CHAPTER 6DECISION MAKING IN THE SHORT TERM TRUE/FALSE 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. LO1 – True 2. An example of a decision that deals with excess supply is altering the product mix to focus on the most profitable ones. LO1 – False An example of a decision that deals with excess demand is altering the product mix to focus on the most profitable ones. 3. The decision of how much capacity to put in place is a long-term decision. LO1 – True 4. In the short term, businesses can alter capacity that they have when dealing with fluctuations in demand. LO1 – False In the short term, businesses must do the best with the capacity that they have when dealing with fluctuations in demand. 5. With proper planning, businesses can match supply and demand exactly all the time. LO1 – False Despite adjustments, businesses can rarely match supply and demand exactly all the time. 6. 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. LO2 – True 7. 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. LO2 – True 8. Relevant cost analysis involves focusing on only those costs and revenues that differ from a benchmark option. LO2 – True 9. 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. LO2 – False 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 a totals (gross) approach. 6-1 Balakrishnan/Managerial Accounting, 2e 10.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. 11. LO2 – False In general, analysis that considers only controllable or relevant costs is more efficient when decision options differ only with respect to a few benefit and cost items. 12. 13.Price gouging occurs when a firm exploits temporary excess demand to raise prices to unreasonable levels. 14.LO3 – True 15. 16.Our ultimate decision will differ when we use incremental analysis versus construct a contribution margin statement for each option. 17.LO3 – False We get the same answer with both approaches. 18. 19.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. 20. LO3 – True. 21. 22.A sunk cost is a relevant cost in decision making under the gross approach. 23.LO3 – False A sunk cost is not a relevant cost in decision making under the gross approach. 24. 25.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. 26.LO3 – True 27. 28.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. 29. LO4 – False When demand is high and a 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 resource. 30. 31.For a resource in short supply, the opportunity cost of the resource is positive. 32.LO4 – True 33. 34.To maximize profit when capacity is in short supply, minimize the contribution margin per unit of capacity. 35. LO4 – False To maximize profit when capacity is in short supply, maximize the contribution margin per unit of capacity. 36. 37.When faced with a situation where supply is limited for multiple resources managers use linear and integer programming to evaluate decision options. 38.LO4 – True 39. 40.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. 6-2 Decision Making in the Short Term 41.LO4 – True 42. 43.Because potential longer-term effects could vary across short-term decision options, they might be relevant. 44. LO5 – True 45. 46.Quantifying the longer-term implications of short-term actions is relatively simple. 47.LO5 – False Quantifying the longer-term implications of short-term actions is difficult. 48. 49.Because quantitative analysis of different decision options is extremely important, it should be the only input into final decision. 50. LO5 – False Quantitative analysis of different decision options is extremely important, yet it constitutes just one input into decision making. 51. 52.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. 53.LO5 – True 54. 55.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. 56.LO5 – True 57. 58.Products that are produced in a joint process where it is not possible to produce one product without producing the others as well are called joint products. 59.Appendix A – True 60. 61.Split-off point is the step in a joint process after which the products are completely processed. 62. Appendix A– False Split-off point is the step in a joint process after which we can identify and process the joint products separately. 63. 64.Joint costs are incurred after the split-off point. 65. Appendix A – False Costs incurred before the split-off point are joint costs that we cannot trace to individual products. 66. 67.Joint cost is not relevant for product-related decisions beyond the split-off point. 68.Appendix A – True. 69. 70.Usually, firms do not process individual products further beyond the split-off point. 71.Appendix A – False Usually firms process individual products further beyond the split-off point. 72. 6-3 Balakrishnan/Managerial Accounting, 2e 73.Managers should not rely on income statements that allocate common costs to product lines or sections to evaluate the effect on short-term profit because such statements mingle controllable and non-controllable costs. 74.Appendix B – True 75. 76.Avoidable fixed costs are costs that need not be incurred if an option is not chosen. 77. Appendix B – True 78. 79.Avoidable fixed costs are also referred to as non-controllable fixed costs. 80.Appendix B – False Avoidable fixed costs are also referred to as controllable fixed costs. 6-4 6-5 . 87. 82.Appendix B – True 83. 84.An example of a an avoidable cost over the short term is the lease payments for a building 85.The segmented income statement offers a convenient way to evaluate shortterm profit effects. Appendix B – False Lease payment for the building is not avoidable or controllable over the short term. 86.Decision Making in the Short Term 81. 96. C. Employees. B. Most short-term decisions can be classified as decisions that: A. C. LO1 – D 103.LO1 – D 91. A. Building a plant large enough so that production can be increased as demand increases.Most short-term decisions deal with temporary gaps between: A. A flexible supply of capacity and a fixed demand. Both A and B. 92. 90. E. D.Capacity is the maximum volume of activity that a company can sustain with available: A. 99.Which of the following is an example of utilizing capacity effectively? A. Resources. D. B. MULTIPLE CHOICE 89. E. 95. E.LO1 – D 100. The amount of fixed costs that can be avoided and the contribution margin. E. F. 101. Deal with excess supply. Building a plant large enough so that production can be increased as demand increases. B. Decreasing variable costs. 98. The demand of and the supply of available capacity. Hiring extra temporary employees to work extended hours during Christmas season at a retail store. Deal with limited capacity. C. 6-6 .One way businesses may manage demand is: A. C. Inventory. C. Rent additional office space. The inability to change selling price and the ability to estimate controllable costs. B and C. D. E. A caterer having a limited number of chefs working during the week and on weekends. D. Raising prices during periods of high demands. An airline selling 20% more tickets for a flight than their airplane has available seats. D. Deal with excess demand. None of the above. Company goals and employee goals. None of the above.LO1 – B 97. B.Balakrishnan/Managerial Accounting. Having all employees of a donut shop work a regular 8-hour shift every day. Discretionary orders. 102. 93. B. 2e 88.LO1 – A 94. None of the above. which of the following is not relevant? A. $17.000 printers at $90 per unit last year.$14. the production would have to be done on an overtime basis at an estimated additional cost of $5 per printer.000 decrease.000 D. 107.000 printers at $72 each was received by Owens in April.600.000 B. C. LO1 – Self-test – C 112. Additional costs associated with the order. B. Whether there is enough capacity to meet the order. LO1 – Self-test – A 106. D. Whether the selling price of the special order covers the variable costs of making the product. When making a decision regarding a special order management must consider: A. The material has a scrap value of $21. $2. however. Warner Company has some material that originally cost $41. $38. The unit product cost of the inventory being sold. 114. The selling price of the product during the promotion.100. 