make or buy decisions are also known as activity sourcing.