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Exam 6: Relevant Information for Special Decisions

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Question 41

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Western Classics Publishing Company produces updated versions of literary classics targeted for children. Its book binding machines are capable of producing 50 books per hour. The unit-related cost of producing books is $2.50, and Western Classics sells its books for $9.50 each. Reading Ready Publishing has asked the company to produce 10,000 copies of a book for $7.50. Western Classics estimates that unit-level costs for the new book will be $3.00, and due to the size of the book, its binding machines will only be able to produce 20 books per hour. Western Classics has a total of 5,000 machine hours of capacity. In addition, to complete the special order, Western Classics will have to purchase an additional special-purpose machine that will cost $8,000.Required: Assume that existing demand for Western Classics' children's classics is 230,000 units and that the special order has to be either taken in full or rejected. Prepare an analysis that indicates whether or not the special order should be accepted.

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Question 42

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To be relevant in decision making, cost or revenue information must be future-oriented and must not differ between the alternatives.

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Question 43

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A company that is subject to the effect of a scarce resource should concentrate on providing products or services that give the greatest contribution margin per unit of product or service.

Engineering design costs are generally referred to as:

Natalie purchased a concert ticket recently for $50. She is trying to decide whether to drive, take a taxi, or ride the public transit bus. The cost of driving to the concert is a sunk cost because Natalie purchased her car several years ago.

Mountain Gear has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $60,000 and a market value of $6,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $15,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $5,000 a year. Select the true statement.

The benefits sacrificed when one alternative is chosen over another are referred to as:

A constraint is a factor that restricts sales of a company's products or services.

Select the correct statement regarding opportunity costs.

Max bought a ticket to the championship baseball game for $75. Someone approaches him outside the stadium and offers him $175 for his ticket. If Max decides to go to the game, instead of selling his ticket, how much does it cost Max to go to the game?

Asset replacement decisions involve:

King Company has two divisions whose most recent financial statements are shown below: $\begin{array}{|l|c|c|}\hline& \text { Commercial }&\text { Residential }\\\hline& \text { Division }&\text { Division }\\\hline \text { Unit sales}&5,000&1,000\\\hline \text { Sales}&\$400,000&\$100,000\\\hline \text { Less: cost of goods sold:}&\\\hline \text { Unit-level production costs } & 175,000 & 60,000 \\\hline \text { Depreciation, production equipment } & 75,000 & 25,000 \\\hline \text { Gross margin } & \$ 150,000 & \$ 15,000 \\\hline \text { Less: operating expenses: }\\\hline \text { Unit-level selling and admiristrative } & 40,000 & 10,000 \\\hline \text { Corporate-level facility costs (fixed) } & 12,500 & 7,500 \\\hline \text { Net income (loss) } &\$ 97,500 &\$ (2,500) \\\hline\end{array}$ Required: 1) Compute the impact on profit if the Residential Division is eliminated.2) Do you recommend that King eliminate the Residential Division?

The following information is provided for two products: Assume the products will be sold in a store where shelf space is a scarce resource and there is sufficient room for only one of the two products. Expected sales for Product X are 6,000 units, and expected sales for Product Y are 8,000 units. Which product should be sold and why? $\begin{array}{|l|l|l|}\hline&\text { Product } X&\text { Product } Y\\\hline \text { Selling price per unit } & \$ 35 & \$ 25 \\\hline \text { Variable cost per unit } & 20 & 15 \\\hline\end{array}$

Taylor Company is considering whether or not to replace a drill press that is several years old. The current market value of the old equipment is an opportunity cost of replacing the drill press.

Monica paid $12 for a music CD for which she later was offered $15. After that someone offered her $18 for the CD. If Monica keeps the CD, the amount of her opportunity cost is $33.

Relevant costs are often referred to as:

Differential revenues are expected future revenues that vary between the alternatives under consideration.

Eastern Company currently produces a component that it uses in making some of its products. The company has calculated the following costs for making the part: $\begin{array} { | l | r | } \hline \text { Unit-level costs } & \\\hline \text { Materials } & \$ 20 \\\hline \text { Labor } & 28 \\\hline \text { Overhead } & 2 \\\hline \text { Allocated facility-level costs } & 10 \\\hline \text { Total cost } & \$ 60 \\\hline\end{array}$ Eastern is considering outsourcing the component. A supplier has offered to sell the component to Eastern for $55 each. Eastern needs 10,000 units each year. If Eastern does outsource the component, it can use the facilities to make another product that would yield contribution margin of $60,000 per year.Required: 1) Should Eastern outsource the component? Support your answer with appropriate computations.2) What qualitative factors should be considered in this decision?

Hancock Company manufactures and sells two lines of furniture, case goods and upholstery. During the most recent accounting period, the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below (Do not round intermediate calculations.) : If unit sales for both divisions increased 10%, the company would report which of the following? $\begin{array}{|l|r|r|}\hline&\text { Case Goods}& \text {Upholstery }\\\hline \text { Sales } & \$ 1,600,000 & \$ 400,000 \\\hline \text { Less cost of goods sold } & & \\\hline \text { Unit-level production cost } & 1,000,000 & 240,000 \\\hline \text { Depreciation, production equipment } & 240,000 & 60,000 \\\hline \text { Gross margin}&\$360,000&\$100,000\\\hline \text { Less operating expenses:}\\\hline \text { Unit-level selling and admin. Costs}&60,000&50,000\\\hline \text { Corporate-level facility expenses (fixe d) }&\underline{52,000}&\underline{52,000}\\\hline \text { Net income (loss) }&\underline{\$248,000}&\underline{\$(2,000) }\\\hline\end{array}$ The word "Costs" should not be capitalized mid-way down. Also, change "admin." to: Administrative The cell should read: Unit-level selling and administrative costs

Which of the following is a way to relax a constraint or bottleneck?