Ch 10 Flashcards
The last step in the decision making process is:
analyze and assess the decision
Incremental … is incremental revenues minus incremental costs.
income
Incremental or differential costs are ….
costs in making decisions.
additional
When making decisions, managers should consider all relevant benefits and relevant costs, which include: (Check all that apply.)
opportunity costs.
incremental costs.
out-of-pocket costs.
A(n) …. cost arises from a past decision, cannot be avoided or changed, and is irrelevant to current and future decisions.
sunk
List the steps of the decision making process, with the first step on top.
- Define decision
- Identify alternatives
- Collect relevant info and evaluate alternatives
- Select course of action
- Analyze and assess decision made
A student purchased a used car for $5,000 three months ago. The car now needs a major repair which will cost $2,000. If the student decides to keep the car and make the repair to the car, then the out-of-pocket costs will be:
$2,000
A student is considering adding a minor to her degree. The additional courses would cost $1,500 but would allow additional income upon graduation of $10,000. The incremental income related to this decision is:
$8,500
10,000−1,500
….. costs, also called differential costs, are the additional costs from selecting a certain course of action.
Incremental
A student purchases a concert ticket for $50. Before entering the concert, the student is offered $75 for the ticket. If the student decides to keep the ticket and attend the concert, the opportunity cost is:
$75
A student is deciding whether to take an additional class or work extra hours. Which amounts are relevant to this decision? (Check all that apply.)
opportunity costs
out-of-pocket costs
A student purchased a used car for $5,000. Three months later, the student discovers the car needs major repairs which will cost $2,000. The student must decide whether to repair the car or purchase another car. Which statement is correct?
The relevant costs are $2,000.
In a make or buy decision, management should consider: (Check all that apply.)
Employee morale
Incremental costs
Workload
product quality
A(n) ______ cost requires a future outlay of cash and is relevant for decisions.
out-of-pocket
When making sell or process decisions, management should consider: (Check all that apply.)
revenue from selling as is.
revenue from selling after further processing.
incremental costs of processing further.
A company incurred $1,000 in costs to produce 500 units which normally sell for $1,500. Upon inspection, it was determined the units were defective and reworking the units would cost an additional $1.50 per unit. The defective units can be sold as is for $1.00 each. How should the company handle the defective units?
Rework the units which will generate incremental income of $250.
Reason: Income if sold as is: $1.00 x 500 = $500. Income if reworked: revenue $3 x 500 = $1,500 minus incremental costs to rework $1.50 x 500 = $750. Incremental income = $750 - $500 = $250.
A(n) …
cost is the potential benefit lost by taking an action instead of an alternative action.
opportunity
A company produces two products. Product A sells for $25, has variable costs of $15, and requires 2 machine hours to produce. Product B sells for $35, has variable costs of $20, and requires 5 machine hours to produce. 40,000 machine hours are available. The company can sell all it can make of either product. Which statement is true?
Product A should be produced because it will provide greater contribution margin per machine hour.
(25-15)/2 = 5
(35-20)/5 = 3
A company currently makes a component used in production. The per unit costs incurred to make the component include: Direct materials: $5; Direct labor: $2; Overhead: $4; Total cost: $11. Twenty-five percent of the overhead costs are considered incremental. The company can purchase the component from another source for $10. The company should do which of the following?
The company should make the components because incremental costs are $2 less than the purchase price.
Reason: Total cost to make = $5+2+(4 x 25%)=$8. Cost to buy is $10. The company will save $2 if it makes the product.
A company produces two products. Product A sells for $25, has variable costs of $15, and requires 2 machine hours to produce. Product B sells for $35, has variable costs of $20, and requires 2 machine hours to produce. 40,000 machine hours are available. The company can sell all it can make of either product. Which statement is true?
Product B should be produced because it will create greater profits.
Reason: CM per machine hour: Product A ($25-15)/2=$5. CM per machine hour: Product B ($35-20)/2=$7.50.
A manufacturing company currently produces 1,000 units of a product at a cost of $5,000. The units sell for $7,000. Alternatively, the company can process the units further to produce a refined product that will sell for $10,000. The additional processing will cost $4,000. The company should:
sell as is because the incremental income of selling as is versus processing further will increase income by $1,000
Reason: Revenue to sell as is: $7,000. Revenue to process further: $10,000-$4,000=$6,000. The company will earn $1,000 more by selling as is.
When making scrap or rework decisions, management should consider: (Check all that apply.)
incremental costs.
revenue from selling defective units as scrap.
When production facilities are limited, the company should produce the mix that will not exceed demand and maximize the production of the product with the:
highest contribution margin per unit of scarce resources
A(n) … cost is the amount that would remain if a segment is eliminated.
Unavoidable
When resources are constrained and products use different inputs, the company should produce the product with the:
highest contribution margin per unit of constrained resource
True or false: When considering the elimination of a segment, management should eliminate a segment if income increases from elimination.
True
When products use the same inputs, the company should produce the product with:
the highest contribution margin per constrained resource
When making sell or process decisions, management should consider: (Check all that apply.)
revenue from selling as is.
incremental costs of processing further.
revenue from selling after further processing.
