Deck 6: Decision Making in the Short Term

Question 1

A temporary gap between the demand and supply of available capacity results because, in the short term, businesses have a fixed supply of capacity but confront changing demand.

Answer 1

True

Question 2

When picking the best decision option from among a set of available options, we could consider controllable costs and benefits or relevant costs and benefits.

Answer 2

True

Question 3

A differential approach is an approach for framing and solving decisions that involves expressing the benefits and costs of the various decision options relative to one of the options.

Answer 3

True

Question 4

When faced with a situation where supply is limited for multiple resources managers use linear and integer programming to evaluate decision options.

Question 5

With proper planning, businesses can match supply and demand exactly all the time.

Question 6

In general, analysis that considers only controllable or relevant costs is less efficient when decision options differ only with respect to a few benefit and cost items.

Question 7

When demand is high and a resource is in short supply, the contribution margin per unit of the resource from its best possible use should exceed that forgone by putting it to the next best use.

Question 8

When demand is high and a scarce resource is in short supply, a company should decide how much of each product to produce by ranking products by the contribution margin per unit of the product.

Question 9

For a resource in short supply, the opportunity cost of the resource is positive.

Question 10

Our ultimate decision will differ when we use incremental analysis versus construct a contribution margin statement for each option.

Question 11

In the short term, businesses can alter capacity that they have when dealing with fluctuations in demand.

Question 12

A sunk cost is a relevant cost in decision making under the gross approach.

Question 13

An example of a decision that deals with excess supply is altering the product mix to focus on the most profitable ones.

Question 14

One reason it might be profitable for a caterer to accept a catering job for Wednesday but reject it for Saturday is because the caterer has excess capacity on Wednesdays.

Question 15

Price gouging occurs when a firm exploits temporary excess demand to raise prices to unreasonable levels.

Question 16

Relevant cost analysis involves focusing on only those costs and revenues that differ from a benchmark option.

Question 17

An approach that includes controllable and non-controllable costs and benefits to construct a contribution margin statement for each decision option is referred to as an incremental product approach.

Question 18

The decision of how much capacity to put in place is a long-term decision.

Question 19

To maximize profit when capacity is in short supply, minimize the contribution margin per unit of capacity.

Question 20

Using the gross approach to choose the best decision option is preferable to the incremental method when the decision option involves many costs and benefits.

Question 21

Because quantitative analysis of different decision options is extremely important, it should be the only input into final decision.

Question 22

The Owens Company budgeted sales of 20,000 printers at $90 per unit last year.Variable manufacturing costs were budgeted at $46 per unit, and fixed manufacturing costs at $12 per unit.A special order for 1,000 printers at $72 each was received by Owens in April.There is enough plant capacity to meet these additional units without incurring any additional fixed manufacturing costs; however, the production would have to be done on an overtime basis at an estimated additional cost of $5 per printer.Acceptance of the special order would not affect Owens' normal sales and no selling expenses would be incurred.What would be increase to net operating income if the special order were accepted?

A)$21,000
B)$9,000
C)$14,000
D)$10,000

Question 23

It is important for effective managers to consider the longer-term implications of short-term decisions because of potential tradeoffs between short-term and long-term interests.

Question 24

Which of the following is an example of utilizing capacity effectively?

A)Building a plant large enough so that production can be increased as demand increases.
B)Hiring extra temporary employees to work extended hours during Christmas season at a retail store.
C)Having all employees of a donut shop work a regular 8-hour shift every day.
D)A caterer having a limited number of chefs working during the week and on weekends.
E)An airline selling 20% more tickets for a flight than their airplane has available seats.

Question 25

Because potential longer-term effects could vary across short-term decision options, they might be relevant.

Question 26

When management must decide whether to offer special promotions in order to reduce excess inventory, which of the following is not relevant?

A)The cost of offering the promotion.
B)The selling price of the product during the promotion.
C)The unit product cost of the inventory being sold.
D)The regular selling price of the product when not on promotion.

