Chapter 17—Activity Resource Usage Model and Tactical Decision
Making Key
1. Tactical decision making consists of choosing among alternatives with an immediate or limited end in view.
2. Sound tactical decision making is limited to achieve small objectives.
3. The first of the six steps of the tactical decision model is to recognize and define the problem.
4. The last of the six steps of the tactical decision model is to choose the quickest way to solve the problem.
5. Tactical cost analysis uses cost data to identify the choice that will bring the organization the most benefit.
6. Relevant costs and revenues are present costs and revenues that differ across alternatives.
7. A sunk cost is irrelevant because it has no influence over future decisions, so it is depreciated.
8. An irrelevant cost is one that is the same for more than one alternative and has no bearing on future
decisions.
9. A tariff is a tax on exports levied by the federal government.
10. Foreign trade zones are set up by the U.S. government to facilitate warehousing and/or manufacturing for
companies.
11. The activity resource usage model focuses on sorting out the behavior of various activity costs and assess
their relevancy.
12. For flexible resources, if the demand for an activity changes across alternatives, then resource spending will
remain the same and costs are relevant.
13. Committed resources are acquired in advance of usage, through implicit contracting.
14. Changes in cost of an activity can occur if the demand for the resource exceeds the supply or if the demand
for the resource drops.
15. Flexible resources are acquired way ahead of time.
16. Tactical decision making includes decisions to make or buy a component.
17. Outsourcing refers to the move of a business function to another company, either in or out of the U.S.
18. Choosing to make or buy may reduce the cost of producing the main product and increase the quality.
19. A keep-or-drop decision uses irrelevant cost analysis to determine whether to continue or discontinue a
segment or line of business.
20. A special-order decision focuses on whether a specially priced order should be accepted or rejected.
21. Decisions consisting of selecting among alternatives with immediate ends in views are
called __________ decisions.
22. Future costs which differ across alternatives are called __________ costs.
23. A __________ model is a set of procedures that, if followed, will lead to a decision.
24. Past cost __________ represents an allocation of a cost already incurred.
25. Areas that are physically on U.S. soil but considered to be outside U.S. commerce are
called __________ zones.
26. The cost of acquiring activity capacity is called __________ spending.
27. Leasing or buying a building are examples of resources.
28. A doctor choosing between buying laboratory tests externally or performing the tests in house is an example
of a __________ decision.
29. In a keep-or-drop decision, the __________ income or loss determines whether a segment is kept or
dropped.
30. A decision to accept or reject a specially priced order is an example of
a __________ decision.
31. The choosing among alternatives with an immediate or limited end in view consists of:
32. Tactical decision making relies
33. The steps in the tactical decision making process are:
I.
Comparing relevant costs and relating to strategic goals
II.
Identifying feasible alternatives
III.
Identifying costs and benefits and eliminating irrelevant costs
IV.
Selecting best alternative
V.
Defining the problem
What is the proper sequence of steps?
34. Which of the following is NOT a step in the tactical decision-making process?
35. Which of the following statement is true concerning the nature of tactical decisions?
36. Sound tactical decision making
37. Qualitative factors that should be considered when evaluating a make-or-buy decision are
38. The use of relevant cost data to identify the alternative that provides the greatest benefit to the organization
describes
39. An important qualitative factor to consider regarding a special order is the
40. Future costs that differ across alternatives describe
41. A purchasing agent has two potential firms from which to buy materials for production. If both firms charge
the same price, the material cost is a(n)
42. Relevant costs are
43. The future costs that differ across alternatives are called
44. In order for costs or benefits to be relevant, what must be true?
45. Sunk costs are
46. Which item is NOT an example of a sunk cost?
47. One of Maersk cargo ships hit an iceberg and sank. In deciding whether or not to salvage the ship, its book
value is a(n)
48. Which of the following statements is TRUE when making a decision between two alternatives?
D. Fixed costs are never relevant.
49. Maldovar Company is considering purchasing a new machine to replace a machine purchased one year ago
that is not achieving the expected results. The following information is available:
Expected maintenance costs of new machine
$ 12,000 per year
Purchase price of existing machine
$150,000
Expected cost savings of new machine
$ 20,000 per year
Expected maintenance costs of existing machine
$ 8,000 per year
Resale value of existing machine
$ 35,000
Which of these items is IRRELEVANT?
