Exam 14: Decision Making: Relevant Costs and Benefits

Consider the following statements about relevant costing and activity-based costing: I. The concept of relevant costs and benefits cannot be used in conjunction with an activity-based costing system. II. The concept of relevant costs and benefits must be modified for use with an activity-based costing system. III. Generally speaking, the decision maker can better associate relevant costs with the activities that drive them under an activity-based costing system than under a conventional product-costing system. Which of the above statements is (are) true?

Dubin Company is operating at capacity and wants to add a new service to its expanding business. The new service should be added as long as service revenues exceed the sum of variable costs and fixed costs.

Linear programming is used for writing code, but not for product mix problems.

The term "outsourcing" is most closely associated with:

Consider the following costs and decision-making situations: I. The cost of existing inventory, in a keep vs. disposal decision. II. The cost of special electrical wiring, in an equipment acquisition decision. III. The salary of a supervisor who will be transferred elsewhere in the organization, in a department-closure decision. Which of the above costs is (are) relevant to the decision situation noted?

Sunk costs and opportunity costs are inherent in decision making. Required: A. Define the terms "sunk cost" and "opportunity cost." B. How are sunk costs treated when making decisions? C. "Information about sunk costs can be found in the financial statements and accounting records; however, information about opportunity costs is omitted." Do you agree with this statement? Explain.

Forrest Corporation manufactures parts that are used in the production of washers and dryers. The following costs are associated with part no. 65: The company received a special-order inquiry from an appliance manufacturer in Brazil for 15,000 units of part no. 65. Only $3 of fixed manufacturing will be incurred on the order, and the variable selling costs per unit will amount to only $5. Since Forrest has excess capacity, the minimum price that Forrest should charge the Brazil manufacturer is:

Alton Van Lines is considering the acquisition of two new trucks. Because of improved mileage, these vehicles are expected to have a lower operating cost per mile than the trucks the company plans to replace. Management is studying whether the firm would be better-off keeping the older vehicles or going ahead with the replacement, and has identified the following decision factors to evaluate: 1. Cost and book value of the old trucks 2. Moving revenues, which are not expected to change with the acquisition 3. Operating costs of the new and old vehicles 4. New truck purchase price and related depreciation charges 5. Proceeds from sale of the old vehicles 6. The 8% return on alternative investments that Alton will forego by tying up cash in the new trucks 7. Drivers' wages and fringe benefits Required: A. Relevant information. B. Opportunity costs. C. Sunk costs. D. Factors to be considered in the decision.

Opportunity cost is not important in special order decisions.

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. -Disregard the information in the previous question. If Omar Industries eliminates Regular and uses the available capacity to produce and sell an additional 1,500 units of Super, what would be the impact on operating income?

An architecture firm currently offers services that appeal to both individuals and commercial clients. If the firm decides to discontinue services to individuals because of ongoing losses, which of the following costs could the company likely avoid?

Ooo-La-La Company has met all production requirements for the current month and has an opportunity to manufacture additional units with its excess capacity. Unit selling prices and unit costs for three product lines follow. Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional manufacture of all products. Required: A. If Ooo-La-La has excess machine capacity and can add more labor as needed (i.e., neither machine capacity nor labor is a constraint), which product is the most attractive to produce? B. If Ooo-La-La has excess machine capacity but a limited amount of labor time available, which product or products should be manufactured in the excess capacity?

Managerial accountants:

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 a constraint function of Technostrain ?

Capacity restrictions often change the way that managers make decisions. For example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding which new products to carry? How would this differ, say, from a concert promoter that desires to bring a rock group to an arena-type facility?

The City of Columbus should not consider the purchase price of its old vehicle when making the decision to replace it with a more cost effective new vehicle.