EXERCISE / PROBLEM
94. Karen’s Cookie Company is considering replacing its giant cookie mixer with a new one.
The following data have been compiled to evaluate the decision. Existing New Original cost $8,000 $10,000 Annual operating cost $4,000 $2,200 Remaining life 5 years 5 years Disposal value now $3,000 --- Required: a. What costs are relevant? b. What costs are sunk? c. What are the net cash flows assuming Karen’s Cookie Company purchases the new
cookie mixer?
95. Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo
Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost, convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below: Existing New Turbo Oven Original cost $60,000 $50,000 Accumulated depreciation $ 5,000 --- Current salvage value $40,000 --- Remaining life 5 years 5 years Annual operating expenses $10,000 $ 7,500 Disposal value in 5 years $ 0 $ 0 Required: a. What costs are sunk? b. What costs are relevant? c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the
new convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this
decision?
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96. Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are
produced each year with production costs as follows: Direct materials $ 45,000 Direct labor 15,000 Flexible support costs 35,000 Capacity-related support costs 25,000 Total costs $120,000 Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20
per unit. If WB23 is outsourced, 40% of the capacity-related costs cannot be immediately converted to other uses. Required: a. Describe avoidable costs. What amount of the WB23 production costs is avoidable? b. Should Quiett Truck outsource WB23? Why or why not? c. What other items should Quiett Truck consider before outsourcing any of the parts it
currently manufactures?
97. Freddie’s Fudge Factory currently makes fudge for retail and mail order customers. It also
offers a variety of roasted nuts. Fudge sales have increased over the past year, so Freddie is considering outsourcing the roasted nuts and using the roasting space to make additional fudge. A reliable supplier has quoted a price of $0.85 per pound for the roasted nuts. The following amounts reflect the in-house manufacturing costs per pound for the roasted nuts: Direct materials $0.50 Direct labor 0.06 Unit-related support costs 0.10 Batch-related support costs 0.04 Product-sustaining support costs 0.05 Facility-sustaining support costs 0.15 Total cost per pound $0.90 Required: a. Should Freddie’s Fudge Factory outsource the roasted nuts? Why or why not? Discuss
all items that should be considered.
b. What incentives can Freddie offer the supplier of the roasted nuts to encourage
continued reliability?
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98.
Kirkland Company manufactures a part for use in its production. When 10,000 items are produced, the costs per unit are:
Direct materials $0.60 Direct manufacturing labor 3.00 Flexible manufacturing support 1.20 Fixed manufacturing support 1.60 Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing support on the original item would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?
99.
Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:
Direct materials
Direct manufacturing labor Flexible manufacturing support Fixed manufacturing support Total
$ 12
60 24 32 $128
Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a
savings of $180,000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing support on the original part would be eliminated. Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lewis Auto Company? By how much?
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100. Carey Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells.
The following estimates have been prepared to evaluate the benefits from the reorganization: Before the change After the change Total annual sales $700,000 $850,000 Costs as percentage of sales: Direct materials 10% 9% Direct labor 6% 4% Support costs 9% 7% Work-in-process inventory $200,000 $120,000 Inventory carrying costs are estimated to be 12% per year. Required: a. Why do the layout reorganization estimates include 1. a decrease in work-in-process inventory? 2. a decrease in direct material costs as a percentage of sales? 3. an increase in sales? b. As a result of the layout reorganization, what amount of change is projected 1. from carrying reduced levels of work-in-process inventory? 2. for incremental manufacturing costs? 3. in total benefits?
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CRITICAL THINKING / ESSAY
101. Are sunk costs considered relevant when choosing among alternatives? Explain.
102. Explain what revenues and costs are relevant when choosing among alternatives.
103. Assume you are a sophomore in college and are committed to earning an undergraduate
degree. Your current decision is whether to finish college in four consecutive years or take a year off and work for some extra cash. a. Identify at least two revenues or costs that are relevant to making this decision.
Explain why each is relevant.
b. Identify at least two costs that would be considered sunk costs for this decision. c. Comment on at least one qualitative consideration for this decision.
104. A restaurant is deciding whether it wants to update its image or not. It currently has a cozy
appeal with an outdated décor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers. Identify for the restaurant management a. those costs that are relevant to this decision, b. those costs that are not differential, c. and qualitative considerations.
105. Are relevant revenues and costs the only information needed by managers to select among
alternatives? Explain using examples.
106. Explain the differences between a process layout, a product layout, and cellular
manufacturing.
107. A motorcycle manufacturer is currently using a conventional processing system. Recently
work-in-process has been piling up at two stations along the assembly line. To eliminate this problem, management discussed the possibility of implementing just-in-time manufacturing. Discuss the advantages and concerns of implementing JIT.
108. In a just-in-time inventory system, explain a. why suppliers become very important to the overall manufacturing process, and b. what incentives can be offered to reward good suppliers.
109. Discuss the implications to employees of changing from a conventional manufacturing
system to just-in-time production.
110. Discuss cost reductions that can result from reducing work-in-process inventory.
111. Snowboarding is a sport with a great amount of risk involved. On which type of quality
costs should the snowboard manufacturer concentrate? Which costs should not be relied on? Explain why.
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