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Exam 4: Relevant Information for Decision Making

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Question 51

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Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of LittleBlast were produced and sold. Following are average prices and costs for last month: BigBlast LittleBlast Selling price $100 $200 Direct materials (25) (75) Direct labour (15) (35) Variable overhead (5) (30) Product line fixed costs (10) (40) Corporate fixed costs (25) (25) Average margin per unit $ 20 $( 5) The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped. What is the breakeven sales volume (in units) for BigBlast? (In other words, what is the sales volume at which Horton should be financially indifferent between dropping and keeping BigBlast?) :

A) 728 units
B) 2,545 units
C) 1,084 units
D) 790 units

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Question 52

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A factor in special order decisions is the effect that the decision will have on regular customers.

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Question 53

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An order from a new customer always constitutes a special order.

Tyke, Inc. produces 2 products A and B, each requiring direct material and labour. Total labour available is 200 hours, and 300 kilograms of material. Each unit of A sells for $10, and B sells for $15. Given the following linear programming information: Maximize: $4A + $5Y Subject to: 3A + 1B ≤ 200 2A + 2B ≤ 300 What are the variable costs per unit for A and B?

The assumption that organizations seek to maximize short-term profits ignores:

A bottleneck:

A not-for-profit organization provides meals and medicine for homeless people. Because of funding cutbacks, one of the two services must be curtailed. To make this choice, managers are likely to consider all of the following except:

To ensure high quality in outsourcing decisions, organizations typically negotiate contracts with:

The general rule for make or buy decisions is to choose the option with the lowest total cost.

The following information is always relevant for short-term decisions:

A company should always promote the product:

Strategic plans require managers to emphasize products that generate the highest short-term profit.

Opportunity costs are often relevant in make or buy decisions.

A company manufactures chips used in the production of computers. The chips can be purchased for $50 each from an outside vendor. It costs the manufacturer $60 a chip to produce them, of which 25% is fixed overhead cost. What are the relevant costs for this decision? Based on these costs, which option should the company choose? Relevant Costs (Manufacture and Purchase) Decision

The accessibility and timeliness of information can affect decision quality in nonroutine situations.

(CMA) Callow Company has considerable excess manufacturing capacity. A special job order's cost sheet includes the following allocated manufacturing overhead costs: Fixed costs $42,000 Variable costs 66,000 The fixed costs include a normal $7,400 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $15,500. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

Rapid growth may require a company to outsource certain products or services.

Various general decision rules are used for different kinds of nonroutine operating decisions. The types of nonroutine operating decisions and decision rules are listed below. Match each decision rule with the appropriate decision type. Each numbered item has only one correct answer. Each lettered item may be used once, more than once, or not at all.

The general rule is to keep any product or service in the short term:

Quick Clean sends workers to homes and offices to perform cleaning services for special occasions. There are 4 different outlets and one headquarters for the company. Headquarters' costs are allocated to outlets using a rate of 30% of revenue. The income statement for one of the outlets for last year was as follows: Revenue (500 visits)$200,000 Costs: Direct labour wages ($160 per visit)$80,000 Rent and insurance 20,000 Variable selling and administrative 10,000 Fixed selling and administrative 35,000 Allocated headquarters costs 60,000 205,000 Income $( 5,000) a)Quick Clean wants to know whether this outlet should be dropped. Identify the relevant cash flows and make a recommendation to management about this decision. b)List one qualitative factor that might affect this type of decision.