Name: student No.

Exercises for decision making

1. relevant information
Home Appliance: 25000 units sold, Selling price: $250, variable cost: $50, wage’s rate:
$16/hour. The company is considering reorganizing its product line, after reorganization, the
workers number will be dropped from 20 to 16. The other data keep the same.
Required: Determine relevant revenue and relevant costs for Home appliance, fill them in
the exhibit 1 and tell if the company should reorganize the product line.
Exhibit 1
All data Relevant data
Do not reorganize Do not reorganize
reorganize reorganize
Revenues $6 250 000 $6250000
Costs:
Direct materials 1250000 1250000
Direct labor 640000 480000
Manufacturing overhead 750000 750000
Marketing 2000000 2000000
Reorganization costs - 90000
Total costs 4640000 4570000
Operating income 1610000 1680000

2. discontinuing or adding
Allied west, the west coast sales office of Allied Furniture, a wholesaler of specialized
furniture, supplies furniture to three local retailers, Vogel, Brenner, and Wisk. Exhibit 2
presents representative revenues and costs of Allied West by customers for the coming year.
Additional information on Allied West’s costs for different activities at various levels of the
cost hierarchy is as follows:
Exhibit 2
Customer
Vogel Brenner Wisk Total
Revenues $500000 $300000 $400000 $1200000
Cost of goods sold 370000 220000 330000 920000
Materials-handling labor 41000 18000 33000 92000
Equipment depreciation expense 12000 4000 9000 25000
Rent 14000 8000 14000 36000
Marketing support 11000 9000 10000 30000
Purchases orders and delivery 13000 7000 12000 32000
processing
General administration 20000 12000 16000 48000

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Allocated corporate office costs 10000 6000 8000 24000
Total costs 491000 284000 432000 1207000
Operating income $9000 $16000 $(32000) $(7000)

(1) Materials-handling labor costs vary with the number of units of furniture shipped to
customers.
(2) Allied reserves different areas of the warehouse to stock furniture for different customers.
Materials-handling equipment in an area and depreciation costs on the equipment are
identified with individual customer accounts. Any equipment not used remains idle. The
equipment has a zero disposal price.
(3) Allied allocates rent to each customer account on the basis of the amount of warehouse
space reserved for that customer.
(4) Marketing costs vary with the number of sales visits made to customers.
(5) purchase-order costs vary with the number of purchase orders received; delivery-
processing costs vary with the number of shipments made.
(6) Allied allocates the fixed general administration costs to customers on the basis of
customer revenues.
(7) Allied allocates its fixed corporate office costs to sales offices on the basis of the square
feet area of each sales office. Allied allocates these costs to customers on the basis of
customer revenue.
2.1 Should Wisk be dropped?

2.2 Should Allied West be closed?

Suppose that closing Allied West will have no effect on corporate office costs.

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 2.3 Should Allied South be opened?
Suppose Allied Furniture has opportunity to open another sales office, Allied South, whose
revenues and costs are identical to Allied West’s (including a cost of $25000 to acquire
materials-handling equipment with a 1-year useful life and zero disposal price). Opening this
office will have no effect on operate office costs. Should Allied furniture open Allied south?
Relevant information analysis for closing Allied West and opening Allied South:
Exhibit 3
Loss in revenues Incremental revenues and
and savings in costs from incremental costs from opening
closing Allied West Allied South
Revenues
Cost of goods sold
Materials handling labor
Depreciation expense
Rent
Marketing support
Purchase orders and
delivery processing
General administration
Corporate office costs
Total costs
Effect on operating income
(loss)

2.4 A question: sometimes, a segment’s income statement shows a loss, but we still choose
keeping it instead of dropping it, why? Why should we keep the digital watch segment in the
PPT when it’s showing a $100,000 loss?

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3 make or buy
The EI Cerrito Company manufactures thermostats-consisting of relays, switches, and valves-
for home and industrial use. EI makes its own switches. Columns 1 and 2 of the following
table report the current costs for HDS, its heavy-duty switch, based on an analysis of its
various manufacturing activities:
Exhibit 4
Total current Current cost Expected total costs Expected
Costs of purchasing per unit of purchasing 10000 cost per
10000 units (1) (2) units next year (3) unit (4)
Direct materials $80000 $8 $80000 $8
Direct labor 10000 1 10000 1
Variable overhead for power and 40000 4 40000 4
utilities 4*10000 4*10000
Mixed (variable and fixed)overhead 17500 1.75 20000 2
costs of materials handling and set 5000+25*500 5000+50*300
ups
Fixed overhead costs of plant lease, 30000 3 30000 3
insurance, and administration
Total manufacturing costs $177500 $17.75 $18000 $18
Materials-handling and set up activities occur each time in a batch of HDS is made. EI Cerrito
produces the 10000 units of HDS in 25 batches of 400 units each. The number of batches is the
cost driver for these costs. Total materials handling and set up costs equal fixed costs of $5000
plus variable costs of $500 per batch (5000+500*25=17500). EI Cerrito commences production
only after it receives a customer order. Because they are trying to lower their inventory levels, EI
Cerrito’s customers are pressuring the company to supply thermostats in smaller batch sizes. EI
Cerrito anticipates that next, the 10000 units of HDS expected to be sold will be manufactured in
50 batches of 200 units each. Through continuous improvement, EI Cerrito expects to reduce
variable costs per batch for materials handling and set up to $300. No other changes in fixed
costs or variable costs per unit are anticipated.
Another manufacturer offers to sell EI 10000 units of HDS next year for $16 per unit on whatever
delivery schedule EI wants. Assume that financial factors predominate in this make –or-buy
decision. Should EI Cerrito make or buy HDS?
Exhibit 5
Relevant items for make or buy decision for HDS
Total relevant costs Per unit relevant costs
Relevant items Make Buy Make Buy
Out purchase of parts
Direct materials
Direct labor
Variable overhead
Mixed overhead

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Total relevant costs
Difference in favor of making HDS
*The $30000 of fixed costs is irrelevant.
4 special order
Fancy Fabrics manufactures quality bath towels at its highly automated Burlington, North
Carolina, plant. The plant has a production capacity of 48000 towels each month. Current
monthly production is 30000 towels. Retail department stores account for all existing sales.
Expected results for the coming month (August) are shown in Exhibit 7. We assume that all costs
can be classified as either variable with respect to a single driver (units of output) or fixed. The
manufacturing costs per unit of $12 consist of the following:
Exhibit 6
Variable costs per unit Fixed costs per unit Total costs per unit
Direct materials $6 $- $6
Manufacturing labor 0.50 1.5 2
Manufacturing overhead 1 3 4
Manufacturing costs $7.5 $4.5 $12
The marketing costs per unit are $7 ($5 of which is variable). Fancy Fabrics has no R&D costs or
product-design costs. Marketing costs include distribution costs and customer-service costs.
As a result of a strike at its existing towel suppliers, a luxury hotel chain has offered to buy from
Fancy in August at $11 per towel. No subsequent sales to this customer are anticipated. Fixed
manufacturing costs are tied to the 48000-towel production capacity. If Fancy accepts the special
order, it will use existing idle capacity to produce the 5000 towels, and hence fixed manufacturing
costs will not change. No marketing expense will be necessary for the special order. The
acceptance of this special order is not expected to affect the selling price or the quantity of
towels sold to regular customers. Should Fancy accept the order?
Exhibit 7 Budgeted income statement for August
Total Per unit
Revenues $600000 $20
Costs of goods sold 360000 12
Marketing costs 210000 7
Full costs of the product 570000 19
Operating income $30000 $1
Exhibit8
Special order decision for Fancy: comparative contribution income statements
Without the special order With the Difference:
special order Relevant amounts
Per unit total Total for the special order
Revenues
Variable costs:
Manufacturing
Marketing
Total variable costs
Contribution margin

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Fixed costs
Manufacturing
Marketing
Total fixed costs
Operating income

5 Jet, Inc. makes a single product whose normal selling price is $20 per unit and variable cost is
$8 per unit. A foreign distributor offers to purchase 3,000 units for $10 per unit. This is a one-time
order that would not affect the company’s regular business. Annual capacity is 10,000 units, but
Jet, Inc. is currently producing and selling only 5,000 units, and fixed costs are unaffected by the
order.
Should Jet accept the offer?

6 Northern Optical ordinarily sells the X-lens for $50. The variable production cost is $10, the
fixed production cost is $18 per unit, and the variable selling cost is $1. A customer has requested
a special order for 10,000 units of the X-lens to be imprinted with the customer’s logo. This
special order would not involve any selling costs, but Northern Optical would have to purchase an
imprinting machine for $50,000. What is the rock bottom minimum price below which Northern
Optical should not go in its negotiations with the customer? There is ample idle capacity to fulfill
the order and the imprinting machine has no further use after this order.

7 The Eastern normally charges ￥ 2000 for this round-trip ticket. Suppose that before the
departure, Eastern finds that there are some spare seats and the ticket agents decide to sell the
ticket for only ￥160/ticket to attract customers. Will this decision make profit?

Suppose General Dynamics has 100 obsolete aircraft parts in its inventory. The original
manufacturing cost of these parts was $100,000. General Dynamics can: Remachine the parts for
$30,000 and then sell them for $50,000, or keep them in storehouse.

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Which should it do?