Question 27

Capacity is the maximum volume of activity that a company can sustain with available:

A)Resources.
B)Discretionary orders.
C)Inventory.
D)Employees.
E)None of the above.

Question 28

Brand X Computers makes and sells computers.Each computer sells for $400.The following cost data per computer are based on a full capacity of 10,000 computers each period: $$\begin{array} { l r } \text { Direct materials } & \$ 150 \\\text { Direct labor } & \$ 100 \\\text { Variable manufacturing overhead } & \$ 38 \\\text { Unavoidable fixed overhead } & \$ 12\end{array}$$ Brand X is considering a special order for a sale of 2,500 computers to an overseas customer.The only selling costs that would be incurred for the order would be shipping charges of $15 per computer.Brand X is currently selling 7,500 computers through its regular orders.What should be the minimum selling price per computer in negotiating a price for the special order?

A)$303
B)$250
C)$300
D)$265
E)$315

Question 29

Which of the following short-term decisions deal with excess capacity?

A)Special order.
B)Product mix.
C)Make or buy.
D)Increasing prices.

Question 30

Quantifying the longer-term implications of short-term actions is relatively simple.

Question 31

If selling price is $25, unit contribution margin equals $15 and fixed costs are $12,000, then breakeven volume is:

A)300 units.
B)1,200 units.
C)800 units.
D)2,500 units.
E)1,500 units.

Question 32

When making a decision regarding a special order management must consider:

A)Whether there is enough capacity to meet the order.
B)Additional costs associated with the order.
C)Whether the selling price of the special order covers the variable costs of making the product.
D)All of the above.

Question 33

Most short-term decisions deal with temporary gaps between:

A)A flexible supply of capacity and a fixed demand.
B)The inability to change selling price and the ability to estimate controllable costs.
C)The amount of fixed costs that can be avoided and the contribution margin.
D)The demand of and the supply of available capacity.
E)Company goals and employee goals.

Question 34

The Huffman Tire Company has 3,000 tires in its inventory which are considered obsolete.Each unit originally cost the company $35.Management is considering options to reduce these inventory levels.Units can be sold directly to car dealerships for $30 per tire as opposed to the normal selling price of $45 per tire.The other option is to offer their current customers a $10 per tire rebate on their purchase.In addition to the $10 rebate, the program would cost the company approximately $24,000 to manage.They predict that either option will rid them completely of their excess inventory.The decision to sell directly to the car dealerships over offering the rebate will result in:

A)A $21,000 increase in profits.
B)A $9,000 increase in profits.
C)A $15,000 decrease in profits.
D)A $24,000 decrease in profits.

Question 35

Consider the following decision option data: $\begin{array}{lll}&\text { Option \#1 } & \text { Option \#2 } \\\text { Number of units } & 150 & 200 \\\text { Revenue per unit } & \$ 25 & \$ 25 \\\text { Cost per unit } & \$ 12 & \$ 12 \\\text { Lost Revenue from choosing option } & \{\$ 500\} & \{\$ 4,000\} \\\text { Cost saving from choosing option } & \$ 0 & \$ 1,000 \\\text { Avo idable Fixed Cost } & \$ 0 & \$ 0\end{array}$ What is the best choice?

A)Option #1
B)Option #2
C)Option #1 and Options #2 are equally good choices.
D)Neither Option #1 nor Option #2 should be chosen

Question 36

Managers often use the term "real options" to denote the flexibility associated with different options and use advanced mathematical techniques to value the real options.

Question 37

Beach Surf Boards is making a decision on whether to add long boards as a new product line to complement its short boards.A recent analysis determined that the average long board can be sold for $300.00 with unit variable costs of $225.Fixed costs are currently $51,000 per month but would be increased to $69,000 if long boards are added.How much is incremental profit or (loss) if long boards are added and its sales volume is expected to be 250?

