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:
If the net operating income will increase or decrease if Azul model is eliminated
Want to see the full answer?
Check out a sample textbook solutionChapter 7 Solutions
WHITECOTTON MGRL ACCTG (LL)
- The Regal Cycle Company manufactures three types of bicycles: a dirt bike, a mountain bike, and a racing bike. Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Required:1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?2. Should the production and sale of racing bikes be discontinued?3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.arrow_forwardTop managers of Vermont Flooring are alarmed by their operating losses. They are considering dropping the laminate flooring product line. Company accountants have prepared the following analysis to help make this decision in the chart below: Total fixed costs will not change if the company stops selling laminate flooring. Requirements 1. Prepare an incremental analysis to show whether Vermont Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $28,000 to operating income? Explain. 2. Assume that the company can avoid $32,000 of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring. 3. Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be avoided if the company stops selling laminate flooring. However,…arrow_forwardMarinette Company makes several products, including canoes. The company has been experiencing losses from its canoe segment and is considering dropping that product line. The following information is availableregarding its canoe segment. Should management discontinue the manufacturing of canoes?arrow_forward
- Crazy Fan Guard Company provides security services to popular live sporting event venues. Crazy Fan management has identified one of its top risks as the possibility that restrictions on premium close seating options will severely decrease its sales revenue by lessening the demand for its security services. The table below displays a description of this top risk, an inherent risk assessment, three risk response alternatives, and finally, a residual risk assessment. Crazy Fan Guards management accounting team estimates that the incremental cost of implementing response A is 2,200,000, and the incremental cost of implementing response B is 700,000. Required: 1. Calculate the benefit of each risk response alternative A through C. 2. Calculate the net benefit of each risk alternative A through C. 3. CONCEPTUAL CONNECTION Using net benefit as the criterion, explain the best risk response alternative that Crazy Fan Guard Company management should implement.arrow_forwardRefer to the information for Petoskey Company from Exercise 8-44. Assume that 20% of theAlanson customers choose to buy from Petoskey because it offers a full range of products, including Conway. If Conway were no longer available from Petoskey, these customers would goelsewhere to purchase Alanson.Required:CONCEPTUAL CONNECTION Estimate the impact on profit that would result from droppingConway. Explain why Petoskey should keep or drop Conwayarrow_forwardValdespin Company manufactures three sizes of camping tents—small (S), medium (M), and large (L). The income statement has consistently indicated a net loss for the M size, and management is considering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total output accordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of Size S so that the entire plant capacity can continue to be used. If Proposal 2 is selected and Size M is discontinued and production curtailed, the annual fixed production costs and fixed operating expenses could be reduced by $46,080 and $32,240, respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of $34,560 for the rental of additional warehouse space would yield an additional 130% in Size S sales volume. It is also assumed that the increased production of Size S would utilize the plant facilities released by the discontinuance of Size M. The sales and costs…arrow_forward
- In deciding whether to drop its electronics product line, Smith Company should consider a. how dropping the electronics product line would affect sales of its other products. b. the costs it could save by dropping the product line. c. the revenues it would lose from dropping the product line. d. All of the above.arrow_forwardJIT production, relevant benets, relevant costs, ethics. Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system (a) will be too costly to manage; (b) will result in too many stockouts; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to nancial factors and not give due…arrow_forwardEvaluating an Incentive Pay Plan; Strategy Anne-Marie Fox is the manager of a boat dealership. She has decided to reevaluate the compensation plan offered to her sales representatives to determine whether the plan encourages the dealership’s success. The representatives are paid no salary, but they receive 20% of the sales price of every boat sold, and they have the authority to negotiate the boats’ prices as far down as their wholesale cost if necessary. Required Strategically, is this plan in the dealership’s best interest, and why? a. Yes, because the plan is likely to increase contribution margin. b. No, because the plan is likely to reduce profits. c. No, because the plan is likely to motivate illegal behavior. d. Yes, because the plan is likely to increase profits.arrow_forward
- Wheels and All Company makes skateboards, roller skates and roller blades. Roller skates are not as popular as they used to be and the company is considering dropping this product. Wheels and All currently sells 10,000 sets of roller skates each year for $60 per set. Variable costs to manufacture the roller skates are $54 per set. Fixed costs of $75,000 can be avoided if Wheels and All do not produce roller skates. Analyse the following independent scenarios for Wheels and All.a. Prepare an analysis to determine whether or not the Company should discontinue the production of roller skates.b. Wheels and All can increase the sales volume to 14,000 sets of roller skates if they company is willing to spend an additional $5,000 on advertising during the year. Prepare an analysis to determine if Wheels and All should continue or discontinue the production of roller skates based on this new information.c. Management have decided that it would be better to lower the selling price in order to…arrow_forwardConsider the following series of independentsituations in which a firm is about to make a strategic decision.Decisionsa. A running shoe manufacturer is weighing whether to purchase leather from a cheaper supplier in orderto compete with lower priced competitors.b. An office supply store is considering adding a delivery service that its competitors do not have.c. A regional retailer is deciding whether to install self-check-out counters. This technology will reducethe number of check-out clerks required in the store.d. A local florist is considering hiring a horticulture specialist to help customers with gardening questions.1. For each decision, state whether the company is following a cost leadership or a product differentiationstrategy.2. For each decision, discuss what information the managerial accountant can provide about the sourceof competitive advantage for these firms.arrow_forwardAT&T (...a telecommunications company) is choosing between two bus models (...for some unexplained reason wtf?!?): The Daintree Rainforest Tour Company is a small firm that runs a single tour each day to the Daintree Rainforest. The company is choosing between two bus models to conduct these tours in: Long Life and Short Life. One of the two bus alternatives (Long Life) is more expensive to purchase and maintain, but lasts much longer than the other alternative (Short Life). The discount rate that is appropriate for all of the tour company's cash flows is 11.6% per year. As the company is a tour company (...and not a telecommunications firm), the company will always need to have an active bus to conduct its business, such that it would repurchase a new replacement bus of the same model at the end of its life. And this pattern would continue for the foreseeable future. Neither model affects the customer experience in a meaningful way and is expected to have no effect on annual…arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningPrinciples of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning