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ch05 TB
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2.
An example of a sunk cost is the amount of a guaranteed contract that has not yet been paid.
a.
True
b.
False
3.
Personal employee responses are not critical considerations for the business decision maker.
a.
True
b.
False
4.
5.
For a particular decision, differential revenues and costs are always relevant.
a.
True
b.
False
6.
A cost may be relevant for one decision, but not relevant for a different decision.
a.
True
b.
False
7.
Avoidable costs should be evaluated when deciding whether to discontinue a part, product,
product line, or business segment.
a.
True
b.
False
8.
In make-or-buy decisions, facility-sustaining support costs are unavoidable if the facility can
be converted to another use.
a.
True
b.
False
9.
For one-time-only special orders, flexible costs may be relevant but not capacity-related
costs.
a.
True
b.
False
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10.
Bid prices and costs that are relevant for regular orders are the same costs that are relevant
for one-time-only special orders.
a.
True
b.
False
11.
12.
Depreciation allocated to a product line is a relevant cost when deciding to discontinue that
product.
a.
True
b.
False
13.
When replacing an old machine with a new machine, the book value of the old machine is a
relevant cost.
a.
True
b.
False
14.
15.
Sometimes qualitative factors are the most important factors in make-or-buy decisions.
a.
True
b.
False
16.
17.
Outsourcing is risk-free to the manufacturer because the supplier now has the responsibility
of producing the part.
a.
True
b.
False
18.
The central goal of the facility layout design process is to streamline operations to increase
operating income.
a.
True
b.
False
19.
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20.
The reduction of setup costs makes smaller batch sizes more feasible.
a.
True
b.
False
21.
22.
23.
A processing cycle efficiency (PCE) of 14% indicates better efficiency than a PCE of 50%.
a.
True
b.
False
24.
When using a just-in-time manufacturing, a problem anywhere in the system can stop all
production.
a.
True
b.
False
25.
26.
Global competition led to the development of international quality standards such as ISO
9000 2000 Standards.
a.
True
b.
False
27.
28.
Experience shows that it is more expensive to prevent defects than to detect and repair
them.
a.
True
b.
False
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MULTIPLE CHOICE
29.
Sunk costs:
a.
are relevant
b.
are differential
c.
have future implications
d.
are ignored when evaluating alternatives
30.
31.
Costs that cannot be changed by any decision made now or in the future are:
a.
fixed costs
b.
indirect costs
c.
avoidable costs
d.
sunk costs
32.
33.
Which of the following costs are NEVER relevant in the decision-making process?
a.
capacity-related
b.
historical costs
c.
relevant costs
d.
variable costs
34.
When deciding to lease a new cutting machine or continue using the old machine, the
following costs are all relevant EXCEPT the:
a.
$50,000 cost of the old machine
b.
$20,000 cost of the new machine
c.
$10,000 selling price of the old machine
d.
$3,000 annual savings in operating costs if the new machine is purchased
35.
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36.
37.
38.
39.
40.
When there is excess capacity, it makes sense to accept a one-time-only special order for
less than the current selling price when:
a.
incremental revenues exceed incremental costs
b.
additional capacity-related costs must be incurred to accommodate the order
c.
the company placing the order is in the same market segment as your current
customers
d.
None of the above is correct.
41.
When deciding whether to discontinue a segment of a business, managers should focus on:
a.
equipment used by the segment that could become idle
b.
reallocation of corporate costs
c.
how total costs differ among alternatives
d.
operating income per unit of the discontinued segment
42.
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44.
45.
If Flowers-For-Everyone replaces the existing delivery van with the new one, over the next
10 years operating income will:
a.
decrease by $180,000
b.
increase by $150,000
c.
decrease by $150,000
d.
None of the above is correct.
46.
Should Flowers-for-Everyone replace the existing van with the new van? What are the
savings or additional cost?
a.
Yes replace, net savings of $15,000
b.
Yes replace, net savings of $150,000
c.
No replace, additional costs of $120,000
d.
No replace, additional costs of $30,000
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Geo Prizm
$15,000
$ 3,000
Honda Civic
$3,000
---
$ 2,280
$2,100
47.
48.
What should Jim do? What are his savings in the first year?
a.
Buy the Honda Civic; $9,780
b.
Fix the Geo Prizm; $5,518
c.
Buy the Honda Civic; $180
d.
Fix the Geo Prizm; $5,280
$ 40,000
10,000
30,000
20,000
$100,000
It is estimated that 10% of the capacity-related support costs assigned to TE456 will no longer be
incurred if the company purchases TE456 from the outside supplier. Konrades Engine Company
has the option of purchasing the part from an outside supplier at $85 per unit.
49.
If Konrades Engine Company accepts the offer from the outside supplier, the monthly
avoidable costs (costs that will no longer be incurred) total:
a.
