Exam 10: Relevant Information for Decision Making

The management of Freeman Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier.A $100 cost per component was determined as follows: Direct material                                                                 $\$ 15$ Directlabor                                                                         40 Variable manufacturing overhead                                       10 $\text { Fixed manufacturing overhe ad }$                         $\underline{35}$                                                                                             $\underline{\$100}$ Freeman Industries uses 4,000 components per year. After Noel Corporation submitted a bid of $80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Noel Corporation, Freeman Industries' unused production facilities could be leased to another company for $50,000 per year. Required: a. Determine the maximum amount per unit Freeman Industries could pay an outside supplier. b. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative. c. Assume the company could eliminate one production supervisor with a salary of $30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.

Athmer Corporation Athmer Corporation sells a product for $18 per unit,and the standard cost card for the product shows the following costs: Direct material                                $\$ 1$ Directlabor                                        2 $\text { Overhe ad (80\% fixed) }$                         $\underline{7}$ Total                                                $\underline{\$10}$ Refer to Athmer Corporation.Assume that Athmer has sufficient idle capacity to produce the 1,000 units.If Athmer wants to increase its operating profit by $5,600,what would it charge as a per-unit selling price?

Costs forgone when an individual or organization chooses one option over another are

Savannah Motors Savannah Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 9,000 \ 20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value of old machine 2,000 Salvage value in 10 years 500 1,000 Remaininglife 10 yrs 10yrs Refer to Savannah Motors.The $20,000 cost of the new machine represents a(n)

Which of the following qualitative factors favors the buy choice in a make or buy decision for a part?

Costs incurred in the past to acquire an asset are referred to as _________.

Glover Company produces a part that has the following costs per unit: Direct material                                $\$ 9$ Directlabor                                        4 Variable overhead                              2 $\text { Fixed overhead. }$                         $\underline{6}$ Total                                                $\underline{\$21}$ London Corporation can provide the part to Glover for $23 per unit.Glover Company has determined that 50 percent of its fixed overhead would continue if it purchased the part.However,if Glover no longer produces the part,it can rent that portion of the plant facilities for $70,000 per year.Glover Company currently produces 12,000 parts per year.Which alternative is preferable and by what margin?

Relevant costs are

Gallagher Company produces a part that has the following costs per unit: Direct material                                $\$ 8$ Directlabor                                        3 Variable overhead                              1 $\text { Fixed overhead. }$                         $\underline{5}$ Total                                                $\underline{\$17}$ Homeland Corporation can provide the part to Gallagher for $19 per unit.Gallagher Company has determined that 60 percent of its fixed overhead would continue if it purchased the part.However,if Gallagher no longer produces the part,it can rent that portion of the plant facilities for $60,000 per year.Gallagher Company currently produces 10,000 parts per year.Which alternative is preferable and by what margin?

Marshall Company has only 30,000 hours of machine time each month to manufacture its two products.Product X has a contribution margin of $60,and Product Y has a contribution margin of $72.Product X requires 6 hours of machine time,and Product Y requires 10 hours of machine time.If Marshall Company wants to dedicate 85 percent of its machine time to the product that will provide the most income,the company will have a total contribution margin of

Savannah Motors Savannah Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 9,000 \ 20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value of old machine 2,000 Salvage value in 10 years 500 1,000 Remaininglife 10 yrs 10yrs Refer to Savannah Motors.The incremental cost to purchase the new machine is

The benefits foregone when one course of action is chosen over another are referred to as ______.

Wholesome Wheat Corporation Wholesome Wheat Corporation grows grain in rural areas of the South.The corporation's costs per bushel of grain (based on an average yield of 130 bushels per acre)follow: Direct material                        $\$1.10$ Direct1abor                              0.40 Variable overhead                   0.30 Fixed overhead                       0.60 Variable selling costs              0.10 Fixed selling cost                       0 Wholesome Wheat Corporation defines direct material costs as seed,fertilizer,water,and other chemicals.The variable overhead costs represent maintenance and repair costs of machinery.The fixed overhead costs are completely comprised of depreciation expense on machinery and real estate taxes. Refer to Wholesome Wheat Corporation.Assume for this question only that the company decided to plant the grain.A local oil refiner has approached the company about converting the crop to grain alcohol (used to make gasohol)rather than selling the grain to the local grain elevator.If Wholesome Wheat converts the grain to alcohol,it will incur additional costs of $0.60 per bushel,and the company will be able to sell the crop to the oil refiner for the equivalent of $2.60 per bushel.Otherwise,the company can sell the grain crop to the local grain elevator for $1.85 per bushel.If Wholesome Wheat elects to sell the grain to the refinery,the company will not incur the variable selling costs.What should the company do? Support your answer with calculations.

A manager is attempting to determine whether a segment of the business should be eliminated.The focus of attention for this decision should be on

In an outsourcing decision,variable costs of production are relevant.

Information that has a bearing on future events is relevant in the decision-making process.

A company may outsource some of its production in order to focus on core competencies.

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is

Boston Bakers Boston Bakers is trying to decide whether it should keep its existing bread-making machine or purchase a new one that has technological advantages (which translate into cost savings)over the existing machine.Information on each machine follows:                                                                         $\text {\underline{ Old machine} }$    $\text {\underline{ New machine} }$ Original cost \ 10,000 \ 25,000 Accumulated depreciation 6,000 0 Annual cash operating costs 9,500 5,000 Current salvage value of old machine 2,500 Salvage value in 10 years 650 1,200 Remaininglife 12 yrs 12yrs Refer to Boston Bakers.The $5,000 of annual operating costs that are common to both the old and the new machine are an example of a(n)

Ultralinear Electronics Corporation Ultralinear Electronics Corporation manufactures and sells FM radios.Information on the prior year's operations (sales and production Model A1)is presented below:

Sales price per unit	$30
Costs per unit:
Direct material	7
Direct labor	4
Overhead (50% variable)	6
Selling costs (40% variable)	10
Production in units	10,000
Sales in units	9,500

Refer to Ultralinear Electronics Corporation.The Model B2 radio is currently in production and it renders the Model A1 radio obsolete.If the remaining 500 units of the Model A1 radio are to be sold through regular channels,what is the minimum price the company would accept for the radios?