Question 1

Growe Company manufactures sewing machines and requires 30,000 units of a component that is used in the manufacturing process. If Growe buys the part from Zigler Brothers the plant will be idle. Of the fixed, 55% overhead will continue regardless of the decision. The cost to buy the part from Zigler is $46. The unit cost to make the part is: $$\begin{array} { l r } 
\text { Direct materials } & \$ 12 \
\text { Direct labour } & 20 \
\text { Variable overhead } & 12 \
\text { Average fixed overhead } & 10 \
\quad \text { Total } & \$ 54
\end{array}$$ Relevant costs to make the part are:

Accepted Answer

The answer of Growe Company manufactures sewing machines and requires...

Question 2

Growe Company manufactures sewing machines and requires 30,000 units of a component that is used in the manufacturing process. If Growe buys the part from Zigler Brothers the plant will be idle. Of the fixed, 55% overhead will continue regardless of the decision. The cost to buy the part from Zigler is $46. The unit cost to make the part is: $$\begin{array} { l r } 
\text { Direct materials } & \$ 12 \
\text { Direct labour } & 20 \
\text { Variable overhead } & 12 \
\text { Average fixed overhead } & 10 \
\quad \text { Total } & \$ 54
\end{array}$$ Which alternative is more profitable and by what amount?

Accepted Answer

The answer of Growe Company manufactures sewing machines and requires...

Question 3

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

Accepted Answer

Qualitative factors are often ignored when organizations focus on maximizing short-term profits. These factors can include things like customer satisfaction, employee morale, and environmental impact.

Question 4

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: $\begin{array}{lrr}&\text { BiqBlast }&\text { LittleBlast }\
\text { Selling price } & \$ 100 & \$ 200 \
\text { Direct materials } & (25) & (75) \
\text { Direct labour } & (15) & (35) \
\text { Variable overhead } & (5) & (30) \
\text { Product line fixed costs } & (10) & (40) \
\text { Corporate fixed costs } & (25) & (25)\
\text { Average margin per unit }&\$20&\$5
\end{array}$ 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.
The following qualitative factors are relevant to Horton's decision:
I. Would dropping one product affect the sales of the other product?
II. Are all product line fixed costs completely avoidable?
III. Would layoffs affect other workers' morale?

Accepted Answer

All three qualitative factors (I, II, and III) are relevant to Horton's decision about dropping a product line. Factor I considers the potential impact on sales of the remaining product if one is dropped, factor II questions the avoidability of fixed costs, and factor III addresses the potential impact on worker morale due to layoffs.

Question 5

Under the general decision rule for relaxing a constraint, managers are willing to pay:

Accepted Answer

Under the general decision rule for relaxing a constraint, managers are willing to pay what they pay now plus some or the entire contribution margin per constrained resource. This means they are willing to pay more than what they are currently paying, up to the point where the additional cost is equal to or less than the additional revenue generated by relaxing the constraint. Therefore, the best choice is C.

Question 6

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: $\begin{array}{lrr}&\text { BiqBlast }&\text { LittleBlast }\
\text { Selling price } & \$ 100 & \$ 200 \
\text { Direct materials } & (25) & (75) \
\text { Direct labour } & (15) & (35) \
\text { Variable overhead } & (5) & (30) \
\text { Product line fixed costs } & (10) & (40) \
\text { Corporate fixed costs } & (25) & (25)\
\text { Average margin per unit }&\$20&\$5
\end{array}$ 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?)

Accepted Answer

The breakeven sales volume for BigBlast is 728 units. This is calculated by dividing the product line fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the variable costs per unit. In this case, the contribution margin per unit for BigBlast is $100 - $25 - $15 - $5 = $55. The product line fixed costs for BigBlast are $10. Therefore, the breakeven sales volume is $10 / $55 = 728 units.

