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Question;Relevant;Decision Factors;63. The following costs relate to a variety of;decision settings;Cost;Decision;1.;Allocated corporate overhead;Closing a;money-losing department;2.;Cost of an old car;Vehicle;replacement;3.;Direct materials;Make or buy a;product;4.;Salary of marketing manager;Project discontinuance, manager to be transferred;elsewhere in the firm;5.;Home theater installation;Purchase of a;new home;6.;Unavoidable fixed overhead;Plant closure;7.;Research expenditures incurred last;year, related to new product;Product;introduction to marketplace;8.;$4 million advertising program;Whether to promote product A or B with the $4 million;program;9.;Manufactured cost of existing inventory;Whether to discard the goods or sell them to a;third-world country;Required;Consider each of the nine costs listed and determine;whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain;why.;Relevant Decision Factors;64. Clancy Van Lines is considering the;acquisition of two new trucks. Because;of improved mileage, these vehicles are expected to have a lower operating cost;per mile than the trucks the company plans to replace. Management is studying whether the firm would;be better-off keeping the older vehicles or going ahead with the replacement;and has identified the following decision factors to evaluate;1. Cost;and book value of the old trucks;2. Moving revenues;which are not expected to change with the acquisition;3. Operating costs;of the new and old vehicles;4. New truck;purchase price and related depreciation charges;5. Proceeds from;sale of the old vehicles;6. The 8% return on;alternative investments that Clancy will forego by tying up cash in the new trucks;7. Drivers' wages;and fringe benefits;Required;Classify;the seven decision factors listed into the following categories (note: factors;may be used more than once);A.;Relevant;costs.;B.;Opportunity;costs.;C.;Sunk;costs.;D.;Factors;to be considered in the decision.;Relevant;Costs;65. Attleboro Company recently discontinued the;manufacture of product J15. The standard;costs for this product were;Direct;material;$ 50;Direct labor;20;Variable;overhead;14;Fixed;overhead;35;Total;$119;There;are 800 units of this product in finished-goods inventory. The units are technologically obsolete, and;the following alternatives are being considered;1. Dispose of as scrap. The proceeds from the sale will equal the cost;of transportation to the disposal site.;2. Sell to an exporter for sale in a;developing country. The sales price to;the exporter would be $12 per unit.;3. Remanufacture the products to convert them;into model J16, a model that normally sells for $200. The additional cost to convert the J15 units;would be $45, the standard cost to manufacture J16 is $125. Presently, there is sufficient capacity to;manufacture product J16 directly or to do the necessary conversion work on J15.;Required;A. Determine the current carrying value of;the J15 inventory.;B. Evaluate each alternative and determine;the financial benefit to Attleboro if the alternative is pursued.;Relevant Costs;66.;Mystic, Inc.;produces a variety of products that carry the logos of teams in Southern;Football League (SFL). The company;recently paid the league $85,000 for the rights to market a popular player;jersey and immediately began production.;The following information is available;Number of;jerseys manufactured: 25,000;Cost of jerseys;manufactured: $625,000;Amount of;manufacturing costs paid to-date: $410,000;Number of;jerseys sold to-date: 0;Estimated;future marketing costs: $330,000;Anticipated;selling price per jersey: $42;The SFL is about to file a lawsuit to stop jersey;sales and is demanding another $50,000 from Mystic for the manufacturing;rights. Conversations with Mystic's;attorneys indicate that the league has a strong case and is likely to win the;suit. If this situation arises, Mystic;will be unable to recover any amounts paid to the SFL.;Required;Mystic's sales department anticipates very strong;demand and a sellout of all jerseys manufactured.;A.;Determine the;overall profitability of the jersey product line if Mystic settles the;disagreement with the SFL and the anticipated sellout occurs.;B.;Should the;company pay the additional $50,000 demanded by the league or should the jersey;program be dropped? Show computations to;support your answer.;Special;(Custom) Order;67. Howard Robinson builds custom homes in;Cincinnati. Robinson was approached not;too long ago by a client about a potential project, and he submitted a bid of;$483,800, derived as follows;Land;$ 80,000;Construction;materials;100,000;Subcontractor;labor costs;120,000;$300,000;Construction;overhead: 25% of direct costs;75,000;Allocated;corporate overhead;35,000;Total cost;$410,000;Robinson adds an 18% profit margin;to all jobs, computed on the basis of total cost. In this client's case the profit margin;amounted to $73,800 ($410,000 x 18%), producing a bid price of $483,800. Assume that 70% of construction overhead is;fixed.;Required;A.;Suppose;that business is presently very slow, and the client countered with an offer on;this home of $390,000. Should Robinson;accept the client's offer? Why?;B.;If;Robinson has more business than he can handle, how much should he be willing to;accept for the home? Why?;B.;483,800;price. This way he can cover