Exam 13: Relevant Information for Special Decisions

King Company has two divisions whose most recent financial statements are shown below: Required: 1) Compute the impact on profit if the Residential Division is eliminated. 2) Do you recommend that King eliminate the Residential Division?

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

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.

Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: Contract X Contract Z Contract Revenue \ 200,000 \ 260,000 Materials 10,000 10,000 Labor 88,000 120,000 Depreciation on Equipment 8,000 10,000 Cost Incurred for Consulting Advice 1,500 1,500 Allocated Portion of Overhead 5,000 3,000 The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another?

Select the incorrect statement concerning opportunity costs.

Sunk costs:

How would you determine whether a particular cost is unit-level or batch-level? Use as an example: product inspection costs.

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 another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a facility-level cost?

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

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

Select the incorrect statement regarding sunk costs.

Pilot Motors Corporation is an automobile manufacturer. The company produces its own motors, tires, and other automobile parts. Pilot has the opportunity to purchase tires from another manufacturer instead of producing them in their own facility. This type of decision is typically known as a(n):

Time Unlimited makes grandfather clock kits that it sells to hobbyists who then assemble and finish the clocks. The company has the capacity to make 5,000 of the kits, and its current volume is 3,000 kits. The costs of a clock kit are: $300 for unit-level materials, $200 for unit-level labor, and $150 for an allocation of facility-level overhead. The normal selling price is $950. The Clock Builder has received a special order for 600 clock kits at a price of $600 each. Required: Should The Clock Builder accept the special order? Support your answer with appropriate computations.

Harris Company currently produces a component that it uses in making some of its products. Harris has calculated the following costs for making the part: Unit-level costs Materials \ 20 Labor 28 Overhead 2 Allocated facility-level costs 10 Total cost \ 60 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.

Which of the following statements is incorrect?

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?

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.

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

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: What is the differential revenue for this decision?

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