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Exam 7: Incremental Analysis for Short-Term Decision Making

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Question 1

True/False

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Opportunity costs are not relevant when a company has idle capacity

A) True
B) False

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Question 2

Multiple Choice

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Pinto Co. has received a special order for 2,000 units of its product at a special price of $75. The product normally sells for $100 and has the following manufacturing costs: Assume that Pinto Co. has sufficient capacity to fill the order without harming normal production and sales. If Pinto Co. accepts the order, what effect will the order have on the company's short-term profit?

A) $30,000 decrease
B) $30,000 increase
C) $50,000 decrease
D) $20,000 increase

E) C) and D)
F) B) and C)

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Question 3

Multiple Choice

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Which of the following is not relevant to a sell-or-process further decision?

Hanson Corp. produces three products, and is currently facing a labor shortage - only 3,000 hours are available this month. The selling price, costs, and labor requirements of the three products are as follows: a. What is the contribution margin per unit for each product? b. What is the contribution margin per direct labor hour for each product? c. Assume Hanson has unlimited demand for each product. Which product should Hanson focus on producing?

Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month. The table below lists the contribution margin, labor and machine time requirements, and demand for each product. What is the total contribution margin if Underwood, Inc. prioritizes production according to its limited resources?

Be cautious of __________ expressed on a per-unit basis when weighing make-or-buy decisions. The total value (instead of the per unit value) is relevant to the decision.

Manor, Inc. currently manufactures 1,000 subcomponents per month in one of its factories. The unit costs to produce the subcomponents are: The unit costs to produce are: Manor is considering purchasing the subcomponents from an outside supplier, who normally charges $300 per unit. The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join, but whose members can purchase the subcomponents for $250 per unit. Fixed overhead is not avoidable. How many units would Manor need to order per month to make it worth it to join the "Exclusive Buyer's Club"?

What are the decision alternatives in a special-order decision?

Dot has received a special order for 2,000 units of its product at a special price. The product normally sells for $200 and has the following manufacturing costs: Assume that Dot has sufficient capacity to fill the order without harming normal production and sales. What minimum price should Dot charge to achieve a $50,000 incremental profit?

Opportunity costs are important in special-order and make-or-buy decisions, but not in keep-or-drop decisions

The manager of Hampton, Inc. is trying to decide whether to make or buy a component of the product it sells. Which of the following costs and benefits is not relevant to the decision?

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. If you earn a scholarship that covers 95% of your tuition costs at the college (but cannot be applied to other learning opportunities) , which option would you choose (based on net enrollment cost) ?

Market Inc. has two divisions, Talbot and Heather. Following is the income statement for the past month: What would Market's profit margin be if the Talbot division was dropped and all fixed costs are unavoidable?

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. Which of the following is not relevant to the decision?

When a firm has limited direct labor hours, it should prioritize the product with:

Which of the following is not a step in the managerial decision-making process?

Rock Inc. has three divisions, Granite, Lime and Nina. All fixed costs are unavoidable. Following is the income statement for the previous year: a. What would Rock's profit margin be if the Lime division were dropped? b. What would Rock's profit margin be if the Nina division were dropped?

A sunk cost is never a relevant cost

Shirley Inc. has three divisions, King, West and Gold. All fixed costs are unavoidable. Following is the income statement for the previous year: a. What would Shirley's profit margin be if the West division were dropped? b. What would Shirley's profit margin be if the Gold division were dropped?

It costs Glenwood, Inc. $70 per unit to manufacture 1,000 units per month of a product that it can sell for $100 each. Alternatively, Glenwood could process the units further into a more complex product, which would cost an additional $40 per unit. Glenwood could sell the more complex product for $145 each. How would processing the product further affect Glenwood's profit?