all of his;costs and make his normal 18% profit margin.;Special Order;Outsourcing;68. Cornell Corporation manufactures;faucets. Several weeks ago, the firm;received a special-order inquiry from Yale, Inc. Yale desires to market a faucet similar to;Cornell's model no. 55 and has offered to purchase 3,000 units. The following data are available;?;Cost;data for Cornell's model no. 55 faucet: direct materials, $45, direct labor;$30 (2 hours at $15 per hour), and manufacturing overhead, $70 (2 hours at $35;per hour).;?;The;normal selling price of model no. 55 is $180, however, Yale has offered Cornell;only $115 because of the large quantity it is willing to purchase.;?;Yale;requires a design modification that will allow a $4 reduction in;direct-material cost.;?;Cornell's;production supervisor notes that the company will incur $8,700 in additional;set-up costs and will have to purchase a $3,300 special device to manufacture;these units. The device will be;discarded once the special order is completed.;?;Total;manufacturing overhead costs are applied to production at the rate of $35 per;labor hour. This figure is based, in;part, on budgeted yearly fixed overhead of $624,000 and planned production;activity of 24,000 labor hours.;?;Cornell;will allocate $5,000 of existing fixed administrative costs to the order as;?part of the cost of doing business.;Required;A.;One;of Cornell's staff accountants wants to reject the special order because;financially, it's a loser.;Do you agree with this conclusion if Cornell currently has excess;capacity? Show calculations to support;your answer.;B.;If;Cornell currently has no excess capacity, should the order be rejected from a;financial perspective? Briefly explain.;C.;Assume;that Cornell currently has no excess capacity.;Would outsourcing be an option that Cornell could consider if management;truly wanted to do business with Yale?;Briefly discuss, citing several key considerations for Cornell in your;answer.;Outsourcing;69. St. Joseph Hospital has been hit with a;number of complaints about its food service from patients, employees, and;cafeteria customers. These complaints;coupled with a very tight local labor market, have prompted the organization to;contact Nationwide Institutional Food Service (NIFS) about the possibility of;an outsourcing arrangement.;The;hospital's business office has provided the following information for food;service for the year just ended: food costs, $890,000, labor, $85,000, variable;overhead, $35,000, allocated fixed overhead, $60,000, and cafeteria food sales;$80,000.;Conversations;with NIFS personnel revealed the following information;?;NIFS;will charge St. Joseph Hospital $14 per day for each patient served. Note: This figure has been "marked;up" by NIFS to reflect the firm's cost of operating the hospital;cafeteria.;?;St.;Joseph's 250-bed facility operates throughout the year and typically has an;average occupancy rate of 70%.;?;Labor;is the primary driver for variable overhead.;If an outsourcing agreement is reached, hospital labor costs will drop;by 90%. NIFS plans to use St. Joseph;facilities for meal preparation.;?;Cafeteria;food sales are expected to increase by 15% because NIFS will offer an improved;menu selection.;Required;A.;What;is meant by the term "outsourcing"?;B.;Should;St. Joseph outsource its food-service operation to NIFS?;C.;What;factors, other than dollars, should St. Joseph consider before making the final;decision?;Store Closure;70. Papa Fred's Pizza store no. 16 has fallen on;hard times and is about to be closed. The;following figures are available for the period just ended;Sales;$205,000;Cost of sales;67,900;Building;occupancy costs;Rent;36,500;Utilities;15,000;Supplies used;5,600;Wages;77,700;Miscellaneous;2,400;Allocated;corporate overhead;16,800;All;employees except the store manager would be discharged. The manager, who earns $27,000 annually, would;be transferred to store no. 19 in a neighboring suburb. Also, no. 16's furnishings and equipment are;fully depreciated and would be removed and transported to Papa Fred's warehouse;at a cost of $2,800.;Required;A.;What;is store no. 16's reported loss for the period just ended?;B.;Should;the store be closed? Why?;C.;Would;Papa Fred's likely lose all $205,000 of sales revenue if store no. 16 were;closed? Explain.;Evaluation of a Service;Line;71. "It's close to a $40,000 loser and we;ought to devote our efforts elsewhere," noted Kara Whitmore, after;reviewing financial reports of her company's attempt to offer a reduced-price;daycare service to employees. The;daycare's financial figures for the year just ended follow.;Revenues;$120,000;Variable costs;45,000;Traceable fixed costs;89,000;Allocated corporate;overhead;24,000;If;the daycare service/center is closed, 70% of the traceable fixed cost will be;avoided. In addition, the company will;incur one-time closure costs of $6,800.;Required;A.;Show;calculations that support Kara Whitmore's belief that the daycare center lost;almost $40,000.;B.;Should;the center be closed? Show calculations;to support your answer.;C.;What;problem might the company experience if the center is closed?;Make or Buy, Capacity;Constraint;72. Fowler Industries produces two bearings: C15;and C19. Data regarding these two;bearings follow.;C15;C19;Machine hours required per unit;2.00;2.50;Standard cost per unit;Direct material;$ 2.50;$ 