Exam 6: Relevant Information for Special Decisions

QRC Company is trying to decide which one of two alternatives it will accept.The costs and revenues associated with each alternative are listed below: Alternative A Alternative B Projected revenue \ 62,500 \ 75,000 Unit-level costs 12,500 18,000 Batch-level costs 6,250 12,000 Product-level costs 7,500 8,500 Facility-level costs 5,000 6,250 What is the differential revenue for this decision?

Which of the following statements is incorrect?

Farris Company reported the following information for its two products: Product X Product Y Selling price per unit \ 25 \3 5 Variable cost per unit 15 20 Due to labor constraints,demand for each of the products is greater than its supply.Product X requires one hour of labor to produce and product Y requires three hours of labor to produce.Which of the following statements is true?

Select the incorrect statement regarding relevant costs and revenues.

Outsourcing reduces the extent of a company's vertical integration.

The decision to accept a lower than normal selling price may depend on the availability of excess capacity.

Talladega produces the clock used in the product.Talladega has received an offer from Daytona,Inc.,to supply the clock.If Talladega discontinues production of the clock,the company will be able to eliminate its product-level costs because no other products along the same line are produced by the company.However,due to its concern for quality,the company will have to inspect each clock.Various costs and items are described below: Required: For each item in the table,place a check mark or X in the column that best describes the item in the context of the described outsourcing decision.A cost varies if the amount of the cost or the incurrence of the cost differs between the two alternatives: continuing to make the clocks or purchasing the clocks from Daytona.

All of the following statements describe qualities of relevance except:

When evaluating alternatives,what type of costs should be considered?

For many managerial decisions (such as outsourcing and special order decisions),unit-level costs are avoidable costs.

ServicePro provides two kinds of services.During the most recent accounting period,the two service lines produced the following operating results: Service 1 Service 2 Service revenue \ 80,000 \ 20,000 Unit-level materials \ (20,000) \ (2,000) Unit-level labor \ (30,000) \ (14,000) Product-level selling \& adrninistrative costs \ (10,000) \ (2,500) Comparywide facility-level costs Net income If the company stops providing Service 2:

Taylor Company is considering whether or not to replace a drill press that is several years old.The current market value of the old equipment is an opportunity cost of replacing the drill press.

Select the incorrect statement concerning opportunity costs.

Which of the following items is qualitative?

To be relevant in decision making,cost or revenue information must be future-oriented and must not differ among the alternatives.

Select the term from the list provided that best matches each of the following descriptions.Put the number of the term in the column for Your Answer.

Differential revenues are expected future revenues that vary among the alternatives under consideration.

A company's compensation system for its managers should provide incentives for the managers to maximize the company's long-term profitability.

Eastern Company currently produces a component that it uses in making some of its products.The company has calculated the following costs for making the component: Unit-level costs Materials \ 20 Labor 28 Overhead 2 Allocated facility-level costs Total cost Eastern is considering outsourcing the component.A supplier has offered to sell the component to Eastern for $55 each.Eastern needs 10,000 units each year.If Eastern does outsource the component,it can use the facilities to make another product that would yield a contribution margin of $60,000 per year. Required: 1)Should Eastern outsource the component? Support your answer with appropriate computations. 2)What qualitative factors should be considered in this decision?