Question 1

Which of the following costs would be incurred even if no units were produced?

Accepted Answer

Building rental costs are fixed costs and are incurred regardless of whether any units are produced. Raw material costs, direct labor costs, transportation costs, and purchasing costs are variable costs that are only incurred when production occurs.

Question 2

A fabrication company wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines is $21 per unit. If the estimated output is 5000 units, which machine should be purchased?

Accepted Answer

The answer of A fabrication company wants to increase capacity...

Question 3

Net present value will be greater

Accepted Answer

Net present value (NPV) is higher when the discount rate is lower because future cash flows are discounted less, resulting in a higher present value. Therefore, an NPV calculated with a 4% discount rate will be greater than one calculated with a 6% discount rate.

Question 4

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5 percent, the net present value of this investment is approximately

Accepted Answer

The NPV is calculated by discounting each cash flow at the cost of capital and summing them up, then subtracting the initial investment. The NPV is approximately $20,920.

Question 5

Fred's Fabrication, Inc. wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $70,000. The variable cost for A is $9.00 per unit and for B, $14.00. The revenue generated by the units processed on these machines is $20 per unit. The crossover between machine A and machine B is

Accepted Answer

To find the crossover point, we need to set the revenue equal to the total cost and solve for the number of units.

For machine A: 
Revenue = Total cost 
20Q = 90,000 + 9Q 
11Q = 90,000 
Q = 8,182 units

For machine B: 
Revenue = Total cost 
20Q = 70,000 + 14Q 
6Q = 70,000 
Q = 11,667 units

Therefore, machine A is more profitable for processing less than 8,182 units and machine B is more profitable for processing more than 11,667 units. The crossover point is between these two values and is equal to 4,000 units. So, option C is the best choice.

Question 6

The three main strategies for increasing capacity are

Accepted Answer

The three main strategies for increasing capacity are leading, lag, and straddle, which refer to the timing of the investment in capacity relative to anticipated demand. Leading strategy involves investing in additional capacity before the anticipated increase in demand occurs. Lag strategy involves investing in additional capacity only after the anticipated increase in demand has occurred. Straddle strategy involves investing in additional capacity in anticipation of a gradual increase in demand.

Question 7

Break-even analysis can be used by a firm that produces more than one product, but

Accepted Answer

The answer of Break-even analysis can be used by a...

Question 8

A shop wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines is $22 per unit. If the estimated output is 9,000 units, which machine should be purchased?

Accepted Answer

The answer of A shop wants to increase capacity by...

Question 9

A common method used to increase capacity with a lag strategy is

Accepted Answer

A lag strategy involves increasing capacity in response to actual increases in demand. Utilizing overtime and subcontractors are common methods to temporarily increase capacity without the long-term commitment of new facilities or machinery.

Question 10

A product sells for $5, and has unit variable costs of $3. This product accounts for $20,000 in annual sales, out of the firm's total of $60,000. When performing multiproduct break-even analysis, the weighted contribution of this product is approximately

Accepted Answer

Weighted contribution = (Contribution margin / Total sales) * Sales of the product= ((5 - 3) / 60,000) * 20,000= (2 / 60,000) * 20,000= 0.133

Question 11

The theory of constraints has its origins in

Accepted Answer

The theory of constraints was developed by Eliyahu Goldratt and introduced in his book, The Goal: A Process of Ongoing Improvement. While the other options may be related to different aspects of operations management, they are not directly linked to the origins of the theory of constraints.

Question 12

Fabricators, Inc. wants to increase capacity by adding a new machine. The fixed costs for machine A are $90,000, and its variable cost is $15 per unit. The revenue is $21 per unit. The break-even point for machine A is

Accepted Answer

To calculate the break-even point, we need to find the number of units needed to cover the fixed costs plus variable costs, which is then equal to the total revenue. 
Let X be the number of units needed to break even.

90,000 + 15X = 21X 
90,000 = 6X 
X = 15,000

Therefore, the break-even point for machine A is 15,000 units.

Question 13

Break-even is the number of units at which

Accepted Answer

The answer of Break-even is the number of units at...

Question 14

Lag and straddle strategies for increasing capacity have what main advantage over a leading strategy?

Accepted Answer

Lag and straddle strategies allow companies to delay major capital expenditures while still increasing capacity. This can be a significant advantage, especially if future demand for the product or service is uncertain. It can also be more cost-effective than investing heavily up front in a leading strategy. However, there is no evidence to suggest that lag and straddle strategies are more accurate or increase demand.

Question 15

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5 percent, the net present value of this investment is

Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. Using a 5% discount rate, the NPV of this investment is less than $30,000, not greater than $80,000 or $130,000, and it can be calculated without knowing the variable costs or having an additional interest rate because the cost of capital (5%) acts as the discount rate.

Question 16

Which of the following techniques is not a technique for dealing with a bottleneck?

Accepted Answer

All of the techniques listed are strategies for dealing with bottlenecks.

Question 17

Basic break-even analysis typically assumes that

Accepted Answer

The answer of Basic break-even analysis typically assumes that
...

Question 18

Net present value

Accepted Answer

Net present value is the discounted value of a series of future cash receipts. It takes into account the time value of money, as future cash flows are discounted back to their present value. Options A, B, and C are incorrect as they do not accurately define net present value. Option D is incorrect as net present value does consider the time value of money.

Question 19

The basic break-even model can be modified to handle more than one product. This extension of the basic model requires

Accepted Answer

To handle more than one product, the break-even model needs price and variable cost for each product, and the percent of sales that each product represents. This information is necessary to calculate the contribution margin for each product and determine the overall break-even point. Therefore, option B is the best choice. Options A, C, D, and E do not provide enough information to accurately calculate the break-even point for multiple products.

Question 20

Which of the following statements regarding fixed costs is true?

Accepted Answer

Fixed costs are costs that do not change with fluctuations in the level of production or sales volume. However, in some cases, an increase in volume may require new or additional fixed costs, such as the purchase of new equipment or the hiring of additional personnel. This is known as a "step cost" or a "semi-variable cost." The other statements are incorrect.

Quiz9: Capacity and Constraint Management