FINANCE

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 $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 Ortega has prepared the following list of statements about decision-making and

incremental analysis.

1. The fi rst step in management’s decision-making process is, “Determine and evaluate

possible courses of action.”

2. The fi nal 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 fi nancial information

because it is objectively determined.

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

6. The process used to identify the fi nancial 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 fi xed 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 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 0.75 750,000

Variable manufacturing overhead 1.00 1,000,000

Fixed manufacturing overhead 1.50 1,500,000

Variable selling expenses 0.25 250,000

Totals $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 profi t. 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 Rachel Rey recently opened her own basketweaving studio. She sells fi nished 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 $14 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 $18 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.

Instructions

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.

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