ManagerialAccounting-OP_x3x7rSO-112

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3. 10.1 Felipe’s Restaurant and Pie Shop needs help defining the costs for his business. He also wants to
know which costs are relevant or irrelevant to his decision. Identify each cost as relevant or irrelevant. Then
identify the type of cost (sunk, fixed, variable, or opportunity).
Cost Relevant or
Irrelevant?
Sunk, Fixed, Variable, or
Opportunity?
Rent
Baker wages
Felipe’s culinary school tuition
Berries for pies
Painting dining area last year
Felipe’s decision not to attend graduate
school
4. 10.2 What factors must any company consider before accepting a special-order contract?
5. 10.2 What are some of the qualitative issues that a special order can create?
6. 10.3 In “The Trouble with Outsourcing,” a Schumpeter column in The Economist, there is a statement of
advice to companies, who outsource products or services: “they need to think harder about what is their core
business, and what is peripheral.”[5] What types of problems do you think they are talking about? In your
answer, present at least five (5) problems that companies should consider when outsourcing products or
services.
7. 10.3 Many outsourced jobs have resulted in “offshoring” jobs, rather than using domestic outsourcing. If
a U.S. company wants to offshore a service like customer service, for example, what are some of their
considerations? In your answer, address offshoring disadvantages as compared with domestic outsourcing.
8. 10.4 What type of qualitative issues should management consider if a quantitative analysis reveals that a
segment should be dropped?
9. 10.4 In the decision by a grocery company that is trying to decide whether to keep or drop the bakery
department in its grocery stores, what would the bakery manager’s salary be in relationship to the decision if
the manager will be laid off?
10. 10.5 What is of key importance for a company whose products can be processed further?
11. 10.5 What is a general rule to remember with respect to a sell-or-process-further environment, and
what costs are irrelevant to the decision?
5 “The Trouble with Outsourcing.” The Economist. July 30, 2011. https://www.economist.com/business/2011/07/30/the-trouble-with-
outsourcing
546 Chapter 10 Short-Term Decision Making
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Exercise Set A
EA1. 10.1 Garrison Boutique, a small novelty store, just spent $4,000 on a new software program that will
help in organizing its inventory. Due to the steep learning curve required to use the new software, Garrison
must decide between hiring two part-time college students or one full-time employee. Each college student
would work 20 hours per week, and would earn $15 per hour. The full-time employee would work 40 hours per
week and would earn $15 per hour plus the equivalent of $2 per hour in benefits. Employees are given two
polo shirts to wear as their uniform. The polo-shirts cost Garrison $10 each. What are the relevant costs,
relevant revenues, sunk costs, and opportunity costs for Garrison?
EA2. 10.1 Derek Dingler conducts corporate training seminars on managerial accounting techniques all
around the country. An upcoming training seminar is to be held in Philadelphia. Just prior to that engagement,
Derek will be in New York City. He plans to stay in Philadelphia the night of the seminar, as the next morning
he plans to meet with clients about future training seminar possibilities. One travel option is to fly from New
York to Philadelphia on the first flight on Friday morning, which will get him to Philadelphia two hours before
the start of his seminar. The cost of that flight is $287. Uber fees for his time in Philadelphia will cost $68. His
meal per diem is $40 for each full day and $25 for each half day. The hotel cost is $225 per night. His second
option is the rent a car and drive the two hours to Philadelphia from New York City the afternoon before the
seminar. The cost of the rental car including gas is $57 per day and the car will be needed for two full days. At
the end of the meetings he will return to New York City. What are the relevant costs, relevant revenues, sunk
costs, and opportunity costs that Derek Dingler has to consider in making the decision whether to fly or drive
from New York City to Philadelphia?
EA3. 10.1 Bridget Youhzi works for a large firm. Her alma mater has asked her to make a presentation to
the upcoming accounting honor society’s annual scholarship dinner. Her firm supports the presentation
because it hopes to recruit more excellent employees like Bridget. The university is 196 miles from her office.
