BEC - B4: Operations Management (Planning Techniques)

Question 1

A company is preparing its budget, wants to separate its costs into fixed and variable components. What method can it use?

Answer 1

-Regression analysis. Specifically, if you use the “least squares” method to separate costs into fixed and variable components.

Question 2

When using regression analysis, which measure indicates the extent to which a change in an independent variable explains a change in a dependent variable?

Answer 2

-R-squared method.

-R-squared is the “coefficient of determination”
R-squared is the “proportion of the total variation in a dependent variable (y) explained by the independent variable (x).”

Question 3

A Regression Equation:

• Estimates the dependent variables (T/F)
• Is based on objective and constraint functions (T/F)

Answer 3

-Estimates the dependent variables.

Based on changes in the independent variables, a regression equation is a statistical model that estimates the dependents.

As for the second answer option, don’t get it confused.
“Objective and constraint functions are used in linear programming, not in a regression analysis.” The statement is incorrect.

Question 4

What is probability analysis?

Answer 4

-An extension of sensitivity analysis.
Probability analysis is used to examine the possible outcomes given different alternatives.
Sensitivity analysis uses trial and error method, the sensitivity of the solution to changes in variables is the calculation. Probability analysis is an extension of this.

Question 5

When reviewing variable costs and volume, a company would most likely find a coefficient of correlation equivalent to:

Answer 5

1.0 (positive)

Question 6

If a regression output has an “intercept” value of 300… what does this mean?

Answer 6

Y = 300, when X = 0.

Question 7

What’s the difference between simple regression and multiple regression?

Answer 7

Multiple regression has more independent variables.

Question 8

The number of components needed for an assembly operation with an 80% learning curve should

• increase for successive periods
• decrease per unit of output

Answer 8

• True. With more productive employees, they will be able to produce more output, therefore requiring more components of input
• False. Without spoilage or waste (no change there), the number of components needed to produce a unit of output will NOT change… stays the same

Question 9

What does a learning curve of .80 represent?

Answer 9

As cumulative quantities double, average cost per unit decreases by 80% of the previous cost.

50 hours to produce one unit
50 * .8 hours to produce two units (doubled)
50* .8 * .8 hours to produce four units (doubled)

Question 10

The method of inventory costing in which direct manufacturing costs, and manufacturing overhead costs, both variable and fixed, are considered inventoriable costs?

Answer 10

-Absorption costing.

Absorption costing charges (1) direct material, (2) direct labor, (3) variable overhead, and (4) fixed overhead as inventoriable costs. Absorption costing is required for external reporting.

Question 11

How do we calculate the breakeven point (in units)

Answer 11

Total fixed costs / contribution margin per unit

Question 12

What are the differences between variable costing and absorption costing?

Answer 12

Variable costing: For internal use only, not external. Excludes fixed costs from product (inventoried) costs, and is useful for internal managers who want to compute break even points, etc. Variable costing has all fixed costs treated as periodic expenses.

Absorption costing: For external use, GAAP compliant. Used for the presentation of financial statements. Allocatable fixed costs are treated as unexpired (inventory), and only recognized as COGS when relieved from inventory.

Question 13

When production is greater than sales, absorption costing income is ____ than variable costing income

Answer 13

Greater. Fixed product costs, which are capitalized into inventory under absorption costing, are not immediately expensed the same way they are under variable costing. These costs will stay in inventory under absorption, therefore making net income higher.

Question 14

Which method of costing will yield the lowest inventory value?

Answer 14

Variable (direct) costing. Only variable costs are capitalized

Question 15

What’s the difference between gross profit and contribution margin?

Answer 15

Gross profit = Sales - cost of goods sold, including overhead
Contribution = sales price - ALL variable costs (including SG&A)

Question 16

Which is better for maximizing profit at full capacity - gross profit or contribution margin?

Answer 16

Contribution margin is better at profit maximization because it includes ALL variable costs. Gross Margin includes consideration of cost of goods sold

Question 17

Which costing method would be least likely to encourage managers to reduce inventory?

Answer 17

Absorption costing, because it absorbs fixed overhead cost into units produced. Once those units go into inventory, they can absorb some of the manager’s cost and raise profits

Question 18

What is the contribution margin ratio calculation?

Answer 18

Contribution margin / Sales price

Question 19

What is the margin of safety?

Answer 19

(Actual or budgeted sales) - (breakeven SALES)

For example:
Actual sales: 200,000
Margin of safety: 80,000

Breakeven sales are therefore 120,000

Question 20

A customer is going to spend a total of 40,000 on one product. A company produces three products with different CM’s.

What calculation would the company perform on its products to determine which one it would like to sell to the customer?

Answer 20

• Contribution margin ratio (CM / sales price)

- CM ratio gives you the biggest positive impact on company profitability.

Question 21

What is the calculation for “cash conversion cycle”

Answer 21

Days in inventory + Days sales in accounts receivable - Days of payables outstanding

Question 22

The CFO is concerned about accounts receivable turnoer ratio. The company currently offers customers terms of 3/10, net 30. What strategy would likely improve AR turnover ratio?

