Brief Exercises: BE7-1, BE7-2
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 ________ Review results of the decision
________ Identify the problem and assign ________ Determine and evaluate possible
responsibility courses of action
BE7-2 Bogart Company is considering two alternatives. Alternative A will have revenues of $1 60,000 and costs of $1 00,000. Alternative B will have revenues of $1 80,000 and costs of $1 25,000. Compare Alternative A to Alternative B showing incremental revenues, costs, and net income.
Exercise: E7-1, E7-4, E7-9
E7-1 Ortega 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.
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 at 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 0.7 5 750,000
Variable manufacturing overhead 1.00 1,000,000
Fixed manufacturing overhead 1.50 1,500,000
Variable selling expenses 0.25 250,000
Totals $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 7 0% 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.
E7-9 Rachel Rey 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. Rachel has put together a variety of raw material kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Rachel 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 Rachel $1 4 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. Rachel is able to produce the second kit by using the basic materials included in the ﬁ rst kit and adding one hour of her own time, which she values at $1 8 per hour. Because she is more efﬁ cient at cutting and dying reeds than her average customer, Rachel 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 $35.
Determine whether Rachel’s basketweaving shop 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.
What factors must management consider when deciding whether to continue using an asset, repair, or replace it?