Quiz 11: Decision Making With a Strategic Emphasis

What are relevant costs Provide several examples for the decision to repair or replace a piece of equipment.

List at least four different decisions for which the relevant cost analysis model can be used effectively.

What is the relevant cost when determining whether or not to process a product further

List four to six strategic factors that are often important in the make-or-buy decision.

How do short-term evaluations affect a manager's incentives and performance

List four or five important limitations of relevant cost analysis.

How do strategic factors affect the proper use of relevant cost analysis

List some of the behavioral, implementation, and legal problems to be anticipated in the use of relevant cost analysis.

How does the presence of one production constraint affect the relevant cost analysis model Two or more production constraints

What is the relationship, if any, between the relevant cost analysis method and cost-volume-profit analysis

Purchase price is $35 for a part that can be manufactured for $33; the $33 manufacturing costs include $5 per unit fixed cost. What is the savings to make rather than to buy

Adams Furniture receives a special order for 10 sofas for a special price of $3,000. The materials and direct labor for each sofa are $100. In addition, the setup, supervision, and other overhead costs are $150 per sofa. Should Adams accept the special order Why or why not Would it make a difference to your answer if Adams is at full capacity and its current line of sofas sell for $500 each

Wings Diner has a box lunch that it sells on football game days at the local university. Each box lunch sells for $6, which includes $2.50 variable costs and $2.50 fixed cost plus a $1 markup. What is the lowest price Wings can sell its box lunch so that Wings will still make a profit

Williams Auto has a machine that installs tires. The machine now is in need of repair. The machine originally cost $10,000 and the repair will cost $1,000, but the machine will then last two years. The variable (labor) cost of operating the machine is $0.50 per tire. Instead of repairing the old machine, Williams could buy a new machine at a cost of $5,000 that would also last two years; the labor cost per tire would be reduced to $0.25 per tire. Should Williams repair or replace the machine if it is installing 10,000 tires in the next two years

Jamison Health Care is trying to decide if it should eliminate its orthopedic care division. In the last year, the orthopedic division had a contribution margin of $100,000 and allocated overhead costs of $200,000, of which $90,000 could be eliminated if the division is dropped. Should Jamison keep the division

ElecPlus Batteries has two different products, AAA and AA batteries. The AA batteries have a contribution margin of $1 per package, and the AAA batteries have a contribution margin of $2 per package. ElecPlus has a capacity for 1 million batteries per month, and both batteries require the same amount of processing time. If a special order for 10,000 AAA exceeds the monthly capacity, should ElecPlus accept the special order

Jackson Inc. disposes of other companies' toxic waste. Currently Jackson loads the waste by hand into the truck, which requires labor of $20 per load. Jackson is considering a machine that would reduce the amount of time needed to load the waste. The machine would cost $200,000, but would reduce labor cost to $5 per load. Should Jackson buy the machine if it averages 10,000 loads per year

Durant Co. manufactures glass bottles for dairy products. The contribution margin is $0.10 per bottle. Durant just received notification that one of their orders for 100,000 bottles contained misprinted labels, and thus had to recall and reprint the bottle labels. If it will cost $0.05 per bottle to reprint the labels and $1,000 to reship the bottles, what will the net contribution margin be after the recall

Lance's Diner has a hot lunch special each weekday and Sunday afternoon. Food and other variable costs for the lunch are $3.50, and the daily fixed costs are $1,000. Lance has an average of 500 customers per day. What is the lowest price Lance should charge for a special group of 200 that wants to come on Saturday for a family reunion What should be the lowest price Lance charges on a normal weekly basis

Sweet Dream Hotel has labor costs that are mostly fixed, including registration desk, maintenance, and general repairs and cleaning. The housekeeping staff is hired in sufficient numbers to clean the rooms that need cleaning, so that housekeeping is a variable cost for the number of occupied rooms. Which of these costs is relevant for determining the price of a room

Special Order; Opportunity Costs Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 20,000 units of one of its most popular products. Grant currently manufactures 40,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50% capacity. There will be no marketing costs on the special order. The sales manager of Grant wants to set the bid at $9 because she is sure that Grant will get the business at that price. Others on the executive committee of the firm object, saying that Grant would lose money on the special order at that price. Required 1. Why does the unit cost decline from $11 to $10 when production level rises from 40,000 to 60,000 units 2. Is the sales manager correct What do you think the bid price should be 3. List some additional factors Grant should consider in deciding how much to bid on this special order. 4. What would the total opportunity cost be if by accepting the special order the company lost sales of 5,000 units to its regular customers Assume the above facts plus a normal selling price of $20 per unit.

Special Order Alton Inc. is working at full production capacity producing 20,000 units of a unique product. Manufacturing costs per unit for the product are The unit manufacturing overhead cost is based on a $4 variable cost per unit and $120,000 fixed costs. The nonmanufacturing costs, all variable, are $8 per unit, and the sales price is $45 per unit. Sports Headquarters Company (SHC) has asked Alton to produce 5,000 units of a modification of the new product. This modification would require the same manufacturing processes. SHC has offered to share the nonmanufacturing costs equally with Alton. Alton would sell the modified product to SHC for $35 per unit. Required Set up an Excel spreadsheet to answer the following questions. 1. Should Alton produce the special order for SHC Why or why not 2. Suppose that Alton Inc. had been working at less than full capacity to produce 16,000 units of the product when SHC made the offer. What is the minimum price that Alton should accept for the modified product under these conditions Explain. 3. Use Goal Seek to determine the minimum price that Alton should accept for the special sales order.

Special Order; Use of Opportunity Cost Information Sharman Athletic Gear Inc (SAG) is considering a special order for 15,000 baseball caps with the logo of East Texas University (ETU) to be purchased by the ETU alumni association. The ETU alumni association is planning to use the caps as gifts and to sell some of the caps at alumni events in celebration of the university's recent national championship by its baseball team. Sharman's cost per hat is $3.50 which includes $1.50 fixed cost related to plant capacity and equipment. ETU has made a firm offer of $35,000 for the hats, and Sharman, considering the price to be far below production costs, decides to decline the offer. Required 1. Did Sharman make the wrong decision Why or why not 2. Consider the management decision-making approach at Sharman that resulted in this decision. How was opportunity cost included or not included in the decision What decision biases are apparent in this decision

Special Order Earth Baby Inc. (EBI) recently celebrated its tenth anniversary. The company produces organic baby products for health-conscious parents. These products include food, clothing, and toys. Earth Baby has recently introduced a new line of premium organic baby foods. Extensive research and scientific testing indicate that babies raised on the new line of foods will have substantial health benefits. EBI is able to sell its products at prices higher than competitors' because of its excellent reputation for superior products. EBI distributes its products through high-end grocery stores, pharmacies, and specialty retail baby stores. Joan Alvarez, the founder and CEO of EBI recently received a proposal from an old business school classmate, Robert Bradley, the vice president of Great Deal Inc (GDI), a large discount retailer. Mr. Bradley proposes a joint venture between his company and EBI, citing the growing demand for organic products and the superior distribution channels of his organization. Under this venture EBI would make some minor modifications to the manufacturing process of some of its best-selling baby foods and the foods would then be packaged and sold by GDI. Under the agreement EBI would receive $3.10 per jar of baby food and would provide GDI a limited right to advertise the product as manufactured for Great Deal by EBI. Joan Alvarez set up a meeting with Fred Stanley, Earth Baby's CFO, to discuss the profitability of the venture. Mr. Stanley made some initial calculations and determined that the direct materials, direct labor, and other variable costs needed for the GDI order would be about $2 per unit as compared to the full cost of $3 (materials, labor, and overhead) for the equivalent EBI product. Required Should Earth Baby Inc. accept the proposed venture from GDI Why or why not

Make or Buy; Continuation of Exercise 9-25 (Chapter 9) Vista Company manufactures electronic equipment. In 2012, it purchased the special switches used in each of its products from an outside supplier. The supplier charged Vista $2 per switch. Vista's CEO considered purchasing either machine A or machine B so the company could manufacture its own switches. The CEO decided at the beginning of 2013 to purchase Machine A, based on the following data: Required 1. For machine A, what is the indifference point between purchasing the machine and purchasing from the outside vendor 2. At what volume level should Vista consider purchasing Machine B 3. Use the Goal Seek function in Excel to determine the volume-indifference level you calculated above in requirement 2.

Sell or Process Further; Product Mix Cantel Company produces cleaning compounds for both commercial and household customers. Some of these products are produced as part of a joint manufacturing process. For example, GR37, a coarse cleaning powder meant for commercial sale, costs $1.60 a pound to make and sells for $2.00 per pound. A portion of the annual production of GR37 is retained for further processing in a separate department where it is combined with several other ingredients to form SilPol, which is sold as a silver polish, at $4.00 per unit. The additional processing requires ¼ pound of GR37 per unit; additional processing costs amount to $2.50 per unit of SilPol produced. Variable selling costs for this product average $0.30 per unit. If production of SilPol were discontinued, $5,600 of costs in the processing department would be avoided. Cantel has, at this point, unlimited demand for, but limited capacity to produce, product GR37. Required 1. Calculate the minimum number of units of SilPol that would have to be sold in order to justify further processing of GR37. 2. Assume that the cost data reported for GR37 are obtained at a level of output equal to 5,000 pounds, which is the maximum that the company can produce at this time. Prepare comparative income statements under each of the following scenarios: (a) all available capacity is used to produce GR37, but no SilPol; (b) 4,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; (c) 8,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; and (d) 10,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37.

Product-Profitability Analysis Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products known for its excellent quality and innovation. Recently the firm conducted a relevant cost analysis of one of its product lines that has only two products, T-1 and T-2. The sales for T-2 are decreasing and the purchase costs are increasing. The firm might dropT-2 and sell only T-1. Barbour allocates fixed costs to products on the basis of sales revenue. When the president of Barbour saw the income statement, he agreed that T-2 should be dropped. If this is done, sales of T-1 are expected to increase by 10% next year; the firm's cost structure will remain the same. Required 1. Find the expected change in annual operating income by dropping T-2 and selling only T-1. 2. By what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2 3. What is the required percentage increase in sales from T-1 to compensate for lost margin from T-2, if total fixed costs can be reduced by $45,000 4. What strategic factors should be considered

Product-Mix Decision Sandalwood Company produces various lines of high-end carpeting in its Asheville, North Carolina, plant. This question pertains to two different grades of carpet in its Symphony line: commercial and residential. The former sells for $16 per square yard, while the latter sells for $25 per square yard (wholesale). Variable manufacturing costs are $10 per square yard and $15 per square yard for the commercial and residential grade products, respectively. On average, it takes 12 labor-hours to produce 100 square yards of commercial carpeting, and 18 labor-hours to produce 100 square yards of residential carpeting. The number of available labor-hours at the plant is limited to 4,600 hours per week. Current sales forecasts indicate that weekly sales for the commercial line and the residential line, respectively, are 30,000 square yards and 8,000 square yards. Fixed manufacturing costs, allocated to products on the basis of 4,600 labor-hours per week, amount to $1.50 and $2.25 for each square yard of commercial versus residential carpet, respectively. Required 1. What is the gross profit (margin) for each of the two products, in total and per square yard 2. What is the contribution margin for each of the two products, in total and per square yard 3. Given the labor constraint and the product demand constraints, what is the optimum product mix, on a weekly basis, for each of the two products (Show calculations.) 4. In general, what is the rule to be followed when attempting to determine the optimum short-term product (or service) mix 5. What is the primary role of the management accountant in terms of addressing the short-term product- (or service-) mix problem

