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Exam 6: Relevant Information for Special Decisions

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Question 71

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Expected future revenues that differ among the alternatives under consideration are often referred to as:

A) Alternative revenues.
B) Preferential revenues.
C) Relative revenues.
D) Differential revenues.

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

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Question 72

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Sunk costs are sometimes relevant for decision-making purposes.

A) True
B) False

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Question 73

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Ann is trying to decide which one of two job offers she will accept. Several items are presented below: Select the items that are irrelevant to Ann's decision.

Which of the following is not a possible alternate term for costs that can be eliminated by taking a specified course of action?

Which of the following statements is incorrect?

Anton Valve Company produces a mechanical valve used in water systems. Three years ago the company introduced an electronic version of the valve. Sales of the mechanical model have steadily declined, and the company will report a loss on the product this year as follows: $\begin{array}{|l|c|}\hline\text{ Sales revenue }& \$ 200,000 \\\hline \text{ Less costs: } \\\hline\text{ Unit-level manufacturing costs }& \$ 157,500 \\\hline\text{ Batch-level costs} & 2,500 \\\hline \text{ Product-level costs} & 5,000 \\\hline \text{ Facility-level costs }& 30,000 \\\hline \text{ Allocated corporate costs} & 11,500 \\\hline\text{ Total costs }& 206,500 \\\hline\text{ Net loss} &\$ (6,500) \\\hline\end{array}$ If production of the mechanical valve is discontinued, product-level costs will be eliminated but facility level and corporate costs would not be affected.Required: 1) Prepare a quantitative analysis that indicates whether the valve should be discontinued.2) What qualitative factors should be considered in this decision?

For an equipment replacement decision, what costs are relevant, and what costs are not relevant?

Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another? $\begin{array} { | l | r | r | } \hline & \text { Contract X } & \text { Contract Z } \\\hline \text { Contract Revenue } & \$ 200,000 & \$ 260,000 \\\hline \text { Materials } & 10,000 & 10,000 \\\hline \text { Labor } & 88,000 & 120,000 \\\hline \text { Depreciation on Equipment } & 8,000 & 10,000 \\\hline \text { Cost Incurred for Consulting Advice } & 1,500 & 1,500 \\\hline \text { Allocated Portion of Overhead } & 5,000 & 3,000 \\\hline\end{array}$

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: What is the differential revenue for this decision?

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: $\begin{array} { | l | r | } \hline \text { Unit-level materials costs } ( 10,000 @ \$ 15 ) & \$ 150,000 \\\hline \text { Unit-level labor costs } ( 10,000 @ \$ 20 ) & 200,000 \\\hline \text { Unit-level overhead costs } ( 10,000 @ \$ 16 ) & 160,000 \\\hline \text { Depreciation expenses on equipment* } & 12,000 \\\hline \text { Other manufacturing overhead** } & 36,000 \\\hline\end{array}$ *The equipment was purchased last year 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 equipment is not used to produce ceramic pots, it can be leased for $8,000 per year.**Includes supervisors' salaries and rent for manufacturing plant.Required: 1) Assume Evergreen Industries uses a cost plus pricing strategy. What price should be charged for the ceramic pot product if the division sets its price 40 percent above the unit product cost? 2) A potential overseas customer who would not compete with the division's existing customers would like to purchase 1,000 ceramic pots but is not willing to pay the regular price. At what selling price would the division be indifferent about accepting the special order? 3) Suppose the division has the opportunity to purchase the ceramic pot from another manufacturer for $60.The supplier is willing to hold sufficient inventories to meet Evergreen's demand. Should the division outsource its ceramic pots? Why or why not?

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

The cost that is avoided when a company eliminates a single item of a product or service is a:

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.

Costs that are not related to any specific product, batch, or unit of production are referred to as facility-level costs.

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department. If the fishing department is closed, the store manager's position will not be affected, but if the entire store is closed, the manager will be terminated. Which of the following lessons should be learned from this example?

Bates Golf Supply produces a golf bag that sells for $220. Although the company's production capacity is 5,000 bags per year, only 4,000 bags are currently being produced and sold. The production costs for 4,000 bags are as follows: $\begin{array} { | l | r | } \hline \text { Unit-level material cost } & \$ 300,000 \\\hline \text { Unit-level labor cost } & 240,000 \\\hline \text { Unit-level overhead } & 75,000 \\\hline \text { Batch-level setup costs ( } 500 \text { units per batch) } & 16,000 \\\hline \text { Product-level costs } & 20,000 \\\hline \text { Allocated facility-level costs } & 25,000\\\hline\end{array}$ Golf Mart Stores has offered to purchase 1,000 golf bags as a one-time special purchase at a price of $170 per bag.Required: 1) Prepare a quantitative analysis that indicates whether the special order should be accepted.2) What qualitative factors should be considered in this special order decision?

The book value of equipment generally is one of the most important factors to consider in deciding to replace the equipment.

In the short run, asset replacement decisions often result in lower reported profits in the period of replacement. Which of the following does not contribute to this?

The practice of relaxing constraints is likely to increase a business's profitability.

The market value of equipment owned by a company is a sunk cost and should not be taken into account in deciding whether or not to replace the equipment.