60189531 Chapter14 Decision Making Relevant Costs and Benefits

MULTIPLE CHOICE QUESTIONS

1. Manage Manageria riall accoun accountan tants: ts: A. rarely become become involved involved in an organizati organization's on's decision decision-maki -making ng activities. activities. B. make decision decisionss that focus focus solely solely on an organiz organization ation's 's accountin accounting g matters. matters. C. collect collect data data and rovide rovide inform information ation so so that decis decisions ions can can be made. made. !. often serve serve as a cross-funct cross-functional ional team team member" member" making making a #ide range of decision decisions. s. $. becom becomee involv involved ed in activi activitie tiess %C% and and %!.% %!.% Ans#er: $ &: 1 (ye: (ye: )C *. +actors +actors in a decision decision roblem roblem that that cannot be e,ress e,ressed ed in numerical numerical terms terms are: A. ual ualit itat ativ ivee in natu nature. re. B. uan uanti tita tati tive ve in in natu nature re.. C. red redic icti tive ve in natu nature re.. !. sens sensit itiv ivee in natu nature re.. $. unce uncert rtai ain n in natu nature re.. Ans#er: A &: * (ye: (ye: )C . At #hich ste or stes in the decision-making decision-making rocess do ualitative considerations generally have the greatest imact/ A. 0ecifyin 0ecifying g the criterio criterion n and identify identifying ing the altern alternative atives. s. B. !evelo !eveloin ing g a decisi decision on mo model del.. C. Coll Collec ecti ting ng the the dat data. a. !. Maki Making ng a deci decisi sion on.. $. dent dentify ifying ing the the alte alterna rnativ tives. es. Ans#er: ! &: * (ye: (ye: )C 2. An accounting accounting information information system system should be designed designed to rovide information that is useful. (o be useful the information must be: A. ualitati ualitative ve rather rather than uantita uantitative. tive. B. uniue uniue and and unavail unavailable able through through other other sources sources.. C. historica historicall in nature nature and and not not urort urort to redict redict the the future. future. !. margi marginal nal bet#e bet#een en t#o alte alterna rnativ tives. es. $. releva relevant" nt" accura accurate" te" and timely timely.. Ans#er: $ &: * (ye: (ye: )C

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3. (o be useful in decision decision making" information should should ossess ossess #hich of the follo#ing characteristics/ )elevance Accuracy (imeliness A. 4es 5o 4es B. 4es 4es 5o C. 4es 4es 4es !. 5o 4es 4es $. 5o 5o 4es Ans#er: C &: * (ye: (ye: )C 6. A trade-off trade-off in a decision decision situation situation sometime sometimess occurs bet#een bet#een information information:: A. accu accura racy cy and and relev relevan ance ce.. B. rele releva vanc ncee and uni uniue uene ness ss.. C. accu accura racy cy and and time timeli line ness ss.. !. sensit sensitiv ivity ity and accura accuracy cy.. $. sens sensit itiv ivity ity and and rele releva vanc nce. e. Ans#er: C &: * (ye: (ye: )C 7. 8hich 8hich of the follo# follo#ing ing best best defines defines the concet concet of a relevant relevant cost/ cost/ A. A ast ast cost cost that that is the the same among among alterna alternative tives. s. B. A ast cost that differs differs among among alternati alternatives. ves. C. A future future cost cost that that is the same same among among alterna alternatives tives.. !. A future future cost cost that that differ differss among among alterna alternatives tives.. $. A cos costt that that is based based on on ast ast e,eri e,erienc ence. e. Ans#er: ! &:  (ye: (ye: )C 9. Consider Consider the follo#i follo#ing ng costs costs and decision-m decision-making aking situati situations: ons: .(he cost of e,isting inventory" inventory" in a kee vs. disosal decision. .(he cost of secial electrical #iring" in an euiment acuisition decision. decision. .(he salary of a suervisor #ho #ill be transferred else#here in the organization" in a deartment-closure decision. 8hich of the above costs is are; relevant to the decision situation noted/ A.  only. B.  only. C.  only. !.  and . $.  an and . Ans#er: B &:  (ye: (ye: 5

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<. (he follo#in follo#ing g costs are are relevant relevant to the decisi decision on situation situation cited cited e,cet: e,cet: A. the cost of hiring a full-time full-time staff attorney attorney"" in a decision to establish an in-house legal deartment or retain the services of a rominent la# firm. B. the remodeli remodeling ng cost of of e,isting e,isting office office sace" sace" in a firm's firm's decision decision to stay at its current current location or move to a ne# building. C. the long-ter long-term m salary costs costs demanded demanded by =oe =oe (orrez (orrez a suerst suerstar; ar; and )i Moran Moran an average layer; in baseball contract negotiations" in a decision that determines the amounts by #hich ticket rices must be raised. !. the cost to enhance an airline's 8eb 8eb site" in a decision to e,and e,isting service service to either either 0alt &ake City or >hoeni,. $. the commiss commissions ions that that could be be earned by a saleser saleserson" son" in a decisio decision n that involv involves es saleserson comensation methods i.e." commissions or flat monthly salaries;. Ans#er: ! &:  (ye: (ye: 5 1?. 8hich 8hich of the follo#in follo#ing g costs can can be ignored ignored #hen #hen making making a decision/ decision/ A. o ort rtun unit ity y cos costs ts.. B. !iff !iffer eren enti tial al cost costs. s. C. 0unk co costs. !. )ele )eleva vant nt cos costs ts.. $. All All fut futur uree cos costs ts.. Ans#er: C &: 2 (ye: (ye: )C 11. 11. (he book book value of euim euiment ent currently currently o#ned o#ned by a firm firm is an e,amle e,amle of an;: A. futu future re co cost. st. B. diff differ eren enti tial al cost cost.. C. com comar arat ativ ivee cost. cost. !. oo oort rtun unit ity y cost cost.. $. sunk cost. Ans#er: $ &: 2 (ye: (ye: )C 1*. (he cost cost of invento inventory ry currently currently o#ned o#ned by a firm is an an e,amle e,amle of an;: an;: A. oo oort rtun unit ity y cost cost.. B. sunk cost. C. rele releva vant nt cost cost.. !. diff differ eren enti tial al cost cost.. $. futu future re cost cost.. Ans#er: B &: 2 (ye: (ye: )C

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1. (he City of Miami is about to relace an old fire truck #ith a ne# vehicle in an effort to save maintenance and other oerating costs. 8hich of the follo#ing items" all related to the transaction" #ould not be considered in the decision/ A. >urchase rice of the ne# vehicle. B. >urchase rice of the old vehicle. C. 0avings in oerating costs as a result of the ne# vehicle. !. >roceeds from disosal of the old vehicle. $. +uture dereciation on the ne# vehicle. Ans#er: B &: 2 (ye: 5 12. $legant" nc." has @1*3"??? of inventory that suffered minor smoke damage from a fire in the #arehouse. (he comany can sell the goods %as is% for @23"??? alternatively" the goods can be cleaned and shied to the firm's outlet center at a cost of @*"???. (here the goods could be sold for @9?"???. 8hat alternative is more desirable and #hat is the relevant cost for that alternative/ A. 0ell %as is"% @1*3"???. B. Clean and shi to outlet center" @*"???. C. Clean and shi to outlet center" @1?"???. !. Clean and shi to outlet center" @129"???. $. 5either alternative is desirable" as both roduce a loss for the firm. Ans#er: B &: 2 (ye: A" 5 13. n early =uly" Mike ottfried urchased a @7? ticket to the !ecember 13 game of the Chicago (itans. (he (itans belong to the Mid#est +ootball &eague and lay their games outdoors on the shore of &ake Michigan.; >arking for the game #as e,ected to cost aro,imately @**" and ottfried #ould robably send another @13 for a souvenir rogram and food. t is no# !ecember 12. (he (itans #ere having a miserable season and the temerature #as e,ected to eak at 3 degrees on game day. Mike therefore decided to ski the game and took his #ife to the movies" #ith tickets and dinner costing @3?. (he sunk cost associated #ith this decision situation is: A. @*?. B. @3?. C. @7?. !. @1?7. $. some other amount. Ans#er: C &: 2 (ye: A

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16. n early =uly" =im &oez urchased a @7? ticket to the !ecember 13 game of the Chicago (itans. (he (itans belong to the Mid#est +ootball &eague and lay their games outdoors on the shore of &ake Michigan.; >arking for the game #as e,ected to cost aro,imately @**" and &oez #ould robably send another @13 for a souvenir rogram and food. t is no# !ecember 12. (he (itans #ere having a miserable season and the temerature #as e,ected to eak at 3 degrees on game day. =im therefore decided to ski the game and took his #ife to the movies" #ith tickets and dinner costing @3?. (he amount of sunk cost that should influence =ims decision to take his #ife to the movies and dinner is: A. @?. B. @*?. C. @3?. !. @7?. $. some other amount. Ans#er: A &: 2 (ye: A" 5 17. An A. B. C. !. $.

oortunity cost may be described as: a forgone benefit. an historical cost. a secialized tye of variable cost. a secialized tye of fi,ed cost. a secialized tye of semivariable cost.

Ans#er: A &: 2 (ye: )C 19. (he term %oortunity cost% is best defined as: A. the amount of money aid for an item. B. the amount of money aid for an item" taking inflation into account. C. the amount of money aid for an item" taking ossible discounts into account. !. the benefit associated #ith a reDected alternative #hen making a choice. $. an irrelevant decision factor. Ans#er: ! &: 2 (ye: )C 1<. A factory that makes a art has significant idle caacity. (he factory's oortunity cost of making this art is eual to: A. the variable manufacturing cost er unit. B. the fi,ed manufacturing cost er unit. C. the semivariable cost er unit. !. the total manufacturing cost er unit. $. zero. Ans#er: $ &: 2 (ye: 5

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*?. 0usan is contemlating a Dob offer #ith an advertising agency #here she #ill make @32"??? in her first year of emloyment. Alternatively" 0usan can begin to #ork in her father's business #here she #ill earn an annual salary of @9"???. f 0usan decides to #ork #ith her father" the oortunity cost #ould be: A. @?. B. @9"???. C. @32"???. !. @<*"???. $. irrelevant in deciding #hich Dob offer to accet. Ans#er: C &: 2 (ye: A *1. 8hich of the follo#ing costs should be used #hen choosing bet#een t#o decision alternatives/ )elevant 0unk ortunity Cost Cost Cost A. 5o 4es 5o B. 5o 4es 4es C. 4es 5o 5o !. 4es 5o 4es $. 4es 4es 4es Ans#er: ! &: 2 (ye: )C **.

(riumh" nc." is studying #hether to e,and oerations by adding a ne# roduct line. 8hich of the follo#ing choices correctly denotes the costs that should be considered in this decision/ ortunity Cost 0unk Cost A. 4es 4es B. 4es 0ometimes C. 4es 5o !. 5o 4es $. 5o 5o Ans#er: C &: 2 (ye: )C

*. A secial order generally should be acceted if: A. its revenue e,ceeds allocated fi,ed costs" regardless of the variable costs associated #ith the order. B. e,cess caacity e,ists and the revenue e,ceeds all variable costs associated #ith the order. C. e,cess caacity e,ists and the revenue e,ceeds allocated fi,ed costs. !. the revenue e,ceeds total costs" regardless of available caacity. $. the revenue e,ceeds variable costs" regardless of available caacity. Ans#er: B &: 3 (ye: )C

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*2. (#o months ago" Eictory urchased 2"3?? ounds of Fydrol" aying @13"??. (he market for this roduct has been very strong since the acuisition" #ith the market rice Duming to @2.?3 er ound. Eictory can buy or sell Fydrol at this rice.; (he comany recently received a secial-order inuiry" one that #ould reuire the use of 2"*?? ounds of Fydrol. 8hich of the follo#ing is are; relevant in deciding #hether to accet the secial order/ A. (he ??-ound remaining inventory of Fydrol. B. (he @2.?3 market rice. C. (he @.2? urchase rice. !. 2"3?? ounds of Fydrol. $. More than one of the above factors are relevant. Ans#er: B &: 3 (ye: A" 5 *3. +lo#er Comany" #hich is oerating at caacity" desires to add a ne# service to its raidly e,anding business. (he service should be added as long as service revenues e,ceed: A. variable costs. B. fi,ed costs. C. the sum of variable costs and fi,ed costs. !. the sum of variable costs and any related oortunity costs. $. the sum of variable costs" fi,ed costs" and any related oortunity costs. Ans#er: ! &: 3 (ye: 5 *6. Ba,ter has been aroached about roviding a ne# service to its clients. (he comany #ill bill clients @1*? er hour the related hourly variable and fi,ed oerating costs #ill be @63 and @13" resectively. f all emloyees are currently #orking at full caacity on other client matters" the er-hour oortunity cost of being unable to rovide this ne# service is: A. @?. B. @2?. C. @33. !. @9?. $. @1*?. Ans#er: C &: 2" 3 (ye: A

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*7. 0nider" nc." #hich has e,cess caacity" received a secial order for 2"??? units at a rice of @13 er unit. Currently" roduction and sales are budgeted for 1?"??? units #ithout considering the secial order. Budget information for the current year follo#s. 0ales &ess: Cost of goods sold ross margin

@1
Cost of goods sold includes @?"??? of fi,ed manufacturing cost. f the secial order is acceted" the comany's income #ill: A. increase by @*"???. B. decrease by @*"???. C. increase by @12"???. !. decrease by @12"???. $. change by some other amount. Ans#er: C &: 3 (ye: A *9. 0ound" nc." reorted the follo#ing results from the sale of *2"??? units of (-32: 0ales Eariable manufacturing costs +i,ed manufacturing costs Eariable selling costs +i,ed administrative costs

@3*9"??? *99"??? 1*?"??? 3*"9?? 3"*??