Question 7

Vicade has 1,000 commercial video game machines in inventory produced at a cost of $400 each (60% variable and 40% fixed). The machines were to have been sold for $1,000 each. However, the machines currently contain a minor malfunction reducing their selling price to $150 each. The company could correct the malfunction at a variable cost of $250 each and then sell the machines for $550 each.
If the games are reworked, what will be the contribution per unit from doing so?

Accepted Answer

- If Vicade sells the machines as is for $150 each, they will lose $250 per unit ($400 cost - $150 selling price).
- If Vicade reworks the machines at a cost of $250 each and then sells them for $550 each, they will have a contribution margin of $300 per unit ($550 selling price - $400 variable cost - $250 rework cost).
- Therefore, the best choice is to rework the machines and sell them for $550 each, resulting in a contribution margin of $300 per unit.

Question 8

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

Accepted Answer

Short-term decisions usually involve considering incremental costs, which are the costs that will change as a result of a particular decision. Of the options given, only incremental costs fit this description. Fixed costs and sunk costs are irrelevant in the short-term, while unavoidable costs may or may not be relevant depending on the decision being made.

Question 9

A cost that has been incurred in the past and cannot be changed is a (an):

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered or changed. It is irrelevant to future decision-making because it cannot be altered. Short-term cost, opportunity cost, and variable cost are all different types of costs that do not necessarily relate to past expenses that cannot be changed.

Question 10

A manufacturer operating with excess capacity has been asked to fill a special order at $7.25 per unit. The regular price is $10 per unit. No other use of the currently idle capacity can be found. The manufacturer's usual variable costs per unit are $3.50 for direct materials, $2.00 for direct labour, $1.00 for variable overhead, and $0.50 for sales commission. No sales commission would be paid on this special order. The average fixed overhead cost per unit is $0.25.
Under the general decision rule, the minimum price per unit for this special order is:

Accepted Answer

The general decision rule states that a company should accept a special order only if the revenue from the order is greater than the additional variable costs plus the opportunity cost of the resources used.

In this case, the additional variable costs per unit for the special order are:
Direct materials: $3.50
Direct labor: $2.00
Variable overhead: $1.00
No sales commission: $0.00
Total additional variable cost per unit: $6.50

The opportunity cost of the resources used is the contribution margin per unit that could be earned from the next best alternative use of the idle capacity. Since no other use of the idle capacity can be found, the opportunity cost is $0.

Therefore, the minimum price per unit for this special order is the additional variable costs per unit, which is $6.50. The special order price of $7.25 per unit is greater than the minimum price per unit, so the manufacturer should accept the special order.

Question 11

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: $\begin{array}{lrr}&\text { BiqBlast }&\text { LittleBlast }\
\text { Selling price } & \$ 100 & \$ 200 \
\text { Direct materials } & (25) & (75) \
\text { Direct labour } & (15) & (35) \
\text { Variable overhead } & (5) & (30) \
\text { Product line fixed costs } & (10) & (40) \
\text { Corporate fixed costs } & (25) & (25)\
\text { Average margin per unit }&\$20&\$5
\end{array}$ 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.
Using only the information provided above, Horton could make several types of decisions. Possible decisions include:
I. Keep or drop
II. Product emphasis
III. Special order
IV. Constrained resources

Accepted Answer

The information provided allows for decisions on whether to keep or drop a product line (I) and which product to emphasize based on profitability (II).

Question 12

Vicade has 1,000 commercial video game machines in inventory produced at a cost of $400 each (60% variable and 40% fixed). The machines were to have been sold for $1,000 each. However, the machines currently contain a minor malfunction reducing their selling price to $150 each. The company could correct the malfunction at a variable cost of $250 each and then sell the machines for $550 each.
For purposes of determining whether the machines should be reworked, what is the opportunity cost per unit?

Accepted Answer

The answer of Vicade has 1,000 commercial video game machines...

