ACCT 2101 : Exam 2 Study Guide

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15 Mar 2019

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New income: (accept if positive, reject if negative, make or buy, commonly referred to as insourcing vs outsourcing decisions. Totals: pick smaller total of make or buy. Direct fixed costs - those that can be attributed to a specific segment of the business: 2. Determine the appropriate limiting resource of the organization: 2. Find the contribution margin per unit of the limited resource. Determined by dividing or multiplying the $ contribution margin per unit of each product by (times) the number of units of the limited resource required for each product: 3. Select the item that generates the higher contribution margin per unit of limited resource: 4. To maximize net income, the units that generate the higher contribution margin per unit of limited resource should be produced. Qualitative factors surrounding decisions: qualitative issues must always be considered in any decision, ex. the effect on employees and the community when deciding whether to use outsourcing.

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1. Which of the following costs is not relevant in aspecial-order decision?
A. Direct labor
B. Direct materials
C. Variable overhead
D. Fixed overhead

2. Costs that change across decision alternatives are
A. accounting costs.
B. activity-based costs.
C. incremental costs.
D. capital costs.

4. The potential benefit of one alternative that is lost bychoosing another is known as a(n):
A. Sunk cost
B. Out-of-pocket cost
C. Differential cost
D. Opportunity cost

5. A cost that cannot be avoided or changed because it arisesfrom a past decision, and is irrelevant to future decisions, iscalled a(n):
A. Uncontrollable cost
B. Incremental cost
C. Opportunity cost
D. Sunk cost

6. An additional cost that is incurred only if a particularaction is taken is a(n):
A. Period cost
B. Pocket cost
C. Discount cost
D. Incremental cost

7. The payback period:
a. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net cash flow.
b. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net income.
c. Takes into consideration the profitability of an investment overits entire life, but ignores the timing of its future cashflows.
d. Takes into consideration both the profitability of an investmentover its entire life and the timing of its future cash flows.

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Tactical decision making

Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.

1.	Recognize and define theproblem.
2.	Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives.
3.	Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision.
4.	Compare the relevant costsand benefits for each alternative.
5.	Assess qualitative factors.
6.	Select the alternative with thegreatest overall benefit.

Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.

Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):

Accept the special order.	- Select your answer -YesNoItem1
Reject the special order.	- Select your answer -YesNoItem2
Sell normal sales for $25 perunit.	- Select your answer -YesNoItem3

Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)

$25 price.	- Select your answer -YesNoItem4
$30 normal price.	- Select your answer -YesNoItem5
Variable cost of making the unitsin the special order.	- Select your answer -YesNoItem6
Depreciation on factory equipmentused in making the special order units.	- Select your answer -YesNoItem7
Increased property taxes on thefactory building which are due while the special order would bemade.	- Select your answer -YesNoItem8

While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.

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1. Company has a capacity to produce 100,000units in a year. Usually the companyproduces and sells 80,000 units in any year. The selling price is $20.00; variableproduction cost is $8.00 per unit and total fixed cost is$400,000. This year company received arequest of special order for 15,000 units at a selling price of$15.00 per unit.

1.For eachitem below decide it is relevant or not relevant.

a. Selling price of $20.00

b. Special order price of $15.00

c. Variable production cost of $8.00

d. Fixed cost of $400,000

1.Should the company accept this specialorder? Why or why not? show calculations to support youranswer.

2.2. In makingbusiness decisions, management ordinarily considers only financialinformation. TRUE OR FALSE?

3. Theprocess used to identify which financial data changes underalternative courses of action is called incremental analysis. TRUEOR FALSE?

4. 4.Opportunity cost is a cost that cannot be changed by anypresent or future decision. TRUE OR FALSE?

5. Asell-or-process further decision compares the total revenue to beearned and all costs of producing the product. TRUE ORFALSE?

6. Sunkcosts are not relevant in incremental analysis. TRUE ORFALSE?

7.7. What is netpresent value?

a. Thedifference between the present value of net income and the capitalinvestment

b. Thedifference between the net cash flows and the capitalinvestment

c. Thedifference between the present value of net cash flows and thecapital investment

d. The difference between the net cash flows and thepresent value of the capital investment

8.8. To produce oneturkey platter, Jax Inc. uses $10 of variable and $1.50 of fixedcosts. A Peruvian wholesaler has offered to purchase 2,000 plattersat $12 each. Jax will incur special shipping costs of $0.75 perplatter if the order is accepted. Jax has sufficient unusedcapacity to produce the additional platters. What will be theeffect on net income if the special order is accepted?

a. $1000 increase

b. $2500 increase

c. $4000 increase

d. $500 decrease

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ACCT 2101 : Exam 2 Study Guide

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