AP1.10 Steve Johnson sells baskets for a wholesaler to retail shops. Retail


Steve Johnson sells baskets for a wholesaler to retail shops. Retail shops like to have 30 days to pay after receipt of the goods. Unfortunately, retail shops often have financial difficulties and fail to make timely payments and in some cases make no payments at all. Steve’s manager, who has never visited the retail shops, makes the decision whether to require collec- Analysis and Interpretation Problems tion on delivery (COD) or allow the store to pay in 30 days. Forcing the store to make payment on delivery often deters the shop from making a purchase. Steve, who visits each store, argues that he should have the right to make the decision on allowing for payment within 30 days.

a. How would the wholesaler benefit from Steve making the decision to allow for payment within 30 days?

b. What types of performance measures should be used for Steve if he is not given the responsibility to allow for payment within 30 days?

c. What types of performance measures should be used for Steve if he is given the responsibility to allow for payment within 30 days?

d. Should Steve be evaluated on increased sales or the level of uncollectible accounts receivable? What are the trade-offs between these two measures?


The owner of a jewelry store has just heard about TQM as a way of managing. The owner sees no reason to invest any further in TQM. As she told a friend, “TQM may be relevant for some of the cheap jewelry shops in town, but I sell only the highest quality diamonds and jewelry. I am already the top-quality jewelry retailer in town. TQM has nothing further to offer me.” Evaluate the comments of the jewelry store owner.


CAM welding machines can be programmed to make different types of welds. Software is inserted into the machine to change the welding pattern. Kipling BoxCompany makes steel boxes that require only one type of weld. The president of the company is trying to decide whether the company should invest in a CAM welding machine. What are the advantages and disadvantages ofinvesting in the CAM welding machine?


A hospital administrator has just read a book about JIT.She believes that JIT is a good idea for manufacturing companies, but doesn’t think that it would be of much use to a service organization. Describe how JIT could be used in a hospital.


A Wall Street Journal article indicated that top-level managers do not understand CIM.ll Only about 20% of the conversions to CIM began with top-level managers, the push for it usually begins with shop-floor engineers. What are the advantages of implementing a change from the top versus the bottom of the organization?

NE 2.5

The fixed cost of trucking a load of potatoes is $50, and the variable cost is $0.50 per mile. What is the estimated cost of trucking a load of potatoes 500 miles?

NE 2.6

A manufacturer of skis has determined that the fixed cost of making skis is $1,000,000and the variable cost is $100 per pair of skis. During normal operations, the firm plans to make 20,000pairs of skis. a. What is the expected cost of making 20,000pairs of skis? b. What are the expected costs of making 30,000pairs of skis? c. Why might the variable and fixed costs be poor predictors of costs when 30,000pairs of skis are made?

NE 2.7

Midwest University is trying to decide whether to admit an additional 100students. Tuition is $5,000per year. The controller has determined the following schedule of costs to educate students: 4,000 $30,000,000 4,100 30,300,000 4,200 30,600,000 4,300 30,900,000 The current enrollment is 4,200 students. The president of the University has calculated the cost per student in the following manner: $30,600,000/4,200 students = $7,286per student. The president wonders why Midwest should accept more students if the tuition is only $5,000. a. What is wrong with the president’s calculation? b. What are the fixed and variable costs of operating Midwest University?

NP 2.8

Allan Brothers Company has designed a machine for sorting apples that is able to detect bruises on an apple. Bruised apples are used for making applesauce. The apples without defects are shipped to grocery stores. Managers at Allan Brothers are uncertain of the demand for these sorting machines but have estimated the following total costs of making different numbers of the machines:

1 $100,000

2 150,000

3 190,000

4 220,000

5 250,000

6 280,000

7 340,000

8 400,000

9 500,000

a. Prepare a table showing how the marginal cost of sorting machines varies with the number of machines manufactured.

b. Why does the marginal cost increase after six machines?

c. What is the average cost of making five sorting machines?

d. If the sorting machine can be sold for $70,000,how many machines should be produced?

NP 2.9

For parts (a) and (b), draw a graph that depicts how costs vary with volume. Completely label each graph and axis.

a. The Medford plant operates 40 hours per week. Management can vary the number of workers; currently, 200 workers are being paid $10 per hour. The plant is near capacity. To increase output, a second shift of 40 hours per week is being considered. To attract workers to the second shift, a 20% wage premium will be offered. Plot total labor costs as a function of labor hours per week.

b. The Dallas plant has a contract with Texas Gas Company to purchase up to 150million cubic feet of natural gas monthly for a flat fee of $1.5million. Additional gas can be purchased for $0.0175per cubic foot. The Dallas plant manufactures aluminum cans; producing 1,000 cans requires 10 cubic feet of gas. Plot total gas costs as a function of can production.