113. 6-7 . What would be increase to net operating income if the special order were accepted? A.600 as is.$10.600 decrease. All of the above.900 increase. What would be the incremental effect on the company's overall profit if it is reworked? a. When management must decide whether to offer special promotions in order to reduce excess inventory. LO1 – Self-test – D 109.Decision Making in the Short Term 104. C. 110. B. 111. b. it could be sold for $29. The Owens Company budgeted sales of 20. $24. There is enough plant capacity to meet these additional units without incurring any additional fixed manufacturing costs. but if reworked at a cost of $4.$9. A special order for 1. and fixed manufacturing costs at $12 per unit.000 105. c.500. The regular selling price of the product when not on promotion. 108.$21. d.000 C. D. The cost of offering the promotion. Acceptance of the special order would not affect Owens’ normal sales and no selling expenses would be incurred. LO1 – Self-test – D 115. Variable manufacturing costs were budgeted at $46 per unit.500 increase. A.000 tires in its inventory which are considered obsolete. A and B only.250) d. $18. Units can be sold directly to car dealerships for $30 per tire as opposed to the normal selling price of $45 per tire. 117. 122. Management is considering options to reduce these inventory levels. Product mix. They predict that either option will rid them completely of their excess inventory. A $21. Special order.00 with unit variable costs of $225.000 decrease in profits. ($32. The other option is to offer their current customers a $10 per tire rebate on their purchase. LO2 – D 127. Increasing prices. A $24. Each unit originally cost the company $35. c. C. In addition to the $10 rebate. LO1 – Post-test – A 124. Fixed costs are currently $51. The Huffman Tire Company has 3. A $9. Accept the client knowing that the consulting job cannot be completed. 6-8 . LO1 – Post-test – A 121. the consultant already has all the clients her present circumstances can handle. Which of the following short-term decisions deal with excess capacity? a. 126. 120.) A.000 per month but would be increased to $69.250) 123. Reject the client. the program would cost the company approximately $24. Make or buy.Balakrishnan/Managerial Accounting. Beach Surf Boards is making a decision on whether to add long boards as a new product line to complement its short boards. 119. 125.000 to manage. How much is incremental profit or (loss) if long boards are added and its sales volume is expected to be 250? a. C. B and C. The decision to sell directly to the car dealerships over offering the rebate will result in: A. D.750 c. B.000 increase in profits. E. B. b. d. Refer the client to a competitor. 2e 116. $750 b.000 increase in profits. but charge a referral fee to the competitor. Which of the following options might a consultant choose when making a decision to accept or reject a new client when capacity is limited? (That is. D. ($50. A recent analysis determined that the average long board can be sold for $300.000 if long boards are added.000 decrease in profits. A $15. LO1 – Self-test – B 118. Lost revenue from 148. ($ choosing option 500) 4. 1. 1 140. B. 300 units. Revenue per unit 142. $1. 2. 20 50 0 141. ($2. What product mix to adopt. O ption ption #1 #2 138.Decision Making in the Short Term 128. D.000) 150. Avoidable fixed cost 154.000. Whether to make or buy an item. Consider the following decision option data: 135. Variable cost per unit 145. The excess supply/excess demand classification is a helpful way for us to evaluate which of the following decision problems? A. 134. 132. $ 155. 800 units. A. $1 choosing option 0 . If selling price is $25. 129.500 units. ($ 149.200 units. C. 1. unit contribution margin equals $15 and fixed costs are $12. 157. Cost savings from 151. E. D. $1 12 2 147. C. $ 146.600 b. B and C. $2 25 5 144. E. B and C only. LO2 – C 133. 131.000 153. Number of units 139. then breakeven volume is: A.500 units. O 137. 136. $ 143. $2. Whether to accept a special order.400) c. $0 0 156.600 d.400 158. LO2 – E 130. $5. What is the incremental profit for Option #2? a. B. ($400) e. $ 152. 6-9 . LO2 – D 159. Option #1 and Options #2 are equally good choices. 2e 160. $303 b.500 computers to an overseas customer. 1 166. Unavoidable fixed 194. 196. Cost per unit 171. Avoidable Fixed Cost 180. $ 169. $ 181. ($ choosing option 500) 4. 20 50 0 167. Option #1 b. LO2 – A 185. 186. O ption ption #1 #2 164.000 179. overhead $12 195. Lost Revenue from 174. 6-10 . ($ 175. The only selling costs that would be incurred for the order would be shipping charges of $15 per computer.000) 176. What is the best choice? a. $250 c.000 computers each period: 187. manufacturing overhead $38 193. Direct labor 190. Option #2 c. $300 d. Revenue per unit 168.500 computers through its regular orders. Cost savings from 177. $2 25 5 170. The following cost data per computer are based on a full capacity of 10. 162. Each computer sells for $400. $1 12 2 173. Consider the following decision option data: 161. Neither Option #1 nor Option #2 should be chosen 184. LO3 – A 198. Brand X Computers makes and sells computers. What should be the minimum selling price per computer in negotiating a price for the special order? a. O 163. Variable 192. $ 178. $150 189. $265 e. $1 choosing option 0 . $ 172. Direct materials 188.Balakrishnan/Managerial Accounting. 183. Brand X is considering a special order for a sale of 2. Brand X is currently selling 7. d. $315 197. Number of units 165. $0 0 182. $100 191. Outsource because the incremental cost savings is $8. 210. Yes 217. 25% can be eliminated if wheels are no longer produced. 212. Vari able 205. No 218. cost 208. The currently manufactured wheels have a variable unit cost of $2.800. Co s assigned st to buy 209. 207. b. Depreciation expense on the plant equipment currently used to make the part B. A supplier has offered to produce this part for $3 per wheel and can produce the 3. however. Should Gecko outsource wheels or make them internally? a. Direct labor costs of the employees in that department which makes the part C.Decision Making in the Short Term 199. LO3 – Post-test – C 6-11 . No 223. In a make-or-buy decision relevant costs would include all of the following except: A. A 214. LO1 – Self-test – A 201. Make the product because the incremental cost savings is $3. 206. Ye 219. d. Direct material costs of the part D. to the item when made 211. 226. Ye 213. 202.200. 227.000 per month.200 wheels for the 800 skateboards needed monthly. Yes s 221. C 220. No 224. LO3 – Self-test – C 225. B 216. Which of the following would be relevant in a make-or-buy decision? 203.800. D 222. c. 204. Outsource because the incremental cost savings is $12. Fixed costs are $16. Outsource because the incremental cost savings is $800. Gecko Company is evaluating the use of a supplier versus making the wheels for its skateboards internally. No s 215. The cost of buying the part from an outside company 200. Balakrishnan/Managerial Accounting. LO3 – C 230. The only additional costs Hobbs will incur are $2 shipping charges per item. b. Manufacturing Overhead 238. c. Management makes the decision to issue a rebate. 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. Direct Labor $20 237. LO3 – B 241.000 DVD players per period. The following cost data per DVD player is based on a capacity of 5. Hobbs Electronics makes and sells portable DVD players. What is the minimum price Hobbs should charge per DVD player for the special order? a. d. $62 240. Management makes the decision to buy parts rather than make them after calculating a positive opportunity cost for capacity. Management makes the decision to close a plant because of increased competition. Hobbs has sufficient idle capacity to produce the additional DVD players. Management makes the decision to make parts rather than buy them after calculating a positive opportunity cost for capacity. 30% fixed) $10 239. offering customers a rebate of $0. d. Which of the following is not a short-term decision that is a reaction to excess capacity? a. b.50 for every widget sold. Hobbs receives a special order for 100 DVD players. $60 b. 229. 