Exam 6: Relevant Information for Special Decisions

Sherman Manufacturing Company currently manufactures a component used in one of its products.The annual production costs for 10,000 components are as follows: Material cost \ 5 per unit Labor cost \ 4 per unit Overhead \ 1 per unit Batch-level set-up costs for the year \ 5,000 Product-level manager's salary \ 18,000 Allocated facility-level costs \ 12,000 An outside company has offered to supply 10,000 units of the component for $12.50 each.If the company outsources the component,it will be able to rent out the idled factory space for $1,000 per month but will not terminate the product manager. Required: 1)Which items are not relevant to this outsourcing decision? 2)Identify any opportunity costs associated with this decision. 3)Prepare a quantitative analysis that indicates whether the component should be outsourced.

Which of the following statements is

A company that is subject to the effect of a scarce resource should concentrate on providing products or services that give the greatest contribution margin per unit of product or service.

Grady Corporation is evaluating two decision alternatives.Alternative One has costs of $2,000 and revenues of $3,000 while Alternative Two has costs of $3,200 and revenues of $4,000.The amount of differential revenue is $1,000.

Which of the following is a

Select the correct statement regarding opportunity costs.

What characteristics must qualitative information have to be relevant to a particular decision?

Which costs are relevant for equipment replacement decisions?

Discuss the conflict that often occurs between short-run and long-run performance in asset replacement decisions.

Taylor Company is considering whether or not to replace a drill press that is several years old.The current market value of the old equipment is an opportunity cost of replacing the drill press.

The benefits sacrificed when one alternative is chosen over another are referred to as:

Groove Music Company produces compact discs of background music for restaurants and other retail shops.Its disc recording machines are capable of producing 50 discs per hour.The unit-related cost of producing the discs is $2.00.The discs sell for $10.00 each.Mood Music Co.has asked the company to produce 10,000 copies of a disc for $9.00.Groove Music estimates that for this special order the unit-related cost of producing the disc will be $4.00 and that,due to the unique nature of the recording,its machines will only be able to produce 20 discs per hour.Groove Music has a total of 5,000 machine hours of capacity.In addition,to accept the special order,Groove Music will have to lease an additional special-purpose machine that will cost $6,500. Required: Assume that existing demand for Groove Music's compact discs is 200,000 units and that the special order has to be either taken in full or rejected.Prepare an analysis that indicates whether or not the special order should be accepted.

Select the term from the list provided that best matches each of the following descriptions.Put the number of the term in the column for Your Answer.

Osprey Company is trying to decide between the following two alternatives: Projected revenue \ 50,000 \ 60,000 Direct material 6,000 12,000 Assembly labor 9,000 9,000 Production supervisor's salary 10,000 10,000 Facility-related costs Profit Which of the following conclusions can be drawn from this example?

When evaluating alternatives,what type of costs should be considered?

A company's compensation system for its managers should provide incentives for the managers to maximize the company's long-term profitability.

Qualitative information is only relevant for decision making if it can be quantified.

Outsourcing reduces the extent of a company's vertical integration.

An alternative under consideration involves incurring $50 in costs to generate $60 in revenue.The differential revenue for this alternative is $10.

The following information is provided for two products: Product Product Y Selling price per unit \ 35 \ 25 Variable cost per unit 20 15 Assume the products will be sold in a store where shelf space is a scarce resource and there is sufficient room for only one of the two products.Expected sales for Product X are 6,000 units,and expected sales for Product Y are 8,000 units.Which product should be sold and why?