Exam 13: Relevant Information for Special Decisions

One of the potential dangers from outsourcing is the possible occurrence of low-ball pricing.

An alternative under consideration involves incurring $50 in costs to generate $60 in revenue. The differential revenue for this alternative is $10.

Facility-level costs are not involved in decisions to eliminate a segment of a business.

Which costs are relevant for equipment replacement decisions?

Select the correct statement regarding opportunity costs.

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's total variable manufacturing costs. Which type of cost is considered relevant to Outdoor Living's decision of whether to accept or reject the special order?

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

Qualitative information is relevant when:

Variable costs are always relevant in decision making.

Indicate whether each of the following statements is true or false. 1. Eliminating a batch of work eliminates both batch-level and product-level costs. 2. Increasing the number of units in a batch increases batch-level costs. 3. Product-level costs are incurred to support specific products or services. 4. Some inventory management costs and engineering design costs are product-level costs. 5. Personnel administration and insurance are examples of facility-level costs.

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.

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Cost Items Appearing on the Income Statement Materials cost ( \1 0 per unit) Depreciation on manufacturing equipment Company president's salary Salaries of administrative personnel Labor cost ( \4 per unit) Research and development costs Advertising costs ( 150.000 per year) Real estate taxes on factory Shipping and handling (\ 0.15 per unit) Inspection costs Easton can currently purchase the scooters it makes from Weston Company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. If Easton outsources the scooters to Weston, which of the following costs would be relevant to the outsourcing decision?

Which of the following items is qualitative?

Indicate whether each of the following statements is true or false. 1. A special order decision involves an offer to purchase goods at a price that is lower than normal. 2. To analyze a special order decision, a manager should identify differential costs and revenues. 3. A special order should be accepted if avoidable costs exceed differential revenue. 4. Availability of idle capacity is often relevant to special order decisions. 5. Alternative uses for facilities should be considered in making a special order decision.

Segment reports are used to evaluate the true profitability of a company's business segments.

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

Indicate whether each of the following statements is true or false. 1. In making a decision to eliminate a segment of a business, managers should compare differential revenues for the segment to its avoidable costs. 2. Eliminating one segment of a business generally has no effect on the other segments. 3. Eliminating one segment of a business has no effect on the customers of the other segments. 4. The opportunity cost, alternative use for facilities, should be considered in deciding whether to retain a segment of a business. 5. A decision to eliminate a segment of a business is likely to have long-term consequences because re-establishing the segment might be difficult.

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

Bates Golf Supply produces a golf bag that sells for $220. Although the company's production capacity is 5,000 bags per year, only 4,000 bags are currently being produced and sold. The production costs for 4,000 bags are as follows: Unit-level material cost \ 3300,000 Unit-level labor cost 240,000 Unit-level overhead 75,000 Batch-level setup costs (500 units per batch) 16,000 Product-level costs 20,000 Allocated facility-level costs 25,000 Golf Mart Stores has offered to purchase 1,000 golf bags as a one-time special purchase at a price of $170 per bag. Required: 1) Prepare a quantitative analysis that indicates whether the special order should be accepted. 2) What qualitative factors should be considered in this special order decision?

Special order decisions: