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10.E: Short-Term Decision Making (Exercises)

  • Page ID
    12144
  • Multiple Choice

    1. ________ are the costs associated with not choosing the other alternative.
      1. Sunk costs
      2. Opportunity costs
      3. Differential costs
      4. Avoidable costs
    Answer:

    b

    1. Which type of incurred costs are not relevant in decision-making (i.e., they have no bearing on future events) and should be excluded in decision-making?
      1. avoidable costs
      2. unavoidable costs
      3. sunk costs
      4. differential costs
    2. The managerial decision-making process has which of the following as its third step?
      1. Review, analyze and evaluate the results of the decision.
      2. Decide, based upon the analysis, the best course of action.
      3. Identify alternative courses of action to achieve a goal or solve a problem.
      4. Perform a comprehensive differential (differential) analysis of potential solutions.
    Answer:

    d

    1. Which of the following is not one of the five steps in the decision-making process?
      1. identify alternatives
      2. review, analyze, and evaluate decision
      3. decide best action
      4. consult with CFO concerning variable costs
    2. Which of the following is sometimes referred to as the “Anti Chain Store Act”?
      1. Sarbanes-Oxley Act
      2. Robinson-Patman Act
      3. Wright-Patman Act
      4. Securities Act of 1939
    Answer:

    b

    1. Jansen Crafters has the capacity to produce \(50,000\) oak shelves per year and is currently selling \(44,000\) shelves for \(\$32\) each. Cutrate Furniture approached Jansen about buying \(1,200\) shelves for bookcases it is building and is willing to pay \(\$26\) for each shelf. No packaging will be required for the bulk order. Jansen usually packages shelves for Home Depot at a price of \(\$1.50\) per shelf. The \(\$1.50\) per-shelf cost is included in the unit variable cost of \(\$27\), with annual fixed costs of \(\$320,000\). However, the \(\$1.50\) packaging cost will not apply in this case. The fixed costs will be unaffected by the special order and the company has the capacity to accept the order. Based on this information, what would be the profit if Jansen accepts the special order?
      1. Profits will decrease by \(\$1,200\).
      2. Profits will increase by \(\$31,200\).
      3. Profits will increase by \(\$600\).
      4. Profits will increase by \(\$7,200\).
    2. ________ is the act of using another company to provide goods or services that your company requires.
      1. Allocating
      2. Outsourcing
      3. Segmenting
      4. Leasing
    Answer:

    b

    1. Which of the following is a disadvantage of outsourcing?
      1. freeing up capacity
      2. freeing up capital
      3. transferring production and technology risks
      4. limiting ability to upsize or downsize production
    2. Which of the following is not a qualitative decision that should be considered in an outsourcing decision?
      1. employee morale
      2. product quality
      3. company reputation
      4. relevant costs
    Answer:

    d

    1. Which of the following is one of the two approaches used to analyze data in the decision to keep or discontinue a segment?
      1. comparing contribution margins and fixed costs
      2. comparing contribution margins and variable costs
      3. comparing gross margin and variable costs
      4. comparing total contribution margin under each alternative
    2. When should a segment be dropped?
      1. only when the decrease in total contribution margin is less than the decrease in fixed cost
      2. only when the decrease in total contribution margin is equal to fixed cost
      3. only when the increase in total contribution margin is more than the decrease in fixed cost
      4. only when the decrease in total contribution margin is less than the decrease in variable cost
    Answer:

    a

    1. Youngstown Construction plans to discontinue its roofing segment. Last year, this segment generated a contribution margin of \(\$65,000\) and incurred \(\$70,000\) in fixed costs. Discontinuing the segment will allow the company to avoid half of the fixed costs. What effect is expected to occur to the company’s overall profit?
      1. a decrease of \(\$5,000\)
      2. a decrease of \(\$30,000\)
      3. a decrease of \(\$5,000\)
      4. an increase of \(\$30,000\)
    2. Mallory’s Video Supply has changed its focus tremendously and as a result has dropped the selling price of DVD players from \(\$45\) to \(\$38\). Some units in the work-in-process inventory have costs of \(\$30\) per unit associated with them, but Mallory can only sell these units in their current state for \(\$22\) each. Otherwise, it will cost Mallory \(\$11\) per unit to rework these units so that they can be sold for \(\$38\) each. How much is the financial impact if the units are processed further?
      1. \(\$5\) per unit profit
      2. \(\$16\) per unit profit
      3. \(\$3\) per unit loss
      4. \(\$12\) per unit loss
    Answer:

    a

    1. A company produces two products, E and F, in batches of \(100\) units. The production and cost data are:
    Product E Contribution margin per batch $450, Machine set-ups needed per batch 25. Product F Contribution margin per batch $340, Machine set-ups needed per batch 20.

    The company can only perform \(12,000\) set-ups each period yet there is unlimited demand for each product. What is the differential profit from producing product E instead of product F for the year?

    1. \(\$216,000\)
    2. \(\$204,000\)
    3. \(\$12,000\)
    4. \(\$54,000\)
    1. When operating in a constrained environment, which products should be produced?
      1. products with the highest contribution margin per unit
      2. products with the highest contribution margin per unit of the constrained process
      3. products with the highest selling price
      4. products with the lowest allocated joint cost
    Answer:

    b

    Questions

    1. Your roommate at school believes that all fixed costs are always avoidable. Do you agree? How would you explain your point of view to your roommate?
    Answer:

    Primarily disagree, but there are a few times where fixed costs can be avoided or partially avoided. Variable costs are avoidable costs since variable costs do not exist if the product is no longer made, or if the portion of the business (such as a segment or division) that generated the variable costs ceases to operate. Fixed costs, on the other hand, may be unavoidable, partially unavoidable, or avoidable only in certain circumstances. When a company discontinues a product or service, certain fixed costs may not be required.

    1. Explain how to differentiate short-term decisions from long-term decisions of a business and the changes in analyses that influence these decisions.
    2. Felipe’s Restaurant and Pie Shop needs help defining the costs for his business. He also wants to know which costs are relevant or irrelevant to his decision. Identify each cost as relevant or irrelevant. Then identify the type of cost (sunk, fixed, variable, or opportunity).
    Cost Relevant or Irrelevant? Sunk, Fixed, Variable, or Opportunity?
    Rent    
    Baker wages    
    Felipe’s culinary school tuition    
    Berries for pies    
    Painting dining area last year    
    Felipe’s decision not to attend graduate school    
    Answer:
    Cost Relevant or Irrelevant Sunk, Fixed, Variable, or Opportunity?
    Rent Relevant Fixed
    Baker wages Relevant Variable
    Felipe’s culinary school tuition Irrelevant Sunk
    Berries for pies Relevant Variable
    Painting dining area last year Irrelevant Sunk
    Felipe’s decision not to attend graduate school Irrelevant Opportunity
    1.  What factors must any company consider before accepting a special-order contract?
    2. What are some of the qualitative issues that a special order can create?
    Answer:

    One issue is the concern for how existing customers will feel if they discover that the company offered a lower price to the special-order customer for the same goods or services. If the goods in the special order are modified, and thus cheaper for that reason, current customers may prefer the modified, cheaper version of the product. The company would need to determine if selling the new version of the project would hurt profitability or the company’s reputation.

    1. In “The Trouble with Outsourcing,” a Schumpeter column in The Economist, there is a statement of advice to companies, who outsource products or services: “they need to think harder about what is their core business, and what is peripheral.”1 What types of problems do you think they are talking about? In your answer, present at least five (5) problems that companies should consider when outsourcing products or services.
    2. Many outsourced jobs have resulted in “offshoring” jobs, rather than using domestic outsourcing. If a U.S. company wants to offshore a service like customer service, for example, what are some of their considerations? In your answer, address offshoring disadvantages as compared with domestic outsourcing.
    Answer:

    First and foremost, customer service quality is a consideration, followed closely by the ability of the offshore personnel to speak clearly in English and to understand the customer’s needs. Chief operating officers should also make sure that the call centers are adequately staffed and run in an ethical manner, similar to the main company contracting with the outsourced service. Offshoring disadvantages should be weighed against domestic outsourcing in the areas of time zone problems, politically correct labor choices, rising labor costs abroad, as well as culture and language.

    1. What type of qualitative issues should management consider if a quantitative analysis reveals that a segment should be dropped?
    2. In the decision by a grocery company that is trying to decide whether to keep or drop the bakery department in its grocery stores, what would the bakery manager’s salary be in relationship to the decision if the manager will be laid off?
    Answer:

    The bakery manager’s salary would be avoidable and therefore differential in the analysis.

    1. What is of key importance for a company whose products can be processed further?
    2. What is a general rule to remember with respect to a sell-or-process-further environment, and what costs are irrelevant to the decision?
    Answer:

    In general, if the differential revenue from processing further is greater than the differential costs, then it will be profitable to process a joint product after the split-off point. Any costs incurred prior to the split-off point are irrelevant to the decision to process further, as those are sunk costs, and only future costs are relevant costs. Joint product costs are common costs that are incurred simultaneously to produce a variety of end products. Even though they are common costs, they are routinely allocated to the joint products.

    Exercise Set A

    1. Garrison Boutique, a small novelty store, just spent \(\$4,000\) on a new software program that will help in organizing its inventory. Due to the steep learning curve required to use the new software, Garrison must decide between hiring two part-time college students or one full-time employee. Each college student would work \(20\) hours per week, and would earn \(\$15\) per hour. The full-time employee would work 40 hours per week and would earn \(\$15\) per hour plus the equivalent of \(\$2\) per hour in benefits. Employees are given two polo shirts to wear as their uniform. The polo-shirts cost Garrison \(\$10\) each. What are the relevant costs, relevant revenues, sunk costs, and opportunity costs for Garrison?
    2. Derek Dingler conducts corporate training seminars on managerial accounting techniques all around the country. An upcoming training seminar is to be held in Philadelphia. Just prior to that engagement, Derek will be in New York City. He plans to stay in Philadelphia the night of the seminar, as the next morning he plans to meet with clients about future training seminar possibilities. One travel option is to fly from New York to Philadelphia on the first flight on Friday morning, which will get him to Philadelphia two hours before the start of his seminar. The cost of that flight is \(\$287\). Uber fees for his time in Philadelphia will cost \(\$68\). His meal per diem is \(\$40\) for each full day and \(\$25\) for each half day. The hotel cost is \(\$225\) per night. His second option is to rent a car and drive the two hours to Philadelphia from New York City the afternoon before the seminar. The cost of the rental car including gas is \(\$57\) per day and the car will be needed for two full days. At the end of the meetings he will return to New York City. What are the relevant costs, relevant revenues, sunk costs, and opportunity costs that Derek Dingler has to consider in making the decision whether to fly or drive from New York City to Philadelphia?
    3. Bridget Youhzi works for a large firm. Her alma mater has asked her to make a presentation to the upcoming accounting honor society’s annual scholarship dinner. Her firm supports the presentation because it hopes to recruit more excellent employees like Bridget. The university is \(196\) miles from her office. In order to get to the dinner by 5:00 p.m., she will need to leave work at 1:00 p.m. She can drive her personal car and be reimbursed \(\$0.50\) per mile. The dinner ends at 9:00 p.m. Company policy allows her to spend the night if the return trip is four hours or more. There is a student-run inn and conference center across the street from campus that charges \(\$101\) per night. Instead of driving, she could catch a 3:00 p.m. flight that has a round-trip fare of \(\$300\). Flying would require her to rent a car for \(\$39\) per day and pay an airport parking fee of \(\$25\) for the day. The company pays a per diem of \(\$35\) for incidentals if the employee spends at least six hours out of town. (The per diem would be for one \(24\)-hour period for either flying or driving.) As a manager, Bridget is responsible for recruiting within a budget and wants to determine which is more economical. Use the information provided to answer these questions.
      1. What is the total amount of expenses Bridget would include on her expense report if she drives?
      2. What is the total amount of expenses she would include on her expense report if she flies?
      3. What is the relevant cost of driving?
      4. What is the relevant cost of flying?
      5. What is the differential cost of flying over driving?
      6. What other factors should Bridget consider in her decision between driving and flying?
    4. Zena Technology sells arc computer printers for \(\$55\) per unit. Unit product costs are:
    Direct materials $14, Direct labor $20, Manufacturing overhead $3 equals Total $37.

    A special order to purchase \(15,000\) arc printers has recently been received from another company and Zena has idle capacity to fill the order. Zena will incur an additional \(\$2\) per printer for additional labor costs due to a slight modification the buyer wants made to the original product. One-third of the manufacturing overhead costs is fixed and will be incurred no matter how many units are produced. When negotiating the price, what is the minimum selling price that Zena should accept for this special order?

    1. Shelby Industries has a capacity to produce \(45,000\) oak shelves per year and is currently selling \(40,000\) shelves for \(\$32\) each. Martin Hardwoods has approached Shelby about buying \(1,200\) shelves for a new project and is willing to pay \(\$26\) each. The shelves can be packaged in bulk; this saves Shelby \(\$1.50\) per shelf compared to the normal packaging cost. Shelves have a unit variable cost of \(\$27\) with fixed costs of \(\$350,000\). Because the shelves don’t require packaging, the unit variable costs for the special order will drop from \(\$27\) per shelf to \(\$25.50\) per shelf. Shelby has enough idle capacity to accept the contract. What is the minimum price per shelf that Shelby should accept for this special order?
    2. Reuben’s Deli currently makes rolls for deli sandwiches it produces. It uses \(30,000\) rolls annually in the production of deli sandwiches. The costs to make the rolls are:
    Cost per roll: Materials $0.24, Labor, $0.40, Variable overhead $0.16, Fixed overhead $0.20.

    A potential supplier has offered to sell Reuben the rolls for \(\$0.90\) each. If the rolls are purchased, \(30\%\) of the fixed overhead could be avoided. If Reuben accepts the offer, what will the effect on profit be?

    1. Almond Treats manufactures various types of cereals that feature almonds. Acme Cereal Company has approached Almond Treats with a proposal to sell the company its top selling cereal at a price of \(\$22,000\) for \(20,000\) pounds. The costs shown are associated with production of \(20,000\) pounds of almond cereal:
    Direct materials $13,000, Direct labor $5,000, Manufacturing overhead $7,000, Total cost $25,000.

    The manufacturing overhead consists of \(\$2,000\) of variable costs with the balance being allocated to fixed costs. Should Almond Treats make or buy the almond cereal?

    1. Party Supply is trying to decide whether or not to continue its costume segment. The information shown is available for Party Supply’s business segments. Assume that neither the Direct fixed costs nor the Allocated common fixed costs may be eliminated, but will be allocated to the two remaining segments.
    Costumes, Party Supplies, and Floral Decorations, respectively: Sales $160,000, $110,000, $120,000 less Variable costs $84,000, $50,000, $120,000 equals Contribution margin $76,000, $60,000, $90,000 less Direct fixed costs $50,000, $20,000, $25,000 and Allocated common fixed costs $30,000, $25,000, $30,000 equals Net income $(4,000), $15,000, $35,000.

    If costumes are dropped, what change will occur to profit?

    1. Underground Food Store has \(4,000\) pounds of raw beef nearing its expiration date. Each pound has a cost of \(\$4.50\). The beef could be sold “as is” for \(\$3.00\) per pound to the dog food processing plant, or roasted and sold in the deli. The cost of roasting the beef will be \(\$2.80\) per pound, and each pound could be sold for \(\$6.50\). What should be done with the beef, and why?
    2. Ralston Dairy gathered this data about the two products that it produces:
    Product, Current Sales Value, Estimated Added Processing Costs, and Sales Value if Processed Further, respectively: Frozen yogurt $8,000, $2,000, $11,000. Ice cream $12,000, $7,000, $18,000.

    Which of the products should be processed further?

    1. Rough Stuff makes \(2\) products: khaki shorts and khaki pants for men. Each product passes through the cutting machine area, which is the chief constraint during production. Khaki shorts take \(15\) minutes on the cutting machine and have a contribution margin per pair of shorts of \(\$16\). Khaki pants take \(24\) minutes on the cutting machine and have a contribution margin per pair of pants of \(\$32\). If it is assumed that Rough Stuff has \(4,800\) hours available on the cutting machine to service a minimum demand for each product of \(3,000\) units, how much will profits increase if \(100\) more hours of machine time can be obtained?
    2. Rough Stuff makes \(2\) products: khaki shorts and khaki pants for men. Each product passes through the cutting machine area, which is the chief constraint during production. Khaki shorts take \(15\) minutes on the cutting machine and have a contribution margin per pair of shorts of \(\$16\). Khaki pants take \(24\) minutes on the cutting machine and have a contribution margin per pair of pants of \(\$32\). If it is assumed that Rough Stuff has \(4,800\) hours available on the cutting machine to service a minimum demand for each product of \(3,000\) units, how many of each product should be made?

    Exercise Set B

    1. Ella Maksimov is CEO of her own marketing firm. The firm recently moved from a strip mall in the suburbs to an office space in a downtown building, in order to make the firm’s employees more accessible to clients. Two new clients are interested in using Ella’s advertising services but both clients are in the same line of business, meaning that Ella’s company can represent only one of the clients. Pampered Pooches wants to hire Ella’s firm for a one-year contract for web, newspaper, radio, and direct mail advertising. Pampered will pay \(\$126,000\) for these services. Ella estimates the cost of the services requested by Pampered Pooches to be \(\$83,000\). Delightful Dogs is interested in hiring Ella to produce mass mailings and web ads. Delightful will pay Ella \(\$94,000\) for these services and Ella estimates the cost of these services to be \(\$47,000\). Identify any relevant costs, relevant revenues, sunk costs, and opportunity costs that Ella Graham has to consider in making the decision whether to represent Pampered Pooches or Delightful Dogs.
    2. You are trying to decide whether to take a job after you graduate or go onto graduate school. Consider the following questions as you make your decision.
      1. Which of these costs, for the most part, would be relevant (R), and which would be irrelevant (IR)?
        • Cost of your undergraduate education
        • Salary with an undergraduate degree
        • Salary with both an undergraduate degree and a graduate degree
        • Rent
        • Car Insurance
        • Graduate school tuition and fees
        • Food costs
        • Moving expenses
      2. Which of these costs could have a differential amount that is relevant/irrelevant, depending upon the location and or policies of your new job?
    3. You are working for a large firm that has asked you to attend a career fair at a university that is \(185\) miles from your office. You need to be there at 9:00 a.m. on a Monday morning. You can drive your personal car and be reimbursed \(\$0.55\) per mile, but you would need to leave home at 5:30 a.m. to get to the event and set up on time. Company policy allows you to spend the night if you must leave town before 6:00 a.m. The hotel across the street from campus charges \(\$85\) per night. Instead of driving, you could catch a 7:00 a.m. flight with a round-trip fare of \(\$260\). Flying would require you to rent a car for \(\$29\) per day, and you would have an airport parking fee of \(\$20\) for the day. The company pays a per diem of \(\$40\) for incidentals if you spend at least \(6\) hours out of town. (The per diem would be for one \(24\)-hour period for either flying or driving.) As a manager, you are responsible for recruiting within a budget and want to determine which is more economical. Use the information provided to answer these questions.
      1. What is the total amount of expenses you would include on your expense report if you drive?
      2. What is the total amount of expenses you would include on your expense report if you fly?
      3. What is the relevant cost of driving?
      4. What is the relevant cost of flying?
      5. What is the differential cost of flying over driving?
      6. What other factors should you consider in your decision between driving and flying?
    4. Dimitri Designs has capacity to produce \(30,000\) desk chairs per year and is currently selling all \(30,000\) for \(\$240\) each. Country Enterprises has approached Dimitri to buy \(800\) chairs for \(\$210\) each. Dimitri’s normal variable cost is \(\$165\) per chair, including \(\$50\) per unit in direct labor per chair. Dimitri can produce the special order on an overtime shift, which means that direct labor would be paid overtime at \(150\%\) of the normal pay rate. The annual fixed costs will be unaffected by the special order and the contract will not disrupt any of Dimitri’s other operations. What will be the impact on profits of accepting the order?
    5. Aspen Enterprises makes award pins for various events. Budget information regarding the current period is:
    Revenue (200,000 pins at $3.00) $600,000, Direct materials $120,000, Direct labor $220,000, variable manufacturing overhead $50,000, Fixed manufacturing overhead $70,000.

    A fraternity with which Aspen has a long relationship approached Aspen with a special order for \(6,000\) pins at a price of \(\$2.75\) per pin. Variable costs will be the same as the current production, and the special order will not impact the rest of the company’s orders. However, Aspen is operating at capacity and will incur an additional \(\$5,000\) in fixed manufacturing overhead if the order is accepted. Based on this information, what is the differential income (loss) associated with accepting the special order?

    1. Country Diner currently makes cookies for its boxed lunches. It uses \(40,000\) cookies annually in the production of the boxed lunches. The costs to make the cookies are:
    Cost per cookie: Materials $0.30, Labor $0.30, Variable overhead $0.20, Fixed overhead $0.10.

    A potential supplier has offered to sell Country Diner the cookies for \(\$0.85\) each. If the cookies are purchased, \(10\%\) of the fixed overhead could be avoided. If Jason accepts the offer, what will the effect on profit be?

    1. Oat Treats manufactures various types of cereal bars featuring oats. Simmons Cereal Company has approached Oat Treats with a proposal to sell the company its top selling oat cereal bar at a price of \(\$27,500\) for \(20,000\) bars. The costs shown are associated with production of \(20,000\) oat bars currently.
    Direct materials $14,000, Direct labor $6,000, Manufacturing overhead $8,000, Total cost $28,000.

    The manufacturing overhead consists of \(\$3,000\) of variable costs with the balance being allocated to fixed costs. Should Oat Treats make or buy the oat bars?

    1. The Party Zone is trying to decide whether or not to continue its costume segment. The information shown is available for Party Zone’s business segments. Assume that neither the Direct fixed costs nor the Allocated common fixed costs may be eliminated, but will be allocated to the two remaining segments.
    Costumes, Party Supplies, and Floral Decorations, respectively: Sales $160,000, $112,000, $215,000 less Variable costs $94,000, $52,000, $125,000 equals Contribution margin $66,000, $60,000, $90,000 less Direct fixed costs $50,000, $22,000, $28,000 and Allocated common fixed costs $20,000, $27,000, $32,000 equals Net income $(4,000), $11,000, $30,000.

    If costumes are dropped, what change will occur to profit?

    1. Beretti’s Food Mart has \(6,000\) pounds of raw pork nearing its expiration date. Each pound has a cost of \(\$5.50\). The pork could be sold “as is” for \(\$2.50\) per pound to the dog food processing plant, or it could be made into custom Italian sausage and sold in the meat department. The cost of the sausage making is \(\$3.00\) per pound and each pound could be sold for \(\$7.50\). What should be done with the pork and why?
    2. Balcom Dairy gathered this data about the two products that it produces:
    Product, Current Sales Value, Estimated Added Processing Costs, and Sales Value if Processed Further, respectively: Cream $9,000, $3,000, $14,000. Milk $14,000, $9,000, $20,000.    

    Which of the products should be processed further?

    1. Power Corp. makes \(2\) products: blades for table saws and blades for handsaws. Each product passes through the sharpening machine area, which is the chief constraint during production. Handsaw blades take \(15\) minutes on the sharpening machine and have a contribution margin per blade of \(\$15\). Table saw blades take \(20\) minutes on the sharpening machine and have a contribution margin per blade of \(\$35\). If it is assumed that Power Corp. has \(5,000\) hours available on the sharpening machine to service a minimum demand for each product of \(4,000\) units, how much will profits increase if \(200\) more hours of machine time can be obtained?
    2. Power Corp. makes \(2\) products: blades for table saws and blades for handsaws. Each product passes through the sharpening machine area, which is the chief constraint during production. Handsaw blades take \(15\) minutes on the sharpening machine and have a contribution margin per blade of \(\$15\). Table saw blades take \(20\) minutes on the sharpening machine and have a contribution margin per blade of \(\$35\). If it is assumed that Power Corp. has \(5,000\) hours available on the sharpening machine to service a minimum demand for each product of \(4,000\) units, how many of each product should be made?

    Problem Set A

    1. Artisan Metalworks has a bottleneck in their production that occurs within the engraving department. Jamal Moore, the COO, is considering hiring an extra worker, whose salary will be \(\$55,000\) per year, to solve the problem. With this extra worker, the company could produce and sell \(3,000\) more units per year. Currently, the selling price per unit is \(\$25\) and the cost per unit is \(\$7.85\). Using the information provided, calculate the annual financial impact of hiring the extra worker.
    Direct materials $3.50, Direct Labor $1.10, Variable overhead $0.45, Fixed overhead (primarily depreciation of equipment) $2.80 equals Total $7.85.
    1. Syntech makes digital cameras for drones. Their basic digital camera uses \(\$80\) in variable costs and requires \(\$1,500\) per month in fixed costs. Syntech sells \(100\) cameras per month. If they process the camera further to enhance its functionality, it will require an additional \(\$45\) per unit of variable costs, plus an increase in fixed costs of \(\$1,000\) per month. The current price of the camera is \(\$160\). The marketing manager is positive that they can sell more and charge a higher price for the improved version. At what price level would the upgraded camera begin to improve operational earnings?
    2. Marcotti Cupcakes bakes and sells a basic cupcake for \(\$1.25\). The cost of producing \(600,000\) cupcakes in the prior year was:
    Revenues $750,000, Direct materials $330,000, Direct labor $66,000, Manufacturing overhead (fixed) $132,000, Manufacturing overhead (variable) $84,000.

    At the start of the current year, Marcotti received a special order for \(15,000\) cupcakes to be sold for \(\$1.10\) per cupcake. To complete the order, the company must incur an additional \(\$700\) in total fixed costs to lease a special machine that will stamp the cupcakes with the customer’s logo. This order will not affect any of Marcotti’s other operations and it has excess capacity to fulfill the contract. Should the company accept the special order? (Show your work.)

    1. Ken Owens Construction specializes in small additions and repairs. His normal charge is \(\$400\)/day plus materials. Due to his physical condition, David, an elderly gentleman, needs a downstairs room converted to a bathroom. Ken has produced a bid for \(\$5000\) to complete the bathroom. He did not provide David with the details of the bid. However, they are shown here.
    Ken’s Bid Detail Dollars: Direct materials $2,200; Direct labor $1,600; Variable overhead $200; Fixed overhead $600; Profit $400 equals $5,000.
    1. The town’s social services has asked Ken if he could reduce his bid to \(\$4000\). Should Ken accept the counter offer?
    Current Bid: Direct materials $2,200; Direct labor $1,600; Variable overhead $200; Fixed overhead $600; Profit $400 equals $5,000. New Bid: Direct materials $2,200; Direct labor $1,600; Variable overhead $200; Fixed overhead $?; Profit $? equals $4,000.
    1. How much would his income be reduced?
    2. If the town’s social services guaranteed him another job next month at his normal price, could he accept this job at \(\$4000\)?
    1. Boston Executive, Inc., produces executive limousines and currently manufactures the mini-bar inset at these costs:
    Cost per unit: Variable costs: Direct material $950, Direct labor $650, Variable overhead $300 equals Total variable costs $1,900. Fixed costs: Depreciation of equipment $500, Depreciation of building $200, Supervisor salaries $300, Total fixed costs $1,000. Total cost $2,900.

    The company received an offer from Elite Mini-Bars to produce the insets for \(\$2,100\) per unit and supply \(1,000\) mini-bars for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased.

    The specialized equipment cannot be used and has no market value. However, the space occupied by the mini-bar production can be used by a different production group that will lease it for \(\$55,000\) per year. Should the company make or buy the mini-bar insert?

    1. Gent Designs requires three units of part A for every unit of A1 that it produces. Currently, part A is made by Gent, with these per-unit costs in a month when \(4,000\) units were produced:
    Direct materials $4.00, Direct labor $1.50, Manufacturing overhead $1.30, Total cost $6.80.

    Variable manufacturing overhead is applied at \(\$1.00\) per unit. The other \(\$0.30\) of overhead consists of allocated fixed costs. Gent will need \(6,000\) units of part A for the next year’s production.

    Cory Corporation has offered to supply \(6,000\) units of part A at a price of \(\$7.00\) per unit. If Gent accepts the offer, all of the variable costs and \(\$1,200\) of the fixed costs will be avoided. Should Gent Designs accept the offer from Cory Corporation?