Solar Panels: Lease vs. Buy As indicated in the Real-World Focus feature on page 418, consumers (including businesses and local governments) interested in using solar power generally have an option to purchase or lease the solar panels. To adequately address the questions below, you will have to first do some research on the web. Please remember to document the website (or other source) from which you obtain information related to this exercise. Required 1. In general, what are the relevant costs associated with the lease decision and the purchase decision in regard to the acquisition of solar panels 2. What are the primary nonfinancial considerations associated with both the decision to use solar energy and the choice to lease versus purchase Address this question from the standpoint of individual consumers, businesses, and society at large (i.e., the environment). Reference:

Relevant Cost Exercises Each of the following situations is independent a. Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $120,000. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs: Required Should Terry Inc. accept the offer from the subcontractor Why or why not Include a consideration of both financial and nonfinancial factors. b. Disposal of Assets A company has an inventory of 2,000 different parts for a line of cars that has been discontinued. The net book value (NBV) of this inventory is $50,000. The parts can be either re machined at a total additional cost of $25,000 and then sold for $30,000 or sold as-is for $2,500. Required What should it do Include a consideration of both financial and nonfinancial factors. c. Replacement of an Asset An uninsured boat costing $90,000 was wrecked the first day it was used. It can be either sold as-is for $9,000 cash and replaced with a similar boat costing$92,000 or rebuilt for $75,000 and be brand new as far as operating characteristics and looks are concerned. Required What should be done Include a consideration of both financial and nonfinancial factors. d. Profit from Processing Further Deaton Corporation manufactures products A, B, and C from a joint process. Joint costs are allocated on the basis of relative sales value at the end of the joint process. Additional information for Deaton Corporation follows: Required 1. Define the following terms: joint production process; joint production costs; separable processing costs; and split-off point. 2. Which, if any, of products A, B, and C should be processed further and then sold (Show calculations.) 3. Why do accountants allocate to individual products joint/common costs in a joint manufacturing process e. Make or Buy Eggers Company needs 20,000 units of a part to use in producing one of its products. If Eggers buys the part from McMillan Company for $90 instead of making it, Eggers could not use the released facilities in another manufacturing activity. Forty percent of the fixed overhead will continue irrespective of CEO Donald Mickey's decision. The cost data are Required Determine which alternative is more attractive to Eggers and by what amount. What nonfinancial factors might bear upon the ultimate decision f. Selection of the Most Profitable Product DVD Production Company produces two basic types of video games, Flash and Clash. Pertinent data for DVD Production Company follow: The DVD game craze is at its height so that either Flash or Clash alone can be sold to keep the plant operating at full capacity. However, labor capacity in the plant is insufficient to meet the combined demand for both games. Flash and Clash are processed through the same production departments. Required 1. What is the meaning and importance of the statement that "Flash and Clash are processed through the same production departments" 2. Which product should be produced Briefly explain your answer. g. Special Order Pricing Barry's Bar-B-Que is a popular lunch-time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 600 patrons for his $5 lunch. His variable cost for each meal is about $2, and he figures his fixed costs, on a daily basis, at about$1,200. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat 700 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $3.50 per meal for each of the 50 bus tour members. Required Should Barry accept the $3.50 price Why or why not What if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $3.00 per meal

Special Order; Strategy; International Williams Company, located in southern Wisconsin, manufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment. Glasgow Industries Ltd. of Scotland has approached management with an offer to buy 120,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Williams's pressure valve; however, a fire in Glasgow Industries valve plant has shut down its manufacturing operations. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers; the company is prepared to pay $21 each for the valves. Williams's product cost for the pressure valve, based on current attainable standards, is Additional costs incurred in connection with sales of the pressure valve are sales commissions of 5% and freight expense of $1 per unit. However, the company does not pay sales commissions on special orders that come directly to management. Freight expense will be paid by Glasgow. In determining selling prices, Williams adds a 40% markup to product cost. This provides a $32 suggested selling price for the pressure valve. The marketing department, however, has set the current selling price at $30 to maintain market share. Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order, Williams will manufacture and ship 30,000 pressure valves to Glasgow Industries each month for the next four months. Shipments will be made in weekly consignments, FOB shipping point. Required 1. Determine how many additional direct labor hours will be required each month to fill the Glasgow order. 2. Prepare an analysis showing the impact on operating profits of accepting the Glasgow order. 3. Calculate the minimum unit price that Williams's management could accept for the Glasgow order without reducing operating income. 4. Use the Goal Seek function in Excel to calculate the minimum unit selling price you calculated above in requirement 3. 5. Suppose now that if the Glasgow order were accepted sales of 5,000 units per month to regular customers would be precluded (at a selling price of $30 per unit). All other facts are as given above. What is the revised breakeven selling price per unit for the Glasgow special sales order 6. Identify the strategic factors that Williams should consider before accepting the Glasgow order. 7. Identify the factors related to international business that Williams should consider before accepting the Glasgow order.