A company purchased manufacturing equipment 5 years ago for $50,000. Book value is currently $5,000 and the remaining useful life is 3 years. The equipment incurs variable manufacturing costs of $30,000. The company is considering replacing the equipment. The new equipment will cost $75,000, have a useful life of 3 years, and is more efficient and, therefore, only costs $10,000 in variable manufacturing costs to operate each year. The vendor is willing to accept the old equipment with a selling price of $20,000. The company should:
replace the old equipment because the total net increase in income will be $5,000
Reason: Cost to replace new machine: [$75,000 + ($10,000 x 3 years) - $20,000] = $(85,000). Cost to keep old machine: ($30,000) x 3 = $(90,000). Company should replace the old equipment because income will increase by $5,000.
A company produces two products. Product A sells for $25, has variable costs of $15, requires 2 machine hours to produce, and the market is limited to 8,000 units. Product B sells for $35, has variable costs of $20, requires 5 machine hours to produce, and the market is limited to 6,000 units. 40,000 machine hours are available. Which statement is true?
The company should produce 8,000 units of Product A and 4,800 units of Product B.
Reason: Product A: CM=$25-15=10/2 hours=5 per machine hour. 8000 units x 2 machine hours=16,000 hours. 40,000 total hours available-16,000 hours for Product A leaves 24,000 hours. 24,000/5 hours for Product B = 4,800.
The costs which are eliminated if a segment is eliminated are called …
costs.
avoidable
A price-setter company will use more:
cost-plus pricing methods
The decision rule for segment elimination is to eliminate a segment if income _____ from elimination.
increases
Under the cost-plus pricing method, the formula to determine selling price per unit is:
cost per unit plus markup per unit
Using the target costing method, if the expected selling price is $50 and the target profit is $5, the target cost is $…
45
50−5
When making keep or replace decisions, management should consider the: (Check all that apply.)
variable manufacturing cost of the new equipment
variable manufacturing cost of the existing equipment
sale of the existing equipment
When production facilities are limited, the company should produce the mix that will not exceed demand and maximize the production of the product with the:
highest contribution margin per unit of scarce resources
Target profit is $100,000; total fixed costs are $120,000, and total variable costs are $500,000, the markup percentage is …
%. Round your answer to the nearest whole percent.
44%
(120,000+100,000)
÷500,000×100 = 44
Which of the following are factors indicating that a company is a price-taker?
product not branded
product not unique
strong competition
When evaluating special offer decisions, management should consider: (Check all that apply.)
existing sales.
available capacity.
incremental costs.
incremental revenues.
Cost-plus pricing adds a …
to cost to get selling price.
markup
List the time and materials price steps in the correct order:
- Compute time charge $
- Compute material markup %
- Estimate DLH, DMC, and markup to gwt price
The costing method defined as expected selling price minus target profit is called
… costing.
target
The formula to compute the markup percentage using the variable cost method is:
(target profit plus total fixed costs) divided by total variable cost
A company receives a special order of 10,000 units of product. The potential customer is willing to pay $0.75 per unit. Current sales are $90,000 and current costs are $75,000 for 90,000 units. If the order is accepted, costs will increase to $82,000. If the company has the capacity to accept the order without affecting current sales, the company should:
accept the order, because income will increase by $500
Reason: Potential sales revenue=.75 x 10,000=$7,500. Increase in costs = $82,000-75,000=$7,000. Profits will increase by $500 ($7,500-7,000).
A common way to price services is
time and materials pricing
CH 10 CV
The decision-making process has five steps. After collecting relevant information and evaluating each alternative, the next step is to:
select the course of action.
Using the drop-down list, select the correct label for each description.
Cost of buying land previously purchased: Not relevant
Future cost of land used to develop a plant site: relevant
Tyler Industries currently manufactures one of its crucial parts at a cost of $4.50 per unit. This cost is based on a normal production rate of 50,000 units per year. Direct materials costs are $1.50 per unit and direct labor is $1.00 per unit, incremental overhead costs related to making this part are $50,000 per year, and allocated fixed overhead costs are $50,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Tyler is considering buying the part from a supplier for a quoted price of $3.70 per unit guaranteed for a three-year period. What is the relevant cost of making the 50,000 units?
$175,000
Relevant Cost of Making the Part = Direct materials and direct labor costs of $125,000 (50,000 units × $1.50 + $1.00 per unit) + Incremental overhead costs of $50,000 = $175,000. Note that the allocated fixed costs of $50,000 are not relevant to this managerial decision because they will continue whether the part is made or bought.
Carrot Company processes carrots that it can sell as is for $2,000, or it can process these carrots further and produce jarred baby food which will result in revenues of $5,000. If they process further, it will cost them an additional $1,500. Incremental income to process further is?
$1,500
Revenue to sell as is is $2,000. If processed further, their revenue is $5,000 − $1,500 = $3,500. The company’s incremental income to process further if $3,500 − $2,000 = $1,500.