232. All of the above a short-term decisions that are reactions to excess demand. Management makes the decision to close a plant because of increased competition. 6-12 . 234. $59 c. Direct Material $30 236. Management makes the decision to emphasize sales in a particular market to boost poor sales. e. All of the above are short-term decisions that are reactions to excess capacity. 231. e. c. 235. $57 d. (70% variable. because inventory is too large. 2e 228. 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. Each DVD player has a selling price of $100. LO3 – C 233. $55 e. c. Direct Labor $18 245.20 255. Manufacturing overhead 246. The above per unit data are based on annual production of 3.80 266.000 units 6-13 . (100% fixed) $10 247. $10.Decision Making in the Short Term 242.70 B. Normal Selling Price $50. Variable Manufacturing Overhead 1. Fixed Manufacturing Overhead $2. Spikes Company manufactures 5.20 253.30 254. One of its most popular products is the LoudBoom Speaker. Fixed Manufacturing Overhead .60 265.000 increase.50 C. 260. $10. If the bicycle seats are purchased from the outside supplier. Unit product cost $10.000 per period. LO3 – A 250. How much of the unit product cost is relevant in making this decision? A.00 per unit. Fixed Selling & Administrative Expense $. Variable Selling Expense $1.30 D. The unit product cost is as follows: 252. Direct materials $ 6.80 269.00 263.50 257. Direct materials $12. Direct labor $3. the facility used to manufacture the seats would be rented for $20.000 decrease. d.90 268.20 264. $35. The cost per unit of manufacturing one bicycle seat is computed as follows: 243.000 decrease. An outside supplier has offered to sell the company the same part at a cost of $9. $2. then the change in annual net operating income is an: a. If Spikes purchases the seats. Direct labor 2.000 increase.00 267. Variable Manufacturing Overhead $1. Augusta Company manufactures stereo components. Spikes has been making all the components for the bikes. LO3 – Self-test – D 259. The Pleasantville Company makes 20. If Spikes chooses to purchase the bicycle seats. $10.000 increase.80 256. If the company purchases the part only half of the fixed overhead would be avoided. but a supplier has approached Spikes with an offer to sell her bicycle seats at a price of $40. 248.10 258. $9. 251. e. $1 per unit of the fixed manufacturing overhead costs can be avoided. $5.000 units per year of a part used in production. Direct Material $10 244.000 high-end racing bicycles each period. b. Data concerning this product are given below: 261. 249. 262. $5. $35. 275. $ margin 35 45 291. $22.60 D. $50. S 278. $17. 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. $19. 273.Balakrishnan/Managerial Accounting. Decrease profits by $30. Unit variable cost 286. and Orlando Company has offered to sell them at $5 per unit. 1 per hour) 294. 8.000. the company would: a. Expecting this trend to continue Little is interested in how to best utilize available capacity. The company needs 10.000. This cost includes $2 of fixed overhead.000 282. $ 287. 2 293. 277. LO3 – Self-test – C 274. one-time-only order for 200 units of the speaker. $ 60 80 285. If Shickman Company purchases the plugs. 5 hours . Decrease profits by $10.00 B. 281. $ 40. $ 290. The demand for doll houses is highest in November and December. c. LO3 – Self-test – C 271. 299. Demand 280. d. $ 25 35 288.000. $ 284. Unit Price 283. what is the minimum price per unit on the special order the company should charge? A.60 C.000 hrs 297. D tandar eluxe d 279. 3 000 . Production rate (units 292.30 270. The company has received a special. Shickman Company makes the widgets it uses in one of its products at a cost of $8 per unit. b. Assuming that Augusta Company has excess capacity and can fill the order without any production disruptions. Available production 295. Increase profits by $10. Increase profits by $30. Unit contribution 289. what combination of doll houses should Little produce? 276. 272. 296. Little Toy Company makes and sells miniature doll houses. 2e of the component.000 of these plugs annually.000 6-14 .000. Given the following information. Total fixed costs 298. Little produces two kinds of houses: Standard and Deluxe. 00 0. e. 333. Demand 311. LO4 – C 304.000 Snip-It. 8. Minimize the contribution margin per unit of capacity. 3. LO4 – B 339.000 Deluxe Clipper. Unit variable cost 319. 3.636 Standard. 302. d. d.000 a. c. D 309. Available production 331.000 Limb-Away. e. 75. 150. c. 100.000 Deluxe Clipper. $ 325. 5. and LimbAway.363 Deluxe. $1 320. Deluxe Clipper. $ 0 15 20 322.000 Standard. Given the following information. b. $ 321. 338. 6-15 . 8. 1 313. e. b. 305. 200. hours 000 hrs 334. 60. 20 312. Li eluxe mb307.636 Standard. 1.000 Snip-It. $ 400. $2 316. 7. $ margin 0 15 30 326. c. Handi-Tool Company manufactures and sells lawn and garden tools.000 Snip-It. 6 0. 8. 300. 0 Snip-It.000 Deluxe Clipper.000 Standard.364 Deluxe. b.000 0 314. 1. $1 324. Maximize the unit contribution margin.000 Limb-Away. 337.000 Standard.000 00. 2 329. 100. Sn Clipp Away ip-It er 310. Handi is interested in how to best utilize available capacity. Production rate (units 327. LO4 – B 301. 336.000 Deluxe. 200. 303. 1 per hour) 5 5 330. 0 Limb-Away. 0 Deluxe Clipper. 60. Unit contribution 323. Maximize the contribution margin per unit of capacity.000 Deluxe Clipper.000 Deluxe.Decision Making in the Short Term a. Total fixed costs 335. The demand for the pruning shears is highest in April. 100. 3. Maximize the margin of safety per unit of capacity.000 Limb-Away. Handi manufactures three kinds of pruning shears: Snip-It. 60. d.000 Limb-Away. 308. 3. 50 328. 332. Unit Price 315.000 Deluxe. The general rule to apply to maximize profit when capacity is in short supply is: a.000 Snip-It. $ 317. 200. Minimize the margin of safety per unit of capacity. what combination of pruning shears should Handi-Tool produce? 306. 45. Expecting this trend to continue. $ 0 30 50 318. 40 1.90 346. Variable Overhead .Balakrishnan/Managerial Accounting.30 $13.05 1. Machine Hours Per Unit . which is the MOST profitable product? A.70 . 343.5 1 . B and C.70 . The Southeast Company makes three products in one manufacturing facility. 341.20 $8. 3.000 machine hours available. Cannot be determined 369. A B C 359. Produce the items with the largest contribution margin per unit of capacity.5 1 . LO4 – D 342.70 $6.25 366. Unit Product Cost $9.200 1. Product A B.10 1. 351. A. c.00 367. Demand (units) 1. Selling Price per Unit $16.55 $10.00 353. Selling Price per Unit $16. LO4 – Self-test – B 356.90 362. Direct Labor 2. 1.60 350. Data regarding these products are as follows: 358.400 B. Demand (units) 1.60 364.400 800 354. Direct Labor 2.00 $18.90 2.90 2.00 $20. d.00 $18. b. A B C 345.80 . e. Purchase some components from outside suppliers. Variable Overhead . 2. 2e 340.20 $8. Data regarding these products are as follows: 344.40 1.25 352.80 . Direct Materials $5. which of the following are alternative courses of action to consider? a. Product B C.00 $20. Produce the items with the largest selling price to maximize revenue. A and B only. 365. Unit Product Cost $9.20 361.20 347. Fixed Overhead 1.90 348. Fixed Overhead 1.05 1.70 $6.200 1. 6-16 . When capacity is limited. 357. If there are only 2. Product C D.90 360. Machine Hours Per Unit . LO4 – Self-test – C 370. Direct Materials $5.400 800 368.200 C.10 1. 850 355. How many machine hours would be required to meet the demand for all products? A. The Southeast Company makes three products in one manufacturing facility.700 D.60 349.60 363.30 $13.55 $10. If there are only 2.90 2...60 377.. Direct Materials $5..000 units of Product Z 408..... 385. 391.000 units of Product X and 0 units of Product Z B..70 ... The highest contribution margin per unit B... The Southeast Company makes three products in one manufacturing facility.........90 B.... A.. 2. how many units of each product should be produced? 390. LO4 – Self-test – A 6-17 .000 units of Product Z D...... and the company desires to maximize its contribution margin.. Machine Hours Per Unit ...60 378. oduct 392. Demand (units) 1. $6..20 375. $7... the company should first produce the product with: A... 402... LO4 – Self-test – D 387. Pr 389... 