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Exam 13: Relevant Information for Special Decisions

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Question 31

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The Mighty Music Company produces and sells a desktop speaker for $320. The company has the capacity to produce 72,000 speakers each period. At capacity, the costs assigned to each unit are as follows: $\begin{array} { l c } \text { Unit level costs } & \$ 155 \\\text { Product level costs } & \$ 37 \\\text { Facility level costs } & \$ 27\end{array}$ The company has received a special order for 23,000 speakers. If this order is accepted, the company will have to spend $32,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A) $206.39
B) $163.89
C) $156.39
D) $166.89

E) B) and C)
F) A) and C)

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Question 32

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Asset replacement decisions involve:

A) Choices between continuing to use existing materials or replacing them with less expensive materials.
B) Choices between closing down or continuing to operate a segment of a business.
C) Choices between continuing to operate existing equipment or replacing it with new equipment.
D) None of these answers are correct.

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

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Question 33

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Select the correct statement regarding opportunity costs.

Scholastic Tours is trying to decide which one of two tours it will introduce. The costs and revenues associated with each alternative are listed below: $\begin{array}{lcc}&\text { Eastern Tour}&\text { Western Tour }\\\text { Projected revenue } & \$ 14,000 & \$ 18,000 \\\text { Variable costs } & 2,000 & 10,000\\\text { Fixed costs } & \underline{6,000 }&\underline{ 6,000} \\\text { Profit } &\underline{ \$ 6,000} &\underline{ \$ 2,000}\end{array}$ What are the incremental (differential) costs of the Western Tour?

Indicate whether each of the following statements is true or false.

Engineering design costs are generally referred to as:

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 $250,000. The old machines presently have a book value of $125,000 and a market value of $17,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $150,000 and have operating expenses of $17,000 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 $35,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $15,000 a year. Select the true statement.

Which of the following costs is an example of a batch-level cost?

Max bought a ticket to the championship baseball game for $175. Someone approaches him outside the stadium and offers him $375 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?

Which of the following is not a possible alternate term for costs that can be eliminated by taking a specified course of action?

Outsourcing reduces the extent of a company's vertical integration.

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$3\\ \text { Unit-level labor cost } &\$2\\ \text { Unit-level overhead } &\$1\\ \text { Batch-level set-up cost ( 5,000 units per batch) } &\$25,000\\ \text {Product-level supervisory salaries } &\$37,500\\ \text { allocated facilitv-level costs } &\$20,000\\\end{array}$ The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:

Select the correct statement regarding quantitative and qualitative information.

Gibbs Corporation makes indoor gas fireplaces. A standard fireplace includes unit-level materials, labor, and overhead costs. In addition, the company incurs product-level engineering and advertising costs. Lastly, the company incurs facility-level costs related to renting the manufacturing building A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs's selling price. Which of the following costs would be relevant to this special order decision?

The book value of equipment generally is one of the most important factors to consider in deciding to replace the equipment.

Facility-level costs are not involved in decisions to eliminate a segment of a business.

All of the following are examples of product-level costs except:

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $24 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$5\\ \text { Unit-level labor cost } &\$4\\ \text { Unit-level overhead } &\$2\\ \text { Batch-level set-up cost ( 7,000 units per batch) } &\$13,000\\ \text {Product-level supervisory salaries } &\$41,500\\ \text { allocated facilitv-level costs } &\$28,000\\\end{array}$ Assume that the company needs 14,000 of the switches, which would be produced in two batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:

Select the term from the list provided that best matches each of the following descriptions. Put the number of the term in the column for Your Answer.

Select the correct statement regarding relevant revenues.