)hythm Comany has offered to urchase "??? (-32s at @16 each. 0ound has available caacity" and the resident is in favor of acceting the order. 0he feels it #ould be rofitable because no variable selling costs #ill be incurred. (he lant manager is oosed because the %full cost% of roduction is @17. 8hich of the follo#ing correctly notes the change in income if the secial order is acceted/ A. @"??? decrease. B. @"??? increase. C. @1*"??? decrease. !. @1*"??? increase. $. 5one of the above. Ans#er: ! &: 3 (ye: A

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*<. Com(ronics" a manufacturer of comuter eriherals" has e,cess caacity. (he comany's Gtah lant has the follo#ing er-unit cost structure for item no. 9<: Eariable manufacturing +i,ed manufacturing Eariable selling +i,ed selling (raceable fi,ed administrative Allocated administrative

@2? 13 9 11 2 *

(he traceable fi,ed administrative cost #as incurred at the Gtah lant in contrast" the allocated administrative cost reresents a %fair share% of Com(ronics' cororate overhead. Gtah has been resented #ith a secial order of 3"??? units of item no. 9< on #hich no selling cost #ill be incurred. (he roer relevant cost in deciding #hether to accet this secial order #ould be: A. @2?. B. @3<. C. @61. !. @9?. $. some other amount. Ans#er: A &: 3 (ye: A ?. (he term %outsourcing% is most closely associated #ith: A. secial-order decisions. B. make-or-buy decisions. C. euiment relacement decisions. !. decisions to rocess Doint roducts beyond the slit-off oint. $. decisions that involve limited resources. Ans#er: B &: 3 (ye: )C 1. (orrey >ines is studying #hether to outsource its Fuman )esources FH); activities. 0alaried rofessionals #ho earn @ines can secure needed FH) services locally for @21?"???" ho# much #ould the comany benefit by outsourcing/ A. @1?"???. B. @3"???. C. @1?"???. !. @133"???. $. 5othing" as it #ould be cheaer to kee the deartment oen. Ans#er: A &: 3 (ye: A

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*. !onnelly" a division of !akota $nterrises" currently makes 1??"??? units of a roduct that has created a number of manufacturing roblems. !onnelly's costs follo#. Manufacturing costs: Eariable +i,ed Allocated cororate administrative cost

@2*?"??? 13?"??? 7?"???

f !onnelly #ere to discontinue roduction" fi,ed manufacturing costs #ould be reduced by 9?I. (he relevant cost of deciding #hether the division should urchase the roduct from an outside sulier is: A. @2*?"???. B. @2er-unit fi,ed cost amounts are valid only for make-or-buy decisions. C. >er-unit fi,ed costs can be misleading because such amounts aear to behave as variable costs #hen" in actuality" the amounts are related to fi,ed e,enditures. !. 0unk costs can be misleading in make-or-buy decisions because these amounts aear to be relevant differential costs. $. ortunity costs should be ignored #hen evaluating decision alternatives. Ans#er: C &: 3 (ye: )C

15!


3. An architecture firm currently offers services that aeal to both individuals and commercial clients. f the firm decides to discontinue services to individuals because of ongoing losses" #hich of the follo#ing costs could the comany likely avoid/ A. Allocated cororate overhead. B. Building dereciation. C. nsurance. !. Eariable oerating costs. $. Monthly installment ayments on general-urose" comuter drafting euiment. Ans#er: ! &: 3 (ye: 5 6. ccidental is contemlating droing a roduct because of ongoing losses. Costs that #ould be relevant in this situation #ould include variable manufacturing costs as #ell as: A. factory dereciation. B. avoidable fi,ed costs. C. unavoidable fi,ed costs. !. allocated cororate administrative costs. $. general cororate advertising. Ans#er: B &: 3 (ye: )C 7. Coastal Airlines has a significant resence at the 0an =ose nternational Airort and therefore oerates the $merald Club" #hich is across from gate 6 in terminal 1. (he $merald Club rovides food and business services e.g." data orts; for the comany's freuent flyers. Consider the follo#ing selected costs of Club oeration: 1. *. . 2. 3.

)ecetionist and suervisory salaries Catering (erminal dereciation based on suare footage; Airort fees comuted as a ercentage of club revenue; Allocated Coastal administrative overhead

Management is e,loring #hether to close the club and e,and the seating area for gate 6. 8hich of the receding e,enses #ould the airline classify as unavoidable/ A. . B. 2. C. 3. !. " 3. $. (he correct ans#er is not listed. Ans#er: ! &: 3 (ye: 5

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9. (he 0hoe !eartment at the Baton )ouge !eartment 0tore is being considered for closure. (he follo#ing information relates to shoe activity: 0ales revenue Eariable costs: Cost of goods sold 0ales commissions +i,ed oerating costs

@3?"??? *9?"??? ?"???
f 7?I of the fi,ed oerating costs are avoidable" should the 0hoe !eartment be closed/ A. 4es" Baton )ouge #ould be better off by @*"???. B. 4es" Baton )ouge #ould be better off by @3?"???. C. 5o" Baton )ouge #ould be #orse off by @1"???. !. 5o" Baton )ouge #ould be #orse off by @2?"???. $. 5one of the above. Ans#er: A &: 3 (ye: A <. 0omerset Cororation is comosed of five divisions" and each division is allocated a share of 0omerset overhead to make divisional managers a#are of the cost of running the cororate headuarters. (he follo#ing information relates to the Metro !ivision: 0ales Eariable oerating costs (raceable fi,ed oerating costs Allocated cororate overhead

@7"3??"??? 3"1??"??? 1"
f the Metro !ivision is closed" 1??I of the traceable fi,ed oerating costs can be eliminated. 8hat #ill be the imact on 0omerset's overall rofitability if the Metro !ivision is closed/ A. !ecrease by @*??"???. B. !ecrease by @3??"???. C. !ecrease by @*"1??"???. !. !ecrease by @*"2??"???. $. 5one of the above. Ans#er: B &: 3 (ye: A 2?. rtega nteriors rovides design services to residential and commercial clients. (he residential services roduce a contribution margin of @23?"??? and have traceable fi,ed oerating costs of @29?"???. Management is studying #hether to dro the residential oeration. f closed" the fi,ed oerating costs #ill fall by @7?"??? and rtega's net income #ill: A. increase by @?"???. B. increase by @9?"???. C. increase by @2?"???. !. decrease by @9?"???. $. decrease by @2?"???. Ans#er: ! &: 3 (ye: A

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Gse the follo#ing to ans#er uestions 21-2*: Fi(ech manufactures t#o roducts: )egular and 0uer. (he results of oerations for *?,1 follo#.

