Looking for Quiz 11 :
Decision Making With a Strategic Emphasis
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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
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Make or buy decision: This is a strategy of deciding whether to manufacture a product internally or to buy the product from external source is known as make or buy decision.
Savings to make rather than to buy:
Savings to make rather than to buy is the difference between the purchase price and the variable cost of making the part.
Hence, the savings to make rather than to buy is
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How does the presence of one production constraint affect the relevant cost analysis model Two or more production constraints
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Relevant cost analysis: Relevant costs are the costs that differ with choices. The analysis of such relevant costs for decision making of either to choose the option or to go for other option is known as relevant cost analysis.
Presence of one production constraint:
As there is no other production constraint, it is advised only to produce only one product for the maximization of the profits of the entity. This results in a good contribution margin.
Presence of two or more production constraints:
As there are two or more production constraints, the best product mix that maximize the income is to be identified and chosen. The decision of best product mix is based on graphical presentation or any mathematical techiniques.
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How do strategic factors affect the proper use of relevant cost analysis
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Relevant costs are future costs. These costs make a change in selecting amid the options accessible for the particular decision. They can be both variables or fixed. Mostly the variable costs are relevant as they are diverse for every option and are committed.
The strategic factor that affects the relevant cost analysis are as follows:
1. The relevant cost focus on financial factors and the strategic cost analysis focuses on the customer.
2. There is no link in the relevant cost and the strategy. But in strategic cost analysis, the strategy is linked with the firm's strategy.
3. The strategic cost analysis is comprehensive and independent but the relevant cost analysis is detailed and quantifiable.
4. The focus for relevant cost analysis is short term in comparison to the strategic cost analysis.
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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
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What are relevant costs Provide several examples for the decision to repair or replace a piece of equipment.
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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
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What is the relevant cost when determining whether or not to process a product further
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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
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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
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List four to six strategic factors that are often important in the make-or-buy decision.
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List some of the behavioral, implementation, and legal problems to be anticipated in the use of relevant cost analysis.
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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
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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
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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
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What is the relationship, if any, between the relevant cost analysis method and cost-volume-profit analysis
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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
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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
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List at least four different decisions for which the relevant cost analysis model can be used effectively.
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