403.. The Jackson Company produces 2 different products. $6.00 $20. LO4 – Self-test – A 384........400 800 382. Selling Price per Unit $16..70 $6.000 units of Product Z C.. Fixed Overhead 1.000 machine hours available. 406. If there are 4. 394. $ $ 395.. 4 407.45 C.. 0 units of Product X and 4....5 1 .Decision Making in the Short Term 371.. X 393.90 374. $12..40 383..30 $13. 388.....10 1..... 0 units of Product X and 1.Labor hours per unit 2 405. A B C 373...000 units of Product X and 4..Variable cost per unit 401..90 376..... how much is the profit per machine hour for product A? A..05 1.Selling price per unit 397.200 1.. 404.25 380... each of which has unlimited demand.. Unit Product Cost $9.... Z 396... Direct Labor 2. Variable Overhead ..... The highest contribution margin ratio C.. When there is a production constraint....55 $10.. 398..70 D.20 $8..00 $18. Data regarding these products are as follows: 372.00 381. 2... 400. $ $ 399..40 1.80 ... 379. The highest revenue per unit D.....000 total available labor hours. The highest contribution margin per unit of the constrained resource 386. Balakrishnan/Managerial Accounting. Qualitative aspects of decisions. It is impossible to make an informed decision. in many cases. All of the above statements are true. b. LO5 – B 421. Which consideration is most relevant for a startup manufacturing company? a. B. c. Consequently: a. A and B only. Short-term decisions regarding production. Implications that arise from people outside the firm such as customers. . Which of the following is in the context of a short-term decision? a. 416. For longer-term actions. 417. Total variable and fixed costs and total sales revenue d. Product promotion. qualitative assessments are the only ones possible. 410. e. LO4 – Post-test – D 412. A. only qualitative assessments are possible.000 for product A and $4. 2e 409. 413. what factors are relevant in determining which of the two products to produce and sell? a. and suppliers. e. LO5 – A 418. c. It is important to consider longer-term implications of short term decisions because of potential tradeoffs between short-term and long-term interests. d. b. Frequently. Which of the following statements is not true? a. and then expanding the range of considered factors. LO4 – E 415. If total fixed costs will be $5. c. suppliers. 422. b. 419. c.500 for product B. 420. d. Selling and variable costs per unit. and large estimations errors accompany such assessments. first by estimating the short-term effects. LO5 – Post-test – B 424. Variable costs per unit and total fixed costs. Quantifying the longer-term implications of short-term actions is difficult. Long-term implications should be ignored in the decision-making process. b. and C are consequences. Quantifying longer-term implications of short-term actions is relatively simple.Variable costs per unit and the fixed cost savings 411. d. Special order. The production of two products has the same selling prices per unit. b. Product mix. A. Decisions that cause profit to be highest in the short-run 423. 6-18 . and the fixed cost savings. c. d. e. A and B only. Many managers follow a “peel the onion” approach to assessing decision effects. B and C. 414. 426. Appendix A – C 427. c. Appendix A – Post-test – C 439. b. d. 428. 432. Appendix A – C 436. Selling price if processed further. Joint cost. e. Both A and D are true statements. Pine bark and pine cones from a pine tree. Appendix A – C 430. e.Decision Making in the Short Term 425. 6-19 . Mined zinc and lead from the same ore. None of the above statements are true. 437. c. Joint costs can be traced to specific outputs. b. The product should be analyzed further to determine its profitability since the joint cost will be incurred whether or not the product is discontinued. 429. d. 435. b. d. c. e. 438. Fixed cost. b. 431. b. d. The product should be processed further so the joint cost can be allocated to additional products. Incremental cost. Profit will be increased if the product is discontinued. Split-off cost. Kerosene and aviation fuel from crude oil. 434. Appendix A – B 433. A joint product costs $20 (including $8 allocated joint cost) and sells for $15. Cost incurred to produce the product after the split-off point. Which of the following statements is true? a. Which of the following is not relevant to make a decision to process further or sell ‘as is’? a. Joint costs occur before the split-off point. Which of the following statements is true? a. Opportunity cost. c. Which of the following is not an example of a joint product? a. Goats’ milk and cows’ milk. c. Joint costs are considered relevant costs beyond the split-off point. d. A cost that is common to two or more products is a: a. Joint costs. Costs incurred to process further. The production of the product should be discontinued since it creates a loss of $5. Joint costs occur after the split-off point. Common costs are not relevant in determining whether to drop a product line.Balakrishnan/Managerial Accounting. Appendix B – B 6-20 . c. 441. Neither of the above statements if true. d. Which of the following statements is not true? a. If a segment of a company has been losing money for several periods because a competitor has opened in the area. b. Both of the above statements are true. 2e 440. the segment should be dropped. 448. Problems 443. solution to keep the tree fresh. 6-21 . 447. She will pay the helper $8 per hour. Required: a. If Robin decides not to hire a helper. 445. Robin offers Christmas tree decorating services six days per week during late November and December. c. 455. She charges $50 per live tree regardless of the size of the tree. Robin’s clients provide all the decorations. 1. 451. Robin has had more calls by the end of October than she had expected and is considering hiring a helper. is $10 per tree and the fixed costs per month total $100. b. 457. 449. 453. 454. Her variable cost.Decision Making in the Short Term 442.) 444. List three long-term effects of Robin’s decision alternative courses of action. Robin estimates that she can decorate 8 trees in a 10-hour day (before hiring a helper) during the holiday season (25 days. 452. 456. 450. list three alternatives she should consider. Does Robin’s decision deal with excess supply or excess demand? 446. her fixed overhead will not change. b. 472. a small business selling fruit-flavored slush drinks.35 465. 478.75 469. travel to and from the party location (estimated to be $15). ice and labor. The hostess is willing to pay $1. 6-22 . $ ÷ 20 drinks per hour) 0. 475. Trisha Hardin owns Ice Flavors. 477.Balakrishnan/Managerial Accounting. Total cost per drink 468. 2e 2.50 per drink. c. etc) 0.40 467.60 461. $ ice 0. which is not during Trisha’s regular business hours. Fixed overhead per drink 466. The party hostess will furnish all cups. 476.50. Should Trisha accept the special order? Why? 479. Each drink sells for $2. Required: a. List the costs that are not relevant to the decision. Variable overhead per drink 464. Trisha is considering a special order for a sale of 100 drinks for a local birthday party. Trisha will provide the drink mixture. Drink mixture and crushed 460. 459. The party will be in the evening. Since the party is not at Trisha’s business. $ 1. 471. napkins and other variable cost items. Trisha derived her price as follows: 458.40 463. Labor per drink ($8 per hour 462. What is the incremental cost associated with accepting the special order? 473. Her only additional expense will be one employee for two hours ($8 per hour). $ (cups. $ 0. 474. 470. 501. c. Outdoor Flames manufactures 5. What is the net total dollar advantage or disadvantage of purchasing the ignition systems rather than making them? 498. 493. Fixed manufacturing 488. How much of the unit product cost of $33 is relevant to the decision to make or buy the ignition systems? 495. The unit cost of each ignition is as follows: 480. Direct Material 482. If the ignition systems are purchased from the outside supplier. Variable manufacturing 486. overhead 14 489. b. If the ignition systems are purchased from an outside supplier.000 per year. $12 483. Direct Labor 484. Required: a.000 outdoor gas fireplaces each period. 