Gnits 0ales &ess: Cost of goods sold ross margin &ess: 0elling e,enses erating income

)egular 1?"??? @*2?"??? 19?"??? @ 6?"??? 6?"??? @ ?

0uer "7?? @72?"??? 291"??? @*3<"??? 12"??? @1*3"???

(otal 1"7?? @<9?"??? 661"??? @1<"??? 1<2"??? @1*3"???

+i,ed manufacturing costs included in cost of goods sold amount to @ er unit for )egular and @*? er unit for 0uer. Eariable selling e,enses are @2 er unit for )egular and @*? er unit for 0uer remaining selling amounts are fi,ed. 21. Fi(ech #ants to dro the )egular roduct line. f the line is droed" comany-#ide fi,ed manufacturing costs #ould fall by 1?I because there is no alternative use of the facilities. 8hat #ould be the imact on oerating income if )egular is discontinued/ A. @?. B. @1?"2?? increase. C. @*?"??? increase. !. @<"6?? decrease. $. 5one of the above. Ans#er: ! &: 3 (ye: A 2*. !isregard the information in the revious uestion. f Fi(ech eliminates )egular and uses the available caacity to roduce and sell an additional 1"3?? units of 0uer" #hat #ould be the imact on oerating income/ A. @*9"??? increase B. @23"??? increase C. @33"??? increase !. @93"??? increase $. 5one of the above. Ans#er: C &: 3 (ye: A 2. 8hen deciding #hether to sell a roduct at the slit-off oint or rocess it further" Doint costs are not usually relevant because: A. such amounts do not hel to increase sales revenue. B. such amounts only slightly increase a comany's sales margin. C. such amounts are sunk and do not change #ith the decision. !. the sales revenue does not decrease to the e,tent that it should" if comared #ith searable rocessing. $. such amounts reflect oortunity costs. Ans#er: C &: 6 (ye: )C

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22. >roduct costs incurred after the slit-off oint in a Doint rocessing environment are termed: A. searable rocessing costs. B. Doint roduct costs. C. non-relevant costs. !. scra costs. $. soilage costs. Ans#er: A &: 6 (ye: )C 23. +oster Comany is considering #hether to sell )eto, at the slit-off oint or subDect it to further rocessing and roduce a more refined roduct kno#n as )eto,-+. Consider the follo#ing items: .(he selling rice of )eto,-+ .(he Doint rocessing cost of )eto,. .(he searable cost of roducing )eto,-+. 8hich of the above items is are; relevant to +oster's decision to rocess )eto, into )eto,-+/ A.  only. B.  only. C.  only. !.  and . $.  and . Ans#er: $ &: 6 (ye: )C 26. &ido manufactures A and B from a Doint rocess cost J @9?"???;. +ive thousand ounds of A can be sold at slit-off for @*? er ound or rocessed further at an additional cost of @*?"??? and then sold for @*3. (en thousand ounds of B can be sold at slit-off for @13 er ound or rocessed further at an additional cost of @*?"??? and later sold for @16. f &ido decides to rocess B beyond the slit-off oint" oerating income #ill: A. increase by @1?"???. B. increase by @*?"???. C. decrease by @1?"???. !. decrease by @*?"???. $. decrease by @39"???. Ans#er: C &: 6 (ye: A

163


27. ndia Cororation has @*??"??? of Doint rocessing costs and is studying #hether to rocess = and K beyond the slit-off oint. nformation about = and K follo#s.

(ons roduced 0earable variable rocessing costs beyond slit-off 0elling rice er ton at slit-off 0elling rice er ton after additional rocessing

>roduct = *3"??? @62"??? 13 *1

>roduct K 13"??? @1??"??? 3* 39

f ndia desires to ma,imize total comany income" #hat should the firm do #ith regard to >roducts = and K/ >roduct = >roduct K A. 0ell at slit-off 0ell at slit-off B. 0ell at slit-off >rocess beyond slit-off C. >rocess beyond slit-off 0ell at slit-off !. >rocess beyond slit-off >rocess beyond slit-off $. (here is not enough information to Dudge. Ans#er: C &: 6 (ye: A 29. A comany that is oerating at full caacity should emhasize those roducts and services that have the: A. lo#est total er-unit costs. B. highest contribution margin er unit. C. highest contribution margin er unit of scarce resource. !. highest oerating income. $. highest sales volume. Ans#er: C &: 6 (ye: )C 2<. A firm that decides to emhasize those goods #ith the highest contribution margin er unit may have made an incorrect decision #hen the comany: A. is highly automated. B. has e,cess caacity. C. has caacity constraints in the form of limited resources. !. has a high fi,ed-cost structure. $. has a high level of sunk costs. Ans#er: C &: 6 (ye: 5

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3?. 8right $nterrises" #hich roduces various goods" has limited rocessing hours at its manufacturing lant. (he follo#ing data aly to roduct no. 6?7: 0ales rice er unit: @<.6? Eariable cost er unit: @6.*? >rocess time er unit: 2 hours Management is no# studying #hether to devote the firm's limited hours to roduct no. 6?7 or to other roducts. 8hat key dollar amount should management focus on #hen determining no. 6?7's %value% to the firm and deciding the best course of action to follo#/ A. @?.93. B. @*.2?. C. @.2?. !. @6.*?. $. @<.6?. Ans#er: A &: 6 (ye: A" 5 31. 0mith Manufacturing has *7"??? labor hours available for roducing L and 4. Consider the follo#ing information:

)euired labor time er unit hours; Ma,imum demand units; Contribution margin er unit Contribution margin er labor hour

>roduct L * 6"??? @3.?? @*.3?

>roduct 4  9"??? @6.?? @*.??

f 0mith follo#s roer managerial accounting ractices" #hich of the follo#ing roduction schedules should the comany set/ >roduct L >roduct 4 A. ? units 9"??? units B. 1"3?? units 9"??? units C. 6"??? units ? units !. 6"??? units 3"??? units $. 6"??? units 9"??? units Ans#er: ! &: 6 (ye: A

165


3*. Bush Manufacturing has 1"??? labor hours available for roducing M and 5. Consider the follo#ing information:

)euired labor time er unit hours; Ma,imum demand units; Contribution margin er unit Contribution margin er labor hour

>roduct M * 6"3?? @3.?? @*.3?

>roduct 5  9"??? @3.7? @1.
f Bush follo#s roer managerial accounting ractices in terms of setting a roduction schedule" ho# much contribution margin #ould the comany e,ect to generate/ A. @1"23?. B. @6"1??. C. @66"7??. !. @79"1??. $. 5one of the above. Ans#er: C &: 6 (ye: A Gse the follo#ing to ans#er uestions 3-32: =ohnson Comany makes t#o roducts: Caret Kleen and +loor !eodorizer. erating information from the revious year follo#s.