Question 13

Variable costs are important for which type of relevant cost decisions?
I. Special order
II. Outsourcing
III. Keep or drop a product

Accepted Answer

Variable costs are crucial in making decisions about special orders, outsourcing, and whether to keep or drop a product, as they change with the level of production or service delivery.

Question 14

General decision rules associated with outsourcing decisions assume the organization's goal is to:

Accepted Answer

General decision rules associated with outsourcing decisions assume that the organization's goal is to maximize short-term profits. This means that the primary focus is on reducing costs and increasing profitability in the short-term, rather than capturing market share or prioritizing long-term strategies.

Question 15

Mr. Bigletter is employed at an annual salary of $25,000. He plans to start his own business and estimates that he can gross $30,000 annually. If he chooses to open the new business, his foregone salary is a (an):

Accepted Answer

The foregone salary is the potential income Mr. Bigletter would have earned if he had stayed in his current job. Since he has chosen to start his own business instead, this represents the opportunity cost of his decision. It is important to consider the opportunity cost when making business decisions because it represents the benefits that could have been gained by choosing an alternative course of action.

Question 16

A manufacturer has been asked to fill a special order at $7.25 per unit. The regular price is $10 per unit. No other use of the currently idle capacity can be found. The manufacturer's usual variable costs per unit are $3.50 for direct materials, $2.00 for direct labour, $1.00 for variable overhead, and $0.50 for sales commission. No sales commission would be paid on this special order. The average fixed overhead cost per unit is $0.25.
Assume there is no excess capacity (i.e., the company can sell every unit that it produces to regular customers). Under the general decision rule, the minimum price per unit for this special order would be:

Accepted Answer

The minimum price should be the regular price of $10.00 because there is no excess capacity, meaning the company can sell all units at the regular price. Accepting the special order at a lower price would result in lost revenue.

Question 17

Tyke, Inc. produces two 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: $$\begin{array} { l l } 
\text { Maximize: } & \$ 4 \mathrm {~A} + \$ 5 \mathrm { Y } \
\text { Subject to: } & 3 \mathrm {~A} + 1 \mathrm {~B} = 200 \
& 2 \mathrm {~A} + 2 \mathrm {~B} = 300
\end{array}$$ What are the variable costs per unit for A and B?

Accepted Answer

The variable costs per unit for A and B are calculated by subtracting the contribution margin (given by the maximize equation: $4A + $5B) from the selling price of each product. However, the given information does not directly provide the variable costs but rather the contribution margin per unit. The correct variable costs cannot be accurately determined from the provided information, leading to a misunderstanding in the question's setup. The choices given do not align with the calculation method for variable costs from the provided data.

Question 18

The Wasson Widget Co. has 1,000 obsolete widgets on hand. These units were produced a year ago at a cost of $10,000. The units could be scrapped for $1,000 or reworked for $2,000 and sold for $5,000. Which alternative is desirable and why?

Accepted Answer

If the units are scrapped, the company will receive $1,000. However, if the units are reworked, the company will have to spend an additional $2,000, making the total cost of the units $12,000. If the reworked units are sold for $5,000 each, the company will generate revenue of $5,000,000.

To determine which option is desirable, we need to compare the income generated by each option.

Income from scrapping units: $1,000

Income from reworking and selling units: $5,000 x 1,000 = $5,000,000

The income generated from reworking and selling the units is significantly higher than the income generated from scrapping them. Therefore, reworking and selling the units is the best choice.

Question 19

Uncertainties affect:

Accepted Answer

Uncertainties can affect all types of decisions, including special order decisions (which involve considering one-time or unique orders), outsourcing decisions (which involve considering whether to outsource a process or service), and product emphasis decisions (which involve deciding which products or services to focus on). Therefore, all choice letters or numbers should be selected.

Question 20

Amortization is irrelevant in decision making:

Accepted Answer

Amortization is irrelevant in decision-making if it is not different for each alternative because it does not affect the incremental cash flows between options.

Quiz 4: Relevant Information for Decision Making