Exam 6: Relevant Information and Decision-Making: Product Decisions

Cleveland Hotel has been offered a contract by a convention planner to reserve a block of 30 rooms for 365 nights at a reduced rate of $60 per night. Cleveland Hotel's usual room rate is $120 per night. When a local sports team is in the playoffs, the rooms can sell for $150 per night. a. Compute the opportunity cost of accepting the contract on a usual night when 15 of the rooms would normally be occupied. b. Compute the opportunity cost of accepting the contract in a playoff night when all of the rooms would normally be occupied, assuming all the rooms would have been occupied. c. Using the usual room rate of $120, what percentage of rooms would have to be rented to make Cleveland Hotel indifferent about accepting the offer?

Deuce Company currently produces 10,000 units of a key part at a total cost of $512,000. Variable costs are $300,000. Of the fixed cost, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000. Alternately, the facilities could be rented out at $60,000. Given all of these alternatives, is Deuce Company's lowest net cost per unit for the part.

The big stumbling block to outsourcing has been the cost.

The split- off point is the juncture in manufacturing where the joint products become individually identifiable.

Dumpster Company produces three products using a joint process which accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 1,000 units. The following unit information is also available: Separable Processing Sales V alue at Costs after Sales Value at Product Split- off Completion \ 12 \ 9 \ 21 10 4 17 15 6 19 If Dumpster Company makes the decisions that maximize profit, Dumpster Company's net income will be:

Tender Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Direct materials \ 3 Direct labor 5 Variable factory overhead 4 Fixed factory overhead Total costs \ 14 The fixed factory overhead costs are unavoidable. Assume that Tender Company has been offered 5,000 units of the part from another producer for $15 each. The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year. Tender Company should:

Opportunity costs need to be considered when deciding on the use of limited resources.

Els Corporation has a joint process that produces two products: A and B. Each product may be sold at the split- off point or processed further and then sold. Joint processing costs for a year amount to $25,000. Product A can be sold at the split- off point for $32,000. Alternately, product A can be processed further and sold for $40,000. Additional processing costs are $5,000. In deciding whether to sell product A at the split- off point or to process further, the is not relevant.

Joint products should be processed beyond the split- off point if:

Past costs that are unavoidable and unchangeable are known as:

Hoover Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: Direct materials \ 20 Direct labor 15 Variable factory overhead 16 Fixed factory overhead Total costs \ 61 The fixed factory overhead costs are unavoidable. Madison Company has offered to sell 10,000 units of the same part to Hoover Company for $55 a unit. Assuming no other use for the facilities, Hoover Company should:

To make outsourcing services a good option, the services must be reliable, available when needed, and flexible to adapt to changing conditions.

The choice of the absorption or contribution approach affects the manufacturing cost per unit because the:

The absorption approach to the computation of manufacturing cost differs from the contribution approach because the absorption approach:

The depreciation charged to the current period

is relevant in a decision to replace equipment.

The strategic use of outside resources to perform activities traditionally handled by internal staff and resources

Opportunity costs and outlay costs are widely used synonyms.

There is no longer an opportunity cost after a homeowner pays off the mortgage.

Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. If production increases from 20,000 units to 25,000 units, the unit cost will: