Exam 6: Relevant Information for Special Decisions

In the short run,asset replacement decisions often result in lower reported profits in the period of replacement.Which of the following does not contribute to this?

Although opportunity costs are not recorded in the financial records,they nevertheless are useful for decision making.

Bland Company makes three different products,Products A,B,and C,for which the company has accumulated the following information: Product A Product B Product C Selling price per unit \ 100 \ 160 \ 200 Variable cost per unit \ 60 \ 90 \ 120 Number of direct labor hours per unit 1 2 2.5 Market demand 10,000 units 8,000 units 4,000 units Required: Assuming that Bland has 15,000 direct labor hours available,which product(s)should the company make and sell,and what will be its total contribution margin for the year?

Jack currently works for a law firm full time and earns $60,000 a year.He is thinking of quitting his job to pursue a medical degree.Medical school will cost him $100,000 per year.If Jack quits his job and goes to medical school,the salary he currently earns would be considered what type of cost?

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

Fixed costs are relevant for decision making if they vary among the alternatives and are future-oriented.

For decision-making purposes,qualitative factors are relevant if they differ among the alternatives and relate to the future.

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department.If the fishing department is closed,the store manager's position will not be affected,but if the entire store is closed,the manager will be terminated.Which of the following lessons should be learned from this example?

Asset replacement decisions involve:

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

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

For an equipment replacement decision,what costs are relevant,and what costs are not relevant?

The practice of relaxing constraints is likely to increase a business's profitability.

Expected future revenues that differ among the alternatives under consideration are often referred to as:

Which of the following statements is true?

Engineering design costs are generally referred to as:

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

Anton Valve Company produces a mechanical valve used in water systems.Three years ago the company introduced an electronic version of the valve.Sales of the mechanical model have steadily declined,and the company will report a loss on the product this year as follows: $\begin{array}{lr}\text { Sales revenue } & \$ 200,000 \\\text { Less costs: } \\\text { Unit-level manufacturing costs } & \$ 157,500 \\\text { Batch-level costs } & 2,500 \\\text { Product-level costs } & 5,000\\\text { Facility-level costs } & 30,000 \\\text { Allocated corporate costs } & \underline{11,500} \\\text { Total costs } &\underline{ 206,500}\\\text { Net loss } &\underline{ \$(6,500)}\end{array}$ If production of the mechanical valve is discontinued,product-level costs will be eliminated but facility-level and corporate costs would not be affected. Required: 1)Prepare a quantitative analysis that indicates whether the valve should be discontinued. 2)What qualitative factors should be considered in this decision?

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants.During the current year,the division produced 10,000 pots and incurred the following costs: Unit-level materials costs (10,000@\ 15) 150,000 Unit-level labor costs (10,000@\ 20) 200,000 Unit-level overhead costs (10,000@\ 16) 160,000 12,000 Other manufacturing overhead 36,000 ^*The equipment was purchased on January 1 last year for $60,000 and has a current book value of $48,000,a remaining useful life of four years,and a zero salvage value.If the equipment is not used to produce ceramic pots,it can be leased for $8,000 per year. ^**Includes supervisors' salaries and rent for manufacturing plant. Required: 1)Assume Forrest Industries uses a cost plus pricing strategy.What price should be charged for the ceramic pot product if the division sets its price 40% above the unit product cost? 2)A potential overseas customer who would not compete with the division's existing customers would like to purchase 1,000 ceramic pots but is not willing to pay the regular price.At what selling price would the division be indifferent about accepting the special order? 3)Suppose the division has the opportunity to purchase the ceramic pot from another manufacturer for $60.The supplier is willing to hold sufficient inventories to meet Forrest's demand.Should the division outsource its ceramic pots? Why or why not?

Harris Company currently produces a component that it uses in making some of its products.Harris has calculated the following costs for making the component: Unit-level costs Materials Labor 28 Overhead 2 Allocated facility-level costs Total cost Harris is considering outsourcing the component.A supplier has offered to sell the component to Harris for $52 each.Harris needs 8,000 units each year. Required: Should Harris outsource the component? Support your answer with appropriate computations.