496. The company has been manufacturing the ignition system for the fireplaces. List three qualitative characteristics that the owner of Outdoor Flames should consider in looking at the long-term effect of purchasing the ignition systems. A local supplier has offered to sell the company the ignition system for $30 each. The additional contribution margin on the other unit would be $42. 492. 497. all the direct labor would be avoided. 5 485. 481. 500. overhead 2 487. 494. Unit product cost 490. but $8 of the fixed cost would continue and be applied to the remaining products even if the part is purchased. the facilities now being used to make them can be used to make other units of a product that is in high demand. $33 491. 6-23 . 499.Decision Making in the Short Term 3. 546. Variable overhead 517. 510. Required: a. 543. 519. 534.200 1. Unit cost 525. Direct material 509. 511. 514. 515. The following information is provided for the products: 502. X Y Z 508. 506. 6-24 . 539. The Gant Company produces three items in its manufacturing plant. 507. variable) 15 14 15 516. Selling price per unit 537. 526. b. $70 $65 $80 540. $16 $10 $14 512.00 800 0 548. Variable selling 541. 529. Products 504. 549. 2e 4. 542. 503. Fixed overhead 521. 523. 553. 535. 552. 20 23 30 524. 538. Monthly demand in 545. 547. 551. 505. 532. units 2.600 minutes per month for production. expense per unit $5 $4 $2 544. $53 $50 $63 528. Minutes required per 533. The plant has a total capacity of 9. 518. 531. 530.Balakrishnan/Managerial Accounting. 522. unit 5 4 6 536. 2 3 4 520. Direct labor (all 513. 554. 527. How many minutes would be required to meet the demand for all three products? 550. How many units of each product should Gant product to maximize profit? Show your calculations. 556. $18.0 613. $ Margin 0. 30 612. 575. For the current year. Segment 573.000 5. 591.000 42. Tot untains ses elisks al 595.000 6-25 . $13. Sales volume 561. in a joint process. 557. 585. Profit 621. 5.000 5. $10 608. 586. 12.80 for Y if the products are sold without further processing.000 605. 583. 588. The selling price $1. Pr 558. Revenues 565. 614. 000 units 00 units 564. $5 609. Hermitage Farms produces two products. and Obelisks.000) 44.000 572. 562. is presented below: 555. Pro 559.000 580. Traceable 611. X and Y. $14 598.000 73. $3 574.000 2. 587. 3 619. 33. 28. 1 processing cost 000 0 7.Decision Making in the Short Term 5.000 15. 1 fixed costs 35. $2 margin 90. 567.000 400 43.000 0. Bird and Butterfly Houses.400 576. $ Taxes 6. Joint costs 577. Creative reported the following results: 589. Hou 593. 16.000 5. Revenue 596.000 34. Creative Lawn Ornaments sells three categories of lawn structures: Fountains. Contribution 606. Fo 592. 4 603. 590. 1 costs 85.000 610. 570. $9 599. 6. $1 597. 93.000 600. T oduct X duct Y otal 560.000 400 60. 30. if processed further. 617. Common 616. ($1 624.000 5.10 for X and $0.000 5.000 5. Required: What is the monetary advantage (disadvantage) of further processing the products? Show calculations. Profit before 581. $ 25. $4 566. 4 604.0 563. $ 2.000 00 000 000 615. fixed costs .00 571.000 3. Data for the two products.000 620. $ 35. Variable 601. $ 622. 602.400 568. 582. 579. 578. Ob 594. $ 607. $ 623. $4 75. 3 618. Traceable 569. The products may each be sold at the split-off point or processed further.000 584.000 05. 630. but its common fixed costs will be allocated to the Fountains. Show all calculations. 633. The owner believes that if the Obelisk sales are discontinued he will be able to display more Fountains and increase the revenues by 5% without increasing any fixed costs. If the Obelisk line is discontinued. all of its traceable fixed costs will be avoided. 2e 625.Balakrishnan/Managerial Accounting. 631. but is concerned about the loss on the Obelisks line and is considering eliminating it. 632. 628. Creative’s owner is pleased with the overall profit. 6-26 . Evaluate whether Creative Lawn Ornaments should discontinue its line of Obelisk structures. 627. Required: 629. 634. 626. 656. and thereby. c. work longer hours. Drink mix and 647. $ 15 654. $ 60 648. Some alternative courses of action include: Instead of hiring a helper. $0 x 2 hrs) 652. Answers may vary. Rej pt Order ect Order 643. With increased business. b. Robin should consider the long-term effect on her personal and family obligations. By hiring a helper and accepting additional clients. doorways. Begin decorating a few days earlier in November. 636. in the long-run she may wish to offer additional services such as decorating mantels. $150 645. Limit the size of tree. $ 16 651. Instead of hiring a helper. in the long-run she may lose clients. If Robin increases business and hires helpers. 637. Increase the price per tree. Labor ($8 per hr 650. Answers may vary. 2. 641. $0 646. With increased business. extend business from six days to seven days per week. Revenue 644. etc. 638. in the long run Robin may have to consider hiring additional employees. $0 655. reduce the number of clients. dining rooms. Instead of hiring a helper paid per hour. thereby being able to complete more trees in the same amount of time. Transportation 653. $0 ice 649. Robin should consider the long-term effect on her health.Decision Making in the Short Term 635. 657. Acce 642. outsource some work for a fixed fee per tree. Solutions to Problems 1. Robin’s decision deals with excess demand. Short-term decision (LO1) a. Incremental cost associated with accepting the order: 640. 6-27 . 639. Special Order (LO2) a. Some long-term effects include: If Robin increases the price per tree. Total Incremental costs: $60 + $16 + $15 = $91 659. 689. Incremental 666. Incremental 668. 6-28 . 42 margin .35 per drink 662. Additional contribution 681.Balakrishnan/Managerial Accounting. Relevant cost 679. b. (1 50. c. $ 17. 688. 670. Make or buy decision (LO2. c. Fixed overhead $0. will the company be able to absorb all the employees from the ignition system into other areas of the company? What are the alternatives if the purchased ignition systems turn out to be a lower quality than expected? Does the high-demand item expected to use the space formerly used for making the ignition systems have a long-range high demand? 687. 673. 671.000 686. 678. Costs $ 91 667. profit $ 59 669. Qualitative considerations: Will the supplier continue to sell the ignition systems at the $30 price? Over the long run. Cost of purchasing 683. Non-relevant costs: 660. Revenue $15 0 665. $12 + $5 + $2 + $6 = $25 676. $1 25. LO5)) 674.000 682. LO3. Relevant unit product cost: 675. it would be profitable to accept the special order.000) 684. Because Trisha’s incremental revenue exceeds her incremental costs and she has the capacity to accept the order (it does not interfere with regular business). Net advantage 685. a. 3. b. Incremental 664.40 per drink 661. Trisha should accept the order: 663. Net total dollar advantage (disadvantage) of purchasing: 677.000 680. 672. 2e 658. Variable overhead $0. Min 744. 697. 719. Variable selling 717. 747. Direct material 705. $38 $31 $35 724. 725.000 752. variable) 15 14 15 712.00 753. a. 732. Minutes required per 730. Contribution margin 734.Decision Making in the Short Term 4. 4. unit 5 4 6 733. Product Y 160units 755. 800 units @4 minutes 0 754. Product X 1. Selling price per unit 701. -0@ 5 minutes 0 757. 80 756. Total variable cost 721. 707. 9.200 units x 5 minutes) + (1. Variable overhead 713. 6-29 . 731.600 minutes 692. 698. 696. per minute $160 $13 $270 6 737. Direct labor (all 709.800 @ 6 minutes 0 751.000 x 4 minutes) + (800 x 6 minutes) = 16. (2. Optimal Units 743. 702. 4. margin per unit $32 $34 $45 729. Total minutes required to meet demand: 691. 2 3 4 716. 700. 711. Production to maximize profit: 693. 718. 703. Products 695. Availab utes Used le Minutes 745. $16 $10 $14 708. 714. 736. b. 735. 746. 4. 694. 723. 706. expense per unit 5 4 2 720. 710. 715. Best use of resources in short supply( LO4) 690. Contribution 726. 740.600 748. 738. 739. 728. Gant should produce the following units to maximize profit: 742. 741. $70 $65 $80 704. 727.80 750. X Y Z 699. Product Z 800 units 749. 