$ 82,000
b.
$ 98,000
c.
$ 50,000
d.
$100,000
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50.
If Konrades Engine Company purchases 1,000 TE456 parts from the outside supplier per
month, then its monthly operating income will:
a.
increase by $2,000
b.
increase by $80,000
c.
decrease by $3,000
d.
decrease by $85,000
51.
The maximum price that Konrades Engine Company should be willing to pay the outside
supplier is:
a.
$80 per TE456 part
b.
$82 per TE456 part
c.
$98 per TE456 part
d.
$100 per TE456 part
$0.25
0.03
0.10
0.12
0.22
0.28
$1.00
52.
53.
The maximum price that Melodees Preserves should be willing to pay for the decorative
jars is:
a.
$0.28 per jar
b.
$0.38 per jar
c.
$0.72 per jar
d.
$1.00 per jar
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Product A
$60,000
36,000
24,000
Product B
$90,000
48,000
42,000
9,000
6,000
$ 9,000
18,000
9,000
$15,000
Product C
$24,000
15,000
9,000
6,000
5,400
$ (2,400)
54.
55.
Assuming Product C is discontinued and the space formerly used to produce Product C is
rented for $12,000 per year, operating income will:
a.
increase by $6,600
b.
increase by $9,000
c.
increase by $12,000
d.
increase by $14,400
56.
Which of the following does NOT need to be considered when evaluating a make-or-buy
decision?
a.
savings from an alternative use of the production equipment
b.
the original cost of the production equipment
c.
the quality of the supplier's product
d.
the reliability of the delivery schedule
57.
58.
Employee morale at Dos Santos, Inc., is very high. This type of information is known as:
a.
a qualitative factor
b.
a quantitative factor
c.
a differential factor
d.
an opportunity cost
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59.
60.
61.
When evaluating a make-or-buy decision, which of the following does NOT need to be
considered?
a.
alternative uses of the production capacity
b.
the original cost of the production equipment
c.
the quality of the supplier's product
d.
the reliability of the supplier's delivery schedule
62.
63.
64.
65.
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66.
In __________, the plant is organized into areas where all machines used to manufacture a
group of similar products are close to each other.
a.
a process layout
b.
a product layout
c.
cellular manufacturing
d.
just-in-time production
67.
68.
69.
Model Y
$60
6
12
8
10
70.
71.
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Model Z
$70
6
24
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72.
73.
74.
How can Lisa Braun encourage her salespeople to promote the more profitable model?
a.
Put all sales persons on salary.
b.
Provide higher sales commissions for higher priced items.
c.
Provide higher sales commissions for items with the greatest contribution margin per
constrained resource.
d.
Both (b) and (c) are correct.
75.
76.
77.
78.
79.
Of the four quality costing categories, the most damaging category to the organization is:
a.
prevention costs
b.
appraisal costs
c.
internal failure costs
d.
external failure costs
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80.
__________ are incurred when a defective component is discovered before shipment to the
customer.
a.
Prevention costs
b.
Appraisal costs
c.
Internal failure costs
d.
External failure costs
81.
82.
83.
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85.
As a result of the layout reorganization, incremental manufacturing costs are projected to:
a.
increase by $84,000
b.
increase by $20,000
c.
decrease by $20,000
d.
decrease by $16,500
86.
87.
88.
After the change, direct labor costs as a percentage of sales are projected to decrease
because:
a.
less work-in-process inventory needs to be moved from location to location
b.
fewer employees are needed to produce a product due to the new work design
c.
less supervisors are needed to oversee operations
d.
All of the above are correct.
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90.
As a result of the layout reorganization, incremental manufacturing costs are projected to:
a.
decrease by $22,800
b.
decrease by $25,000
c.
increase by $25,000
d.
increase by $40,000
91.
92.
93.
After the change, work-in-process carrying costs are projected to decrease because of:
a.
reduced costs in materials handling
b.
lower financing costs
c.
the decreased need for inventory storage
d.
All of the above are correct.
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EXERCISE / PROBLEM
94.
Karens Cookie Company is considering replacing its giant cookie mixer with a new one.
The following data have been compiled to evaluate the decision.
Existing
$8,000
$4,000
5 years
$3,000
Original cost
Annual operating cost
Remaining life
Disposal value now
New
$10,000
$2,200
5 years
---
Required:
a.
What costs are relevant?
b.
What costs are sunk?
c.
What are the net cash flows assuming Karens 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, loweroperating cost, convection oven to replace the existing one they recently purchased.
Selected information about the two ovens is given below:
Original cost
Accumulated depreciation
Current salvage value
Remaining life
Annual operating expenses
Disposal value in 5 years
Existing
$60,000
$ 5,000
$40,000
5 years
$10,000
$
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
Direct labor
Flexible support costs
Capacity-related support costs
Total costs
$ 45,000
15,000
35,000
25,000
$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.