    1. Trifecta Distributors has decided to discontinue manufacturing its X Plus model. Currently, the company has \(4,600\) partially completed X Plus models on hand. The government has put a recall on a particular part in the X Plus model, so each base model must now be reworked to accommodate the style of the new part. The company has spent \(\$110\) per unit to manufacture these X Plus models to their current state. Reworking each X Plus model will cost \(\$20\) for materials and \(\$20\) for direct labor. In addition, \(\$7\) of variable overhead and \(\$32\) of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be allocated per unit. If Trifecta completes the X Plus models, it can sell them for \(\$160\) per unit. On the other hand, another manufacturer is interested in purchasing the partially completed units for \(\$104\) each and converting them into Z Plus models. Prepare a differential analysis per unit to determine if Trifecta should complete the X Plus models or sell them in their current state.
    2. Extreme Sports sells logo sports merchandise. The company is contemplating whether or not to continue its custom embroidery service. All of the company’s direct fixed costs can be avoided if a segment is dropped. This information is available for the segments.
    Custom Embroidery and Logo Apparel, respectively: Sales $60,000, $250,000 less Variable costs $30,000, $110,000 equals Contribution margin $30,000, $140,000 less direct fixed costs $22,000, $40,000 and Allocated common fixed costs $12,000, $50,000 equals Net income $(4,000), $50,000.
    1. What will be the impact on net income if the embroidery segment is dropped?
    2. Assume that if the embroidery segment is dropped, apparel sales will increase \(10\%\). What is the impact on the contribution margin and net income solely for the apparel?
    3. Identify one cost that is not relevant in this analysis.
    1. Hong Publishing has purchased Lang Publishing. After reviewing titles from both companies, a decision must be made to determine what titles must be dropped. The following information is available to make the decision.
    Title X, Title Y, and Title Z, respectively: Sales $100,000, $150,000, $200,000 less Variable cost $50,000, $75,000, $100,000 equals Contribution margin $50,000, $70,000, $100,000 less direct fixed cost $20,000, $30,000, $40,000 and Allocated common fixed cost $10,000, $15,000, $20,000 equals Net income $20,000), $30,000, $40,000.
    1. What is the total income if all titles were produced?
    2. If Title X was dropped, what would be the effect on Net Income?
    3. How much did Title X Contribute to Fixed Costs?
    4. Determine the cost and the amount that will remain even if Title X is dropped?
    5. Which costs and amount will be eliminated if Title X is dropped?
    1. Calcion Industries produces two joint products, Y and Z. Prior to the split-off point, the company incurred costs of \(\$36,000\). Product Y weighs \(25\) pounds and product Z weighs \(75\) pounds. Product Y sells for \(\$150\) per pound and product Z sells for \(\$125\) per pound. Based on a physical measure of output, allocate joint costs to products Y and Z.
    2. Quality Clothing, Inc., produces skorts and jumper uniforms for school children. In the process of cutting out the cloth pieces for each product, a certain amount of scrap cloth is produced. Quality has been selling this cloth scrap to Jorge’s Scrap Warehouse for \(\$3.25\) per pound. Last year, the company sold \(40,000\) lb. of scrap, which would be enough to make \(10,000\) teddy bears that the management of Quality is now interested in producing. Their processes would need some reprogramming, particularly in the cutting and stitching processes, but it would require no additional worker training. However, new packaging would be needed. The total variable cost to produce the teddy bears \(\$3.85\). Fixed costs would increase by \(\$95,000\) per year for the lease of the packaging equipment and Quality estimates it could produce and sell \(10,000\) teddy bears per year. Finished teddy bears could be sold for \(\$18.00\) each. Should Quality continue to sell the scrap cloth or should Quality process the scrap into teddy bears to sell?
    3. At Gems in the Rough, a jewelry company, the engraving department is a bottleneck. The company is considering hiring an extra worker, whose salary will be \(\$56,000\) per year, to ease the problem. Using the extra worker, the company will be able to engrave \(8,000\) more units per year. The selling price per unit is \(\$16\). The cost per unit currently is \(\$11.85\) as shown:
    Direct material $4.50. Direct labor $2.10. Variable overhead $1.45. Fixed overhead (primarily depreciation of equipment) $3.80. Equals a total of $11.85.

    What is the annual financial impact of hiring the extra worker for the bottleneck process?

    1. Sports Specialists makes baseballs and softballs in a three-step process. Unfortunately, the sewing machine process has been identified as a bottleneck. Each softball has a contribution margin of \(\$6.00\) and each baseball has a contribution margin of \(\$2.00\). The sewing machine can make \(10\) softballs or \(25\) baseballs in one hour.
      1. If demand for both products is unlimited and the sewing machine capacity cannot be expanded, which product should be produced?
      2. If demand for each ball is limited to \(6,000\) balls and there are \(800\) hours available on the machine, how many of each product should be produced?

    Problem Set B

    1. Variety Artisans has a bottleneck in their production that occurs within the engraving department. Arjun Naipul, the COO, is considering hiring an extra worker, whose salary will be \(\$45,000\) per year, to solve the problem. With this extra worker, the company could produce and sell \(3,500\) more units per year. Currently, the selling price per unit is \(\$18\) and the cost per unit is \(\$5.85\). Using the information provided, calculate the annual financial impact of hiring the extra worker.
    Direct materials $2.50, Direct Labor $1.10, Variable overhead $0.45, Fixed overhead (primarily depreciation of equipment) $1.80 equals Total $5.85.
    1. Mortech makes digital cameras for drones. Their basic digital camera uses \(\$80\) in variable costs and requires \(\$1,500\) per month in fixed costs. Mortech sells \(200\) cameras per month. If they process the camera further to enhance its functionality, it will require an additional \(\$45\) per unit of variable costs, plus an increase in fixed costs of \(\$1,000\) per month. The current price of the camera is \(\$200\). The marketing manager is positive that they can sell more and charge a higher price for the improved version. At what price level would the upgraded camera begin to improve operational earnings?
    2. Cinnamon Depot bakes and sells cinnamon rolls for \(\$1.75\) each. The cost of producing \(500,000\) rolls in the prior year was:
    Revenues $875,000, Direct materials $425,000, Direct labor $75,000, Manufacturing overhead (fixed) $125,000, Manufacturing overhead (variable) $90,000.

    At the start of the current year, Cinnamon Depot received a special order for \(18,000\) rolls to be sold for \(\$1.50\) per roll. The company estimates it will incur an additional \(\$1,000\) in total fixed costs in order to lease a special machine that forms the rolls in the shape of a heart per the customer’s request. This order will not affect any of its other operations. Should the company accept the special order? (Show your work.)