Special Order Award Plus Co. manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 10,000 medals each month; current monthly production is 7,500 medals. The company normally charges $175 per medal. Variable costs and fixed costs for the current activity level of 75% follow: Award Plus has just received a special one-time order for 2,500 medals at $100 per medal. For this particular order, no variable marketing costs will be incurred. Cathy Senna, a management accountant with Award Plus, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it. After examining the costs, Senna suggested to her supervisor, Gerard LePenn, who is the controller, that they request competitive bids from vendors for the raw materials since the current quote seems high. LePenn insisted that the prices are in line with other vendors and told her that she was not to discuss her observations with anyone else. Senna later discovered that LePenn is a brother-in-law of the owner of the current raw materials supply vendor. Required 1. Calculate both the old (i.e., prior to the special order) average cost per unit and the recalculated average cost per unit, including the effect of the special sales order. Are either of these two figures relevant for evaluating whether to accept or reject the special order Explain. 2. Based on a short-term financial analysis, determine if Award Plus Co. should accept the special order and why. 3. What is the breakeven selling price per unit for the special sales order 4. Discuss at least three other considerations that Cathy Senna should include in her analysis of the special order. 5. Explain how Cathy Senna should try to resolve the ethical conflict arising out of the controller's insistence that the company avoid competitive bidding.

Special Order Green Grow Inc. (GGI) manufactures lawn fertilizer and because of its very high quality often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI's operating capacity is 22,000 one-hundred-pound bags per month, and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000 one-hundred-pound bags of fertilizer for $125,000 from APAC, a research organization. The production costs would be the same, although delivery and other packaging and distribution services would cause a one-time $2,000 cost for GGI. The special order would be processed in two batches of 2,500 bags each. The following information is provided about GGI's current operations: No marketing costs would be associated with the special order. Since the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags. Required 1. What is the total relevant cost of filling this special sales order 2. What would be the change in operating income if the special order is accepted 3. What is the breakeven selling price per unit for the special sales order (that is, what is the selling price that would result in a zero effect on operating income) 4. Prepare comparative income statements, contribution format, for both the current situation and assuming the special order is accepted at the breakeven price determined in requirement 3 above. 5. Suppose that after GGI accepts the special order, it finds that unexpected production delays will not allow it to supply all 5,000 units from its own plants and meet the promised delivery date. It can provide the same materials by purchasing them in bulk from a competing firm. The materials would then be packaged in GGI bags to complete the order. GGI knows the competitor's materials are very good quality, but it cannot be sure that the quality meets its own exacting standards. There is not enough time to carefully test the competitor's product to determine its quality. What should GGI do

Special Order; ABC Costing (Continuation of Problem 11-33) Assume the same information as for Problem 11-33, except that the $12 fixed manufacturing overhead consists of $8 per unit batch related costs and $4 per unit facilities-level fixed costs. Also, assume that each new batch causes increased costs of $5,000 per batch; the remainder of the batch-level costs consists of tools and supervision labor that do not vary with the number of batches. The remainder of fixed costs do not vary with the number of units produced or the number of batches. Required 1. Calculate the relevant unit and total cost of the special order, including the new information about batch-related costs. 2. If accepted, how would the special order affect GGI's operating income (Show calculations.) Reference: Special Order Green Grow Inc. (GGI) manufactures lawn fertilizer and because of its very high quality often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI's operating capacity is 22,000 one-hundred-pound bags per month, and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000 one-hundred-pound bags of fertilizer for $125,000 from APAC, a research organization. The production costs would be the same, although delivery and other packaging and distribution services would cause a one-time $2,000 cost for GGI. The special order would be processed in two batches of 2,500 bags each. The following information is provided about GGI's current operations: No marketing costs would be associated with the special order. Since the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags. Required 1. What is the total relevant cost of filling this special sales order 2. What would be the change in operating income if the special order is accepted 3. What is the breakeven selling price per unit for the special sales order (that is, what is the selling price that would result in a zero effect on operating income) 4. Prepare comparative income statements, contribution format, for both the current situation and assuming the special order is accepted at the breakeven price determined in requirement 3 above. 5. Suppose that after GGI accepts the special order, it finds that unexpected production delays will not allow it to supply all 5,000 units from its own plants and meet the promised delivery date. It can provide the same materials by purchasing them in bulk from a competing firm. The materials would then be packaged in GGI bags to complete the order. GGI knows the competitor's materials are very good quality, but it cannot be sure that the quality meets its own exacting standards. There is not enough time to carefully test the competitor's product to determine its quality. What should GGI do

Make or Buy Martens, Inc., manufactures a variety of electronic products. It specializes in commercial and residential products with moderate to large electric motors such as pumps and fans. Martens is now looking closely at its production of attic fans, which included 10,000 units in the prior year and had the following costs. These costs included $100,000 of allocated fixed manufacturing overhead. Martens has capacity to manufacture 15,000 attic fans per year. Martens believes demand in the coming year will be 20,000 attic fans. The company has looked into the possibility of purchasing the attic fans from another manufacturer to help it meet this demand. Harris Products, a steady supplier of quality products, would be able to provide up to 9,000 attic fans per year at a price of $46 per fan delivered to Martens's facility. For each unit of product that Martens sells, regardless of whether the product has been purchased from Harris or is manufactured by Martens, there is an additional selling and administrative cost of $20, which includes an allocated $6 fixed overhead cost per unit. The following is based on the production of 10,000 units in the prior year. Required 1. Assuming Martens plans to meet the expected demand for 20,000 attic fans, how many should it manufacture and how many should it purchase from Harris Products Explain your reasoning with calculations. 2. Independent of Part 1 above, assume that Beth Johnson, Martens's product manager, has suggested that the company could make better use of its fan department capacity by manufacturing marine pumps instead of fans. Johnson believes that Martens could expect to use the production capacity to produce and sell 25,000 pumps annually at a price of $60 per pump. Johnson's estimate of the costs to manufacture the pumps is presented below. If Johnson's suggestion is not accepted, Martens would sell 20,000 attic fans instead. Should Martens manufacture pumps or attic fans Information on the sales price and costs for the marine pumps follows. 3. What are some of the long-term considerations in Martens's decisions in Parts 1 and 2 above

