Exam 6: Relevant Information for Special Decisions

Natalie purchased a concert ticket recently for $50.She is trying to decide whether to drive,take a taxi,or ride the public transit bus.The cost of driving to the concert is a sunk cost because Natalie purchased her car several years ago.

Scholastic Tours is trying to decide which one of two tours it will introduce.The costs and revenues associated with each alternative are listed below: Eastem Tour Western Tour Projected revenue \ 14,000 \ 18,000 Variable costs 2,000 10,000 Fixed costs Profit What are the incremental (differential)costs of the Western Tour?

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.

Alex brought his lunch today but now a coworker has asked him to go to the deli across the street. Select the correct statement from the following.

Sunk costs:

Only variable costs are relevant for decision making.

Discuss why qualitative characteristics must be considered when making decisions such as special orders,outsourcing,elimination and replacement decisions,and scarce resource allocation decisions.Give examples.

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems.The switches are purchased for $20 each.The company is considering making the switches internally and has conducted a study to determine the costs involved.The costs below are projected annual production costs: Unit-level material cost \3 Unit-level labor cost \2 Unit-level overhead \1 Batch-level set-up cost (5,000 units per batch) \ 5,000 Product-level supervisory salaries \ 37,500 Allocated facility-level costs \ 20,000 Assume that the company needs 15,000 of the switches,which would be produced in three batches.Assume also that the company will still be operating within the relevant range.If Safety decides to make the parts under these conditions,the total relevant costs will be:

What are constraints? Provide an example.

Select the incorrect statement regarding sunk costs.

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 Depreciation expenses on equipment* 30,000 36,000 ^*The equipment was purchased for $150,000 and has a current book value of $120,000,remaining useful life of four years,and a zero salvage value.If the company does not use the equipment,it can be leased for $8,000 per year. ^**Includes supervisors' salaries and rent for manufacturing plant. Required: The division is considering replacing the equipment used to manufacture its ceramic pots.Replacement equipment can be purchased at a price of $200,000.The new equipment,which is expected to last four years and have a salvage value of $20,000,will reduce unit-level labor costs by 25%.Assuming the division desires to maintain its production and sales at 10,000 ceramic pots per year,prepare a schedule that shows the relevant cost of operating the existing equipment versus the cost of operating the new equipment.Should the existing equipment be replaced? Why or why not?

Chavez Company is considering purchasing new equipment or overhauling its existing equipment.The manager has gathered the following information: Current machinery: Original cost \5 0,000 Accumulated depreciation 40,000 Annual operating costs 5,000 Current market value 1,500 Salvage value at the end of five year's - Cost of overhauling machinery: Cost of overhaul \1 2,000 Anual operating costs after overhauling 2,000 Salvage value at the end of five years - New machinerv: Cost \ 56,00 Annual operating costs 1,000 Salvage value at the end of five years - Required: 1)Identify the sunk costs associated with this decision. 2)Compute the increase or decrease in total income over the five-year period if the company chooses to buy the new equipment. 3)Compute the increase or decrease in total income over the five-year period if the company chooses to overhaul its existing machinery. 4)What is your recommendation for this decision?

Which of the following statements is incorrect?