Exam 9: Relevant Costs for Decision Making

Redmond Ltd is closing one of its divisions. Operating data on this division follows: Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Redmond even if the division is closed. Assuming all overhead costs continue to be incurred even if the division closes, what will be the effect on overall company profits of closing the division?

Managers may outsource a service because they do not consider it a core competency.

A manufacturer operating with excess capacity has been asked to fill a special order at $7.25 per unit. The regular price is $10 per unit. No other use of the currently idle capacity can be found. The manufacturer's usual variable costs per unit are $3.50 for direct materials, $2.00 for direct labor, $1.00 for variable overhead, and $0.50 for sales commission. No sales commission would be paid on this special order. The average fixed overhead cost per unit is $0.25. Under the general decision rule, the minimum price per unit for this special order is

One way to deal with constrained resources is to spend money to alleviate them.

In a linear programming problem, slack resources are the same as

The general rule for make or buy decisions is to choose the option with the lowest total cost.

Which of the following statements about outsourcing is true? Outsourcing is used for manufactured goods, but not for services

Tieton Ltd. has two departments, Fabrication and Assembly. They produce 2 products. Product T needs 6 hours in fabrication and 6 hours in assembly. Product S needs 2 hours in fabrication and 4 hours in assembly. Fabrication has 24 hours available and Assembly 18. Total variable costs are $ 20 and $15 for T and S respectively. T sells for $22 and S for $16. The constraints for Tieton's 2 departments are

To make a decision about a special order, managers need to know whether

Managers should discontinue a business if which of the following is less than the sum of relevant fixed costs and opportunity costs?

The general rule is to discontinue a service when its total fixed costs are less than its avoidable fixed costs.

Average costs are appropriate to use when deciding whether to keep a product or product line.

In multi-product firms, managers need to consider the effect on demand for other products when they make a keep or drop decision about one product.

"Whether delivery timeliness is an important factor" is an example of a

In an outsourcing decision, the general rule managers should follow is to

In general, a company should outsource if the cost to buy is

The managers of Adamson Apple Ltd. are considering dropping one of their product lines. The product line typically has the following revenue and costs: If the product line is discontinued, $4,000 of the fixed costs would be avoided. Also, the freed-up capacity would generate $4,000 of additional contribution margin from the expansion of other product lines. If Adamson discontinues the product line, the effect on overall profit will be

A factor in special order decisions is the effect that the decision will have on regular customers.

Amsat has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available: Which product should be emphasised first?

Because non-routine operating decisions are so unique, managers cannot use a standard decision process for addressing them.