Make or Buy GianAuto Corporation manufactures parts and components for manufacturers and suppliers of parts for automobiles, vans, and trucks. Sales have increased each year based in part on the company's excellent record of customer service and reliability. The industry as a whole has also grown as auto manufacturers continue to outsource more of their production, especially to cost-efficient manufacturers such as GianAuto. To take advantage of lower wage rates and favorable business environments around the world, Gian has located its plants in six different countries. Among the various GianAuto plants is the Denver Cover Plant, one of Gian Auto's earliest plants. The Denver Cover Plant prepares and sews coverings made primarily of leather and upholstery fabric and ships them to other GianAuto plants where they are used to cover seats, headboards, door panels, and other GianAuto products. Ted Vosilo is the plant manager for the Denver Cover Plant, which was the first GianAuto plant in the region. As other area plants were opened, Ted was given the responsibility for managing them in recognition of his management ability. He functions as a regional manager although the budget for him and his staff is charged to the Denver Cover Plant. Ted has just received a report indicating that GianAuto could purchase the entire annual output of Denver Cover from suppliers in other countries for $60 million. He was astonished at the low outside price because the budget for Denver Cover Plant's operating costs for the coming year was set at $82 million. He believes that GianAuto will have to close operations at Denver Cover to realize the $22 million in annual cost savings. Denver Cover's budget for operating costs for the coming year follows: Additional facts regarding the plant's operations are as follows: • Due to Denver Cover's commitment to use high-quality fabrics in all its products, the purchasing department placed blanket purchase orders with major suppliers to ensure the receipt of sufficient materials for the coming year. If these orders are canceled as a result of the plant closing, termination charges would amount to 15 percent of the cost of direct materials. • Approximately 400 plant employees will lose theirjobs if the plant is closed. This includes all direct laborers and supervisors as well as the plumbers, electricians, and other skilled workers classified as indirect plant workers. Some would be able to find new jobs, but many would have difficulty doing so. All employees would have difficulty matching Denver Cover's base pay of $14.40 per hour, the highest in the area. A clause in Denver Cover's contract with the union could help some employees; the company must provide employment assistance to its former employees for 12 months after a plant closing. The estimated cost to administer this service is $1 million for the year. • Some employees would probably elect early retirement because GianAuto has an excellent plan. In fact, $3 million of the 2010 pension expense would continue whether Denver Cover is open or not. • Ted and his staff would not be affected by closing Denver Cover. They would still be responsible for managing three other area plants. • Denver Cover considers equipment depreciation to be a variable cost and uses the units-of- production method to depreciate its equipment and the customary straight-line method to depreciate its building. Required 1. Explain GianAuto's competitive strategy and how this strategy should be considered with regard to the Denver Plant decision. Identify the key strategic factors that should be considered in the decision. 2. GianAuto Corporation plans to prepare a strategic analysis to use in deciding whether to close the Denver Cover Plant. In your analysis, use the above information, and include consideration of global competition and GianAuto's competitive strategy.

Make or Buy The Midwest Division of the Paibec Corporation manufactures subassemblies used in Paibec's final products. Lynn Hardt of Midwest's profit planning department has been assigned the task of determining whether Midwest should continue to manufacture a subassembly component, MTR-2000, or purchase it from Marley Company, an outside supplier. Marley has submitted a bid to manufacture and supply the 32,000 units of MTR-2000 that Paibec will need for 2013 at a unit price of $17.30. Marley has assured Paibec that the units will be delivered according to Paibec's production specifications and needs. The contract price of$17.30 is applicable only in 2013, but Marley is interested in entering into a long-term arrangement beyond 2013. Lynn has submitted the following information regarding Midwest's cost to manufacture 30,000 units of MTR-2000 in 2012: Lynn has collected the following information related to manufacturing MTR-2000: • Equipment leasing costs represent special equipment used to manufacture MTR-2000. Midwest can terminate this lease by paying the equivalent of one month's lease payment for each of the two years left on its lease agreement. • Forty percent of the other manufacturing overhead is considered variable. Variable overhead changes with the number of units produced, and this rate per unit is not expected to change in 2013. The fixed manufacturing overhead costs are not expected to change whether Midwest manufactures or purchases MTR-2000. Midwest can use equipment other than the leased equipment in its other manufacturing operations. • Direct materials cost used in the production of MTR-2000 is expected to increase 8% in 2013. • Midwest's direct labor contract calls for a 5% wage increase in 2013. • The facilities used to manufacture MTR-2000 are rented under a month-to-month rental agreement. Midwest would have no need for this space if it does not manufacture MTR-2000. Thus, Midwest can withdraw from the rental agreement without any penalty. John Porter, Midwest divisional manager, stopped by Lynn's office to voice his opinion regarding the outsourcing of MTR-2000. He commented, "I am really concerned about outsourcing MTR- 2000. I have a son-in-law and a nephew, not to mention a member of our bowling team, who work on MTR-2000. They could lose their jobs if we buy that component from Marley. I really would appreciate anything you can do to make sure the cost analysis shows that we should continue making MTR-2000. Corporate is not aware of materials cost increases and maybe you can leave out some of those fixed costs. I just think we should continue making MTR-2000." Required 1. Prepare a relevant cost analysis that shows whether the Midwest Division should make MTR-2000 or purchase it from Marley Company for 2013. 2. Identify and briefly discuss the strategic factors that Midwest should consider in this decision. 3. By referring to the specific ethical standards for management accountants outlined in Chapter 1, assess the ethical issues in John Porter's request of Lynn Hardt.

