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Exam 6: Relevant Information for Special Decisions

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Question 51

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The following information is provided for two products: $\begin{array}{|l|c|c|}\hline & \text { Product } \mathrm{X} & \text { Product Y } \\\hline \text { Selling price per unit } & \$ 35 & \$ 25 \\\hline \text { Variable cost per unit } & 20 & 15 \\\hline\end{array}$ Assume the products will be sold in a store where shelf space is a scarce resource and there is sufficient room for only one of the two products.Expected sales for Product X are 6,000 units,and expected sales for Product Y are 8,000 units.Which product should be sold and why?

A) Product Y should be sold solely because the expected demand for this product is greater than the expected demand for Product X.
B) Product Y should be sold because sales of this product will provide a greater profit.
C) Product X should be sold because it provides a greater contribution margin per unit.
D) Product X should be sold because sales of this product will provide a greater profit.

E) A) and B)
F) C) and D)

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Question 52

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When evaluating alternatives,what type of costs should be considered?

A) Relevant costs
B) Sunk costs
C) Prevention costs
D) Fixed costs

E) B) and C)
F) B) and D)

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Question 53

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Outsourcing reduces the extent of a company's vertical integration.

A company's compensation system for its managers should provide incentives for the managers to maximize the company's long-term profitability.

Which of the following statements is

Groove Music Company produces compact discs of background music for restaurants and other retail shops.Its disc recording machines are capable of producing 50 discs per hour.The unit-related cost of producing the discs is $2.00.The discs sell for $10.00 each.Mood Music Co.has asked the company to produce 10,000 copies of a disc for $9.00.Groove Music estimates that for this special order the unit-related cost of producing the disc will be $4.00 and that,due to the unique nature of the recording,its machines will only be able to produce 20 discs per hour.Groove Music has a total of 5,000 machine hours of capacity.In addition,to accept the special order,Groove Music will have to lease an additional special-purpose machine that will cost $6,500. Required: Assume that existing demand for Groove Music's compact discs is 200,000 units and that the special order has to be either taken in full or rejected.Prepare an analysis that indicates whether or not the special order should be accepted.

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.

Which of the following is a

Discuss the conflict that often occurs between short-run and long-run performance in asset replacement decisions.

Select the term from the list provided that best matches each of the following descriptions.Put the number of the term in the column for Your Answer.

What characteristics must qualitative information have to be relevant to a particular decision?

A company that is subject to the effect of a scarce resource should concentrate on providing products or services that give the greatest contribution margin per unit of product or service.

Qualitative information is only relevant for decision making if it can be quantified.

Sherman Manufacturing Company currently manufactures a component used in one of its products.The annual production costs for 10,000 components are as follows: $\begin{array}{|l|c|}\hline \text { Material cost } & \$ 5 \text { per unit } \\\hline \text { Labor cost } & \$ 4 \text { per unit } \\\hline \text { Overhead } & \$ 1 \text { per unit } \\\hline \text { Batch-level set-up costs for the year } & \$ 5,000 \\\hline \text { Product-level manager's salary } & \$ 18,000 \\\hline \text { Allocated facility-level costs } & \$ 12,000 \\\hline\end{array}$ An outside company has offered to supply 10,000 units of the component for $12.50 each.If the company outsources the component,it will be able to rent out the idled factory space for $1,000 per month but will not terminate the product manager. Required: 1)Which items are not relevant to this outsourcing decision? 2)Identify any opportunity costs associated with this decision. 3)Prepare a quantitative analysis that indicates whether the component should be outsourced.

Osprey Company is trying to decide between the following two alternatives: $\begin{array}{|l|r|r|}\hline & \underline {\text { Alternative A }} & \underline {\text { Alternative B }} \\\hline \text { Projected revenue } & \$ 50,000 & \$ 60,000 \\\hline \text { Direct material } & 6,000 & 12,000 \\\hline \text { Assembly labor } & 9,000 & 9,000 \\\hline \text { Production supervisor's salary } & 10,000 & 10,000 \\\hline \text { Facility-related costs } & \underline {10,000} & \underline {15,000} \\\hline \text { Profit } &\underline { \$ 15,000} & \underline {\$ 14,000} \\\hline\\\hline\end{array}$ Which of the following conclusions can be drawn from this example?

The benefits sacrificed when one alternative is chosen over another are referred to as:

Which costs are relevant for equipment replacement decisions?

Select the correct statement regarding opportunity costs.

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

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.