758. 722. 5.600 797. $ 0. 852. Traceable processing costs 800.000 49. 811. 000 units 00 units 773. 854. 2e 5. 853. 857. 807. $1 819.600 804.000 5. 4 825.000 5. $ 2.000 15. 791. 798. 28. 767. 1 778. F 858. $ 840. 787.800 800 43. F 861. 792.$30. Variable 823.000 822.000 5. Traceable 833. 2. 849. Sell at Split-Off Revenue 796. $2 margin 0. 760. 790.000 827.000 73. 1 costs 85. O 859. $18. $2 841.400 785. $4 75.000 842. T oduct X duct Y otal 765. Discontinue 856.000 0. Pr 762. $3 782.800) 808. $3 794. 795. 788.0 771. 786. $ 839.000 400 60. 845. 799. O 862. Process Further: Sales volume 772. a. $4 774.000 3. 779. 769. $9 821. T 860.400 . 803. $ 0. Segment Margin 784. The disadvantage of processing Product X further is $800. 783. 775. T 6-30 . Dropping product line (Appendix B 810.000 . 3 835. $13. 6. $12.000 0. $5 831. $10 830.800) 806. 846. Joint costs (Appendix A) 759.000 2. 824.000 400 43.000 3. Segment 838. 813. 844.800 800 43. 793. Hou 815. Revenues 776.000 000 17. 16. $14 820. fixed costs 30. revenue if Obelisk 847. 0 0 0 801. $ 0. Pro 763. $1 Profit 60. 812.000 781.000 837. 4 826. Continue 855. ($13. $9 829. $12. Fo 814.$12. 848. Contribution 828. Revenue 818. 789.Balakrishnan/Managerial Accounting.000 69.000 42.000 832. 834.400 777. ($30. 850. 809. 851. Traceable processing cost 780. Increased 843. $3 802.000 0. 766.000 93. Tot untains ses elisks al 817. 3 836. Ob 816. 768. 770. b. 805. Segment Margin 761. The advantage of processing Product Y further is $600. 764. 000 5. ($ 896. 35. 888. $ 895.000 885. $ 95. $ 270.000 183. 3 0. ( $15. 3 882. 7 889.000 878. 8 30. 1 874. Traceable fixed costs 884.00 0) otal ountain belisk otal 866. $ 175.000 70. 4 5. 6 881. The increase in revenue from the additional fountain sales does not offset the portion of common fixed costs that the Obelisk absorbs.75 0 873.000 892.000 0. 0 869.000 886. 8 5.000 894.250 880.000 887. 3 0. $ 25.000 9. 8 875. 3 5.500) 898. 0 883.Decision Making in the Short Term 863. Net Income ountain 864.000 871. $ 867. 6-31 . 3 0.000 0.250 9. Common fixed costs 891.500) $5.000 893. 70. 0 876. 0 897. 0 890. $ 868.000 0. Revenue 870. Creative’s owner should not discontinue its Obelisk line of products.000 872. Variable costs 877.750 183. 899.000 belisk 865.000 879. ( 10. Briefly describe the totals or the gross approach to making short-term decisions. 2e 900. 906. What do short-term decisions deal with in most business environments? 902. 4. 8. 7. 905. Why is the decision of how much capacity to put in place a long-term decision? 904. 13. Short Answer 1. How might managers deal with the possible long-term implications that may arise from short-run decisions? 6-32 . 9. When might the gross approach be preferable to the incremental approach for making short-term decisions? 909. End of Chapter Content 901. 5. What does the term “capacity” mean? 903. requires more computations? Why? 908. Briefly describe the incremental or differential method approach to making shortterm decisions. Which approach. 6.When does it make sense to compute the contribution margin per unit of a particular resource in making short-term decisions? 912. What are the two broad classifications of short-term decisions? List two examples of each. 3. 11.What is a make-or-buy decision? 911. 12.Balakrishnan/Managerial Accounting. Are sales promotion decisions typically responses to an excess supply situation or an excess demand situation? 910. 2. 907. incremental or totals.What is the general rule for allocating a scarce resource to making multiple products? 913. 10. and using extra capacity to make production inputs in-house. running special promotions. (LO-1) (1) Decisions that deal with excess supply. (LO-3) Excess supply – usually. (LO-2) This method focuses only on those costs and revenues that differ from the benchmark option. (LO1) The temporary gaps between the demand and supply of available capacity. maximize the contribution margin per unit of capacity. Solutions to Short Answer 1. 11. the firm is deciding whether to make a product. (LO-2) This method considers the gross revenues and costs associated with each option. 923. 918. (LO-1) The maximum volume of activity that a company can sustain with available resources. and altering the product mix to focus on the most profitable ones. (2) Decisions that deal with excess demand.(LO-5) Typically on a qualitative basis – by considering how customers. rent office space. 4. 9. Examples include reducing prices to stimulate demand. meeting additional demand by outsourcing production. 2.(LO-4) When demand is high and a resource is in short supply. and competitors might respond to the decision being made. 13.(LO-4) To maximize profit when capacity is in short supply. 917. 3. 916. 922. They build plants. 8. internally or outsource and buy them from a supplier. Examples include increasing prices to take advantage of favorable demand conditions. (LO-2) The totals approach requires more computations because it includes some noncontrollable benefits and costs. 926. (LO-1) Because organizations make capacity decisions based on the expected volume of operations over a horizon spanning many years. 7. 5. 920. (LO-2) In decisions involving many costs and benefits – it helps us ensure that we do not “forget” to include a relevant cost or benefit. 10. 6. processing special orders.(LO-3) In a make or buy decision. rather than the incremental amounts relative to the benchmark option. buy equipment.Decision Making in the Short Term 914. 924. 919. suppliers. 925. the firm cuts prices to stimulate demand. and hire salaried personnel in anticipation of the demand for their products and services. or piece thereof. 915. 921. 12. 6-33 . “incremental. 6. each use might need a minimum of 10 units of space. 7. That is. Why might this practice be optimal? 936. Identify the one resource whose daily supply is fixed for each person.Balakrishnan/Managerial Accounting. In periods of excess capacity. 9. the capacity of the most expensive machine defines a plant’s capacity. Often. why does it sometimes make sense for a company to increase prices? For example. 2e 927. 8. What would General Motors consider as short-term? Is this period longer than what a bakery would consider as short-term? Why? 928.e. does it make sense for a manufacturing company to produce some products to stock (i. Why might this general rule not hold when individual uses require a minimum amount of the resource? (For example. The definition of “short-term” depends on the business context.How does the notion of maximizing the contribution per unit of the scarce resource apply when some products have minimum production quantities? 938. 931. Some people argue that the gross method is also. How could we improve the effectiveness with which we consume this resource? 930. Short Essay 1. When faced with a sudden spurt in demand. 933.The general allocation procedure in the text assumes few constraints on how we could use resources. firms will deliberately install excess capacity in “cheap” resources.. 6-34 . How can you reconcile these seemingly contradictory inferences? 929. What are other long-term strategies a company could adopt to insulate itself against uncertain demand? 935. 2. Automobile dealers frequently advertise sales because their lots are “overflowing.” Evaluate this argument. 3.” The ads suggest a shortage of storage capacity but the pricecutting action indicates a demand shortfall. How does holding inventory help reduce the expected gap between available capacity and uncertain demand? 934. at some level. Inventory is one mechanism that a firm could use to protect itself from the impact of fluctuating demand. Give two examples where it might be a bad idea. 11. 5. build up inventory) for sale in future periods of high demand? Give two examples of industries where this might be a good idea. 10. 4. why do airlines raise fares during peak travel periods? Why might it not be a good idea for consulting companies? 932. if we are allocating space.) How might we modify our approach to incorporate lumpy uses of capacity? 937. 13. adversely affecting employee morale. How might a manager trade off these two factors? 6-35 . its ability to be nimble in responding to competition? What are some long-term costs and benefits of outsourcing? 