Freddies 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
Direct labor
Unit-related support costs
Batch-related support costs
Product-sustaining support costs
Facility-sustaining support costs
Total cost per pound
$0.50
0.06
0.10
0.04
0.05
0.15
$0.90
Required:
a.
Should Freddies 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
Direct manufacturing labor
Flexible manufacturing support
Fixed manufacturing support
Total
$0.60
3.00
1.20
1.60
$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 suppliers 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.
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CHAPTER 5 SOLUTIONS
MULTIPLE CHOICE
LO1
LO1
LO1
LO2
LO2
1.
2.
3.
4.
5.
a
a
b
a
a
LO2
LO2
LO2
LO2
LO2
6.
7.
8.
9.
10.
a
a
b
a
b
LO2
LO2
LO2
LO3
LO3
11.
12.
13.
14.
15.
a
b
b
a
a
LO3
LO3
LO4
LO4
LO4
16.
17.
18.
19.
20.
a
b
a
a
a
LO4
LO5
LO6
LO6
LO6
21.
22.
23.
24.
25.
a
b
b
a
a
LO7
LO8
LO8
26.
27.
28.
a
a
b
LO1
LO1
29.
30.
d
a
LO1
LO2
LO2
LO2
LO2
31.
32.
33.
34.
35.
d
d
b
a
d
LO2
LO2
LO2
LO2
LO2
36.
37.
38.
39.
40.
c
d
b
d
a
LO2
LO2
LO1
LO2
LO2
41.
42.
43.
44.
45.
c
c
a
c
b
LO2
LO2
LO2
LO2
LO2
46.
47.
48.
49.
50.
a
a
c
a
c
LO2
LO2
LO2
LO2
LO2
51.
52.
53.
54.
55.
b
d
d
c
b
LO3
LO3
LO3
LO3
LO3
56.
57.
58.
59.
60.
b
c
a
d
c
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LO3
LO4
LO4
LO4
LO4
61.
62.
63.
64.
65.
b
a
b
b
a
LO4
LO4
LO5
LO5
LO5
66.
67.
68.
69.
70.
c
d
b
d
b
LO5
LO5
LO5
LO5
LO6
71.
72.
73.
74.
75.
a
b
a
c
d
LO6
LO6
LO6
LO7
LO7
76.
77.
78.
79.
80.
c
a
b
d
c
LO7
LO7
LO7
LO8
LO8
81.
82.
83.
84.
85.
d
a
b
d
b
LO8
LO8
LO8
LO8
LO8
86.
87.
88.
89.
90.
c
a
b
a
c
LO8
LO8
LO8
91.
92.
93.
b
a
d
Schoenebeck
MULTIPLE CHOICE
45.
72.
73.
New van ($20,000 x 10 years) Existing van ($35,000 x 10 years) = $150,000 less in
operating costs, which results in a $150,000 increase in operating income.
New van ($180,000) + $45,000 + (-$20,000 x 10 years) = costs of ($335,000)
Existing van (-$35,000 x 10 years) = costs of ($350,000)
Replacement results in net savings of $15,000
Geo ($3,000 + $2,280) - Honda ($3,000 + $2,100) = $180 cost savings with the Honda
option
$40,000 + $10,000 + $30,000 + ($20,000 x 10%) = $82,000
Avoidable costs $82,000 ($85 x 1,000 units) = decrease of $3,000
Avoidable costs $82,000 / 1,000 units = $82 per part
All avoidable costs are relevant for this decision.
Considering only quantitative factors, the company should not pay more than the avoidable
costs of $1.00 per jar. There may be qualitative factors that are also important.
$24,000 - $15,000 - $6,000 = $3,000. Product C contributes $3,000 toward corporate
profits. Without Product C, operating income would be $3,000 less than currently reported.
$(3,000) + $12,000 = $9,000
Model X $50 - $6 - $12 - $4 = $28
Model Y $60 - $6 - $12 - $8 = $34 **highest
Model Z $70 - $6 - $24 - $8 = $32
Model X $50 - $6 - $12 - $4 = $28 / 1 = $28 **highest
Model Y $60 - $6 - $12 - $8 = $34 / 2 = $17
Model Z $70 - $6 - $24 - $8 = $32 / 2 = $16
Model Y since it has the greatest contribution margin per unit
Model X since it has the greatest contribution margin per machine-hour
84.
85.
(Before: $125,000 x 10%) less (After: $90,000 x 10%) equals cost savings of $3,500.
(Before: $600,000 x 50%) less (After: $800,000 x 40%) equals additional costs of $20,000.
46.
48.
49.
50.
51.
52.
53.
54.
55.
70.
71.
86.
