Application Problems Week 5

BE7-1 The steps in management’s decision making process are listed in random order below. Indicate the order in which the steps should be executed.

______Make a decision                                  ______Review results of the decision

______Identify the problem and assign         ______Determine and evaluate

            responsibility                                                   possible courses of action

BE7-2 Bogart Company is considering two alternatives. Alternative A will have revenues of $160,000 and costs of $100,000. Alternative B will have revenues of $180,000 and costs of $125,000. Compare Alternative A to Alternative B showing incremental revenues, costs, and net income.

E7-1 As a study aid, your classmate Pascal Adams has prepared the following list of statements about decision-making and incremental analysis.

1.      The first step in management’s decision-making process is, “Determine and evaluate courses of action.”

2.      The final step in management’s decision-making process is to actually make the decision.

3.      Accounting’s contribution to management’s decision-making process occurs primarily in evaluating possible courses of action and in reviewing results.

4.      In making business decisions, management ordinarily considers only financial information because it is objectively determined.

5.      Decisions involve a choice among alternative courses of action.

6.      The process used to identify the financial data that change under alternative courses of action is called incremental analysis.

7.      Cost that are the same under all alternative courses of action sometimes affect the decision.

8.      When using incremental analysis, some cost will always change under alternative courses of action, but revenues will not.

9.      Variable cost will change under alternative courses of action, but fixed cost will not.

Instructions

Identify each statement as true or false. If false, indicate how to correct the statement.

E7-4 Klean Fiber Company is the creator of Y-GO, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. Y-Go has become very popular in undergarments for sports activities. Operating at capacity, the company can produce 1,000,000 Y-Go undergarments a year. The per unit and total costs for an individual garment when the company operates at full capacity are as follows.

                                                            Per Undergarment                Total

Direct materials                                              $2.00                           $2,000,000

Direct labor                                                       0.75                                 750,000

Variable manufacturing overhead                   1.00                             1,000,000

Fixed manufacturing overhead                        1.50                             1,500,000

Variable selling expenses                                 0.25                                250,000

            Totals                                                    $.50                           $5,500,000

The U.S. Army has approached Klean Fiber and expressed an interest in purchasing 250,000 Y-Go undergarments for soldiers in extremely warm climates. The Army would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. In addition, the Army has agreed to pay an additional $1 per undergarment to cover all costs and provide a profit. Presently, Klean Fiber is operating at %70 capacity and does not have any other potential buyers for Y-Go. If Klean Fiber accepts the Army’s offer, it will not incur any variable selling expenses related to this order.

Instructions

Using incremental analysis, determine whether Klean Fiber should accept the Army’s offer.

E7-9 Anna Garden recently opened her own basket weaving studio. She sells finished baskets in addition to the raw materials needed by customers to weave baskets of their own. Anna has put together a variety of raw material kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Anna is unable to carry all varieties of kits originally assembled and must choose between two basic packages. The basis introductory kit includes un-dyed, uncut reeds (with dye included) for weaving one basket. This package costs Anna $16 and sells for $30. The second kit, called stage 2, includes cut reeds that have already been dyed. With this kit the customer need only soak the reeds and weave the basket. Anna is able to produce the second kit by using the basic materials included in the first kit and adding one hour of her own time, which she values at $18 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Anna is able to make two kits of the dyed reeds, in one hour; from one kit of un-dyed reeds. The stage 2 kit sells for $36.

Instructions

Determine whether Anna’s basket weaving studio should carry the basic introductory kit with un-dyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut. Prepare an incremental analysis to support your answer.