A)$750
B)$18,750
C)($32,250)
D)($50,250)

Question 38

Warner Company has some material that originally cost $41,500.The material has a scrap value of $21,600 as is, but if reworked at a cost of $4,600, it could be sold for $29,100.What would be the incremental effect on the company's overall profit if it is reworked?

A)$17,000 decrease.
B)$38,600 decrease.
C)$2,900 increase.
D)$24,500 increase.

Question 39

Consider the following decision option data: $\begin{array}{lll}&\text { Option \#1 } & \text { Option \#2 } \\\text { Number of units } & 150 & 200 \\\text { Revenue per unit } & \$ 25 & \$ 25 \\\text { Variable cost per unit } & \$ 12 & \$ 12 \\\text { Lost revenue from choosing option } & \{\$ 500\} & \{\$ 4,000\} \\\text { Cost savings from choosing option } & \$ 0 & \$ 1,000 \\\text { Avo idable fixed cost } & \$ 0 & \$ 0\end{array}$ What is the incremental profit for Option #2?

A)$5,600
B)($2,400)
C)$2,600
D)($400)
E)$1,400

Question 40

One way businesses may manage demand is:

A)Building a plant large enough so that production can be increased as demand increases.
B)Rent additional office space.
C)Decreasing variable costs.
D)Raising prices during periods of high demands.
E)None of the above.

Question 41

In a make-or-buy decision relevant costs would include all of the following except:

A)Depreciation expense on the plant equipment currently used to make the part
B)Direct labor costs of the employees in that department which makes the part
C)Direct material costs of the part
D)The cost of buying the part from an outside company

Question 42

The Pleasantville Company makes 20,000 units per year of a part used in production.The unit product cost is as follows: $\begin{array}{lr}\text { Direct materials } & \$ 6.20 \\\text { Direct labor } & 2.30 \\\text { Variable Manufacturing Overhead } & 1.20 \\\text { Fixed Manufacturing Overhead } & .80\\\text { Unit product cost }&\$10.50\end{array}$ An outside supplier has offered to sell the company the same part at a cost of $9.00 per unit.If the company purchases the part only half of the fixed overhead would be avoided.How much of the unit product cost is relevant in making this decision?

A)$9.70
B)$10.50
C)$2.30
D)$10.10

Question 43

Hobbs Electronics makes and sells portable DVD players.Each DVD player has a selling price of $100.The following cost data per DVD player is based on a capacity of 5,000 DVD players per period. $$\begin{array} { l r } \text { Direct Material } & \$ 30 \\\text { Direct Labor } & \$ 20 \\\text { Manufacturing Overhead } \\\text { (70\% variable; } 30 \% \text { fixed) } & \$ 10\end{array}$$ Hobbs receives a special order for 100 DVD players.The only additional costs Hobbs will incur are $2 shipping charges per item.Hobbs has sufficient idle capacity to produce the additional DVD players.What is the minimum price Hobbs should charge per DVD player for the special order?

A)$60
B)$59
C)$57
D)$55
E)$62

Question 44

Which of the following is not a short-term decision that is a reaction to excess capacity?

A)Management makes the decision to emphasize sales in a particular market to boost poor sales.
B)Management makes the decision to issue a rebate, offering customers a rebate of $0.50 for every widget sold, because inventory is too large.
C)Management makes the decision to close a plant because of increased competition.
D)Management accepts a special order at a reduced selling price since the order's relevant costs will be less than the special order's sales price.
E)All of the above are short-term decisions that are reactions to excess capacity.

Question 45

The Southeast Company makes three products in one manufacturing facility.Data regarding these products are as follows: $\begin{array}{llll} & \mathrm{A} & \mathrm{B} & \mathrm{C} \\\text { Direct Materials } & \$ 5.70 & \$ 6.20 & \$ 8.90 \\\text { Direct Labor } & 2.05 & 1.90 & 2.20 \\\text { Variable Overhead } & .70 & .80 & .90 \\\text { Fixed Overhead } & \underline{1.10} & \underline{1.40} & \underline{1.60}\\\text { Unit Product Cost } & \$ 9.55 & \$ 10.30 & \$ 13.60\\\\\text { Machine Hours Per Unit } & .5 & 1 & .25 \\\text { Selling Price per Unit } & \$ 16.00 & \$ 18.00 & \$ 20.00 \\\text { Demand (units) } & 1,200 & 1,400 & 800\end{array}$ If there are only 2,000 machine hours available, how much is the profit per machine hour for product A?