NP 2.13

A soccer ball manufacturer plans to make 100,000balls per year. The following annual costs are estimated:

Utilities $ 10,000

Machines 50,000

Administration 100,000

Marketing 120,000

labor 200,000

Materials 150,000

Total ~

Labor and materials are variable costs. The remaining costs are fixed.

a. What are the annual fixed costs of making soccer balls?

b. What is the variable cost per soccer ball?

c. What is the average cost per ball?

d. If the manufacturer is operating normally and not near capacity, what is the expected cost of making 1,000more balls?

NP 2.15

Based on the last few years of operations (when he made between 1,000and 15,000units), Bill Jones calculated that the fixed cost of making his sale product is $400,000and the variable cost per unit is $200. a. If Jones expects to make 18,000units, what is his expected cost in the next year using the fixed and variable costs? b. What are two dangers of using the fixed and per unit variable cost, as calculated, to estimate next year’s costs?

NP 2.17

A tennis ball manufacturer is noted for making all its tennis balls exactly the same way. The manufacturer is less certain, however, about its costs. The manufacturer hasn’t changed its operating methods in the last 10 years, and the cost of labor and raw materials has remained about the same. The manufacturer has had the following costs and output during the last 10 years:

1992 $20,000,000 50,000,000

1993 25,000,000 75,000,000

1994 30,000,000 105,000,000

1995 28,000,000 100,000,000

1996 32,000,000 110,000,000

1997 23,000,000 80,000,000

1998 35,000,000 120,000,000

1999 31,000,000 115,000,000

2000 36,000,000 118,000,000

2001 22,000,000 90,000,000

a. Plot these data.

b. Identify the highest and lowest output levels.

c. Using the high/low method, estimate the fixed costs of making tennis balls.

d. What are the variable costs per ball?

e. If the manufacturer ex

pacts to make 112,000,000balls, what are the expected costs in the coming year?

f. Why would it be more difficult to estimate the expected costs if the manufacturer expects to make 150,000,000balls?

AIP 2.14

Steve Martinez was saddened when he heard of the death of his uncle and was shocked AlP 2.14 when he learned that he had inherited a 1,000acre ranch in Wyoming called Windy Acres. Opportunity Costs The ranch had a house, bunkroom for help, and a barn. The inheritance also included 500 head of cattle. When Steve arrived in Wyoming to check on his inheritance, he found the buildings and fences in need of repair. The manager of the ranch greeted Steve with a handshake and the financial statement from the end of the most recent fiscal year, which was about three months ago. The accounting report included only a balance sheet and an income statement:

Assets Liabilities

Cash $ 2,000 Mortgage $200,000

Equipment 100,000 , •

Buildings 184,000

Owner s Equity

Accumulated depreciation (52,000) Owner’s Share 34,000

— —

Total assets $234,000 Total liabilities & equities $234,000

= = =


Sale of cattle $ 50,000

Cost of supplies (10,000)

Manager’s salary (15,000)

Depreciation (10,000)

Interest on mortgage (20,000)

Net loss $ (5,000)

Steve looked a little worried after seeing the financial statements. He was relieved, however, when he noticed that the cattle were not on the balance sheet. “Well, at least there’s some additional value on this ranch that isn’t recorded in the financial statements,” he said. The manager replied, “We decided not to report the cattle as an asset because the number varies throughout the year and we’re never sure exactly how many cattle are out there. I’d like to keep working for you, but my feeling is that you should sell this place. A neighbor is willing to buy it for $300,000.I think it is a good offer and you should accept it.” Steve Martinez is reluctant to accept the offer without further investigation of the operations of Windy Acres.

a. How does the offer to buy Windy Acres provide a benchmark for Steve?

b. How should Steve use the balance sheet and income statement to value Windy Acres?

c. If Steve decides to continue operating Windy Acres as a cattle ranch, how should he decide on the appropriate number of cattle to raise?

NP 3.10

A road contractor has been using kilometers of road constructed as a cost driver. Based on last year’s costs, he estimates that he can build a kilometer of road for $3 million. The county has recently asked him for an estimate to build 20 kilometers of road. Beforemaking his bid based on his $3-million-per-kilometer estimate, he goes to his accountant for advice. The accountant has analyzed last year’s costs much differently. She has divided last year’s costs into different activities and chosen a cost driver and measured its usage last year. Her estimates follow:

NP 3.11

NP 3.13