Gnits roduced and sold Machine hours used 0ales rice er unit Eariable cost er unit

Caret Kleen 3"??? 3"??? @7 @2

+loor !eodorizer 2"??? *"??? @1? @9

+i,ed costs of @*?"??? er year are resently allocated eually bet#een both roducts. f the roduct mi, #ere to change" total fi,ed costs #ould remain the same. 3. (he contribution margin er machine hour for +loor !eodorizer is: A. @?.*3. B. @*.??. C. @2.??. !. @3.??. $. @*?.??. Ans#er: C &: 6 (ye: A

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166

32. Assuming there is unlimited demand for both roducts and =ohnson has 1?"??? machine hours available" ho# many units of each roduct should be roduced and sold/ Caret Kleen +loor !eodorizer A. ? units ? units B. ? units *?"??? units C. 3"??? units 1?"??? units !. 9"??? units 2"??? units $. 1?"??? units ? units Ans#er: B &: 6 (ye: A" 5 33. A techniue that is useful in e,loring #hat #ould haen if a key decision rediction or assumtion roved #rong is termed: A. sensitivity analysis. B. uncertainty analysis. C. roDect analysis. !. linear rogramming. $. the theory of constraints. Ans#er: A &: 6 (ye: )C 36. 8hich of the follo#ing characteristics #ould best e,lain the use of robabilities and e,ected values in a decision analysis/ A. &imited resources. B. Gncertainty. C. nflation. !. Multile roducts and services. $. >roduction bottlenecks. Ans#er: B &: 6 (ye: )C 37. Consider the follo#ing statements about relevant costing and activity-based costing: .(he concet of relevant costs and benefits cannot be used in conDunction #ith an activity based costing system. .(he concet of relevant costs and benefits must be modified for use #ith an activity-based costing system. .enerally seaking" the decision maker can better associate relevant costs #ith the activities that drive them under an activity-based costing system than under a conventional roduct-costing system. 8hich of the above statements is are; true/ A.  only. B.  only. C.  only. !.  and . $.  and . Ans#er: C &: 7 (ye: )C

167


39. &inear rogramming #ould be used by decision makers #hen there are: A. limited resources for labor. B. scarce resources for machine hours. C. scarce resources for both labor and machine hours. !. multile scarce resources. $. limited resources for material. Ans#er: ! &: 9 (ye: )C 3<. A constraint function in a linear-rogramming roblem might focus on: A. sales dollars. B. labor hours. C. variable costs. !. fi,ed costs. $. ualitative factors. Ans#er: B &: 9 (ye: 5 6?. 8hen using a grahical solution to a linear rogramming roblem" the otimal solution #ill lie in an area commonly kno#n as the: A. region of ma,imization. B. feasible region. C. obDective region. !. constraint region. $. curvilinear region. Ans#er: B &: 9 (ye: )C Gse the follo#ing to ans#er uestions 61-6*: >rudential Cororation manufactures t#o roducts: L and 4. (he comany has 2"??? hours of machine time available and can sell no more than 9?? units of roduct L. ther ertinent data follo#.

0elling rice Eariable cost +i,ed cost Machine time er unit

>roduct L @9.?? .?? .3? * hours

>roduct 4 @1<.?? 3.?? 6.*3  hours

61. 8hich of the follo#ing is >rudential's obDective function/ A. Ma,imize  J *L N 4. B. Ma,imize  J 9L N 1<4. C. Ma,imize  J 3L N 124. !. Ma,imize  J 1.3?L N 7.734. $. Minimize  J 6.3?L N 11.*34. Ans#er: C &: 9 (ye: A

Chapter 14

16

6*. 8hich of the follo#ing is a constraint function of >rudential/ A. Ma,imize  J 3L N 124. B. Minimize  J 6.3?L N 11.*34. C. L ≥ 9??. !. *L ≤ 2"??? 4 ≤ 2"???. $. *L N 4 ≤ 2"???. Ans#er: $ &: 9 (ye: A

EXERCISES Relevant Decision Factors

6. (he follo#ing costs relate to a variety of decision settings:

1. *. . 2.

Cost Allocated cororate overhead Cost of an old car !irect materials 0alary of marketing manager

3. Fome theater installation 6. Gnavoidable fi,ed overhead 7. )esearch e,enditures incurred last year" related to ne# roduct 9. @2 million advertising rogram <.

Manufactured cost of e,isting inventory

!ecision Closing a money- losing deartment Eehicle relacement Make or buy a roduct >roDect discontinuance manager to be transferred else#here in the firm >urchase of a ne# home >lant closure >roduct introduction to marketlace 8hether to romote roduct A or B #ith the @2 million rogram 8hether to discard the goods or sell them to a third-#orld country

)euired: Consider each of the nine costs listed and determine #hether it is relevant or irrelevant to the decision cited. f the cost is irrelevant" briefly e,lain #hy. &: " 2" 3 (ye: 5 Ans#er: 1. rrelevantO(he cost #ill be incurred #hether the deartment continues to oerate or is closed. *. rrelevantO(he cost is sunk. . )elevant 2. rrelevantO(he cost #ill be incurred #hether or not the roDect is discontinued. 3. )elevant" although this is a highly otional item. 6. rrelevantO(he cost #ill be incurred #hether or not the lant is closed. 7. rrelevantO(he cost is sunk. 9. rrelevantO(he cost is the same regardless of #hich roduct is selected. <. rrelevantO(he cost is sunk.

16!


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170

Relevant Decision Factors

62. Clancy Ean &ines is considering the acuisition of t#o ne# trucks. Because of imroved mileage" these vehicles are e,ected to have a lo#er oerating cost er mile than the trucks the comany lans to relace. Management is studying #hether the firm #ould be better-off keeing the older vehicles or going ahead #ith the relacement" and has identified the follo#ing decision factors to evaluate: 1. *. . 2. 3. 6.

Cost and book value of the old trucks Moving revenues" #hich are not e,ected to change #ith the acuisition erating costs of the ne# and old vehicles 5e# truck urchase rice and related dereciation charges >roceeds from sale of the old vehicles (he 9I return on alternative investments that Clancy #ill forego by tying u cash in the ne# trucks 7. !rivers' #ages and fringe benefits )euired: Classify the seven decision factors listed into the follo#ing categories note: factors may be used more than once;: A. )elevant costs. B. ortunity costs. C. 0unk costs. !. +actors to be considered in the decision. &: " 2" 3 (ye: 5 Ans#er: A. " 2" 6 B. 6 C. 1 !. " 2" 3" 6

171


Relevant Costs

63. Attleboro Comany recently discontinued the manufacture of roduct =13. (he standard costs for this roduct #ere: !irect material !irect labor Eariable overhead +i,ed overhead (otal

@ 3? *? 12 3 @11<

(here are 9?? units of this roduct in finished-goods inventory. (he units are technologically obsolete" and the follo#ing alternatives are being considered: 1.!isose of as scra. (he roceeds from the sale #ill eual the cost of transortation to the disosal site. *.0ell to an e,orter for sale in a develoing country. (he sales rice to the e,orter #ould be @1* er unit. .)emanufacture the roducts to convert them into model =16" a model that normally sells for @*??. (he additional cost to convert the =13 units #ould be @23 the standard cost to manufacture =16 is @1*3. >resently" there is sufficient caacity to manufacture roduct =16 directly or to do the necessary conversion #ork on =13. )euired: A. !etermine the current carrying value of the =13 inventory. B. $valuate each alternative and determine the financial benefit to Attleboro if the alternative is ursued. &: 2" 3 (ye: A Ans#er: A. $nding inventory: 9?? units , @11< J @<3"*?? B.

