W5 Assignment Application Problems 5
Page 298: Brief Exercises 7-1,
7-2
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 ________ Identify the problem
and assign
________ Review results of the
decision ________ Determine and evaluate possible responsibility 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.
Pages 300-301: Exercises 7-1, 7-4
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 possible 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 the 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. Costs that are the same under
all alternative courses of action sometimes affect the decision.
8. When using incremental
analysis, some costs will always change under alternative courses of action,
but revenues will not.
9. Variable costs will change
under alternative courses of action, but fixed costs 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 as an undergarment for sports
activities. Operating in capacity, the company can produce 1,000,000
undergarments of Y-Go a year. The per unit and the 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
$5.50 5,500,000
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
$5.50 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 other 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.
Page 303: Exercise 7-9
E7-9 Anna Garden recently opened
her own basketweaving 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 basic introductory kit includes undyed, uncut reeds (with
dye included) for weaving one basket. This basic 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 undyed reeds. The Stage 2 kit sells for
$36.
Instructions:
Determine whether Anna’s
basketweaving studio should carry the basic introductory kit with undyed and
uncut reeds or the Stage 2 kit with reeds already dyed and cut. Prepare an
incremental analysis to support your answer.
TUTORIAL PREVIEW
|
|
Reject Order
|
Accept
Order |
Net
Income
Increase (Decrease) |
|
Revenues
|
$0
|
$1,187,500 (1)
|
$1,187,500
|
|
Variable costs:
|
|
|
|
|
Direct materials
|
0
|
500,000
|
(500,000)
|
