Exam 14: Decision Making: Relevant Costs and Benefits

Allison is contemplating a job offer with an advertising agency where she will make $54,000 in her first year of employment. Alternatively, Allison can begin to work in her father's business where she will earn an annual salary of $38,000. If Allison decides to work with her father, the opportunity cost would be:

Factors in a decision problem that cannot be expressed in numerical terms are:

Carlton Corporation is composed of five divisions. Each division is allocated a share of Carlton's overhead to make divisional managers aware of the cost of running the corporate headquarters. The following information relates to the Metro Division: If the Metro Division is closed, 100% of the traceable fixed operating costs can be eliminated. What will be the impact on Carlton's overall profitability if the Metro Division is closed?

Use the following information to answer the following Questions Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow. Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed. -Omar Industries wants to drop the Regular product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the impact on operating income if Regular is discontinued?

A special order generally should be accepted if:

Icon, Inc. produces a variety of products that carry the logos of teams in the Fortified Football League (FFL). The company recently paid the league $85,000 for the rights to market a popular player jersey and immediately began production. The following information is available: Number of jerseys manufactured: 25,000 Cost of jerseys manufactured: $625,000 Amount of manufacturing costs paid to-date: $410,000 Number of jerseys sold to-date: 0 Estimated future marketing costs: $330,000 Anticipated selling price per jersey: $42 The FFL is about to file a lawsuit to stop jersey sales and is demanding another $50,000 from Icon for the manufacturing rights. Conversations with Icon's attorneys indicate that the league has a strong case and is likely to win the suit. If this situation arises, Icon will be unable to recover any amounts paid to the FFL. Required: A. Determine the overall profitability of the jersey product line if Icon settles the disagreement with the FFL and the anticipated sellout occurs. B. Should the company pay the additional $50,000 demanded by the league or should the jersey program be dropped? Show computations to support your answer.

McAlister Company is operating at capacity and desires to add a new service to its rapidly expanding business. The service should be added as long as service revenues exceed:

Which of the following statements regarding costs and decision making is correct?

The following costs are relevant to the decision situation cited except:

A firm that decides to emphasize those goods with the highest contribution margin per unit may have made an incorrect decision when the company has capacity constraints in the form of limited resources.

Product costs incurred after the split-off point in a joint processing environment are called:

Drew Mellow builds custom homes in Miami. Mellow was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows: Mellow adds a 25% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $118,000 ($472,000 *25%), producing a bid price of $590,000. Assume that 60% of construction overhead is fixed. Required: A. Suppose that business is presently very slow, and the client countered with an offer on this home of $455,000. Should Mellow accept the client's offer? Why? B. If Mellow has more business than he can handle, how much should he be willing to accept for the home? Why?

The concept of a relevant cost can be defined as a past cost that differs among alternatives.

Phillippe manufactures A and B from a joint process (cost = $80,000). Ten thousand pounds of B can be sold at split-off for $15 per pound or processed further at an additional cost of $20,000 and later sold for $16. If Phillippe decides to process B beyond the split-off point, operating income will:

The process of identifying relevant costs and benefits is largely the same whether the decision is viewed from a short-run or long-run perspective.

Mama Louise's Pizza store no. 16 has fallen on hard times and is about to be closed. The following figures are available for the period just ended: All employees except the store manager would be discharged. The manager, who earns $27,000 annually, would be transferred to store no. 19 in a neighboring suburb. Additionally, no. 16's furnishings and equipment are fully depreciated and would be removed and transported to Mama Louise's warehouse at a cost of $2,800. Required: A. What is store no. 16's reported loss for the period just ended? B. Should the store be closed? Why? C. Would Mama Louise's likely lose all $205,000 of sales revenue if store no. 16 were closed? Explain.

Elkhorn, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows. Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company's income will:

The book value of equipment currently owned by a company is an example of a (n):

Use the following information to answer the following Questions Technostrain Corporation manufactures two products: X and Y. The company has 4,000 hours of machine time available and can sell no more than 800 units of product X. Other pertinent data follow. -Which of the following is Technostrain's objective function?

The first step in the decision-making process is to identify the alternatives.