A)$12.90
B)$6.45
C)$7.70
D)$6.40

Question 46

When there is a production constraint, the company should first produce the product with:

A)The highest contribution margin per unit
B)The highest contribution margin ratio
C)The highest revenue per unit
D)The highest contribution margin per unit of the constrained resource

Question 47

The general rule to apply to maximize profit when capacity is in short supply is:

A)Minimize the contribution margin per unit of capacity.
B)Maximize the margin of safety per unit of capacity.
C)Maximize the contribution margin per unit of capacity.
D)Minimize the margin of safety per unit of capacity.
E)Maximize the unit contribution margin.

Question 48

When capacity is limited, which of the following are alternative courses of action to consider?

A)Produce the items with the largest contribution margin per unit of capacity.
B)Purchase some components from outside suppliers.
C)Produce the items with the largest selling price to maximize revenue.
D)A and B only.
E)A, B and ؤ

Question 49

Handi-Tool Company manufactures and sells lawn and garden tools.Handi manufactures three kinds of pruning shears: Snip-It, Deluxe Clipper, and Limb-Away.The demand for the pruning shears is highest in April.Expecting this trend to continue, Handi is interested in how to best utilize available capacity.Given the following information, what combination of pruning shears should Handi-Tool produce? $\begin{array}{lrrr}&& \text { Deluxe } & \text { Limb- } \\&\text { Snip-It } & \text { Clipper } & \text { Away }\\\text { Demand } & 200,000 & 100,000 & 60,000 \\\text { Unit Price } & \$ 20 & \$ 30 & \$ 50 \\\text { Unit variable cost } & \$ 10 & \$ 15 & \$ 20 \\\text { Unit contribution margin } & \$ 10 & \$ 15 & \$ 30 \\\text { Production rate (units per hour) } & 50 & 25 & 15\\\text { Available production hours } &&& 8,000 \mathrm{hrs} \\\text { Total fixed costs } &&& \$ 400,000\end{array}$

A)200,000 Snip-It; 100,000 Deluxe Clipper, 0 Limb-Away.
B)200,000 Snip-It; 60,000 Limb-Away; 0 Deluxe Clipper.
C)100,000 Deluxe Clipper; 60,000 Limb-Away; 0 Snip-It.
D)200,000 Snip-It; 100,000 Deluxe Clipper; 60,000 Limb-Away.
E)150,000 Snip-It; 75,000 Deluxe Clipper; 45,000 Limb-Away.

Question 50

Little Toy Company makes and sells miniature doll houses.Little produces two kinds of houses: Standard and Deluxe.The demand for doll houses is highest in November and December.Expecting this trend to continue Little is interested in how to best utilize available capacity.Given the following information, what combination of doll houses should Little produce? $$\begin{array} { l r r } & \text { Standard } & \text { Deluxe } \\\text { Demand } & 8,000 & 3,000 \\\text { Unit Price } & \$ 60 & \$ 80 \\\text { Unit variable cost } & \$ 25 & \$ 35 \\\text { Unit contribution margin } & \$ 35 & \$ 45 \\\text { Production rate (units per hour) } & 2 & 1 \\\text { Available production hours } & & 5,000 \text { hrs } \\\text { Total fixed costs } & & \$ 40,000\end{array}$$

A)8,000 Standard; 3,000 Deluxe.
B)8,000 Standard; 1,000 Deluxe.
C)5,000 Standard; 3,000 Deluxe.
D)3,636 Standard; 7,364 Deluxe.
E)3,636 Standard; 1,363 Deluxe.

