Chapter 11
1. A _ ___ is a formal method of making a choice, often
involving both quantitative and qualitative analysis.
2. In a one-time-only special order decision, the relevant
costs are the _ costs that _ ___ between the âacceptâ and ârejectâ
alternatives.
3. In management decisions, outcomes that are difficult to
measure accurately in numerical terms are called _ __ factors.
4. Producing goods or providing services within the
organization rather than purchasing the same goods or services from outside
vendors is called _ _.
5. _ is the contribution to operating income that is forgone
(given up) by not using a limited resource in its next-best alternative use.
6. In equipment replacement decisions, an item that is
always irrelevant is the_ ___.
7. (Appendix) _…………………. is an optimization
technique used to maximize the objective function when there are multiple
constraints.
True-False
_ __ 1. In general, all variable costs are relevant to
decisions, and all fixed costs are irrelevant to decisions.
_ _ 2. Past (historical) costs are always irrelevant to
decisions but they can be helpful in predicting future costs.
_ __ 3. A car rental company is comparing two makes of cars
to decide which one to purchase for its fleet. Miles per gallon of fuel
consumption is a qualitative factor in this decision.
_ __ 4. Assuming sufficient idle production capacity is
available, a one-time-only special order should not be accepted at a selling
price below the total manufacturing cost per unit.
_ ___ 5. Opportunity costs do not entail cash receipts or
disbursements.
_ ___ 6. Incremental cost and differential cost have the
same meaning.
__ __ 7. In deciding among three alternatives for the sale
of units held in finished goods inventory, the manager should regard past cost
of the inventory as irrelevant, whether or not the inventory is obsolete.
__ __ 8. If there is an inconsistency between the decision
model and the performance evaluation model in a decision to keep or replace
some âoldâ equipment, the managerâs choice tends to be influenced more by the
decision model.
__ __ 9. (Appendix) The LP model is not applicable to
situations where there are more than three constraints.
__ __ 10. (Appendix) The area of feasible solutions in an LP
graphic solution shows the boundaries of those combinations of the two products
that satisfy all constraints.
Multiple Choice
_ ___ 1. (CPA) Light Company has 2,000 obsolete light
fixtures that were manufactured at a cost of $30,000. If the fixtures are
reworked for $10,000, they can be sold for $18,000. Alternatively, the fixtures
can be sold for $3,000 to a jobber. Assuming the fixtures are reworked and sold,
the opportunity cost is:
_ __ 2. (CPA) The manufacturing capacity of Jordan Companyâs
facilities is 30,000 units of a product per year. A summary of operating
results for the year ended December 31, 2010, is as follows:
Revenues,
18,000 unitsÃ$100
$1,800,000
Variable costs
990,000
Contribution margin
810,000
Fixed costs
495,000
Operating income
$ 315,000
A foreign
distributor has offered to buy 15,000 units at $90 per unit during 2011. Assume
all of Jordanâs costs will have the same behavior patterns in 2011 as in 2010.
If Jordan accepts this offer and rejects 3,000 units of business from regular
customers so as not to exceed its capacity, total operating income for 2009 is:
_ __ 3. (CPA) Gata Co. plans to discontinue a division with
a $48,000 contribution margin, and allocated fixed costs of $96,000, of which
$42,000 cannot be eliminated. What is the effect on Gataâs operating income of
discontinuing this division?
__ __ 4. Which one of the following items is relevant to an
equipment replacement decision?
_ ___ 5. (CPA) Maxwell Company has an opportunity to acquire
a new machine to replace one of its old machines. The new machine costs $90,000
and has an estimated useful life of five years, with a zero terminal disposal
value. Variable operating costs are $100,000 per year. The old machine has a
book value of $50,000 and a remaining life of five years. Its disposal value
now is $5,000 but would be zero after five years. Variable operating costs are
$125,000 per year. Considering the five years in total, but ignoring time value
of money and income taxes, what is the difference in operating income by
replacing the old machine?