4.00;Direct labor;5.00;4.00;Manufacturing overhead;Variable*;3.00;2.50;Fixed**;4.00;5.00;Total;$14.50;$15.50;*Applied on the;basis of direct labor hours;**Applied on the basis of machine hours;The;company requires 8,000 units of C15 and 11,000 units of C19. Recently, management decided to devote;additional machine time to other product lines, resulting in only 31,000;machine hours per year that can be dedicated to production of the bearings. An outside company has offered to sell Fowler;the bearings at prices of $13.50 for C15 and $13.50 for C19.;Required;A.;Assume;that Fowler decided to produce all C15s and purchase C19s only as needed. Determine the number of C19s to be purchased.;B.;Compute;the net benefit to the firm of manufacturing (rather than purchasing) a unit of;C15. Repeat the calculation for a unit;of C19.;C.;Fowler;lacks sufficient machine time to produce all of the C15s and C19s needed. Which;component (C15 or C19) should Fowler manufacture first with the limited machine;hours available? Why? Be sure to show all supporting computations.;Use of Excess Production;Capacity;73. Lee Company has met all production;requirements for the current month and has an opportunity to manufacture;additional units with its excess capacity. Unit selling prices and unit costs for three;product lines follow.;Plain;Regular;Super;Selling price;$40;$55;$65;Direct;material;12;16;22;Direct labor;(at $20 per hour);10;15;20;Variable;overhead;8;12;16;Fixed;overhead;6;7;8;Variable;overhead is applied on the basis of direct labor dollars, whereas fixed;overhead is applied on the basis of machine hours. There is sufficient demand for the additional;manufacture of all products.;Required;A.;If Lee;Company has excess machine capacity and can add more labor as needed (i.e.;neither machine capacity nor labor is a constraint), which product is the most;attractive to produce?;B.;If Lee;Company has excess machine capacity but a limited amount of labor time;available, which product or products should be manufactured in the excess;capacity?;Joint Costs;Allocation and Decision Making;74. Riverside Company manufactures G and H in a;joint process. The joint costs amount to;$80,000 per batch of finished goods. Each;batch yields 20,000 liters, of which 40% are G and 60% are H. The selling price of G is $8.75 per liter, and;the selling price of H is $15.00 per liter.;Required;A.;If;the joint costs are allocated on the basis of the products' sales value at the;split-off point, what amount of joint cost will be charged to each;product?;B.;Riverside;has discovered a new process by which G can be refined into Product GG, which;has a sales price of $12 per liter. This;additional processing would increase costs by $2.10 per liter. Assuming there are no other changes in costs;should the company use the new process? Show;calculations.;Joint Costs: Allocation, Focus on Decision Making;75.;Stowers;Corporation manufactures products J, K, and L in a joint process. The company incurred $480,000 of joint;processing costs during the period just ended and had the following data that;related to production;Sales Values and Additional;Cost if Processed Beyond Split-off;Product;Sales Value at Split-off;Sales Value;Additional Cost;J;$400,000;$550,000;$130,000;K;350,000;540,000;240,000;L;850,000;975,000;118,000;An analysis revealed that all costs incurred after the;split-off point are variable and directly traceable to the individual product;line.;Required;A.;If Stowers;allocates joint costs on the basis of the products' sales values at the;split-off point, what amount of joint cost would be allocated to product J?;B.;If production of;J totaled 50,000 gallons for the period, determine the relevant cost per gallon;that should be used in decisions that explore whether to sell at the split-off;point or process further? Briefly;explain your answer.;C.;At the beginning;of the current year, Stowers decided to process all three products beyond the;split-off point. If the company desired;to maximize income, did it err in regards to its decision with product J? Product K? Product L?;By how much?;J;DISCUSSION QUESTIONS;Characteristics of;Information for Decision Making;76. Information is said to be useful in decision;making if it possesses three characteristics.;Required;A.;List;the three characteristics of useful information.;B.;Frequently;there is a conflict between two of the characteristics requested in part;A." Briefly explain what this;conflict is.;C.;What;distinguishes relevant from irrelevant information?;Distinctions Between Sunk;Costs and Opportunity Costs;77. Sunk costs and opportunity costs are inherent;in decision making.;Required;A.;Define;the terms "sunk cost" and "opportunity cost.;B.;How;are sunk costs treated when making decisions?;C.;Information;about sunk costs can be found in the financial statements and accounting;records, however, information about opportunity costs is omitted." Do you agree with this statement? Explain.;A..;Capacity Restrictions;78. Capacity restrictions often change the way;that managers make decisions. For;example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding;which new products to carry? How would;this differ, say, from a concert promoter that desires to bring a rock group to;an arena-type facility?


Paper#44967 | Written in 18-Jul-2015

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