Exam 6: Relevant Information for Special Decisions

Lindsay purchased a raffle ticket for $5.Just before the grand prize drawing two people tried to buy her ticket.The first person offered $30,and another offered $65.What is Lindsay's opportunity cost of keeping the raffle ticket?

Gibbs Corporation makes indoor gas fireplaces.A standard fireplace includes unit-level materials,labor,and overhead costs.In addition,the company incurs product-level engineering and advertising costs.The sales staff is paid a 5% commission on each fireplace sold.A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs's selling price.Which of the following costs would be relevant to this special order decision?

Rachel is deciding whether to remain in the home she has lived in for the past ten years,which is located very near her work,or to move into a newer home that is located in the suburbs farther from her job.The old house was purchased for $160,000 and has a market value of $220,000.The new home can be purchased for $285,000.Which of the following is not relevant to Rachel's decision?

For purposes of decision making,avoidable costs are costs that:

Dapper Dan produces a man's suit that sells for $200.Although the company's production capacity is 3,000 suits per year,only 2,500 suits are currently being produced and sold.At this level of production,the company incurs the following costs: Unit-level material cost per suit \ 80 Unit-level labor cost per suit \ 40 Unit-level overhead per suit \ 20 Batch-level set-up costs for each batch of 500 suits \ 1,200 Annual product-level costs \ 15,000 Allocated facility-level costs \ 50,000 Easton Clothiers has offered to purchase 500 suits as a one-time special purchase at a price of $135. Required: Prepare a quantitative analysis that indicates whether the special order should be accepted.

The cost that is avoided when a company eliminates a single item of a product or service is a:

Indicate whether each of the following statements is true or false.

Which of the following is not a possible alternate term for costs that can be eliminated by taking a specified course of action?

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

A constraint is a factor that restricts sales of a company's products or services.

How can managers manage (that is,reduce the impact of)constraints?

Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date.The same equipment would cost $800,000 to replace.What is the total amount of sunk cost in this decision?

A business segment should be eliminated if the revenue generated by the segment exceeds only its fixed costs.

The management practice that increases profitability through the management of bottlenecks is known as:

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.

Relevant costs are frequently called unavoidable costs.

A potential danger from outsourcing is that a company may become too dependent on the supplier.

Clean,Inc.cleans and waxes floors for commercial customers.The company is presently operating at less than capacity,with equipment and employees idle at times.The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $4,500.The size of the proposed job is 11,000 square feet.The company's normal service costs are as follows: Unit-level materials \ 0.18 per square foot Unit-level labor \ 0.25 per square foot Unit-level variable overhead \ 0.08 per square foot Facility-level overhead Allocated at \ 0.10 per square foot If the company accepts the special offer:

Classifying costs into one of four hierarchical levels can facilitate the identification of relevant costs.Place an "X" in the appropriate column to classify the following costs as Unit-Level,Batch-Level,Product-Level,and Facility-Level. Description of Cost Unit- Batch- Product- Facility- Level Level Level Level Administrative costs Assembly labor Equipment setup costs Engineering design Inspection costs Direct materials cost Materials handling cost Personnel administration and training Plant manager's salary Product manager's salary

Which of the following costs is an example of a batch-level cost?