• changing terms to 1/10, net 30
• chaning terms to 3/20, net 30
• Pledging AR to a finance company
• Entering into a factoring agreement with a finance company

Answer 22

-C: entering into a factoring agreement would serve to reduce the amount of AR (indicating more rapid collections), and thereby increase the company’s AR turnover ratio.

Pledging AR does not impact either sales or AR.

Changing the terms in both of these examples actually decentivizes customers to pay more timely.

Question 23

Jackson Distributors sells to stores on credit terms of 2/10, net 30. Daily sales = 150 units, $300 each. 60 percent of customers take the discount and pay day 10. 40% pay day 30. All sales on credit.

What is the amount of Jackson’s AR?

Answer 23

$300 * (150*60%) = 27,000 daily sales to early payers
Ten days of waiting for these guys to pay = 27,000 * 10 = 270,000

$300 * (150*40%) = 18,000 daily sales to early payers
Thirty days of waiting for these guys to pay = 18,000 * 30 = 540,000

Total AR from one daily sales group: $810,000

Question 24

Which of the following costs is generally not relevant to a decision?

• Avoidable cost
• Incremental cost
• Opportunity cost
• Historical cost

Answer 24

Historical cost.

All of the others are relevant.

Question 25

The relevance of a particular cost to a decision is determined by:

Answer 25

The potential effect on the decision.

Key: Relevant costs are expected future costs that vary with an action taken. All other costs are assumed to be constant, and thus have no effect on a decision.

Relevance is NOT determined by:

• riskiness
• number of decision variables
• accuracy of the cost

Question 26

Costs relevant to a make-or-buy decision include:

Answer 26

• Variable labor costs
• Variable materials costs
• Avoidable fixed costs

Question 27

In joint product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold in order to maximize profits?

Answer 27

Separable costs after the split-off

Question 28

Which of the following is true:

1) Accounting profit = total revenue - explicit and implicit costs
2) Implicit costs are not opportunity costs, because they are internal costs
3) Explicit costs are opportunity costs from purchasing from the resource market, rather than producing
4) The use of resource markets outside a company involves opportunity cost

Answer 28

-4) is correct: the use of outside markets to purchase resources rather than produce involves opportunity cost

1) is wrong because Accounting profit = total revenue - explicit costs. Implicit costs are not counted
2) is wrong because implicit costs are opportunity costs
3) is wrong because explicit costs are not opportunity costs

Question 29

In evaluating costs for decision making, a company would always consider each of the following as relevant, except:

• differential costs
• variable costs
• avoidable costs
• incremental costs

Answer 29

EXCEPT: variable costs, the rest are all synonymous with “relevant costs”

While variable costs are usually relevant, not all variable costs are necessarily relevant.

Question 30

A company can produce 12,000 widgets in a factory. Currently, it is producing 10,000. They incur 50,000 in variable costs for their current production, and carry a 40,000 fixed cost burden. They have a special order for 1,000 widgets… what should the price per unit charged exceed?

Answer 30

$5 per widget. Assuming available capacity, the minimum cost per unit of a special order is equal to the variable cost per unit. Fixed costs are irrelevant when there is excess capacity.

Question 31

A company is operating at full capacity. They receive a special, one-time order for 1,000 widgets. The next best alternative use of their capacity on existing equipment has a contribution of $10,000. What will be considered in the calculation of the minimum price that is acceptable for this one-time, special order?

Answer 31

• All variable costs (including selling and administrative)
• None of the fixed costs (not manufacturing overhead, not selling and admin)
• Plus the opportunity cost of $10,000 margin / 1,000 widgets. Opportunity cost is $10 per unit, which must be added to the pricing calculation.

Question 32

A company can choose between project X and project Y. NPV of X is 1,000,000; NPV of Y is 750,000. Company chooses X. What’s the opportunity cost of Y?

Answer 32

750,000.

Question 33

A company produces tables and chairs. Tables has a contribution margin of 18,000; and fixed costs in the following: avoidable 12,000; unavoidable 10,800. Operating income (loss) is: (4,800).

If they get rid of the tables unit, what will be the effect on operating income?

Answer 33

Decrease operating income by 6,000.

You lose an 18,000 contribution margin, and you also forfeit 12,000 avoidable fixed costs. 6,000 operating income decrease.

Also calculatable by looking at net OI (4,800), and comparing to unavoidable fixed costs.

Question 34

How would we calculate a cost increase / decrease in a scenario in which a manufacturer decides to (a) purchase a product rather than make it, and (b) rent out the idle space?

What’s the calculation?

Answer 34

Costs increased / decreased =

(1) Cost to purchase the items
- (2) any costs recovered by using the space differently (ie rent)
- (3) any avoidable costs you avoided
= net: costs increased (positive) or decreased (negative)

Another way to think is:
How much cost do we save by purchasing versus producing (full cost)
How much can we get in rent
How much is unavoidable.

Add those three up and you will get the cost difference. Positive here = cost decrease, negative here = cost increase