Question 51

The Southeast Company makes three products in one manufacturing facility.Data regarding these products are as follows: $\begin{array}{llll} & \mathrm{A} & \mathrm{B} & \mathrm{C} \\\text { Direct Materials } & \$ 5.70 & \$ 6.20 & \$ 8.90 \\\text { Direct Labor } & 2.05 & 1.90 & 2.20 \\\text { Variable Overhead } & .70 & .80 & .90 \\\text { Fixed Overhead } & \underline{1.10} & \underline{1.40} & \underline{1.60}\\\text { Unit Product Cost } & \$ 9.55 & \$ 10.30 & \$ 13.60\\\\\text { Machine Hours Per Unit } & .5 & 1 & .25 \\\text { Selling Price per Unit } & \$ 16.00 & \$ 18.00 & \$ 20.00 \\\text { Demand (units) } & 1,200 & 1,400 & 800\end{array}$ How many machine hours would be required to meet the demand for all products?

A)3,400
B)2,200
C)1,700
D)850

Question 52

Which of the following is a short-term decision that is a reaction to excess demand?

A)Management makes the decision to emphasize sales in a certain market to boost poor sales.
B)Management makes the decision to close a plant because of increased competition.
C)Management makes the decision to buy parts rather than make them after calculating a positive opportunity cost for capacity.
D)Management makes the decision to make parts rather than buy them after calculating a positive opportunity cost for capacity.
E)All of the above a short-term decisions that are reactions to excess demand.

Question 53

Shickman Company makes the widgets it uses in one of its products at a cost of $8 per unit.This cost includes $2 of fixed overhead.The company needs 10,000 of these plugs annually, and Orlando Company has offered to sell them at $5 per unit.If Shickman Company purchases the plugs, the company would:

A)Increase profits by $30,000.
B)Decrease profits by $10,000.
C)Increase profits by $10,000.
D)Decrease profits by $30,000.

Question 54

Augusta Company manufactures stereo components.One of its most popular products is the LoudBoom Speaker.Data concerning this product are given below: $$\begin{array} { l l } \text { Normal Selling Price } & \$ 50.00 \\\text { Direct materials } & \$ 12.20 \\\text { Direct labor } & \$ 3.60 \\\text { Variable Manufacturing Overhead } & \$ 1.80 \\\text { Fixed Manufacturing Overhead } & \$ 2.00 \\\text { Variable Selling Expense } & \$ 1.90 \\\text { Fixed Selling \& Administrative Expense } & \$ .80\end{array}$$ The above per unit data are based on annual production of 3,000 units of the component.The company has received a special, one-time-only order for 200 units of the speaker.There would be no selling expenses on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.Assuming that Augusta Company has excess capacity and can fill the order without any production disruptions, what is the minimum price per unit on the special order the company should charge?

A)$50.00
B)$19.60
C)$17.60
D)$22.30

Question 55

The production of two products has the same selling prices per unit.If total fixed costs will be $5,000 for product A and $4,500 for product B, what factors are relevant in determining which of the two products to produce and sell?

A)Selling and variable costs per unit, and the fixed cost savings.
B)Variable costs per unit and total fixed costs.
C)Total variable and fixed costs and total sales revenue
D).Variable costs per unit and the fixed cost savings

Question 56

Which of the following would be relevant in a make-or-buy decision?

Question 57

Spikes Company manufactures 5,000 high-end racing bicycles each period.Spikes has been making all the components for the bikes, but a supplier has approached Spikes with an offer to sell her bicycle seats at a price of $40.The cost per unit of manufacturing one bicycle seat is computed as follows: $$\begin{array} { l r } \text { Direct Material } & \$ 10 \\\text { Direct Labor } & \$ 18 \\\begin{array} { l } \text { Manufacturing overhead } \\( 100 \% \text { fixed) }\end{array} & \$ 10\end{array}$$ If the bicycle seats are purchased from the outside supplier, $1 per unit of the fixed manufacturing overhead costs can be avoided.If Spikes purchases the seats, the facility used to manufacture the seats would be rented for $20,000 per period.If Spikes chooses to purchase the bicycle seats, then the change in annual net operating income is an:

A)$35,000 decrease.
B)$35,000 increase.
C)$5,000 decrease.
D)$5,000 increase.
E)$10,000 increase.

Question 58

The Southeast Company makes three products in one manufacturing facility.Data regarding these products are as follows: $\begin{array}{llll} & \mathrm{A} & \mathrm{B} & \mathrm{C} \\\text { Direct Materials } & \$ 5.70 & \$ 6.20 & \$ 8.90 \\\text { Direct Labor } & 2.05 & 1.90 & 2.20 \\\text { Variable Overhead } & .70 & .80 & .90 \\\text { Fixed Overhead } & \underline{1.10} & \underline{1.40} & \underline{1.60}\\\text { Unit Product Cost } & \$ 9.55 & \$ 10.30 & \$ 13.60\\\\\text { Machine Hours Per Unit } & .5 & 1 & .25 \\\text { Selling Price per Unit } & \$ 16.00 & \$ 18.00 & \$ 20.00 \\\text { Demand (units) } & 1,200 & 1,400 & 800\end{array}$ If there are only 2,000 machine hours available, which is the MOST profitable product?

A)Product A
B)Product B
C)Product C
D)Cannot be determined

Question 59

The Jackson Company produces 2 different products, each of which has unlimited demand.If there are 4,000 total available labor hours, and the company desires to maximize its contribution margin, how many units of each product should be produced? $\begin{array}{lr}&\text { Product }\\&X & Z \\\text { Selling price per unit }&\$ 8 & \$ 16 \\\text {Variable cost per unit. }&\$ 4 & \$ 9 \\\text {Labor hours per unit. }&2 & 4\end{array}$

A)2,000 units of Product X and 0 units of Product Z
B)0 units of Product X and 1,000 units of Product Z
C)0 units of Product X and 4,000 units of Product Z
D)2,000 units of Product X and 4,000 units of Product Z

Question 60

Gecko Company is evaluating the use of a supplier versus making the wheels for its skateboards internally.The currently manufactured wheels have a variable unit cost of $2.Fixed costs are $16,000 per month, however, 25% can be eliminated if wheels are no longer produced.A supplier has offered to produce this part for $3 per wheel and can produce the 3,200 wheels for the 800 skateboards needed monthly.Should Gecko outsource wheels or make them internally?

A)Outsource because the incremental cost savings is $12,800.
B)Make the product because the incremental cost savings is $3,200.
C)Outsource because the incremental cost savings is $800.
D)Outsource because the incremental cost savings is $8,800.

Question 61

Which of the following statements is not true?

A)Quantifying longer-term implications of short-term actions is relatively simple.
B)It is important to consider longer-term implications of short term decisions because of potential tradeoffs between short-term and long-term interests.
C)Many managers follow a "peel the onion" approach to assessing decision effects, first by estimating the short-term effects, and then expanding the range of considered factors.
D)For longer-term actions, in many cases, qualitative assessments are the only ones possible, and large estimations errors accompany such assessments.
E)All of the above statements are true.

Question 62

Quantifying the longer-term implications of short-term actions is difficult.Consequently:

A)It is impossible to make an informed decision.
B)Frequently, only qualitative assessments are possible.
C)Long-term implications should be ignored in the decision-making process.
D)A and B only.
E)A, B, and C are consequences.

Question 63

Which of the following is in the context of a short-term decision?

A)Special order.
B)Product promotion.
C)Product mix.
D)A and B only.
E)A, B and C

Question 64

Which consideration is most relevant for a startup manufacturing company?

A)Short-term decisions regarding production.
B)Implications that arise from people outside the firm such as customers, suppliers, and suppliers.
C)Qualitative aspects of decisions.
D)Decisions that cause profit to be highest in the short-run