In order to get to the dinner by 5:00 p.m., she will need to leave work at 1:00 pm. She can drive her personal
car and be reimbursed $0.50 per mile. The dinner ends at 9:00 p.m. Company policy allows her to spend the
night if the return trip is four hours or more. There is a student-run inn and conference center across the
street from campus that charges $101 per night.
Instead of driving, she could catch a 3:00 p.m. flight that has a round-trip fare of $300. Flying would require her
to rent a car for $39 per day and pay an airport parking fee of $25 for the day. The company pays a per diem of
$35 for incidentals if the employee spends at least six hours out of town. (The per diem would be for one
24-hour period for either flying or driving.) As a manager, Bridget is responsible for recruiting within a budget
and wants to determine which is more economical.
Use the information provided to answer these questions.
A. What is the total amount of expenses Bridget would include on her expense report if she drives?
B. What is the total amount of expenses she would include on her expense report if she flies?
C. What is the relevant cost of driving?
D. What is the relevant cost of flying?
E. What is the differential cost of flying over driving?
F. What other factors should Bridget consider in her decision between driving and flying?
Chapter 10 Short-Term Decision Making 547
EA4. 10.2 Zena Technology sells arc computer printers for $55 per unit. Unit product costs are:
A special order to purchase 15,000 arc printers has recently been received from another company and Zena
has idle capacity to fill the order. Zena will incur an additional $2 per printer for additional labor costs due to a
slight modification the buyer wants made to the original product. One-third of the manufacturing overhead
costs is fixed and will be incurred no matter how many units are produced. When negotiating the price, what is
the minimum selling price that Zena should accept for this special order?
EA5. 10.2 Shelby Industries has a capacity to produce 45,000 oak shelves per year and is currently selling
40,000 shelves for $32 each. Martin Hardwoods has approached Shelby about buying 1,200 shelves for a new
project and is willing to pay $26 each. The shelves can be packaged in bulk; this saves Shelby $1.50 per shelf
compared to the normal packaging cost. Shelves have a unit variable cost of $27 with fixed costs of $350,000.
Because the shelves don’t require packaging, the unit variable costs for the special order will drop from $27
per shelf to $25.50 per shelf. Shelby has enough idle capacity to accept the contract. What is the minimum
price per shelf that Shelby should accept for this special order?
EA6. 10.3 Reuben’s Deli currently makes rolls for deli sandwiches it produces. It uses 30,000 rolls annually
in the production of deli sandwiches. The costs to make the rolls are:
A potential supplier has offered to sell Reuben the rolls for $0.90 each. If the rolls are purchased, 30% of the
fixed overhead could be avoided. If Reuben accepts the offer, what will the effect on profit be?
EA7. 10.3 Almond Treats manufactures various types of cereals that feature almonds. Acme Cereal
Company has approached Almond Treats with a proposal to sell the company its top selling cereal at a price of
$22,000 for 20,000 pounds. The costs shown are associated with production of 20,000 pounds of almond
cereal:The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed
costs. Should Almond Treats make or buy the almond cereal?
548 Chapter 10 Short-Term Decision Making
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EA8. 10.4 Party Supply is trying to decide whether or not to continue its costume segment. The information
shown is available for Party Supply’s business segments. Assume that neither the Direct fixed costs nor the
Allocated common fixed costs may be eliminated, but will be allocated to the two remaining segments.
If costumes are dropped, what change will occur to profit?
EA9. 10.5 Underground Food Store has 4,000 pounds of raw beef nearing its expiration date. Each pound
has a cost of $4.50. The beef could be sold “as is” for $3.00 per pound to the dog food processing plant, or
roasted and sold in the deli. The cost of roasting the beef will be $2.80 per pound, and each pound could be
sold for $6.50. What should be done with the beef, and why?
EA10. 10.5 Ralston Dairy gathered this data about the two products that it produces:
Which of the products should be processed further?