    1. Myrna White is a mobile housekeeper. The price for a standard house cleaning is \(\$150\) and takes \(5\) hours. Each worker is paid \(\$25\)/hour, uses \(\$15\) of materials and \(\$0.50\) per mile to use their own vehicle to travel from job to job. The average job is \(5\) miles. Arniz Meyroyan has a family reunion at her house and needs her house freshened up. She offers \(\$75\) for this emergency tidy-up service. This service includes vacuuming and cleaning floors, dusting, and cleaning the bathrooms. Only \(\$5\) of materials would be used.
      1. Prepare an Excel spread sheet to determine the differential income if the emergency tidy-up service is priced at \(\$75\). The tidy-up service will take \(2\) hours.
      2. If a \(\$25\) surcharge was included to make the price of \(\$100\) how would the differential income change?
      3. If the hourly worker rate increased to \(\$30\)/hour, how would net income change?
      4. What other issue would you need to consider?
    2. Blake Cohen Painting Service specializes in small paint jobs. His normal charge is \(\$350\)/day plus materials. Moesha needs her basement painted. Blake has produced a bid for \(\$1500\) to complete the basement painting. Blake completed a cost estimate for his service as shown.
    Direct materials $200, Direct labor $700, Variable overhead $50, Fixed overhead $60, Profit $100 equals $1,110.
    1. Moesha mentions that she can’t pay the \(\$1500\). She is a widow and you feel an obligation to take care of widows but can’t lose money. How much would you charge and still be able to make a profit?
    2. Moesha has asked you to paint the rest of her house. Could you continue to give her the same deal?
    1. Regal Executive, Inc., produces executive motor coaches and currently manufactures the tent awnings that accompany them at these costs:
    Cost per unit: Variable costs: Direct material $1,250, Direct labor $750, Variable overhead $500 equals Total variable costs $2,500. Fixed costs: Depreciation of equipment $500, Depreciation of building $400, Supervisor salaries $300, Total fixed costs $1200. Total cost $3,700.

    The company received an offer from Saied Tents to produce the awnings for \(\$3,200\) per unit and supply \(1,000\) awnings for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased.

    The specialized equipment cannot be used and has no market value. However, the space occupied by the awning production can be used by a different production group that will lease it for \(\$60,000\) per year. Should the company make or buy the awnings?

    1. Remarkable Enterprises requires four units of part A for every unit of A1 that it produces. Currently, part A is made by Remarkable, with these per-unit costs in a month when \(4,000\) units were produced:
    Direct materials $4.80, Direct labor $2.00, Manufacturing overhead $2.10, Total cost $8.90.

    Variable manufacturing overhead is applied at \(\$1.60\) per unit. The other \(\$0.50\) of overhead consists of allocated fixed costs. Remarkable will need \(8,000\) units of part A for the next year’s production.

    Altoona Corporation has offered to supply \(8,000\) units of part A at a price of \(\$8.00\) per unit. If Remarkable accepts the offer, all of the variable costs and \(\$2,000\) of the fixed costs will be avoided. Should Remarkable accept the offer from Altoona Corporation?

    1. Colin O’Shea has a carpentry shop that employs \(4\) carpenters. Colin received an order for \(1,000\) coffee tables. The coffee tables have a round table top and four decorative legs. An offer for \(\$500\) per table was received. Colin found an unfinished round table top that he could buy for \(\$50\) each.
      1. Using this quantitative cost data to make the table top, should Colin buy the table top or make it?
    Direct material $10, Direct labor $35, Variable overhead $20, Fixed overhead $7.
    1. What qualitative factors would be included in your decision.
    2. Can the vendor make it to the same quality standards? Can it be completed on time? Is there idle capacity in the factory that could be used?
    1. ZZOOM, Inc., has decided to discontinue manufacturing its Z Best model. Currently, the company has \(4,600\) partially completed Z Best models on hand. The government has put a recall on a particular part in the Z Best model, so each base model must now be reworked to accommodate the style of the new part. The company has spent \(\$110\) per unit to manufacture these Z Best models to their current state. Reworking each Z Best model will cost \(\$22\) for materials and \(\$25\) for direct labor. In addition, \(\$9\) of variable overhead and \(\$34\) of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be allocated per unit. If ZZOOM completes the Z Best models, it can sell them for \(\$180\) per unit. On the other hand, another manufacturer is interested in purchasing the partially completed units for \(\$105\) each and converting them into Z Plus models. Prepare a differential analysis per unit to determine if ZZOOM should complete the Z Best models or sell them in their current state.
    2. Cable paper company produces many colors of paper. The current popular color is grey. To increase the production of grey paper, a decision must be made to determine what color must be dropped. The following information is available to make the decision.
    Peach, Blue, and Plum, respectively: Sales $40,000, $60,000, $80,000 less Variable costs $20,000, $30,000, $40,000 equals Contribution margin $20,000, $30,000, $40,000 less Direct fixed costs $8,000, $12,000, $16,000 and Allocated common fixed costs $4,000, $6,000, $8,000 equals Net income $8,000, $12,000, $16,000.
    1. What is the total income if all colors were produced?
    2. If Peach was dropped, what would be the effect on Net Income?
    3. How much did Peach paper contribute to Fixed Costs?
    4. Determine the cost and the amount that will remain even if Peach is dropped?
    5. Which costs and amount will be eliminated if Peach is dropped?
    1. Strawberry Sweet Company makes a variety of jams and jellies. During June, \(55,000\) gallons of strawberry mash was processed at a joint cost of \(\$40,000\). This produced \(42,000\) gallons of preserve-grade mix and \(4,000\) gallons of strawberry juice for jelly. The juice could be processed further into energy drinks, and the preserve mix could be processed further into ice cream flavoring. Information on these items is shown:
    Product, Sales Value at Split-off Point, Estimated Further Processing Costs, and Sales Value after Processing, respectively: Preserve mix $104,500, $8,000, $125,000. Juice for jelly $50,500, $40,000, $70,000.
    1. Assume that the joint cost is allocated to the products based on the physical quantity of output of each product. How much joint cost should be assigned to each product?
    2. How much joint cost should be assigned to each product if the relative sales value allocation method is used?
    3. Which products should be processed further?
    1. Laramie Industries produces two joint products, H and C. Prior to the split-off point, the company incurred costs of \(\$66,000\). Product H weighs \(44\) pounds and product C weighs \(66\) pounds. Product H sells for \(\$250\) per pound and product C sells for \(\$295\) per pound. Based on a physical measure of output, allocate joint costs to products H and C.
    2. Jamboree Outfitters, Inc., produces pocket knives and fillet knives for outdoor sporting. In the process of making the knives, some irregularities occur and no further work is performed on the blades. Jamboree has been selling these irregular blades to scrap dealers for \(\$5.00\) per pound. Last year, the company sold \(50,000\) lbs. of scrap. The company found that Amazon will buy the irregular knives for \(\$12\) each provided Jamboree finishes producing the knives into sellable form and also assuming there are enough irregular blades to make \(50,000\) completed knives. Jamboree’s processes would not need reprogramming, particularly in the shaping and sharpening processes. However, this would require one additional worker, and new packaging would be needed. The total variable cost to produce the irregulars is \(\$4.85\). Fixed costs would increase by \(\$175,000\) per year for the lease of the packaging equipment and the new worker. Jamboree estimates it could produce and sell \(50,000\) knives per year. Should Jamboree continue to sell the scrap blades or should Jamboree process the irregulars to sell to Amazon?
    3. Daisy Hernandez sells girls christening dresses through the online store, Etsy. Her customers have asked if she has necklaces that could be included with the dress. Daisy found white glossy ceramic hearts from another Etsy vendor for \(\$20\). Daisy has the talent and already has a fully depreciated kiln to make these hearts.
      1. Using the provided quantitative cost data to make the heart, should Daisy buy from her fellow Etsy vendor or make it herself?
    Direct materials $3, Direct labor $5, Variable overhead $2, Fixed overhead $7.
    1. What qualitative factors would be included in your decision.
    1. Dr. Detail is a mobile car wash. The price for a standard wash is \(\$35\) and takes half an hour. Each worker is paid \(\$20\)/hr, uses \(\$5\) of materials and \(\$0.50\) per mile to use their own vehicle to travel from job to job. The average job is \(5\) miles. Ernest Kuhn’s son got sick in the car, and Ernest Kuhn has asked Dr. Detail to detail his car instead of doing a simple wash and vacuum.
      1. Determine the differential income if \(\$100\) was charged to detail the car. Each car detail will take \(2\) hours. The materials used by the worker is three times that of a standard car wash.
      2. If the price is raised to \(\$150\), what is the differential income change?
      3. Keeping the price at \(\$150\), if the worker rate per hour would increase to \(\$20\)/hr how would the differential income change? Prepare an Excel spreadsheet.
      4. What other issues would you need to consider?
    2. At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The company is considering hiring an extra worker, whose salary will be \(\$67,000\) per year, to ease the problem. Using the extra worker, the company will be able to produce and sell \(9,000\) more units per year. The selling price per unit is \(\$20\). The cost per unit currently is \(\$15.85\) as shown:
    Direct material $5.50. Direct labor $3.10. Variable overhead $2.45. Fixed overhead (primarily depreciation of equipment) $4.80. Equals a total of $15.85.

