LO4,8 100. a.
1.
2.
3.
Layout reorganization estimates include a decrease in work-in-process inventory because cellular manufacturing streamlines production flows. When products flow immediately from one processing stage to the next, there is less build-up of work-in-process inventories.
When products flow immediately from one processing stage to the next, workers downstream can identify an upstream problem in that component almost immediately and correct it before it leads to the production of more defective components. Early detection of defective units reduces the amount of raw
materials needed for rework, which results in decreased direct material costs as a percentage of sales.
A streamlined manufacturing operation leads to reduced manufacturing cycle times, improved quality, and a shorter lead-time for orders. Quicker delivery to customers and higher quality products usually result in increased customer sales. Carrying reduced levels of work-in-process inventory results in a projected cost savings of $9,600.
Before the change: $200,000 x 12% = $24,000 After the change: $120,000 x 12% = 14,400 Cost savings $ 9,600 As a result of the layout reorganization, incremental manufacturing costs are projected to decrease by $5,000.
Before the change: $700,000 x 25% = $175,000 After the change: $850,000 x 20% = 170,000 Cost savings $ 5,000 As a result of switching to a cellular manufacturing operation, total benefits are projected to increase by $164,600.
Before the Change $700,000 (175,000) (24,000) $501,000 After the Change $850,000 (170,000) (14,400) $665,600 Difference $150,000 5,000 9,600 $164,600 b. 1.
2.
3.
Sales
Manufacturing costs*
WIP inventory carrying costs** Total benefits
* **
Before the change: $700,000 x (10% + 6% + 9%) = $175,000 After the change: $850,000 x (9% + 4% + 7%) = $170,000 Before the change: $200,000 x 12% = $24,000 After the change: $120,000 x 12% = $14,400
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CRITICAL THINKING / ESSAY LO1
101. Are sunk costs considered relevant when choosing among alternatives? Explain. Solution: No. Amounts that remain the same among alternatives do not add useful
information for selecting an alternative, and therefore, are not considered relevant for
decision making. Sunk costs by definition are those costs that have already been committed, cannot be changed, and will never differ among alternatives. LO2
102. Explain what revenues and costs are relevant when choosing among alternatives. Solution: Amounts that differ among alternatives are considered relevant. Amounts that
remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making.
LO2,3
103. Assume you are a sophomore in college and you 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. Solution: a. Relevant revenues/costs are those that differ between the alternatives of continuing
with college or taking a year off from college and working. Relevant costs for continuing your college education without a break include:
1. Earnings lost next year due to the hours you are not able to work because of
classes and homework.
2. As a result of graduating a year earlier, higher wages will be earned a year
earlier as well.
b. Sunk costs for this decision include: 1. Amounts paid for college tuition and books during the past two years. 2. Amounts committed for college tuition and books for the remaining two years. c. A qualitative consideration would include having different activities and priorities
than your friends who are students, graduating later than students who started college the same time you did, and retaining information over the year off from school.
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LO2,3
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. Solution: For the decision of whether to update the restaurant’s image: a. Relevant costs include a one-time cost of the renovation for the updated image, a
change in future sales which includes an increase in sales due to the updated image, decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed or having a limited serving area during renovation.
b. Costs that are not differential include replacing the menus and the carpet since they
need to be replaced whether the image is updated or not.
c. Qualitative considerations include whether the restaurant will lose that cozy appeal it
currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and new customers may not be the type of customer the restaurant wants to attract.
LO3
105. Are relevant revenues and costs the only information needed by managers to select among
alternatives? Explain using examples. Solution: No, relevant revenues and costs provide a financial analysis but they do not take
into consideration qualitative implications. In a make-or-buy decision, examples of qualitative issues include the supplier’s ability to meet expected quality and delivery
standards and the likelihood that suppliers increase prices of the components in the future.
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LO4
106. Explain the differences between a process layout, a product layout, and cellular
manufacturing. Solution: In process layouts, all similar equipment and functions are grouped together.
Process layouts occur typically in organizations in which production is done in small batches of unique products. In process layouts, products are moved and processed from one area to another until the product is completed. In contrast, in product layouts, equipment is organized to accommodate the production of a
specific product. Product layouts are most effective for companies producing high-volume products. Typically products are moved and are processed along an assembly line.
Meanwhile, cellular manufacturing involves the organization of a plant into a number of cells. Within each cell, machines that are needed to manufacture a group of similar products are arranged close to one another. The organization reduces production cycle time, which is the time from receipt of raw materials from the supplier to delivery of the finished goods. LO6
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. Solution: The advantages of implementing just-in-time manufacturing include fewer
inventories, which generally result in reduced cycle time, improved quality, and reduced waste. Concerns include establishing and maintaining good relations with reliable suppliers and
the structural and cultural change in the work environment.
LO3,6
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. Solution: a. In a just-in-time inventory system, suppliers are very important because if good
quality raw materials are not delivered in a timely manner, the entire processing system will shut down.
b. Incentives that can be offered to reward good suppliers include prompt payment and
guaranteed total purchase volume.
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LO6
109. Discuss the implications to employees of changing from a conventional manufacturing
system to just-in-time production. Solution: With the implementation of a just-in-time system, employees have to adapt to a
new cultural work climate. Employees will have to adapt to structural changes in the work place to accommodate JIT, a faster work pace, and the concept of teamwork. JIT often relies on teamwork, which requires individuals that may have worked in isolation to subordinate their interests to those of the team. LO6
110. Discuss cost reductions that can result from reducing work-in-process inventory. Solution: Decreasing work-in-process inventory results in reduced financing costs,
decreased storage and handling costs, and increased sales due to improved manufacturing cycle times and shorter lead-time for orders. LO7
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 considered? Explain why. Solution: In regard to quality, snowboard manufacturers should concentrate on prevention
costs so that only high quality snowboards are manufactured. Emphasis should be placed on quality engineering so the product is competitive and reliable. The use of external failure costs could put the company out of business. Lawsuits regarding defective snowboards causing or attributing to bodily injury on the ski slopes could ruin a snowboard
manufacturer by damaging its reputation or by awarding damages of such magnitude that the costs would bankrupt the company.
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