1.

0cra: no financial benefit.

*.

0ell to e,orter: 9?? units , @1* J @<"6??

. ncremental revenue &ess: ncremental cost 5et benefit

Modify =13 @*?? 23 @133

Manufacture =16 @*?? 1*3 @ 73

(he conversion of =13 into =16 #ill yield a @133 benefit" more than roducing =16s directly. 5ote that the @11< cost of e,isting =13s is sunk.

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Relevant Costs

66. Mystic" nc." roduces a variety of roducts that carry the logos of teams in 0outhern +ootball &eague 0+&;. (he comany recently aid the league @93"??? for the rights to market a oular layer Dersey and immediately began roduction. (he follo#ing information is available: 5umber of Derseys manufactured: *3"??? Cost of Derseys manufactured: @6*3"??? Amount of manufacturing costs aid to-date: @21?"??? 5umber of Derseys sold to-date: ? $stimated future marketing costs: @?"??? Anticiated selling rice er Dersey: @2* (he 0+& is about to file a la#suit to sto Dersey sales and is demanding another @3?"??? from Mystic for the manufacturing rights. Conversations #ith Mystic's attorneys indicate that the league has a strong case and is likely to #in the suit. f this situation arises" Mystic #ill be unable to recover any amounts aid to the 0+&. )euired: Mystic's sales deartment anticiates very strong demand and a sellout of all Derseys manufactured. A. !etermine the overall rofitability of the Dersey roduct line if Mystic settles the disagreement #ith the 0+& and the anticiated sellout occurs. B. 0hould the comany ay the additional @3?"??? demanded by the league or should the Dersey rogram be droed/ 0ho# comutations to suort your ans#er. &: 2" 3 (ye: A Ans#er: A. (he Derseys roduce a @2?"??? loss for the comany: 0ales revenues *3"??? , @2* J @1"?3?"???; - manufacturing costs @6*3"???; - rights @93"??? N @3?"???; - romotion costs @?"???;. B. Mystic should ay the @3?"??? demanded by the league given that sunk costs in this situation total @71?"??? @93"??? N @6*3"???;. Although only @21?"??? of this latter amount has been aid to-date" the comany is liable for 1??I of the manufacturing cost incurred.; (hus" for a @3?"??? ayment" Mystic #ill generate @1"?3?"??? in revenue and incur currentHfuture costs of @9?"??? @?"??? N @3?"???;" for a net benefit of @67?"???. (his net benefit #ill contribute to#ard covering the reviously incurred sunk costs of @71?"???.

173


Special (Csto!" Or#er

67. Fo#ard )obinson builds custom homes in Cincinnati. )obinson #as aroached not too long ago by a client about a otential roDect" and he submitted a bid of @29"9??" derived as follo#s: &and Construction materials 0ubcontractor labor costs Construction overhead: *3I of direct costs Allocated cororate overhead (otal cost

@ 9?"??? 1??"??? 1*?"??? @??"??? 73"??? 3"??? @21?"???

)obinson adds an 19I rofit margin to all Dobs" comuted on the basis of total cost. n this client's case the rofit margin amounted to @7"9?? @21?"??? , 19I;" roducing a bid rice of @29"9??. Assume that 7?I of construction overhead is fi,ed. )euired: A. 0uose that business is resently very slo#" and the client countered #ith an offer on this home of @
@ 9?"??? 1??"??? 1*?"??? **"3?? @**"3??

B.0ince demand is very strong" )obinson should hold firm to the @29"9?? rice. (his #ay he can cover all of his costs and make his normal 19I rofit margin.

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Special Or#er$ Otsorcin%

69. Cornell Cororation manufactures faucets. 0everal #eeks ago" the firm received a secialorder inuiry from 4ale" nc. 4ale desires to market a faucet similar to Cornell's model no. 33 and has offered to urchase "??? units. (he follo#ing data are available: Cost data for Cornell's model no. 33 faucet: direct materials" @23 direct labor" @? * • hours at @13 er hour; and manufacturing overhead" @7? * hours at @3 er hour;. (he normal selling rice of model no. 33 is @19? ho#ever" 4ale has offered Cornell • only @113 because of the large uantity it is #illing to urchase. 4ale reuires a design modification that #ill allo# a @2 reduction in direct-material • cost. Cornell's roduction suervisor notes that the comany #ill incur @9"7?? in additional • set-u costs and #ill have to urchase a @"?? secial device to manufacture these units. (he device #ill be discarded once the secial order is comleted. (otal manufacturing overhead costs are alied to roduction at the rate of @3 er • labor hour. (his figure is based" in art" on budgeted yearly fi,ed overhead of @6*2"??? and lanned roduction activity of *2"??? labor hours. Cornell #ill allocate @3"??? of e,isting fi,ed administrative costs to the order as %P • art of the cost of doing business.% )euired: A. ne of Cornell's staff accountants #ants to reDect the secial order because %financially" it's a loser.% !o you agree #ith this conclusion if Cornell currently has e,cess caacity/ 0ho# calculations to suort your ans#er. B. f Cornell currently has no e,cess caacity" should the order be reDected from a financial ersective/ Briefly e,lain. C. Assume that Cornell currently has no e,cess caacity. 8ould outsourcing be an otion that Cornell could consider if management truly #anted to do business #ith 4ale/ Briefly discuss" citing several key considerations for Cornell in your ans#er. &: 2" 3 (ye: A" 5

175


Ans#er: A. 5o" the conclusion is incorrect because the order generates a net contribution of @66"??? for the firm. 5ote: (he fi,ed administrative cost is irrelevant to the decision. 0elling rice &ess: !irect materials @23 - @2; !irect labor Eariable manufacturing overhead * hours , @
@113 @21 ? 19

9< @ *6

@79"??? @9"7?? "??

1*"??? @66"???

Q+i,ed manufacturing overhead: @6*2"??? R *2"??? labor hours J @*6 er hour Eariable manufacturing overhead: @3 - @*6 J @< B. 4es" the order should be reDected. An environment of no e,cess caacity imlies a very strong marketlace. Cornell #ould be giving u sales at @19? er faucet" to be relaced #ith sales of @113 er unit and the need to incur additional set-u costs and the cost of a secial device. Comany rofitability #ould suffer. C. 4es" outsourcing is an otion. Cornell could have another manufacturer roduce the faucets for 4ale or erhas even for another customer. >rice" roduct uality" and sulier reliability #ould be imortant considerations in this decision.

