Exam 17: Accounting for Decision Making: With and Without Resource Constraints

Pronto Ltd manufactures photo frames and photo albums but 15 000 units of photo frames could be purchased for $5.00 each. The per-unit costs of production for these frames are: Pronto is considering whether to make or buy the photo frames. The costs that are irrelevant to this decision are:

Sunk costs are:

When there are resource constraints, the objective that should be applied is to establish the optimum output within the constraints to maximise contribution and thus profits.

The following information has been supplied regarding three products. Assuming that the current restriction on labour is 7000 hours, what is the total cost of labour per unit that needs to be considered before management can decide whether to employ additional labour or not? (Hint: First calculate the contribution per unit of labour and determine which products will be produced at the current available hours.)

Consider the following information. The breakeven in units for Product X and Product Y are:

Fixed costs are irrelevant to a decision if they remain the same regardless of the decision.

The selection of a special order will improve net profit when the order's income exceeds:

Qualitative factors in the make or buy decisions include:

The potential to damage customer loyalty or employee morale is a qualitative factor that needs to be considered in decision analysis.

Which of the following is not a relevant cost or benefit when determining a contribution margin?

Finefurniture Ltd has the opportunity to purchase componentry in sufficient quantities at $5.50 per chair. Currently Finefurniture Ltd makes the components for 7000 chairs at the following costs: A saving of 20% of fixed overhead would occur if the components were bought. Should the component be bought, and why?

James is considering replacing his worn-out machines. Which of the following is not a relevant cost for James when considering various available options?

Avoidable costs are those costs that will not be incurred if a particular decision is taken, therefore avoidable costs are relevant to decision making.

Which of the following statements about qualitative factors is not true?

Where an entity faces resource constraints, the appropriate selection of what to produce should be based on the contribution per unit of resource constraint, as this will optimise output and profits.

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The replacement cost for the bike is:

Unavoidable costs will be incurred regardless of the decision made and are therefore relevant to decision making.

The Northern Division of CPP Corporation supplies parts to its Southern Division. These parts are also available in the market from other suppliers. Northern Division is operating at 80% capacity, with a variable cost per unit of $6. Because of a personality conflict between the two division managers, however, Southern has elected to buy the part from outside suppliers at $7 per unit. As a result of this action, CPP Corporation will be:

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The variable and fixed costs for producing the bike are:

Hartly Company manufactures three products: A, B, and C. The same raw material is used in all three products. The company has only 5000 kilograms of material on hand and will not be able to obtain any more for several weeks. Management is trying to decide on which products to concentrate on next week to fill its backlog of orders. Material cost is $8.00 per kilogram. There are no beginning or ending inventories except the raw materials on hand mentioned above.