50. Which of the following costs is NOT relevant to a special-order decision?
51. Which of the following costs is NOT relevant to a make-or-buy decision?
52. Which of the following costs is NOT relevant to a decision to sell a product at split-off or process the
product further and then sell the product?
53. Which of the following costs is NOT relevant for special decisions?
54. Which of the following costs is relevant to a make-or-buy decision?
55. Which of the following is NOT a way that companies might reduce tariffs?
56. The U.S. government has set up foreign trade zones (FTZ) that
57. For flexible resources, which of the following statements is true?
58. Which of the following would be TRUE?
Relationships
Relevancy
59. The cost of acquiring activity capacity is(are)
60. Santa Lucia Industries employs 500 workers in the factory. These workers produced 85,000 units in 2014.
Due to a special order, the units produced in 2015 increased to 95,000 units. However, Santa Lucia produced
these units without adding workers. How is that possible?
61. Upfront resource spending
62. In the activity resource model, flexible resources are
63. Which of the following items would be classified as committed resources (short-term)?
64. Which of the following items would be classified as flexible resources?
65. Which of the following items would be classified as committed resources (long-term)?
66. Yankton Industries manufactures 20,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials
$140,000
Direct labor
230,000
Variable manufacturing overhead
80,000
Fixed manufacturing overhead
120,000
Total
$570,000
An outside supplier has offered to sell the component for $23.50.
What is the effect on income if Yankton Industries purchases the component from the outside supplier?
67. Yankton Industries manufactures 20,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials
$140,000
Direct labor
230,000
Inspecting products
60,000
Providing power
30,000
Providing supervision
40,000
Setting up equipment
60,000
Moving materials
20,000
Total
$580,000
If the component is not produced by Yankton, inspection of products and provision of power costs will only be 10 percent of the production costs;
moving materials costs and setting up equipment costs will only be 50 percent of the production costs; and supervision costs will amount to only 40
percent of the production amount. An outside supplier has offered to sell the component for $23.50.
What is the effect on income if Yankton Industries purchases the component from the outside supplier?
68. Yankton Industries manufactures 20,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials
$140,000
Direct labor
230,000
Variable manufacturing overhead
80,000
Fixed manufacturing overhead
120,000
Total
$570,000
An outside supplier has offered to sell the component for $23.50.
Yankton Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.
What is the effect on income if Yankton purchases the component from the outside supplier?
69. A decision to make a component internally versus purchasing from a supplier is a
70. Concierge Industries manufactures 40,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials
$ 75,000
Direct labor
120,000
Variable manufacturing overhead
45,000
Fixed manufacturing overhead
60,000
Total
$300,000
An outside supplier has offered to sell the component for $12.75.
What is the effect on income if Concierge Industries purchases the component from the outside supplier?
71. Concierge Industries manufactures 40,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials
$ 75,000
Direct labor
120,000
Variable manufacturing overhead
45,000
Fixed manufacturing overhead
60,000
Total
$300,000
An outside supplier has offered to sell the component for $12.75.
Concierge Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.
What is the effect on income if Concierge purchases the component from the outside supplier?
72. Hobart Company produces speakers for PA systems. The speakers are sold to retail music stores for $30.
Manufacturing and other costs are as follows:
Variable costs per unit:
Fixed costs per month:
Direct materials
$ 9.00
Factory overhead
$120,000
Direct labor
4.50
Selling and admin.
60,000
Factory overhead
3.00
Total
$180,000
Distribution
1.50
Total
$18.00
The variable distribution costs are for transportation to the retail music stores. The current production and sales volume is 20,000 per year. Capacity
is 25,000 units per year.
A Memphis manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $6.00 per unit. If Hobart Company accepts the
offer, it will be able to reduce variable costs by 30 percent and rent unused space to an outside firm for $18,000 per year. All other information
remains the same as the original data. What is the effect on profits if Hobart Company buys from the Memphis firm?
73. Hobart Company produces speakers for home stereo units. The speakers are sold to retail music stores for
$30. Manufacturing and other costs are as follows:
Variable costs per unit:
Fixed costs per month:
Direct materials
$ 9.00
Factory overhead
$120,000
Direct labor
4.50
Selling and admin.
60,000
Factory overhead
3.00
Total
$180,000
Distribution
1.50
Total
$18.00
The variable distribution costs are for transportation to the retail music stores. The current production and sales volume is 20,000 per year. Capacity
is 25,000 units per year.
A Memphis manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $17.00 per unit. If Hobart Company accepts the
offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is
the effect on profits if Hobart Company buys from the Memphis firm?
74. Hobart Company produces speakers for PA systems. The speakers are sold to retail music stores for $30.
Manufacturing and other costs are as follows:
Variable costs per unit:
Fixed costs per month:
Direct materials
$ 9.00
Factory overhead
$120,000
Direct labor
4.50
Selling and admin.
60,000
Factory overhead
3.00
Total
$180,000
Distribution
1.50
Total
$18.00
The variable distribution costs are for transportation to the retail music stores. The current production and sales volume is 20,000 per year. Capacity
is 25,000 units per year.
The speakers are currently unpackaged. Packaging them individually would increase costs by $1.20 per unit. However, the units could then be sold
for $33.00. All other information remains the same as the original data. What is the effect on profits if Hobart Company packages the speakers?
75. Composite Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part
AA1 at this volume is as follows:
Direct materials
$11.00
Direct labor
15.00
Variable overhead
6.00
Fixed overhead
4.00
Total
$36.00
An outside supplier has offered to sell Composite Company unlimited quantities of part AA1 at a unit cost of $32.00. If Composite Company accepts
this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would
be rented to another company for $24,000 per year. If Composite Company accepts the offer of the outside supplier, annual profits will
76. Figure 17-1
The following data pertains to the Montrose Company’s three products:
M
N
O
Unit sales per month
9,000
14,000
8,000
Selling price per unit
$6.00
$11.25
$ 7.50
Variable costs per unit
3.00
9.00
7.00
Unit contribution margin
$3.00
$ 2.25
$ 0.50
Batches
5
10
5
Setups
6
3
1
Direct fixed costs
Advertising
$3,000
$2,000
$1,000
Supervision
5,000
5,000
5,000
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
Refer to Figure 17-1. When Montrose converted over to ABC it discovered the following:
inspecting products
—
20 percent of the inspection activity was unused. The inspections used
were based on the number of batches produced.
materials handling
—
10 percent of the materials handling activity was unused. The materials
handling activity used was based on the number of production runs.
customer service
—
50 percent of the customer service activity was unused. The usage was
given as follows: M 1,000, N 1,000, O 500
plant depreciation
—
facility level cost
general administration
—
facility level cost
The operating income for Montrose would be
77. Figure 17-1
The following data pertains to the Montrose Company’s three products:
M
N
O
Unit sales per month
9,000
14,000
8,000
Selling price per unit
$6.00
$11.25
$ 7.50
Variable costs per unit
3.00
9.00
7.00
Unit contribution margin
$3.00
$ 2.25
$ 0.50
Batches
5
10
5
Setups
6
3
1
Direct fixed costs
Advertising
$3,000
$2,000
$1,000
Supervision
5,000
5,000
5,000
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
Refer to Figure 17-1. When Montrose converted over to ABC it discovered the following:
Inspecting products
—
20% of the inspection activity was unused. The inspections used were based on
the number of batches produced.
Materials
handling
—
10% of the materials handling activity was unused. The materials handling
activity used was based on the number of production runs.