___ 6. (Appendix, CMA adapted) Pleasant Valley Company makes
two products, ceramic vases (V) and ceramic bowls (B). Each vase requires two
pounds of direct materials and three hours of direct manufacturing labor. Each
bowl requires two pounds of direct materials and one hour of direct manufacturing
labor. During the next production week, 100 pounds of direct materials and 60
hours of direct manufacturing labor are available to make vases and bowls. Each
pound of direct material costs $4 and each hour of direct manufacturing labor
costs $10. All manufacturing overhead is fixed and is estimated to be $200 per
week for this production process. Pleasant Valley sells vases for $50 each and
bowls for $35 each. The objective function for total contribution margin is:
____ 7. Using the information in question 6, one of the
constraints is:
Review Exercises
1. Edgewood Corporation has 1,440 machine-hours of plant
capacity available during a particular period for manufacturing two products
with the following characteristics:
T L
Selling price $42 $75
Variable cost per unit $20 $25
Units that can be manufactured per machine-hour 8 3
Demand in units 13,500 6,000
Compute the number of available machine-hours that should be
used to manufacture each product.
2. (CMA) Richardson Motors uses ten units of Part T305 each
month in the production of large diesel engines. The cost to manufacture one
unit of T305 is as follows:
Direct materials$
2,000
Materials handling
(20% of direct material costs) 400
Direct manufacturing labor 16,000
Manufacturing overhead
(150% of direct
manufacturing labor cost) 24,000
Total manufacturing cost $42,400
Materials handling, a separate cost category that is not
included in manufacturing overhead, represents those direct variable costs of
the Receiving Department that are allocated to direct materials and purchased
components on the basis of their cost. Richardsonâs annual manufacturing
overhead budget is one-third variable and two-thirds fixed. Simpson Castings,
one of Richardsonâs reliable vendors, offers to supply T305 at a unit price of
$30,000. Assume Richardson Motors could rent out all its idle production
capacity for $50,000 per month.
Compute how much Richardsonâs monthly cost of T305
increases/decreases if the company purchases the ten units from Simpson
Castings.
3. (CPA) Bradshaw
Manufacturing Company is reviewing the profitability of the companyâs four
products and the potential of several proposals for improving the profitability
of the product mix. An income statement and other data follow:
Total
Product W
Product X
Product Y
Product Z
Revenues
$62,600
$10,000
$18,000
$12,600
$22,000
Cost of goods sold
44,274
4,750
7,056
13,968
18,500
Gross margin
18,326
5,250
10,944
(1,368)
3,500
Operating costs
12,012
1,990
2,976
2,826
4,220
Operating income
$ 6,314
$ 3,260
$ 7,968
$ (4,194)
$ (720)
Units sold
1,000
1,200
1,800
2,000
Selling price
$ 10.00
$ 15.00
$ 7.00
$ 11.00
Variable cost of goods sold per unit
$ 2.50
$ 3.00
$ 6.50
$ 6.00
Variable operating cost per unit
$ 1.17
$ 1.25
$ 1.00
$ 1.20
Each of the
following proposals is to be considered independently. Consider only the
product changes
stated in each
proposal; the production and sales levels of the other products remain the
same.
a. Compute the
effect on operating income if Y is dropped.
b. Compute the total effect on operating income if Y is
dropped and a resulting loss of customers causes a decrease of 200 units in the
production and sales of X.
c. Assume the area of the plant in which W is manufactured
can easily be adapted to the production of Z, but changes in quantities
produced necessitate changes in selling prices. Compute the total effect on
operating income if production of W is reduced to 500 units (to be sold at $12
each) and production of Z is increased to 2,500 units (to be sold at $10.50
each).
Chapter 13
1. An organizationâs ability to offer products or services
perceived by its customers to be superior and unique relative to the products
or services of its competitors is the strategy called _ ___.
2. The __ __ translates an organizationâs mission and
strategy into a set of performance measures that provides the framework for
implementing its strategy.
3. The fundamental rethinking and redesign of business
processes to achieve improvements in critical measures of performance such as
cost, quality, service, speed, and customer satisfaction is called __ ___.
4. A __ ____ is a diagram that describes how an organization
creates value by connecting strategic objectives in explicit cause-and-effect
relationships with each other in the financial, customer, internal business
process, and learning and growth perspectives.
5. In subdividing the change in operating income from 2010 to
2011 into components, the ______ component measures the change in operating
income attributable solely to the change in the quantity of output sold from
2010 to 2011.
6. _ ___ costs result from a cause-and-effect relationship
between the cost driver, output, and the (direct or indirect) resources used to
produce that output.
7. _ ____ is an integrated approach of configuring
processes, products, and personnel to match costs to the activities that need
to be performed to operate effectively and efficiently in the present and
future.