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176

Otsorcin%

6<. 0t. =oseh Fosital has been hit #ith a number of comlaints about its food service from atients" emloyees" and cafeteria customers. (hese comlaints" couled #ith a very tight local labor market" have romted the organization to contact 5ation#ide nstitutional +ood 0ervice 5+0; about the ossibility of an outsourcing arrangement. (he hosital's business office has rovided the follo#ing information for food service for the year Dust ended: food costs" @9
A. B. C.

8hat is meant by the term %outsourcing%/ 0hould 0t. =oseh outsource its food-service oeration to 5+0/ 8hat factors" other than dollars" should 0t. =oseh consider before making the final decision/

&: 2" 3 (ye: A" 5 Ans#er: A. utsourcing is essentially a make-or-buy decision" that is" roducing a roduct or service in-house or urchasing it from an e,ternal sulier. B. (he hosital #ould be better off to outsource its food-service oeration" benefiting by @113"73? @<?"??? - @912"*3?;. 5ote: (he allocated overhead is not a relevant decision factor.

+ood cost &abor @93"??? @93"??? , 1?I; Eariable overhead @3"??? @3"??? , 1?I; Cafeteria food sales @9?"??? @9?"??? , 113I; 5+0 charges *3? beds , 7?I , 63 days , @12; 5et cost

0t. =oseh @9
5+0 --9"3?? "3?? <*"???; 9<2"*3? @912"*3?

@

C. +actors to consider #ould include imrovement in food uality" reliability of 5+0"

177


elimination of labor roblems" and data validity in future years.

Store Closre

7?. >aa +red's >izza store no. 16 has fallen on hard times and is about to be closed. (he follo#ing figures are available for the eriod Dust ended: 0ales Cost of sales Building occuancy costs: )ent Gtilities 0ulies used 8ages Miscellaneous Allocated cororate overhead

@*?3"??? 67"
All emloyees e,cet the store manager #ould be discharged. (he manager" #ho earns @*7"??? annually" #ould be transferred to store no. 1< in a neighboring suburb. Also" no. 16's furnishings and euiment are fully dereciated and #ould be removed and transorted to >aa +red's #arehouse at a cost of @*"9??. )euired: A. 8hat is store no. 16's reorted loss for the eriod Dust ended/ B. 0hould the store be closed/ 8hy/ C. 8ould >aa +red's likely lose all @*?3"??? of sales revenue if store no. 16 #ere closed/ $,lain. &: 2" 3 (ye: A" 5 Ans#er: A. 0ales &ess: Cost of sales )ent Gtilities 0ulies used 8ages Miscellaneous Allocated cororate overhead erating income loss;

@*?3"??? @67"
**1"
B.

5o" the store should continue in oeration. (#o of the costs included in the receding total are not relevant for the decision. >aa +red's #ill continue to incur the costs of the store manager @*7"???; and allocated cororate overhead @16"9??; regardless of the decision" resulting in %relevant oerating income% of @*6"aa +red's #ould avoid the @*"9?? cost associated #ith euiment removal.

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17

C.

17!

>robably not. f the store is closed" loyal customers may go to another location. (he firm #ill lose some sales" but the likelihood of losing the entire @*?3"??? revenue ool is lo#.


Evalation o& a Service Line

71. %t's close to a @2?"??? loser and #e ought to devote our efforts else#here"% noted Kara 8hitmore" after revie#ing financial reorts of her comany's attemt to offer a reduced-rice daycare service to emloyees. (he daycare's financial figures for the year Dust ended follo#. )evenues Eariable costs (raceable fi,ed costs Allocated cororate overhead

@1*?"??? 23"??? 9<"??? *2"???

f the daycare serviceHcenter is closed" 7?I of the traceable fi,ed cost #ill be avoided. n addition" the comany #ill incur one-time closure costs of @6"9??. )euired: A. 0ho# calculations that suort Kara 8hitmore's belief that the daycare center lost almost @2?"???. B. 0hould the center be closed/ 0ho# calculations to suort your ans#er. C. 8hat roblem might the comany e,erience if the center is closed/ &: 2" 3 (ye: A" 5 Ans#er: A. )evenues &ess: Eariable costs (raceable fi,ed costs Allocated cororate overhead erating income loss; B.

@1*?"??? @23"??? 9<"??? *2"???

(he comany #ould be better-off to continue the daycare service" as the cost of closure e,ceeds the benefit of on-going oeration: Contribution margin lost @1*?"??? - @23"???; 0avings in traceable fi,ed costs @9<"??? , 7?I; ne-time closure cost Benefit cost; of closure

C.

Chapter 14

139"??? @9"???;

@73"???; 6*"?? 6"9??; @1<"3??;

(he center is a fringe benefit for emloyees. 8ithout the service" the comany may lose some key eole and have trouble attracting ne# hires. $ven if the center roduces a small loss" 8hitmore should not be alarmed" as fringe benefits rarely have a zero rice tag.

10

Ma'e or )$ Capacit) Constraint

7*. +o#ler ndustries roduces t#o bearings: C13 and C1<. !ata regarding these t#o bearings follo#.

Machine hours reuired er unit 0tandard cost er unit: !irect material !irect labor Manufacturing overhead: EariableQ +i,edQQ (otal

C13 *.??

C1< *.3?

@ *.3? 3.??

@ 2.?? 2.??

.?? 2.?? @12.3?

*.3? 3.?? @13.3?

QAlied on the basis of direct labor hours QQAlied on the basis of machine hours (he comany reuires 9"??? units of C13 and 11"??? units of C1<. )ecently" management decided to devote additional machine time to other roduct lines" resulting in only 1"??? machine hours er year that can be dedicated to roduction of the bearings. An outside comany has offered to sell +o#ler the bearings at rices of @1.3? for C13 and @1.3? for C1<. )euired: A. Assume that +o#ler decided to roduce all C13s and urchase C1
11


Ans#er: A. Machine hours available &ess: Machine hours for C13 9"??? , *; Machine hours available for C1< Machine hours er unit of C1< Gnits to be manufactured

1"??? 16"??? 13"??? R *.3 6"???

Annual reuirement &ess: Gnits to be manufactured C1
C.

Chapter 14

11"??? 6"??? 3"???

!irect material !irect labor Eariable overhead (otal variable cost

C13 @ *.3? 3.?? .?? @1?.3?

C1< @ 2.?? 2.?? *.3? @1?.3?

>urchase rice uoted &ess: (otal variable cost 5et benefit er unit of manufacturing

@1.3? 1?.3? @ .??

@1.3? 1?.3? @ .??