939. outsourcing the component means that 20 longterm employees would be laid off.000 annually over making it in-house.Outsourcing is the practice of having an external party take over some business and/or manufacturing processes.Suppose that buying a component is estimated to save $50.Decision Making in the Short Term 12. However. How does outsourcing change a firm’s cost structure and. therefore. 946. and price-cutting and other promotions become necessary to move the vehicles. 943. demand for a product decreases as its price increases. Air travelers usually understand this behavior and plan their travel accordingly. (LO-1) Most of us drive to work. in most market settings. The airline industry is a good example. product characteristics often play a critical role in determining how “long” the short-term horizon is. 6. The toy industry and the apparels industry are good examples. (LO-3) Yes. 2. In peak times. For General Motors anywhere from few weeks to a few months may be considered short-term. When a firm does not have enough capacity to meet a sudden spurt in demand. the gross method is also incremental when viewed in this context. 5. But. (LO-1) The reason why the lots are overflowing is that vehicles are not being sold at the expected rate. therefore. Raising their rates when their business is good usually backfires because it hurts reputation and goodwill in the long-run. it is. Solutions to Short Essay 1.Balakrishnan/Managerial Accounting. will continue to travel. as pricing and promotion decisions depend on how fast different models of cars and trucks are moving from the dealers’ inventories. LO-5) Increasing prices is a natural way of decreasing demand. 6-36 . consulting companies rely on longstanding relationships with their customers. 945. capacity should be defined in terms the number of vehicles that can potentially be sold per day. 942. Airline companies usually face no long-term adverse implications from increasing prices to deal with peak demand situations. and so the demand for gasoline is fairly stable. From an overall organizational standpoint. Rather. For a baker. LO-2) Yes. 941. In fact. it can reduce the demand by increasing prices and “turning away” some customers to a point where the demand can be met. the definition of what is short-term and what is long-term depends on the business context. each decision has an incremental effect. 2e 940. On the other hand. a day or two days may be too long as baked goods do not retain their “freshness’’ for long. This is typically referred to as “production smoothing” and makes good business sense as long the product is storable for sale in the future period. One way to economize on gasoline consumption is to car pool. (LO-3. 3. Thus. even though some of them may be non-controllable. Unsold vehicles occupy space in the lot. an increase in airfare induces some travelers to seek other means of travel or postpone their travels. When demand falls short of supply based on the anticipated number of vehicles to be sold per day. 944. it does not consider cash flows associated with many other decisions that the companies may be considering. and as long as inventory carrying costs are manageable. 4. The gross method considers all cash inflows and cash outflows that are associated with the options being considered in the context of a particular decision. lots overflow. or have rigid and noncancelable schedules. Only those that are able to afford the higher prices. Thus. it does. and. (LO-1) Yes. it is not correct to define capacity in terms of the lot space available. The 6-37 . However. Plants and offices have to be closed down and people have to be fired and so on. If this test marketing effort fails. But one way to reduce this risk is to do a small scale launch aimed at representative customers. (LO-4) The idea is to make the most profitable use of critical and most expensive resources. By doing so. Offering a new product often involves putting in place and committing to various organizational resources. producing and stocking for future may backfire. high. 9. the company would embrace a cost structure with less fixed costs and more variable costs i. a cost structure with lower operating leverage. 951. On the other hand.(LO-5) Test marketing is a way to minimize risk associated with large investments. To avoid such situations. it makes more economic sense to install excess capacity in other resources. 949.(LO-4) Products requiring minimum production quantities involve committing requisite amounts of capacity to these products if they are chosen production..Decision Making in the Short Term 7. Any situation in which such a resource has to wait because some other “cheaper” resource is in short supply is undesirable.(LO-5) Employee morale is an important factor in outsourcing decisions. Loss of morale leads to a loss in productivity which might make outsourcing even more attractive. and it is used in a lumpy manner. turn key projects and so on).(LO-4) When a resource is in short supply. Another strategy to find other uses for capacity so that excess capacity can be put to profitable alternate use during periods of lean demand (such as accepting special custom jobs. but instead use the capacity to schedule products that yield lower contribution margins per unit of the scarce capacity resource. 13. 950. such products may well necessitate leaving out products with higher contribution margins per scarce capacity unit in order to meet their minimum production requirements. (LO-3) One strategy is to invest less in capacity and rely more on outsourcing. then a larger scale launch is unadvisable. (LO-3) Companies can produce and stock up during periods of lean demand to be ready for peak periods whenever demand outstrips capacity. 12. 10. calculating contribution margin per unit of the resource to allocate its use to various products is at best approximate and can often lead to wrong decisions. The alternative is to not lock up capacity by scheduling such products. 11. Moreover. whenever demand is low and there is considerable uncertainty as to whether demand would rise again. Whenever capacity is in short supply. especially if outsourcing is a sign of things to come. Once the product is launched it is often extremely costly to cut back should the product fail. The consequent trade-off will determine whether it is profitable to make products with minimum production requirements. The opportunity cost of such a resource is by assumption. feedback from the test market is often useful in redesigning the product to reduce the risk of failure subsequently. and products do fail. 8. Risk of failure is an inherent part of business.e. such use of inventory is beneficial when demand follows reasonably predictable cycles of high and low demand. 948. 947. Advanced techniques such as integer programming may have to be employed to come up with the right way to allocate scarce resources to products in such settings. who may prefer jobs elsewhere to being fired. while others can be outsourced. Managers therefore have to be clear about the impact of outsourcing on employee morale so that they can make the appropriate tradeoff between immediate cost savings from outsourcing and longer-term adverse impact of a loss in morale. However.Balakrishnan/Managerial Accounting. decision making with respect to outsourcing has to be clearly communicated to the employees to avoid disgruntlement. 6-38 . 2e company may lose talented and experienced personnel. Certain critical activities are better done in-house for strategic reasons. Marketing & administrative $0. 953. Assume Ajay’s fixed costs were $1. and his fixed costs amount to $600 per month. 964. Which option should Déjà Vu pursue? 977.000 cards Selling price $1. The Déjà Vu Card Company offers greeting cards for every occasion at unmatched prices. The following information comes from Déjà Vu’s accounting records for December of the most recent year: Greeting cards sold 100. c.21 per card 971. 966.50 per hour. 2. Ajay estimates that he can wrap 60 packages in a 10-hour day. 967. Using the gross approach. regardless of size.500 cards if it holds a 50% off sale and 4. to hire a helper? 