Exam 6: Relevant Information for Decision Making With a Focus on Operational Decisions

Uptown Corporation has a joint process that produces three products: P,G and A.Each product may be sold at split-off or processed further and then sold.Joint-processing costs for a year amount to $20,000.Other data follows: Sales Value Separable Processing Sales Value Product at Split-Off Costs after Split-Off at Completion P \ 32,000 \ 5,000 \ 39,000 G 16,500 7,500 29,000 A 6,400 8,000 10,000 Processing Product P beyond the split-off point will cause profits to ________.

Thompson Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Annual variable costs are $300,000.Of the annual fixed costs,$140,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $60,000 annually.Alternatively,the facilities could be rented out at $70,000 annually.If Thompson Company makes the part,what is the annual opportunity cost of the facilities?

In retail sales,the limiting resource is often floor space.

Each year,Madsen Company purchases 8,000 units of a part that it needs for production of its product.The supplier notified Madsen Company that a price increase will take effect shortly,which will bring the price of the part to $25 per part.Madsen Company is considering the use of idle facilities to produce the part.The annual production costs to produce the needed 8,000 parts are as follows: Direct materials \ 17,500 Direct labor 30,000 Variable indirect production costs 14,000 Fixed indirect production costs 33,500 The idle facilities could also be rented out at an annual rent of $99,000.All the fixed indirect production costs are avoidable. Required: Determine if Madsen Company should buy the part or produce it internally.

The disposal value of old equipment is relevant in equipment replacement decisions.

Buddy Company manufactures a part for its production cycle.The costs per unit for 5,000 units of the part are as follows: Per Unit Direct materials \ 3.00 Direct labor 5.00 Variable factory overhead 4.00 Fixed factory overhead Total costs \ 16.00 The fixed factory overhead costs are avoidable.Spalding Company has offered to sell 5,000 units of the same part to Buddy Company for $15 per unit.Assuming no other use for the facilities,Buddy Company should ________.

Marianne Company has an idle machine that originally cost $200,000.The book value of the machine is $100,000.The company is considering three alternative uses of the idle machine: Alternative 1: Disposal of machine.Disposal value of machine is $50,000. Alternative 2: Use the idle machine to increase production of Product A.Contribution margin from additional sales of Product A is estimated to be $60,000. Alternative 3: Use the idle machine to increase production of Product B.Contribution margin from additional sales of Product B is estimated to be $70,000. When considering Alternative 2,what is the opportunity cost of the idle machine?

Kaiman Company currently produces a key part at a total cost of $210,000.Annual variable costs are $170,000.Of the annual fixed costs,$10,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part annually for $200,000.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year.Alternatively,the facilities could be rented out at $60,000 per year.Given all of these alternatives,what is Kaiman Company's lowest net relevant cost for the parts?

Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year.If production increases from 20,000 units to 25,000 units,the total cost will ________.

Sue is considering leaving her current position to open a coffee shop.Sue's current annual salary is $83,000.Annual coffee shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Sue's opportunity cost of staying at her current work position?

Department A covers one section of a large factory building.Which of the following costs is relevant to the decision to eliminate Department A?

Conflicts in the decision-making process can arise when superiors evaluate a manager's performance using a model consistent with the decision model used by the manager.

Cleveland Corporation has a joint process that produces three products: X,Y and Z.Each product may be sold at split-off or processed further and then sold.Joint-processing costs for a year amount to $100,000.Other data follows: Sales Value Separable Processing Sales Value Product at Split-Off Costs after Split-Off at Completion X \ 128,000 \ 16,000 \ 140,000 Y 50,000 27,000 76,000 Z 25,600 10,000 40,000 To maximize profits,the corporation should process ________ further.

Since managers are usually evaluated based on the operating results in one year,they do not usually consider the long range impact of their decisions.

The cost of new equipment is relevant in deciding whether to keep or replace old equipment.

An opportunity cost is ________.

Andrea Company manufactures a part for its production cycle.The annual costs per unit for 20,000 units of this part are as follows: Direct materials \1 5 Direct labor 12 Variable indirect production costs 19 Fixed indirect production costs 16 Total cost \6 2 Andrea Company has been approached by a supplier who will sell 20,000 units of the same part for $940,000.All the fixed indirect production costs are unavoidable if Andrea Company ceases production of the part. Required: A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make the part? B) Assume the facilities can be rented out for $100,000 per year. Should Andrea Company buy the part? If so, how much money will be saved?

Jorgensen Company is considering the replacement of equipment used in operations.The following data are available: Old Machine NEW Machine Original cost \ 210,000 \ 40,000 Useful life in years 12 7 Current age in years 5 0 Book value \ 65,000 - Disposal value now \ 30,000 - Disposal value in 7 years 0 0 Annual cash operating costs \ 9,000 \ 8,000 Required: A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items together for the next 7 years. B) Should the old equipment be replaced?

The most recent income statement for the South Branch of First Financial Bank is presented below: $\begin{array}{ll}\text { Sales } & \$ 57,000 \\\text { Variable costs } & 31,500\\\text { Contribution margin } & 25,500 \\\text { Avoidable fixed costs } & 13,500 \\\text { Unavoidable fixed costs } & 18,000\\\text { Operating loss }&\$(6,000)\end{array}$ First Financial Bank is thinking about eliminating the South Branch.If the branch is eliminated,First Financial Bank's operating income will ________.

Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Variable costs are $300,000 annually.Of the annual fixed costs,$140,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year.Alternatively,the facilities could be rented out at $60,000 per year.Given all of these alternatives,what is Dolphin Company's lowest net relevant cost for the parts?