Sales
Manufacturing costs
WIP inventory carrying costs
Total benefits
89.
90.
Before the
Change
$600,000
(300,000)
(12,500)
$287,500
After the
Change
$800,000
(320,000)
(9,000)
$471,000
Difference
$200,000
(20,000)
3,500
$183,500
(Before: $100,000 x 11%) less (After: $80,000 x 11%) equals cost savings of $2,200.
(Before: $500,000 x 40%) less (After: $750,000 x 30%) equals additional costs of $25,000.
91.
Sales
Manufacturing costs
WIP inventory carrying costs
Total benefits
Chapter 5
Before the
Change
$500,000
(200,000)
(11,000)
$289,000
Page 22
After the
Change
$750,000
(225,000)
(8,800)
$516,200
Difference
$250,000
(25,000)
2,200
$227,200
Schoenebeck
EXERCISE/PROBLEM
LO1,2
94. a.
Relevant costs include the acquisition cost of the new giant cookie mixer, annual
operating costs for both the old and the new cookie mixers, and the current disposal
value of the old mixer.
b.
Sunk costs include the original cost of the existing cookie mixer.
c.
Net cash flows over 5 years with the giant cookie mixer:
Cash inflow:
Decrease in annual operating expenses ($1,800 x 5)
Sale of the existing cookie mixer
Cash outflow:
Acquisition of the new giant cookie mixer
Net cash inflow (outflow)
LO1,2,3
95. a.
$ 9,000
3,000
(10,000)
$ 2,000
Sunk costs include the original cost of the existing convection oven and the
accompanying accumulated depreciation.
b.
c.
Net cash flows over 5 years with the new Turbo oven:
Cash inflow:
Decrease in annual operating expenses ($2,500 x 5)
Sale of the existing oven
$ 12,500
40,000
Cash outflow:
Acquisition of the new Turbo oven
(50,000)
$ 2,500
Other items the manager should consider when making this decision include:
The Turbo Ovens reliability and efficiency is still unknown since it is a
brand new product.
If the Turbo Oven bakes faster as it claims, the Pizzeria may be able to
increase sales due to the quicker baking time.
Even though purchasing another oven just six months prior, top
management should consider the Turbo oven option, but they may also
question the decision-making ability of Pat, the current manager.
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LO2,3
96. a.
Avoidable costs are those costs eliminated when a part, product, product line, or
business segmented is discontinued. Avoidable production costs for WB23 total
$110,000, which are all but the $10,000 ($25,000 x 40%) of capacity-related costs
that cannot be immediately converted to other uses.
b.
Based on the financial considerations given, Quiett Truck should NOT outsource
WB23 because the $112,000 (10,000 units x $11.20 per part) outsourced cost is
greater than the $110,000 reduction in annual production costs. In other words, the
outsourcing would cost Quiett Truck an additional $2,000 annually.
c.
Other factors to consider include the suppliers ability to meet expected quality and
delivery standards, and the likelihood of suppliers increasing prices of components in
the future.
LO2,3
97. a.
b.
Because Freddies Fudge Factory can make use of the roasting space, it can be
assumed the facility-sustaining support costs are avoidable. Assuming the unit-related,
batch-related, and product-sustaining support costs are also all avoidable costs, YES,
Freddies Fudge should outsource the nuts because the $0.85 per pound of the supplier
is less than the current $0.90 per pound cost to Freddie.
Freddie can offer the supplier prompt payment and a guaranteed total purchase volume
to encourage continued reliability.
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LO1,2
98.
a.
Direct materials
Direct manufacturing labor
Flexible manufacturing support
Avoidable fixed support
Total relevant per unit costs
$0.60
3.00
1.20
1.00
$5.80
b.
Make
Purchase price
Savings in space
Direct materials
Direct mfg. labor
Flexible support
Fixed support saved
Totals
Buy
$60,000
(9,000)
$6,000
30,000
12,000
$48,000
(10,000)
$41,000
Effect of Buying
$(60,000)
9,000
6,000
30,000
12,000
10,000
$7,000
LO1,2
99.
a.
Direct materials
Direct manufacturing labor
Flexible manufacturing support
Avoidable fixed support
Total relevant per unit costs
b.
$12
60
24
20
$116
Make
Purchase price
Savings in space
Direct materials
Direct manufacturing labor
Flexible support
Fixed support saved
Totals
Buy
$1,200,000
(180,000)
$120,000
600,000
240,000
$960,000
(200,000)
$820,000
Effect of Buying
$(1,200,000)
180,000
120,000
600,000
240,000
200,000
$140,000
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LO4,8
100. a.
1.
2.
3.
b.
1.
2.
3.
Sales
Manufacturing costs*
WIP inventory carrying costs**
Total benefits
*
**
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
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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 dcor 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 restaurants 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 suppliers 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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