Outsourcing Call Centers Merchants' Bank (MB) is a large regional bank operating in 634 locations in the Southeast U.S. Until 2005, the bank operated a call center for customer inquiries out of a single location in Atlanta, Georgia. MB understood the importance of the call center for overall customer satisfaction and made sure that the center was managed effectively. However, in early 2004, it became clear that the cost of running the center was increasing very rapidly, along with the firm's growth, and that some issues were arising about the quality of the service. To improve the quality and dramatically reduce the cost of the service, MB moved its call center to Bangalore, India, to be run by an experienced outsourcing firm, Naftel, which offers similar services to other banks like MB. The Naftel contract was for five years, and in late 2008 it was time to consider whether to renew the contract, change to another call center service provider (in India or elsewhere), or bring the call center back to Atlanta. Some important factors to consider in the decision: • At the time of the decision in late 2008, the value of the dollar had been increasing relative to most other currencies. • The financial crisis of 2008 had been affecting the banking business, and the outlook for growth for MB at the time had not been as rosy as it had been for the last few years. Top management and economic advisors for the bank had basically no idea what the right forecast for the coming five years was. • At the time of the decision, the employment rate in Atlanta had been falling to the point that there was a good supply of talented employees who could have been recruited into the call center if the center were relocated back to Atlanta. • The bank had just completed a new headquarters building in Atlanta and had a good bit of space in the building that MB had yet to lease. The outlook for the Atlanta economy was such that MB did not expect to lease much of this space for at least three years. If the call center were returned to Atlanta, it would occupy a space that would be rented for $100,000per year, if there were a company that wanted to lease the space. • If renewed, the Naftel contract would cost $4,200,000 per year for the next five years. • The cost of salaries to staff the call center in Atlanta was expected to be $2,300,000 per year, the equipment would be leased for $850,000 per year, telecommunication services were expected to cost $500,000 per year, administrative costs for the call center were expected to be $600,000 per year, and the call center's share of corporate overhead was expected to be $400,000 per year. Required 1. At the time of the above facts, should MB have returned the call center to Atlanta or should it have renewed the contract with Naftel Develop your answer for both a one-year and a five-year time horizon. Consider the strategic context of the decision as an integral part of your answer. ( Hint: Using discounted cash flow is not required but would improve your answer; MB uses a discount rate of 6%.) 2. What are the global issues that should have been considered in the decision 3. What ethical issues, if any, should have been considered in the decision

Sustainability If Problem 10-58 (Budgeting and Sustainability) has not already been assigned, it can be assigned here. Reference:

Profitability Analysis High Point Furniture Company (HPF) manufactures very high-quality furniture for sale directly to exclusive hotels, interior designers, and select retail outlets throughout the world. HPF's products include upholstered furniture, dining tables, bedroom furniture, and a variety of other products, including end tables. Through attention to quality and design innovation, and by careful attention to changing consumer tastes, HPF has become one of the most successful furniture manufacturers worldwide. Hal Blin, the chief operating officer of HPF, is reviewing the most recent sales and profits report for the three best-selling end tables in HPFs product line-the Parker, Virginian, and Weldon end tables. Hal is concerned about the relatively poor performance of the Weldon line. He discusses the prospects for the line with HPF's marketing and sales vice-president, Joan Hunt. Joan notes that there has been no significant trend up or down in any of the end table lines, though the direction of consumer tastes would probably favor the Virginian and Parker lines. Hal and Joan agree that this may be the time for further analysis to determine whether the Weldon line should be discontinued. HPF Sales and Profits Report: End Note: Selling expense consists of fixed salaries for the sales staff, advertising, and the cost of marketing/sales management. Power is for equipment used in manufacturing and varies with the number of units produced. Other factory costs, including repairs and equipment, are considered to be fixed costs. Required 1. Using Excel or an equivalent spreadsheet, develop an analysis that can help Hal decide about the future of the Weldon line. Should the Weldon line be dropped Why or why not 2. Using the spreadsheet you developed in Part 1, determine whether your answer would change if sales of Weldon are expected to fall by 80 percent. 3. Again using the spreadsheet in Part 1, determine whether the Weldon line should be discontinued if the resources devoted to Weldon could be used to increase sales by 10 percent in each of the other two lines. 4. Again using the spreadsheet in Part 1 and using Goal Seek in Excel or an equivalent, determine the sales increase (or decrease) in the sales of the Parker line that would be necessary if the Weldon line were discontinued to maintain the firm's overall profit in Part 1. For an illustration of Goal Seek, seek Exhibit 9.5 in Chapter 9. 5. Given your answers to Parts 1 through 4 above, consider the overall competitive environment facing HPF and make your recommendations regarding the firm's strategic position and direction at this time.