8. (Appendix) The ratio of the quantity of output produced
to the costs of all input used based on current period prices is called _ ___.
True-False
___ 1. The balanced scorecard has separate columns for
objectives, initiatives, performance measures, target performance, and actual
performance.
___ 2. The balanced scorecard gets its name because it
balances short-run and longrun financial performance measures in a single
report.
__ __ 3. Under the strategy of product differentiation, the
financial perspective of a well-designed balanced scorecard focuses on how much
operating income results from charging premium selling prices.
____ 4. The cause-and-effect relationship built into the
balanced scorecard is that gains in learning and growth lead to improvements in
internal business processes, which in turn lead to higher customer satisfaction
and market share, and finally result in superior financial performance.
_F___ 5. In a well-designed balanced scorecard, many
financial performance measures serve as leading indicators of future
nonfinancial performance.
____ 6. Successful reengineering efforts involve changing
roles and responsibilities, eliminating unnecessary activities and tasks, using
information technology, and developing employee skills.
_7. A well-designed balanced scorecard uses only objective
financial and nonfinancial performance measures.
___ 8. The most noteworthy aspect of engineered costs is
that managers are seldom confident that the âcorrectâ amounts are being spent.
___ 9. (Appendix) The lower the inputs for a given quantity
of output or the higher the output for a given quantity of inputs, the higher
the level of productivity.
___ 10. (Appendix) Fluctuations in input prices affect
partial productivity measures.
Multiple Choice
___ 1. Brand loyalty is associated closely with:
__ 2. The percentage of manufacturing processes with
real-time feedback is a performance measure under which perspective in the
balanced scorecard?
____ 3. Reengineering relates to which perspective in the
balanced scorecard?
____ 4. In analyzing the change in a companyâs operating
income from one year to the next, which effect(s) is computed for the
price-recovery component?
Revenue Cost
Effect Effect
___ 5. Nesbitt Company analyzed the change in its operating
income from 2010 to 2011 into three components as follows:
If operating income is $1,050,000 in 2011, operating income
in 2010 is:
___ 6. Drummond Enterprises had an increase in its operating
income from 2010 to 2011 of $200,000. Two of the three factors accounting for
the increase are:
The third factor to complete this analysis is:
__ 7. (Appendix, CMA) Fabro Inc. produced 1,500 units of
Product RX-6 last week. The inputs for
this production are:
450 pounds of Material A at a cost of $1.50 per pound
300 pounds of Material Z at a cost of $2.75 per pound
300 labor-hours at a cost of $15.00 per hour
The total factor productivity for Product RX-6 is:
d. 0.25 output units per dollar of input costs.
Review Exercises
1. The following information is from the Solution to the
Featured Exercise, pp.172-173:
Castleton Companyâs strategy is cost leadership.
Change in operating income due to growth component$ 64,800 F
Change in operating income due to price-recovery component 82,320 F
Change in operating income due to productivity component 11,840 F
Change in operating income from 2010 to 2011 $158,960 F
During 2011 the unit sales for Castletonâs fertilizer
product, Turfgro, increased by 4% (from 10,000 tons in 2010 to 10,400 tons in
2011). A trade association reports the industry market size for this type of
fertilizer increased by 3% in 2011. The increase in Turfgroâs market share
(that is, its unit sales grew by more than the 3% growth in industry market
size) and the increase in its selling price are due to customers perceiving
this product to be a superior fertilizer.
a. Compute the change in operating income from 2010 to 2011
that is due to three factors: industry market size, product differentiation and
cost leadership.
b. How successful has Castleton been in implementing its
cost leadership strategy for Turfgro? Explain.
2. (Appendix)
Vander Lind Industries makes a chemical product using direct materials and
direct manufacturing labor, which are partial substitutes for each other. The
company reported the following data for the last two years of operations:
2010
2011
Output units
8,500
10,200
Direct materials used (in kilograms)
5,700
7,000
Direct material cost per kilogram
$3.20
$3.00
Direct manufacturing labor-hours used
700
800
Wages per labor-hour
$14
$15
Manufacturing capacity in output units
12,000
11,500
Manufacturing overhead costs
$15,000
$14,950
Manufacturing overhead costs per unit of capacity
$1.25
$1.30
a. Compute the
partial productivity ratios for each input for each year, and compute the
change in partial
b. Compute the change in total factor productivity from 2010
to 2011.
