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Exam 7: Incremental Analysis for Short-Term Decision Making

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Question 71

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Olive Corp.currently makes 20,000 subcomponents a year in one of its factories.The unit costs to produce are: An outside supplier has offered to provide Olive Corp.with the 20,000 subcomponents at a $36 per unit price.Fixed overhead is not avoidable.If Olive Corp.accepts the outside offer,what will be the effect on short-term profits?

A) $160,000 decrease
B) $320,000 increase
C) $160,000 increase
D) $80,000 decrease

E) B) and C)
F) None of the above

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Question 72

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Archer currently manufactures a subcomponent that is used in its main product.A supplier has offered to supply all the subcomponents needed at a price of $42.Archer currently produces 100,000 subcomponents at the following manufacturing costs: a.If Archer has no alternative uses for the manufacturing capacity,what would be the profit impact of buying the subcomponents from the supplier? b.If Archer has no alternative uses for the manufacturing capacity,what would be the maximum price per unit they would be willing to pay the supplier? c.Now assume Archer would avoid $150,000 in equipment leases and salaries if the subcomponent were purchased from the supplier.Now what would be the profit impact of buying from the supplier?

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a.$800,000 less profit if buying outside...

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Question 73

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Power Inc.has two divisions,Windsor and Ridge.Following is the income statement for the past month: What would Power's profit margin be if the Windsor division was dropped and all fixed costs are unavoidable?

Spencer Inc.manufactures a product that costs $36 per unit plus $32,000 in fixed costs each month.Spencer currently sells 1,000 of these units per month for $80 each.If Spencer leased a machine for $8,000 a month,it could add features to the product that would allow it to sell for $120 each.It would cost an additional $12 per unit to add these features.How much would Spencer have to charge for the product with additional features to make it worthwhile to lease the machine?

A make-or-buy decision is the same as:

It costs Elmwood,Inc.$78 per unit to manufacture 1,000 units per month of a product that it can sell for $90 each.Alternatively,Elmwood could sell the units at an earlier stage of processing,which would save $36 per unit.Elmwood could sell the simpler product for $60 each.How would selling the simpler product affect Elmwood's profit?

It costs Camp,Inc.$35 per unit to manufacture 1,000 units per month of a product that it can sell for $50 each.Alternatively,Camp could process the units further into a more complex product,which would cost an additional $30 per unit.Camp could sell the more complex product for $75 each.How would processing the product further affect Camp's profit?

Opportunity costs are important in special-order and make-or-buy decisions,but not in keep-or-drop decisions.

When a firm has limited direct labor hours,it should prioritize the product with:

A special-order decision analysis should not be used to make long-term pricing decisions.

What is the term for the most constrained resource?

Rock Inc.has three divisions,Granite,Lime and Nina.All fixed costs are unavoidable.Following is the income statement for the previous year: a.What would Rock's profit margin be if the Lime division were dropped? b.What would Rock's profit margin be if the Nina division were dropped?

You wish to take an Excel course.You may enroll at one within your school or you may take a community class at the local library.You've gathered the following information to aid in your decision-making process. If you earn a scholarship that covers 95% of your tuition costs at the college (but cannot be applied to other learning opportunities) ,which option would you choose (based on net enrollment cost) ?

Edward currently manufactures a subcomponent that is used in its main product.A supplier has offered to supply all the subcomponents needed at a price of $22.Edward currently produces 100,000 subcomponents at the following manufacturing costs: a.If Edward has no alternative uses for the manufacturing capacity,what would be the profit impact of buying the subcomponents from the supplier? b.If Edward has no alternative uses for the manufacturing capacity,what would be the maximum price per unit they would be willing to pay the supplier? c.Now assume Edward would avoid $300,000 in equipment leases and salaries if the subcomponent were purchased from the supplier.Now what would be the profit impact of buying from the supplier?

Which of the following steps in the managerial decision-making process involves differential analysis?

Hamilton,Inc.has two divisions,Parker and Blaine.Following is the income statement for the previous year: Of the total fixed costs,$600,000 are common fixed costs that are allocated equally between the divisions.What is Parker's segment margin?

Hamilton,Inc.has two divisions,Parker and Blaine.Following is the income statement for the previous year: Of the total fixed costs,$600,000 are common fixed costs that are allocated equally between the divisions.What would Hamilton's profit margin be if Blaine were dropped?