Customer
service
—
50% of the customer service activity was unused. The usage was given as
follows: M 1,000, N 1000, O 500
Plant depreciation
—
facility level cost
General administration
—
facility level cost
The product margin for product M using ABC would be
78. Figure 17-1
The following data pertains to the Montrose Company’s three products:
M
N
O
Unit sales per month
9,000
14,000
8,000
Selling price per unit
$6.00
$11.25
$ 7.50
Variable costs per unit
3.00
9.00
7.00
Unit contribution margin
$3.00
$ 2.25
$ 0.50
Batches
5
10
5
Setups
6
3
1
Direct fixed costs
Advertising
$3,000
$2,000
$1,000
Supervision
5,000
5,000
5,000
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)
Refer to Figure 17-1. The product margin for product M using functional-based costing would be
79. The operations of California Corporation are divided into the Mendocino Division and the Napa Division.
Projections for the next year are as follows:
Mendocino
Napa
Division
Division
Total
Sales
$430,000
$252,000
$682,000
Variable costs
147,000
115,500
262,500
Contribution margin
$283,000
$136,500
$419,500
Direct fixed costs
126,000
105,000
231,000
Segment margin
$157,000
$ 31,500
$188,500
Allocated common costs
63,000
47,250
110,250
Operating income (loss)
$ 94,000
$(15,750)
$ 78,250
Operating income for California Corporation as a whole if the Napa Division were dropped would be
80. San Antonio Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units of
this part are as follows:
Direct materials
$ 32
Direct labor
40
Variable overhead
16
Fixed overhead
32
Total
$120
Amarillo Company has offered to sell San Antonio Corporation 5,000 units of the part for $112 per unit. If San Antonio Corporation accepts
Amarillo Company’s offer, total fixed costs will be reduced to $60,000. What alternative is more desirable and by what amount is it more desirable?
Alternative
Amount
81. A decision to make or eliminate an unprofitable product is a
82. The operations of Smithsonian Corporation are divided into the Manhattan Division and the Bronx Division.
Projections for the next year are as follows:
Manhattan
Bronx
Division
Division
Total
Sales
$250,000
$180,000
$430,000
Variable costs
90,000
100,000
190,000
Contribution margin
$160,000
$ 80,000
$240,000
Direct fixed costs
75,000
62,500
137,500
Segment margin
$ 85,000
$ 17,500
$102,500
Allocated common costs
35,000
27,500
62,500
Operating income (loss)
$ 50,000
$(10,000)
$ 40,000
Operating income for Smithsonian Corporation as a whole if the Bronx Division were dropped would be
83. The following information pertains to Dallas Churning Company’s three products:
D
E
F
Unit sales per month
900
1,400
800
Selling price per unit
$6.00
$11.25
$ 7.50
Variable costs per unit
3.00
9.00
7.80
Unit contribution margin
$3.00
$ 2.25
$(0.30)
Assume that product F is discontinued and the space used to produce product F is rented for $600 per month. Monthly profits will
84. The following information pertains to Dallas Churning Company’s three products:
D
E
F
Unit sales per month
900
1,400
800
Selling price per unit
$6.00
$11.25
$ 7.50
Variable costs per unit
3.00
9.00
7.80
Unit contribution margin
$3.00
$ 2.25
$(0.30)
Assume that product F is discontinued and the space is used to produce E. Product E’s production is increased to 2,200 units per month, but E’s
selling price of all units of E is reduced to $10.20. Monthly profits will
85. The following information pertains to the Dallas Churning Company’s three products:
D
E
F
Unit sales per month
900
1,400
800
Selling price per unit
$6.00
$11.25
$ 7.50
Variable costs per unit
3.00
9.00
7.80
Unit contribution margin
$3.00
$ 2.25
$(0.30)
Assume that the selling price of product F is increased to $8.25 with a reduction in monthly sales to 400 units. Monthly profits will
86. The following information pertains to Salamandre Company’s three products:
A
B
C
Unit sales per year
250
400
250
Selling price per unit
$9.00
$12.00
$ 10.00
Variable costs per unit
3.60
9.00
11.00
Unit contribution margin
$5.40
$ 3.00
$(1.00)
Contribution margin ratio
60%
25%
(10)%
Assume that product C is discontinued and the extra space is rented for $300 per month. All other information remains the same as the original data.
Annual profits will
87. Figure 17-2
Wannabee Company manufactures a product with the following costs per unit at the expected production level
of 84,000 units:
Direct materials
$12
Direct labor
36
Variable manufacturing overhead
18
Fixed manufacturing overhead
24
The company has the capacity to produce 90,000 units. The product regularly sells for $120.
Refer to Figure 17-2. A wholesaler has offered to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a