Profitability Analysis "I'm not looking forward to breaking the news," groaned Charlie Wettle, the controller of Meyer Paint Company. He and Don Smith, state liaison for the firm, were returning from a meeting with representatives of the Virginia General Services Administration (GSA), the agency that administers bidding on state contracts. Charlie and Don had expected to get the specifications to bid on the traffic paint contract, soon to be renewed. Instead of picking up the bid sheets and renewing old friendships at the GSA, however, they were stunned to learn that Meyer's paint samples had performed poorly on the road test and the firm was not eligible to bid on the contract. Meyer's two main product lines are traffic paint, used for painting yellow and white lines on highways, and commercial paints, sold through local retail outlets. The paint-production process is fairly simple. Raw materials are kept in the storage area that occupies approximately half of the plant space. Large tanks that resemble silos are used to store the latex that is the main ingredient in its paint. These tanks are located on the loading dock just outside the plant so that when a shipment of latex arrives, it can be pumped directly from the tank truck into these storage tanks. Latex is extremely sensitive to cold. It cannot be stored outside or even shipped in the winter without heated trucks, which are very expensive for a small firm such as Meyer. Currently, Meyer has the traffic paint contracts for the states of Pennsylvania, North Carolina, Delaware, and Virginia. Of last year's total production of 380,000 gallons, 90% was traffic paint. Of this amount, 88,000 gallons were for the Virginia contract. Each state has unique specifications for color, thickness, texture, drying time, and other characteristics of the paint. For example, paint sold to Pennsylvania must withstand heavy use of salt on roads during the winter. Paint for North Carolina highways must tolerate extended periods of intense heat during summer months. Due to the high cost of shipping paint, most paint producers can be competitive on price only in locations fairly close to their production facilities. Accordingly, Meyer has enjoyed an advantage in bidding on contracts in the eastern states close to Virginia. However, one of their biggest competitors, Heron Paint Company of Houston, Texas, is building a new plant in North Carolina. With lower costs due to its efficient new facility and its proximity, Heron will become a major competitive threat. Meyer's commercial paint line includes interior and exterior house paints in a wide range of colors formulated to approximate authentic colonial colors. Because of the historical association, the line has been well received in Virginia. Most of these paints are sold through paint and hardware stores as the stores' second or third line of paint. The large national firms such as Benjamin Moore or Sherwin Williams provide extensive services to paint retailers such as computerized color matching equipment. Partly because it lacks the resources to provide such amenities and partly because it has always considered the commercial paint a sideline, Meyer has never tried to market the commercial line aggressively. Meyer sells 38,000 gallons of commercial paint per year. Charlie is worried about the future of the company. The firm's strategic goal is to provide a quality product at the lowest possible cost and in a timely fashion. After absorbing the shock of losing the Virginia contract, Charlie wondered whether the firm should consider increasing production of commercial paints to lessen the company's dependence on traffic paint contracts. Carl Bunch, who manages the day-to-day operation of the firm, believes the company can double its sales of commercial paint if it undertakes a promotional campaign estimated to cost $120,000. The average price of traffic paint sold last year was $20 per gallon. For commercial paint, the average price was $24. Charlie Wettle has assembled the following data to evaluate the financial performance of the two lines of paint. The primary raw material used in paint production is latex. The list price for latex is $32 per pound; 450 pounds of latex are needed to produce 1,000 gallons of traffic paint. Commercial paint requires 325 pounds of latex per 1,000 gallons of paint. In addition to the cost of the latex, other variable costs are as shown below. Last year, fixed overhead costs attributable to the traffic paint totaled $170,000, including an estimated $50,000 of costs directly associated with the Virginia contract; the $50,000 can be eliminated in approximately two years. Fixed overhead costs attributable to the commercial paint are $26,000. Other fixed manufacturing overhead costs total $220,000. Charlie estimates that $80,000 of this amount is inventory-handling costs that will be avoided due to the loss of the Virginia contract. Both the remaining fixed manufacturing overhead ($140,000) and the general and administrative costs of $280,000 are allocated equally to all gallons of paint produced. Required 1. Calculate the contribution margin for each type of paint and total firmwide contribution under each of the following scenarios: Scenario A Current production, including the Virginia contract Scenario B Without either the Virginia contract or the promotion to expand sales of commercial paint Scenario C Without the Virginia contract but with the promotion to expand sales of the commercial paint 2. Determine whether scenario B or C (per requirement 1 above) should be chosen by Meyer and explain why, including a consideration of the strategic context.

Project Analysis; Sales Promotions Hillside Furniture Company makes outdoor furniture from recycled products, including plastics and wood by-products. Its three furniture products are gliders, chairs with footstools, and tables. The products appeal primarily to cost-conscious consumers and those who value the recycling of materials. The company wholesales its products to retailers and various mass merchandisers. Because of the seasonal nature of the products, most orders are manufactured during the winter months for delivery in the early spring. Michael Cain, founder and owner, is dismayed that sales for two of the products are tracking below budget. The chart below shows pertinent year-to-date data regarding the company's products. Certain that the shortfall was caused by a lack of effort by the sales force, Michael has suggested to Lisa Boyle, the sales manager, that the company announce two contests to correct this situation before it deteriorates. The first contest is a trip to Hawaii awarded to the top salesperson if incremental glider sales are attained to close the budget shortfall. The second contest is a golf weekend, complete with a new set of golf clubs, awarded to the top salesperson if incremental sales of chairs with footstools are attained to close the budget shortfall. The Hawaiian vacation would cost $16,500 and the golf trip would cost $12,500. Required 1. Explain whether either contest is desirable or not. Supplement your analysis by determining the total contribution margin for the glider and the chair-with-footstool products, under each of the following two scenarios: (a) actual sales volume at actual selling prices, actual costs, and actual resource usage, and (b) actual sales volume at budgeted selling prices, budgeted resource usage, and budgeted costs. 2. Explain the strategic issues guiding your choice about these contests.

