75. One of the key management functions is to perform a regular review of product
profitability. Which question below would not typically be asked when performing such an
analysis?
76.
Value
streams
are useful in decision-making because:
77. Zippy Company has a product that it currently sells in the market for $50 per unit. Zippy
has developed a new feature which, if added to the existing product, will allow Zippy to receive a
price of $65 per unit. The cost of adding this new feature is $26,000 and Zippy expects to sell
1,600 units in the coming year. What is the net effect on next-year’s operating income of adding
the feature to the product?
78. The Robinson-Patman Act, administered by the U.S. Federal Trade Commission,
addresses pricing that could substantially damage the level of competition in an industry. This
type of pricing is called:
79. Triad Children’s Center, a non-profit organization, uses relevant cost analysis to
determine whether or not new services are desirable. TCC is looking at adding a new educational
program for grade school children who are having difficulty with their reading and math skills.
The following relevant costs are expected if the program is accepted:
Costs (per year)
Program Director $39,000
Part-time Assistants $28,000
Variable cost per child $900
TCC estimates that a maximum of 40 children will participate in this program in the first year. If
TCC decides to implement this program, funding will be received from the City Chamber of
Commerce ($50,000) and a local Private University Endowment Fund ($35,000).
Calculate the expected surplus or deficit from operations given the above information.
80. Triad Children’s Center, a non-profit organization, uses relevant cost analysis to
determine whether or not new services are desirable. TCC is looking at adding a new educational
program for grade school children who are having difficulty with their reading and math skills.
The following relevant costs are expected if the program is accepted:
Costs (per year)
Program Director $39,000
Part-time Assistants $28,000
Variable cost per child $900
TCC estimates that a maximum of 40 children will participate in this program in the first year. If
TCC decides to implement this program, funding will be received from the City Chamber of
Commerce ($50,000) and a local Private University Endowment Fund ($35,000).
In deciding between alternative choices for a given situation, managers usually employ a five–
step process. Which of the following is not a recommended step in this decision-making process?
81. Maxwell Manufacturing is contemplating the purchase of a new machine to replace a
machine that has been in use for seven years. The old machine has a net book value (NBV) of
$50,000 and still has five years of useful life remaining. The old machine has a current market
value of $5,000, but is expected to have no market value after five years. The variable operating
costs and depreciation expenses (straight-line) are $135,000 per year. The new machine will cost
$90,000, has an estimated useful life of five years with zero disposal value after five years, and
an annual operating expense of $118,000 (including straight-line depreciation). Considering the
five years in total and ignoring the time value of money and income taxes, what is the difference
in total relevant costs for the two decision alternatives (keep vs. replace)?
82. You just bought a new luxury sports car for $125,000. Before you had time to get
insurance, the car was wrecked. Weird Wally offers to take it off your hands for $10,000. You can
then purchase a similar model for $128,000. A body-shop (with an excellent reputation) offers to
rebuild the wrecked car for $90,000 and loan you a similar model while the vehicle is being
rebuilt. Once rebuilt, the body-shop claims, it will “run like a new car and nobody will be able to
tell the difference.” What would you do from a financial point of view?
83. A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can
either be disposed for $5,000 cash and replaced with a similar truck costing $27,000, or rebuilt
for $20,000 and be “new” as far as operating characteristics and looks are concerned. The net
relevant cost of the replacing option is:
84. A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can
either be disposed for $5,000 cash and replaced with a similar truck costing $27,000, or it can be
rebuilt for $20,000 and be brand new as far as operating characteristics and looks are concerned.
The better decision choice provides a net cost savings of:
85. The mathematical tool used to determine the optimum short-term product (or service)
mix is:
86. The make-or-buy (i.e., sourcing) decision can (most likely) apply to decisions regarding
all of the following functions or expenditures except:
87. A
decision
bias
is an inherent tendency that leads to incorrect decisions. An example of a
decision
bias
is failure to:
88. In a sell-or-process-further decision, joint production costs:
89. In a manufacturing environment the short-term profit-maximizing decision would be to:
90. A company’s approach to a make-or-buy decision:
91. Sunk costs are:
92. Regis Company manufactures plugs at a cost of $36 per unit, which includes $8 of fixed
overhead. Regis needs 30,000 of these plugs annually (as part of a larger product it produces).
Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to
purchase the plugs, $60,000 of the annual fixed overhead cost will be eliminated, and the
company may be able to rent the facility previously used for manufacturing the plugs.
If Regis Company purchases the plugs but does not rent the unused facility, the company would:
93. Regis Company manufactures plugs at a cost of $36 per unit, which includes $8 of fixed
overhead. Regis needs 30,000 of these plugs annually (as part of a larger product it produces).
Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to
purchase the plugs, $60,000 of the annual fixed overhead cost will be eliminated, and the
company may be able to rent the facility previously used for manufacturing the plugs.
If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in
net savings annually. To achieve this goal, the minimum annual rent on the facility must be:
94. Costs relevant to a make-versus-buy decision typically include variable manufacturing
costs as well as:
95. Opportunity costs are:
96. Relevant (i.e., differential) cost analysis:
97. Keego Enterprises manufactures two products, boat wax and car wax, in two
departments, Mixing and Packaging. The Mixing Department has 800 hours per month available
while the Packaging Department has 1,200 hours per month available. Production of the two
products cannot exceed 36,000 pounds. Data on the two products follow:
Contribution Margin
(per 100 pounds) Hours per 100
Mixing (M) Pounds of Output
Packaging (P)
Boat wax (B) $200 5.0 3.6
Car wax (C) $150 2.4 6.0
The objective function for the linear program Keego would use to determine the optimum
monthly product mix would be:
98. Keego Enterprises manufactures two products, boat wax and car wax, in two
departments, Mixing and Packaging. The Mixing Department has 800 hours per month available
while the Packaging Department has 1,200 hours per month available. Production of the two
products cannot exceed 36,000 pounds. Data on the two products follow:
Contribution Margin
(per 100 pounds) Hours per 100
Mixing (M) Pounds of Output
Packaging (P)
Boat wax (B) $200 5.0 3.6
Car wax (C) $150 2.4 6.0
The Mixing Department constraint for the Keego linear program would be:
99. Which of the following costs would be relevant in short-term decision making (evaluating
“special sales orders,” make-vs.-buy decisions, etc.)?
100. When a decision is made in an organization, it is selected from a group of alternative
courses of action (i.e., decision alternatives). The loss associated with not choosing a given
decision alternative is referred to as a(n):