Exam 9: Relevant Costs for Decision Making

Because many management decisions are unique, managers address them using a/an

Since non-routine operating decisions do not typically involve large dollar amounts, managers do not need to consider uncertainties when evaluating them.

Sebastian is a manager at DLL Restaurant. He is considering accepting a special order from a neighborhood homeless shelter for 150 Christmas meals. Which of the following is a relevant qualitative factor he should consider?

PQK Ltd produces and sells bookends. Its managers are considering whether to outsource the task of cutting the wood for the bookends to DLN Ltd. Which of the following is most likely to be a qualitative factor that managers will consider in making the decision?

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. Assume there is no excess capacity (i.e., the company can sell every unit that it produces to regular customers). Under the general decision rule, the minimum price per unit for this special order would be

Managers relax constraints by

Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of the LittleBlast were produced and sold. Following are average prices and costs for last month: The production lines for both products are highly automated, so large changes in production cause very little change in total direct labor costs. Workers who are classified as direct labor monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped. What is the breakeven sales volume (in units) for BigBlast? (In other words, what is the sales volume at which Horton should be financially indifferent between dropping and keeping BigBlast?)

Uncertainties about future revenues affect all non-routine operating decisions.

Future revenues and costs are often a source of uncertainty for non-routine operating decisions. Future revenues and costs can be affected by

Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of the LittleBlast were produced and sold. Following are average prices and costs for last month: The production lines for both products are highly automated, so large changes in production cause very little change in total direct labor costs. Workers who are classified as direct labor monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped. Using only the information provided above, Horton could make several types of decisions. Possible decisions include

Wasson Widget has 1,000 obsolete widgets on hand. These units were produced a year ago at a cost of $10,000. The units could be scrapped for $1,000 or reworked for $2,000 and sold for $5,000. Which alternative is desirable and why?

The general rule is to discontinue a segment of the business when its total contribution margin does not cover avoidable fixed costs.

Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of the LittleBlast were produced and sold. Following are average prices and costs for last month: The production lines for both products are highly automated, so large changes in production cause very little change in total direct labor costs. Workers who are classified as direct labor monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped. The following qualitative factors are relevant to Horton's decision.

If idle capacity exists, a special order must cover its full cost to be profitable.

Vicade has 1,000 commercial video game machines in inventory produced at a cost of $400 each (60% variable and 40% fixed). The machines were to have been sold for $1,000 each. However, the machines currently contain a minor malfunction, reducing their selling price to $150 each. The company could correct the malfunction at a variable cost of $250 each, and then sell the machines for $550 each. For purposes of determining whether the machines should be reworked, what is the opportunity cost per unit?

Vicade has 1,000 commercial video game machines in inventory produced at a cost of $400 each (60% variable and 40% fixed). The machines were to have been sold for $1,000 each. However, the machines currently contain a minor malfunction, reducing their selling price to $150 each. The company could correct the malfunction at a variable cost of $250 each, and then sell the machines for $550 each. If the games are reworked, what will be the contribution per unit from doing so?

Managers should generally consider opportunity costs in both "keep or drop" and "make or buy" decisions. Which of the following is an opportunity cost they should consider in both situations?

Financial institutions often consider outsourcing their information technology functions internationally. Which of the following are qualitative factors that should managers consider in the decision?

Sunk costs should be considered in

As long as managers can identify all the relevant quantitative information for making non-routine operating decisions, they will make the best decision.