EA11. 10.6 Rough Stuff makes 2 products: khaki shorts and khaki pants for men. Each product passes
through the cutting machine area, which is the chief constraint during production. Khaki shorts take 15
minutes on the cutting machine and have a contribution margin per pair of shorts of $16. Khaki pants take 24
minutes on the cutting machine and have a contribution margin per pair of pants of $32. If it is assumed that
Rough Stuff has 4,800 hours available on the cutting machine to service a minimum demand for each product
of 3,000 units, how much will profits increase if 100 more hours of machine time can be obtained?
EA12. 10.6 Rough Stuff makes 2 products: khaki shorts and khaki pants for men. Each product passes
through the cutting machine area, which is the chief constraint during production. Khaki shorts take 15
minutes on the cutting machine and have a contribution margin per pair of shorts of $16. Khaki pants take 24
minutes on the cutting machine and have a contribution margin per pair of pants of $32. If it is assumed that
Rough Stuff has 4,800 hours available on the cutting machine to service a minimum demand for each product
of 3,000 units, how many of each product should be made?
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B Exercise Set B
EB1. 10.1 Ella Maksimov is CEO of her own marketing firm. The firm recently moved from a strip mall in the
suburbs to an office space in a downtown building, in order to make the firm’s employees more accessible to
clients. Two new clients are interested in using Ella’s advertising services but both clients are in the same line
of business, meaning that Ella’s company can represent only one of the clients. Pampered Pooches wants to
hire Ella’s firm for a one-year contract for web, newspaper, radio, and direct mail advertising. Pampered will
pay $126,000 for these services. Ella estimates the cost of the services requested by Pampered Pooches to be
$83,000. Delightful Dogs is interested in hiring Ella to produce mass mailings and web ads. Delightful will pay
Ella $94,000 for these services and Ella estimates the cost of these services to be $47,000. Identify any relevant
costs, relevant revenues, sunk costs, and opportunity costs that Ella Graham has to consider in making the
decision whether to represent Pampered Pooches or Delightful Dogs.
EB2. 10.1 You are trying to decide whether to take a job after you graduate or go onto graduate school.
Consider the following questions as you make your decision.
A. Which of these costs, for the most part, would be relevant (R), and which would be irrelevant (IR)?
◦ Cost of your undergraduate education
◦ Salary with an undergraduate degree
◦ Salary with both an undergraduate degree and a graduate degree
◦ Rent
◦ Car Insurance
◦ Graduate school tuition and fees
◦ Food costs
◦ Moving expenses
B. Which of these costs could have a differential amount that is relevant/irrelevant, depending upon the
location and or policies of your new job?
EB3. 10.1 You are working for a large firm that has asked you to attend a career fair at a university that is
185 miles from your office. You need to be there at 9:00 a.m. on a Monday morning. You can drive your
personal car and be reimbursed $0.55 per mile, but you would need to leave home at 5:30 a.m. to get to the
event and set up on time. Company policy allows you to spend the night if you must leave town before 6:00
a.m. The hotel across the street from campus charges $85 per night. Instead of driving, you could catch a 7:00
a.m. flight with a round-trip fare of $260. Flying would require you to rent a car for $29 per day, and you would
have an airport parking fee of $20 for the day. The company pays a per diem of $40 for incidentals if you spend
at least 6 hours out of town. (The per diem would be for one 24-hour period for either flying or driving.) As a
manager, you are responsible for recruiting within a budget and want to determine which is more
economical.
Use the information provided to answer these questions.
A. What is the total amount of expenses you would include on your expense report if you drive?
B. What is the total amount of expenses you would include on your expense report if you fly?
C. What is the relevant cost of driving?
D. What is the relevant cost of flying?
E. What is the differential cost of flying over driving?
F. What other factors should you consider in your decision between driving and flying?
550 Chapter 10 Short-Term Decision Making
This OpenStax book is available for free at http://cnx.org/content/col25479/1.11
	Chapter 10. Short-Term Decision Making
	Exercise Set A
	Exercise Set B