FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 6: Relevant Information for Special Decisions

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Essay

Review LaterAdd Note

Review Later

Discuss why qualitative characteristics must be considered when making decisions such as special orders, outsourcing, elimination and replacement decisions and scarce resource allocation decisions. Give examples.

Correct Answer

verified

Answers will vary
As with quantitative d...

View Answer

Show Answer

Question 2

Multiple Choice

Review LaterAdd Note

Review Later

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a facility-level cost? $\begin{array} { | l | l | } \hline { \text { Cost Items Appearing } } & \text { on the Income Statement } \\\hline \text { Materials cost (\$10 per unit) } & \text { Depreciation on manufacturing equipment } \\\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \\\hline \text { Labor cost (\$4 per unit) } & \text { Research and development costs } \\\hline \text { Advertising costs ( } 150,000 \text { per vear) } & \text { Real estate taxes on factory } \\\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \\\hline\end{array}$

A) Inspection costs
B) Shipping and handling
C) Materials cost
D) Company president's salary

E) A) and B)
F) None of the above

Correct Answer

verified

D

Question 3

Multiple Choice

Review LaterAdd Note

Sunk costs:

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants. During the current year, the division produced 10,000 pots and incurred the following costs: $\begin{array}{|l|r|}\hline\text { Unit-level materials costs }(10,000 @ \$ 15) & \$ 150,000 \\\hline \text { Unit-level labor costs }(10,000 @ \$ 20) & 200,000\\\hline \text { Unit-level overhead costs }(10,000 @ \$ 16) & 160,000 \\\hline \text { Depreciation expenses on equipment* } & 30,000 \\\hline \text { Other manufacturing overhead** } & 36,000 \\\hline\end{array}$ *The equipment was purchased for $150,000 and has a current book value of $120,000, remaining useful life of four years, and a zero salvage value. If the company does not use the equipment, it can be leased for $8,000 per year.**Includes supervisors' salaries and rent for manufacturing plant.Required: The division is considering replacing the equipment used to manufacture its ceramic pots. Replacement equipment can be purchased at a price of $200,000. The new equipment, which is expected to last 4 years and have a salvage value of $20,000, will reduce unit-level labor costs by 25 percent. Assuming the division desires to maintain its production and sales at 10,000 ceramic pots per year, prepare a schedule that shows the relevant cost of operating the existing equipment versus the cost of operating the new equipment. Should the existing equipment be replaced? Why or why not?

Only variable costs are relevant for decision making.

Select the correct statement regarding relevant costs and revenues.

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Which type of cost is considered a sunk cost to Outdoor Living's decision of whether to accept or reject the special order?

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

A manager refuses to replace an existing asset even though an extensive analysis indicates that replacement is desirable. One possible explanation for the manager's action is that:

Variable costs are always relevant in decision making.

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $20 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: Assume that the company needs 15,000 of the switches, which would be produced in three batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be: $\begin{array} { | l | l | } \hline \text { Unit-level material cost } & \$ 3 \\\hline \text { Unit-level labor cost } & \$ 2 \\\hline \text { Unit-level overhead } & \$ 1 \\\hline \text { Batch-level cost ( } 5,000 \text { units per batch) } & \$5,000 \\\hline \text { Product-level supervisory salaries } & \$ 37,500 \\\hline \text { Allocated facility-level costs } & \$ 20,000 \\\hline\end{array}$

Variable costs that are proxies for long-term costs should be used to measure profitability.

Lindsay purchased a raffle ticket for $5. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $30, and another offered $65. What is Lindsay's opportunity cost of keeping the raffle ticket?

Select the incorrect statement concerning opportunity costs.

The decision to accept a lower-than-normal selling price may depend on the availability of excess capacity.

The management practice that increases profitability through the management of bottlenecks is known as:

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

Which of the following statements is incorrect?

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

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