The management of City Front Incorporated must decide between scrapping or reworking units that do not pass inspection. The company has 11,000 defective units that cost $6.00 per unit to manufacture. The units can be sold as is for $2.50 each or they can be reworked for $3.50 each and then sold for the full price of $9.70 each. What is the incremental income from reworking and selling the units?
$40,700
Income to scrap = Sale of scrapped units = $27,500 (11,000 units × $2.50).
Income to rework = Sale of reworked units of $106,700 (11,000 units × $9.70) − Cost to rework units of $38,500 (11,000 units × $3.50) = $68,200
Incremental income = Income to rework − Income to scrap = $68,200 − $27,500 = $40,700
Hamrick Industries makes and sells two products. The demand for both products is unlimited. Product A has a contribution margin of $7.70 per unit. Product B has a contribution margin of $2.64 per unit. The same machines are used to produce both products. Product A requires 0.33 machine hours and product B requires 0.20 machine hours. Which product should the company make and sell?
Product A because the contribution margin per MH is $23.33.
determine the contribution margin per MH. Product A = Contribution margin per unit of $7.70 ÷ 0.33 MH = $23.33 per MH. Product B = Contribution margin per unit of $2.64 ÷ 0.20 MH = $13.20 per MH. Because it has a higher contribution margin per machine hour (the constraint), the company should manufacture as many units of Product A as it can produce and sell until reaching the customer‘s demand. Thereafter, any remaining capacity should be devoted to Product B until reading the customer‘s demand.
Cabby Jewelers has two divisions, the ring division and the necklace division. The ring division has shown a net loss of $40,000 for the past year. The necklace division has shown net income of $10,000 for that same period of time. The ring division has avoidable expenses of $30,000 and unavoidable expenses of $20,000. With revenues of $90,000, should the ring division be eliminated?
No, revenue exceeds avoidable costs by $60,000
decision rule is to eliminate a segment if its revenues are less than its avoidable expenses. The ring division has revenues of $90,000 and avoidable expenses of $30,000. Since its revenues exceed its avoidable expenses by $60,000 (or $90,000 − $30,000), it should not be eliminated. However, other important considerations should also be taken into account.
A company is considering replacing an existing machine with a new machine. Based on the information below, should the company keep or replace the existing machine?
Existing Machine New Machine
Book value $ 35,000 Purchase price $ 75,000
Variable manufacturing costs per year $ 10,000 Variable manufacturing costs per year $ 8,000
Salvage value $ 0
Selling price $ 40,000
Remaining useful life 5 years Useful life 5 years
Keep the existing machine becaThe company should keep the existing machine because the new machine will decrease overall income by $25,000.
Keep or Replace Analysis Keep Replace Income Increase (Decrease)
Revenues
Sale of existing machine $ 40,000
Costs
Purchase of new machine (75,000)
Variable manufacturing costs $ (50,000) (40,000)
Income (loss) $ (50,000) $ (75,000) $ (25,000)use the new machine will decrease overall income by $25,000
Place the following cost-plus product price setting process in the correct order:
Determine selling price per unit: step 3
Determine the dollar markup per unit: step 2
Determine total cost per unit: step 1
Stuart Company uses the total cost method to set their selling price. Management expects to produce and sell 50,000 units of the company’s product. Variable costs include product costs of $20 per unit and selling, general and administrative costs of $10 per unit. Fixed costs include overhead of $200,000 and selling, general and administrative costs of $50,000. Total cost and total cost per unit equal:
$1,750,000 and $35
Production costs = Variable product costs of $1,000,000 (or $20 per unit × 50,000 units) + Fixed costs of $200,000 = $1,200,000.
Selling, general and administrative costs = Variable selling, general and administrative costs of $500,000 (or $10 per unit × 50,000 units) + Fixed selling, general and administrative costs of $50,000 = $550,000.
Total costs = Product costs of $1,200,000 + Selling, general and administrative costs of $550,000 = $1,750,000.
Total cost per unit = Total costs of $1,750,000 ÷ Total units expected to be produced and sold of 50,000 = $35.
Cold Company makes large containers of ice cream at a variable cost of $10 per container. It usually sells the container for $15. Cold Company is operating at less than full capacity. A potential new customer is requesting containers of ice cream at a selling price of $12. Fixed overhead will not change regardless of whether this order is accepted. Should Cold Company accept the special order?
Yes, there will be a $2 increase in income for every new container sold
Reason:
Yes, there will be an increase in income of $2 (or selling price of $12 − variable cost of $10) for every container sold to the new customer.
Place the following time and material price setting process in the correct order:
Compute the materials markup: step 2
Estimate the number of direct labor hours and total materials cost: step 3
Compute the time charge per hour of direct labor: step 1
Marshall Grocery Delivery Service reports the following information:
Direct labor rate per hour $ 20
Non-materials related overhead per hour $ 25.80
Materials-related overhead 4% of Direct materials cost
Target profit margin 20%
The materials markup per dollar of materials cost is:
24%
4% DM costs + 20% target prof msrgin
