Concept explainers
Concept introduction:
Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager’s decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.
Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.
Two basic types of the relevant costs are as follows:
- Out-of-pocket costs
- Opportunity costs
To indicate:
The decision for make or buy
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Managerial Accounting
- Making outsourcing decisions Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows: Suppose Topnotch will sell bindings to Cold Sports for $15 each. Cold Sports would pay $3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.50 per binding. Requirements Cold Sports’s accountants predict that purchasing the bindings from Topnotch will enable the company to avoid $2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sports’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.arrow_forwardhow can the changes below affect Mirabel’s overall cost structure. For those changes that are controllable, make a recommendation considering the uncontrollable cost changes. Be certain to consider not only the company’s break-even point, but also the desired margin of safety. If Mirabel purchases the new equipment for $1,200,000, it will increase fixed costs by 10% but will decrease the variable cost per unit for all 3 models by 5%. If Mirabel invests the additional $650,000 in fixed marketing expenses, sales of the Model 301 are expected to increase by 8%. If the projection is that sales will increase by 10% in the coming year. The sales volume remains fixed but there is a 5% increase in variable expenses (materials cost) for the Model 101 and 301, and a 10% increase in variable expenses for Model 201.arrow_forwardMaking outsourcing decisions Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows; Suppose Livingston will sell bindings to Snow Ride for $13 each. Snow Ride would pay $3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.50 per binding. Requirements Snow Ride’s accountants predict that purchasing the bindings from Livingston will enable the company to avoid $2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Ride’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.arrow_forward
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- Value Electronics uses a standard part in the manufacture of different types of radios. The total cost of producing 32,000 parts is $90,000, which includes fixed costs of $30,000 and variable costs of $60,000. The company can buy this part from an external supplier for $5 per unit and avoid 10% of the fixed costs. If Value Electronics decides to outsource the production of the part, how will it impact its operating income? A. Operating income increases by $97,000. B. Operating income decreases by $100,000. C. Operating income decreases by $97,000. D. Operating income increases by $100,000.arrow_forwardMohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from a supplier in Vietnam to produce 9,200 units per year for $6.00 each. Mohave has the following information about the cost of producing tote bags: Direct materials $ 3.00 Direct labor 1.00 Variable manufacturing overhead 1.00 Fixed manufacturing overhead 2.00 Total cost per unit $ 7.00 Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 percent of the fixed overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote bags.Required:1. Compute the difference in cost between making and buying the umbrella tote bag.2. Based strictly on the incremental analysis, should Mohave buy the tote bags or continue to make them?3-a. Suppose that the space Mohave currently uses to make the bags could be…arrow_forwardAutoTech's Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of?arrow_forward
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