Chapter19
Review Questions and Exercises
1. __ _____ quality refers to how closely the
characteristics of a product or service meet the needs and wants of customers.
2. __ _______ quality is the performance of a product or
service relative to its design and product specifications.
3. Costs of quality (COQ) are classified into which four
categories? ___.___
4. The time it takes from the time a customer places an
order for a product or service to the time the product or service is delivered
to the customer is called _ ___.
5. __ ____ is the time it takes from the time an order is
received by the Manufacturing Department to the time a finished good is
produced.
6. An operation in which the work required to be performed
approaches or exceeds the capacity available to do it is called a _ _____.
7. Under the theory of constraints, throughput margin equals
_ ____.
True-False
F__ 1. Costs of quality incurred to detect which of the
individual units of a product do not conform to specifications are called
internal failure costs.
___ 2. All the costs of quality entail cash outflows.
__ 3. Costs of quality are incurred across the entire value
chain.
__ 4. Statistical quality control often uses Pareto diagrams
to distinguish random variation from nonrandom variation in an operating
process.
____ 5. A Pareto diagram helps to identify the potential
causes of product failure.
____ 6. Customer-response time is an example of a
nonfinancial measure of performance used in quality-improvement programs.
____ 7. Average waiting time is inversely related to the
amount of unused capacity.
____ 8. Considering only quantitative factors, it may be
undesirable to introduce a new product that has a positive contribution margin,
even though machine capacity is available.
____ 9. It is undesirable to have unused capacity at the
bottleneck operation in a manufacturing plant.
Multiple Choice
____ 1. (CMA adapted) The costs of rework in a
quality-improvement program are categorized as:
____ 2. (CMA) The costs of using statistical quality control
in a quality-improvement program are categorized as:
___ 3. (CMA) All of the following costs are generally
included in a costs of quality report except:
4. (CMA) The following selected line items are from the Cost
of Quality Report for Watson Company for May.
Cost
Rework
$ 725
Equipment maintenance
1,154
Product testing
786
Product repair
695
Watsonâs total
prevention and appraisal costs for May are:
___ 5. Johnâs Custom Shirts has variable demand.
Historically, demand has ranged from 20 to 40 shirts a day with an average of
30. John works 8 hours a day, 5 days a week. Each order he receives is to
custom print one shirt and each shirt takes 12 minutes to print. The average
waiting time (rounded to nearest tenth of a minute) is:
____ 6. Ashmore Company has two production departments,
Cutting and Finishing. The Cutting Department is constrained by the speed of
the cutting machines. The Finishing Department is constrained by the speed of
the workers. The Finishing Department normally waits on work coming from the
Cutting Department. Each department works an 8-hour day. If the Cutting
Departmentwere to begin work 2 hours earlier than the Finishing Department each
day (thereby working a 10-hour day), the two departments would finish their
work at about the same time. Not only would this change eliminate the
bottleneck, but also it would increase production by 40 finished units per day.
The number of units in finished goods inventory would remain the same. It costs
$400 to operate the Cutting Department 2 more hours per day. The contribution
margin is $15 per unit. If the Cutting Department operates 10 hours per day,
the total production per day is:
____ 7. Using the information in question 6, and assuming
the Cutting Department operates 10 hours per day, the total contribution margin
per day:
___ 8. Which of the following is not an action in managing
bottleneck operations under the theory of constraints?
Review Exercises
1. Palmateer
Company manufactures two products, C and P. Pertinent information is as
follows:
Each operation has
a capacity of 2,400 minutes per week.
What production
schedule for C and P maximizes Palmateerâs weekly throughput margin? Show your computations.
2. Huntington
Industries makes an electronic component in two departments, Machining and
Assembly. The capacity per month is 30,000 units in the Machining Department and
20,000 units in the Assembly Department. The only variable cost of the product
is direct material of $100 per unit. All direct material cost is incurred in
the Machining Department. All other costs of operating the two departments are
fixed costs. Huntington can sell as many units of this electronic component as
it produces at a selling price of $300 per unit.
Assuming any
defective units produced in either department must be scrapped:
a. Compute the loss
that occurs if a defective unit is produced in the Machining Department.
b. Compute the loss
that occurs if a defective unit is produced in the Assembly Department.
c. How do your answers in parts (a) and (b) relate to the theory
of constraints? Explain.