963. Without the helper. Exercises 1. d. in the customer’s choice of wrapping paper and bow for a price of $3. 965. 954. a. b. Ajay estimates that he can wrap 110 packages in a 10-hour day. Variable costs: 972.000 holiday greeting cards. at a cost of $8. Déjà Vu has an extra stock of 5. Ajay Singh offers gift-wrapping services at the local mall. determine whether Ajay should hire the helper. Does Ajay’s decision deal with excess supply or excess demand? 956.30 per card 970. 975. Due to the anticipated increase in demand over the holiday season. The company is considering two options: (1) holding a 50% off sale and (2) holding an 80% off sale. 960.15 per card 973. Using controllable cost analysis. 958. Ajay wraps each package. Déjà Vu expects to sell 1. Required: 976. With the helper. Would this affect Ajay’s decision 962. Required: 955. 961.00 per card Fixed costs: 969. to help him wrap packages.08 per card 974. Marketing & administrative $0. 959. determine whether Ajay should hire the helper. 957. The remaining cards would be discarded. Ajay plans on operating his business for thirty 10-hour days during the holiday season.000 rather than $600. Ajay’s variable costs total $1 per package wrapped. 6-39 . Manufacturing $0. Manufacturing $0. Ajay is considering hiring a helper.Decision Making in the Short Term 952. 968.000 cards if it holds an 80% off sale. reduce the yield of sand from 1. b. Myers Quarry produces coarse gravel and sand in an 8:2 ratio. Values at the split-off point are $30 per ton for gravel and $40 per ton for sand. This superior grade of sand (“sandbox” quality) retails for $160 per ton. Allocate joint costs to the two products using the relative sales value at split off as the allocation basis.000. The process will. Should Myers sell the coarse sand as is or process it further into sandbox quality sand? 6-40 . however. However. Required: 980. 981.Balakrishnan/Managerial Accounting. Suppose Myers can run the sand through a sieve to remove small rocks and make fine sand used to fill sandboxes.000 tons of rocks input) amount to $225. a. 2e 3. Myers will incur $18. Joint costs for a month (volume 5 9. 982. 979.000 to process the sand into “sandbox” quality. 978.800 tons to 900 tons. 984. Ajay expects a surge in gift-wrapping needs. 60.00 1016. 600 00 .50 10) 1011. 1009. $1 110) 1003. b. 991. ($1 60.0 0. This is akin to a manufacturing firm outsourcing some production in periods of high demand.000) for the season. Total contributio n 999. 1023. 1005. $3 110) 998. Dail y contributio n 1010. $8. Total fixed costs 1015. 1013.00 1020. $3. 110. t 1019. 990. 600. we have: 985. 60 993. We can construct the entire CVP model for Ajay. 110 packag packages es per per day day 996. selecting the option with the higher profit. $33 $18 0. 994. 85. With the information provided. Dail y revenue 995. ($3 60.00 000 . $3. if he wishes to maximize profit then Ajay should hire the helper.0 $3. Accordingly. 989.0 0 1012. Given 1018.0 0 1000. 450. 50. 1021. Dail y pay for help 1006. $13 $12 5. 00 00 1004.00 0. (LO1. Due to the holidays.00 0. LO2) a. We then compare the profit under each option. (0. To handle this surge. 997. Dail y variable costs 1002.00 600 . $4. Profi 1007. W 988. Ajay’s profit increases by $450 ($3. Ajay’s decision deals with excess demand. 986. Row 1– rows 2 & 3 987. 1017. 6-41 . 1001. W ithout ith Helper Helper 992. Ajay is considering hiring a helper.00 1022. Solutions to Exercises 1.Decision Making in the Short Term 983. if he hires the helper. 30 Row 4 1014.450 – $3.0 0 0 1008. we could leave out the non-controllable fixed costs of $600. $ 1040. 1039. 50 packages per day $3 1032. We compute only the incremental revenues and costs associated with a particular decision option relative to the status quo. In constructing the income statement for each option. 5 1036. Incremental revenue 1026. d. 1030. If Ajay seeks to maximize profit. $ 1037. Value of hiring helper 1041. 2e 1024. the change in fixed costs will not alter his decision to hire the helper. Incremental cost (helper) 1033. The fixed costs are equal under each option and are not relevant for this particular problem. they “wash” because they are included in the total cost for both options. 6-42 . Incremental profit per day 1038. 50 packages per day $1 1035. The difference in profit derived with controllable cost analysis exactly equals the difference in profit under the gross approach. c. 1028. the gross approach provides decision makers some flexibility in terms of what is included and excluded from the income statement. $8. $ 1031. we have: 1025. 1045. Ajay increases monthly profit by $450 if he hires a helper. 1044. Even though the gross approach uses fixed costs. $15 30days 1042.50 10 hours 1027. the difference in profit would be preserved. While the absolute profit numbers would change. 1029. Thus. Incremental variable cost (packages) 1034. 8 1043.Balakrishnan/Managerial Accounting. Since operating without the helper is the status quo. as they are not expected to change.20 × 4.20 × 2. At a 50% off sale.15+$0. not a card that has already been produced. By employing such a strategy. (LO2) Similar to the Superior Cereals problem in the text. Thus. This amount represents a $450 (= $1.50 × 1.000 – 1. Déjà Vu’s profit increases by $0.250.500 = $750.$800) increase over its best option. they are not relevant to Déjà Vu’s decision. 1050. a 25% discount and increases the discount rate over time (perhaps by as much as 15-25% a week). 1046. Additionally.08) in variable costs associated with producing and selling a card. Déjà Vu could earn: 1053.500) + ($0. even though the resulting price is below the $0. Such a strategy may work quite well for Déjà Vu – i. 1056.500 = 2. we often observe stores employing a staggered discounting strategy – the store starts with. the problem is one of revenue maximization. At an 80% off sale. Thus. 1052.000 = $800. 1051. In this way. 1048. the store attempts to capture as much consumer surplus (gross revenue) as possible by grouping customer types according to their willingness to wait and run the risk of having the item selling out. for example. Déjà Vu’s fixed costs are non-controllable for the decision. 6-43 . the key to this problem is to realize that the variable costs associated with manufacturing the greeting cards are sunk – thus.20. 1047. Déjà Vu’s profit increases by $0.500 cards at $0. Expected Profit = ($0. What we need to remember is that this is the variable cost of a card yet to be produced. the company could sell the first 1. Specifically.50 and 4.500 cards at $0. Déjà Vu maximizes its profit by holding the 80% off sale. 1049.e.50 × 1.500) = $1.Decision Making in the Short Term 2. Note: This problem links to a common business practice. 1054.250 .23 (= $0.. 1055. (Appendix A) a.750 to gravel and $72.78125 = $56.000 tons × 0. We know that only incremental revenues and costs are important for this decision.000 tons × 0. Myers should process the sand at split off into sandbox quality sand because it increases profit by $126. Let us begin by calculating relative sales values.8 × 9.2 × $40 $72.2 × 1059.000/$288.000 1067. 1062.000× 0.250. 1 6-44 .0001 .000) would be allocated to gravel and the 25% to sand. Net gain in revenue $72.000 = $54. Thus. Lost value at split off 9. Gravel: $30 $216.78125 = $168. 1060. Net value $54. we can calculate the rate per sales $ at the split off as $225. Thus.000. Cost of additional processing given ($18.000 tons × 0.750 and 0.25 × $225.000 1063.000 1065.000 9.000 Total $288.000 = $0.$72. 1069. Sand: $40 $72.75 × $225.000/$288. is not relevant for the decision in [b]. or how it is allocated. Let us therefore calculate the net gain from processing the sand further.250 to sand. 1068.78125. We have the cost allocated as 0. Note: The important point to note is that the joint cost. Value of sandbox quality 900 tons × $160 $144. 1061.Balakrishnan/Managerial Accounting.000 = $168. 2e 3.000 1058. 1057. 75% of the joint cost (=$216. That joint cost is sunk for this decision. b.000) 1066.000 = $56. These allocations are usually done only for the purpose of valuing inventory.000 1064.000 × $0. We then allocate $216. Alternatively.