Profitability Analysis; Review of Master Budget RayLok Incorporated has invented a secret process to improve light intensity and manufactures a variety of products related to this process. Each product is independent of the others and is treated as a separate profit/loss division. Product (division) managers have a great deal of freedom to manage their divisions as they think best. Failure to produce target division income is dealt with severely; however, rewards for exceeding one's profit objective are, as one division manager described them, lavish. The DimLok Division sells an add-on automotive accessory that automatically dims a vehicle's headlights by sensing a certain intensity of light coming from a specific direction. DimLok has had a new manager in each of the three previous years because each manager failed to reach RayLok's target profit. Donna Barnes has just been promoted to manager and is studying ways to meet the current target profit for DimLok. DimLok's two profit targets for the coming year are $800,000 (20 percent return on the investment in the annual fixed costs of the division) plus an additional profit of $20 for each DimLok unit sold. Other constraints on division operations are • Production cannot exceed sales because RayLok's corporate advertising program stresses completely new product models each year, although the models might have only cosmetic changes. • DimLok's selling price cannot vary above the current selling price of $200 per unit but may vary as much as 10 percent below $200. • A division manager can elect to expand fixed production or selling facilities; however, the target objective related to fixed costs is increased by 20 percent of the cost of such expansion. Furthermore, a manager cannot expand fixed facilities by more than 30 percent of existing fixed cost levels without approval from the board of directors. Donna is now examining data gathered by her staff to determine whether DimLok can achieve its target profits of $800,000 and $20 per unit. A summary of these reports shows the following: • Last year's sales were 30,000 units at $200 per unit. • DimLok's current manufacturing facility capacity is40,000 units per year but can be increased to 80,000 units per year with an increase of $1,000,000 in annual fixed costs. • Present variable costs amount to $80 per unit, but DimLok's vendors are willing to offer raw materials discounts amounting to $20 per unit, beginning with unit number 60,001. • Sales can be increased up to 100,000 units per year by committing large blocks of product to institutional buyers at a discounted unit price of $180. However, this discount applies only to sales in excess of 40,000 units per year. Donna believes that these projections are reliable and is now trying to determine what DimLok must do to meet the profit objectives that RayLok's board of directors assigned to it. Required 1. Determine the dollar amount of DimLok's present annual fixed costs. 2. Determine the number of units that DimLok must sell to achieve both profit objectives. Be sure to consider all constraints in determining your answer. 3. Without regard to your answer in Part 2, assume that Donna decides to sell 40,000 units at $200 per unit and 24,000 units at $180 per unit. Prepare a master budget income statement for DimLok showing whether her decision will achieve DimLok's profit objectives. 4. Assess DimLok's competitive strategy. 5. Identify the strategic factors that DimLok should consider.

Product-Profitability Analysis; Scarce Resources Santana Company produces a variety of consumer electronic products. Unit selling prices and costs for three models of one of its product lines are as follows: Variable overhead is charged to products on the basis of direct labor dollars; fixed overhead is allocated to products on the basis of machine-hours. Required 1. What is fundamentally different about the fixed versus variable overhead assigned to products (Answer the question within the context of the relevance of this difference to the determination of short-term product mix.) 2. Calculate for each product both the gross profit per unit and the contribution margin per unit. Are either of these profitability measures useful for planning the optimum short-term product mix Why or why not 3. If the company has excess machine capacity but a limited amount of labor time, how should the optimum short-term product mix be determined 4. Assume now that machine-hours, not direct labor-hours, is the limiting resource. How, if at all, would this affect the product-mix decision 5. How can the optimum product mix be determined when there are only two products, and one or more constraints 6. How can the optimum product mix be determined when there are more than two products, and one or more constraints 7. What is the primary role of the management accountant in terms of planning the optimum short-term product mix

Profitability Analysis; Linear Programming (Appendix) Home Service Company offers monthly service plans to provide prepared meals that are delivered to customers' homes and need only be heated in a microwave or conventional oven. Home Service offers two monthly plans, premier cuisine and haute cuisine. The premier cuisine plan provides frozen meals that are delivered twice each month; the premier generates a contribution of $150 for each monthly service plan sold. The haute cuisine plan provides freshly prepared meals delivered on a daily basis and generates a contribution of $100 for each monthly plan sold. Home Service's strong reputation enables it to sell all meals that it can prepare. Each meal goes through food preparation and cooking steps in the company's kitchens. After these steps, the premier cuisine meals are flash frozen. The time requirements per monthly meal plan and hours available per month follow: For planning purposes, Home Service uses linear programming to determine the most profitable number of premier and haute cuisine meals to produce. Required 1. Using the Solver function of Microsoft Excel, determine the most profitable product mix for Home Service given the existing constraints and contribution margins. 2. Generate and interpret the information contained in the "Sensitivity Report" associated with the solution in requirement 1. 3. Using the Solver function of Microsoft Excel, determine the most profitable product mix for Home Service given the existing contribution margins and all constraints except the preparation time constraint.

Decision-Making Biases Obtain from your library a copy of the following article: D. Kahneman, D. Lovallo, and O. Sibony, "Before You Make That Big Decision... ," Harvard Business Review, June 2011, pp. 51-60. In this article, the authors argue that, "Even highly experienced, superbly competent, and well-intentioned managers are fallible...." (p. 60). They discuss a variety of cognitive biases associated with the decision-making process. Such biases can diminish the quality of decisions. The authors maintain that understanding these biases may decrease their effect and offer a checklist designed to facilitate decision quality control. Required 1. What is meant by the term "cognitive bias" 2. What is the specific decision-making context addressed by the authors of this article 3. What are the three major categories of the decision quality-control checklist recommended by the authors 4. What are the specific cognitive biases discussed by the authors of this article