    What is the annual financial impact of hiring the extra worker for the bottleneck process?

    1. Sports Buffs makes basketballs and footballs in a three-step process. Unfortunately, the stem insertion process has been identified as a bottleneck. Each basketball has a contribution margin of \(\$15.00\) and each football has a contribution margin of \(\$4.00\). The stem insertion equipment can make \(10\) basketballs or \(30\) footballs in one hour.
      1. If demand for both products is unlimited and the stem insertion machine capacity cannot be expanded, which product should be produced?
      2. If demand for each ball is limited to \(30,000\) balls and there are \(4,000\) hours available on the machine, how many of each product should be produced?

    Thought Provokers

    1. Seda Sarkisian makes wedding cakes from her home. A customer has requested two duplicate wedding cakes: one for the wedding and one to be frozen for their anniversary. The couple has offered \(\$400\) for both cakes instead of \(\$500\) (\(\$250\) each). The cost information to make one cake is shown.
    For one cake: Direct materials $50, Direct labor $100, Variable overhead $25, Fixed overhead $10.
    1. What is the cost for the first cake?
    2. What cost would not be included in the second cake?
    3. What is the cost of the second cake?
    4. What would be the total cost of this order if the offer was accepted?
    5. How much profit will Seda be recording for this special order?
    6. If your company policy is to always have a \(15\%\) profit on all order, would you still accept this order?
    7. If you would not accept the order, what price would you negotiate?
    1. You are a management accountant for Time Treasures Company, whose company has recently signed an outsourcing agreement with Spotless, Inc., a janitorial service company. Spotless will provide all of Time Treasures’ janitorial services, including sweeping floors, hauling trash, washing windows, stocking restrooms, and performing minor repairs. Time Treasures will be billed at an hourly rate based on the type of service performed. The work of common laborers (sweeping, hauling trash) is to be billed at \(\$8\) per hour. More skilled (repairs) and more dangerous work (washing outside windows on the \(23^{rd}\) floor) are to be billed at \(\$18\) per hour. Supervisory time is to be billed at \(\$20\) per hour. Spotless will submit monthly invoices, which will show the number and types of hours for which Time Treasures is being charged. The outsourcing contract is simple and straightforward.
      1. What are some of the internal control problems you foresee as a result of outsourcing the janitorial service with this contract?
      2. Explain recommendations to control risk that would you suggest after reviewing the contract.
    2. Brindi’s Babysitting Center currently rents a \(1200\) sq foot facility for her \(20\)-child facility. Her business has gotten five stars on Yelp, which has prompted more applications. She has to make a decision between expanding her operations to an \(1,800\) sq foot facility or staying in the current facility. Shown is the cost data of the options:
    Expand and Stay, respectively: Children served 30, 20; Annual rent $1,500, $1,000; Utilities $500, $300; Food and materials $2,100, $1,400; Direct labor $6,000, $4,000; Moving cost $5,000, $?.

    What is the differential cost of the two alternatives:

    1. move to a larger facility or
    2. stay in current facility?
    1. Akimoto’s Bicycle Co assembles three types of bicycles: Charger, Sublime, Kidde. Due to their residential location they operate with one 8 hour shift, \(5\) days per week, \(50\) weeks a year. Balancing the bikes is the bottleneck. The information about production time and costs for these three bicycles are:
    Charger, Sublime, and Kidde, respectively: Hours to produce 2, 1.75, 0.5; Selling price $600, $300, $200; Direct material $100, $75, $50; Direct labor $150, $100, $75; Variable overhead $50, $25, $25; Fixed overhead $25, $25, $20.
    1. How many of each bicycle should be produced to maximize profits?
    2. What qualitative factors would you need to consider?