C13 consumes * hours of machine time" thus roviding a net benefit of @1.3? er hour @ R *;. n contrast" C1< consumes *.3 hours of time and roduces a benefit of @1.*? er hour @ R *.3;. n the basis of this information" the comany should focus on C13.

12

Use o& E*cess Pro#ction Capacit)

7. &ee Comany has met all roduction reuirements for the current month and has an oortunity to manufacture additional units #ith its e,cess caacity. Gnit selling rices and unit costs for three roduct lines follo#.

0elling rice !irect material !irect labor at @*? er hour; Eariable overhead +i,ed overhead

>lain @2? 1* 1? 9 6

)egular @33 16 13 1* 7

0uer @63 ** *? 16 9

Eariable overhead is alied on the basis of direct labor dollars" #hereas fi,ed overhead is alied on the basis of machine hours. (here is sufficient demand for the additional manufacture of all roducts. )euired: A. f &ee Comany has e,cess machine caacity and can add more labor as needed i.e." neither machine caacity nor labor is a constraint;" #hich roduct is the most attractive to roduce/ B. f &ee Comany has e,cess machine caacity but a limited amount of labor time available" #hich roduct or roducts should be manufactured in the e,cess caacity/ &: 3" 6 (ye: A Ans#er: A. 0elling rice !irect material !irect labor Eariable overhead (otal variable cost Gnit contribution margin

>lain @2? @1* 1? 9 @? @1?

)egular @33 @16 13 1* @2 @1*

0uer @63 @** *? 16 @39 @ 7

8hen there is no limit on roduction caacity" )egular should be manufactured because it has the highest contribution margin er unit. B. Gnit contribution margin !irect labor hours reuired !&@ R @*?; Contribution margin er direct labor hour

>lain @1? R ?.3? @*?

)egular @1* R ?.73 @16

0uer @7 R 1.?? @7

8hen labor is in short suly" >lain should be manufactured because it has the highest contribution margin er direct labor hour.

13


+oint Costs, -llocation an# Decision Ma'in%

72. )iverside Comany manufactures  and F in a Doint rocess. (he Doint costs amount to @9?"??? er batch of finished goods. $ach batch yields *?"??? liters" of #hich 2?I are  and 6?I are F. (he selling rice of  is @9.73 er liter" and the selling rice of F is @13.?? er liter. )euired: A. f the Doint costs are allocated on the basis of the roducts' sales value at the slit-off oint" #hat amount of Doint cost #ill be charged to each roduct/ B. )iverside has discovered a ne# rocess by #hich  can be refined into >roduct " #hich has a sales rice of @1* er liter. (his additional rocessing #ould increase costs by @*.1? er liter. Assuming there are no other changes in costs" should the comany use the ne# rocess/ 0ho# calculations. &: 6 (ye: A Ans#er: A. $ach batch of *?"??? liters yields 9"??? liters of  2?I; and 1*"??? liters of F 6?I;. (hus" the sales values at slit-off are: " @7?"??? 9"??? , @9.73; and F" @19?"??? 1*"??? , @13.??;" for a total of @*3?"???. (he Doint cost allocation is: : @7?"??? R @*3?"???; , @9?"??? J @**"2?? F: @19?"??? R @*3?"???; , @9?"??? J @37"6?? B.

ncremental revenue er liter @1*.?? - @9.73; &ess: ncremental costs er liter ncremental rofit er liter Eolume in liters ncremental rofit

@ .*3 *.1? @ 1.13 , 9"??? @ <"*??

)iverside should go ahead #ith the ne# rocess as it is rofitable for the firm.

Chapter 14

14

+oint Costs, -llocation$ Focs on Decision Ma'in%

73. 0to#ers Cororation manufactures roducts =" K" and & in a Doint rocess. (he comany incurred @29?"??? of Doint rocessing costs during the eriod Dust ended and had the follo#ing data that related to roduction:

>roduct = K &

0ales Ealue at 0lit-off @2??"??? 3?"??? 93?"???

0ales Ealues and Additional Cost if >rocessed Beyond 0lit-off 0ales Ealue Additional Cost @33?"??? @1?"??? 32?"??? *2?"??? <73"??? 119"???

An analysis revealed that all costs incurred after the slit-off oint are variable and directly traceable to the individual roduct line. )euired: A. f 0to#ers allocates Doint costs on the basis of the roducts' sales values at the slit-off oint" #hat amount of Doint cost #ould be allocated to roduct =/ B. f roduction of = totaled 3?"??? gallons for the eriod" determine the relevant cost er gallon that should be used in decisions that e,lore #hether to sell at the slit-off oint or rocess further/ Briefly e,lain your ans#er. C. At the beginning of the current year" 0to#ers decided to rocess all three roducts beyond the slit-off oint. f the comany desired to ma,imize income" did it err in regards to its decision #ith roduct =/ >roduct K/ >roduct &/ By ho# much/ &: 6 (ye: A" 5 Ans#er: A. (he total sales value at slit-off amounts to @1"6??"??? @2??"??? N @3?"??? N @93?"???. 0ince = has *3I of the sales value @2??"??? R @1"6??"???;" 0to#ers #ould allocate @1*?"??? of Doint cost @29?"??? , *3I;. B. =oint costs are not relevant in making this decision because the amounts have already been incurred and are the same regardless of #hat the comany decides to do. (he only relevant cost is cost incurred beyond the slit-off" #hich for = amounts to @*.6? er gallon @1?"??? R 3?"??? gallons;. C. As noted in art %B"% Doint cost is not relevant for sell at slit vs. rocess further decisions. )ather" one must e,lore differential revenue vs. differential cost" as follo#s: =: @33?"??? - @2??"???; vs. @1?"??? J @*?"??? K: @32?"??? - @3?"???; vs. @*2?"??? J @3?"???; &: @<73"??? - @93?"???; vs. @119"??? J @7"??? (he comany erred in rocessing K beyond the slit oint and lost @3?"??? in the rocess.

15


DISCUSSION QUESTIONS C.aracteristics o& In&or!ation &or Decision Ma'in%

76. nformation is said to be useful in decision making if it ossesses three characteristics. )euired: A. &ist the three characteristics of useful information. B. +reuently" there is a conflict bet#een t#o of the characteristics reuested in art %A.% Briefly e,lain #hat this conflict is. C. 8hat distinguishes relevant from irrelevant information/ &:  (ye: )C Ans#er: A. (he three characteristics are relevance" accuracy" and timeliness. B. Accuracy freuently can be enhanced if more time is used to develo" obtain" or analyze information. (hus" in order to meet deadlines for decisions" information may have to be develoed that is less accurate than desired. C. )elevant information is ertinent to the decision" that is" it has the otential to influence the decision. 0ecifically" future costs and revenues that differ among alternatives must be considered. n contrast" irrelevant information includes ast conditions as #ell as future conditions that #ill not be affected by the choice among alternatives.

Chapter 14

16

60189531 Chapter14 Decision Making Relevant Costs and Benefits

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