Module 6: Short-term and Long-term decision making

Question 1

The role of _______ and ________ information is critical to the ________-________ process

Answer 1

relevant; reliable; decision-making;

Question 2

Decision making always involves a choice between __________ _______ of ______

Answer 2

alternative courses; action;

Question 3

Steps in the decision-making process:

1) Define the _________
2) Identify ______-_______ ________ (goals and objectives)
3) Develop __________ _________/____________ which might contribute towards achieving goals and objectives
4) C______ and ________ relevant ____ about each __________
5) S_____ an __________ and _____ the __________ outcome

6) Implement the decision

Answer 3

problem;
decision-making criteria;
alternative solutions/opportunities;
Collect; analyse; data; alternative;
Select; alternative; state; expected;

Question 4

In a l_______ f______ situation, c___________ will be maximised by earning the _______ _________ __________ per unit of ________ ______

Answer 4

limiting factor; contribution; biggest possible contribution; limiting factor;

Question 5

Possible limiting factors include:
- S____
- L_____
- M_______
- M__________ c_______

Answer 5

Sales;
Labour;
Materials;
Manufacturing capacity;

Question 6

Colour makes two products, the Red and the Blue. Unit variable costs are as follows:
Direct materials (Red) = $1
Direct materials (Blue) = $3
Direct labour ($3/hr)(Red) = $6
Direct labour ($3/hr)(Blue) = $3
Variable Overhead (Red) = $1
Variable Overhead (Blue) = $1
The sales price per unit is $14 per Red and $11 for Blue. During July 20X2 the available direct labour is limited to 8000 hrs. Sales demand in July is expected to be 3000 units for Reds and 5000 units for Blues
Determine the profit-maximising production mix, assuming that monthly fixed costs are $20,000 and that opening inventories of finished goods and work in progress are nil.

Answer 6

Units (Blues) = 5000
Units (Reds) = 1500
Profit = $9000

Question 7

Jam Co. makes two products, the K and the L. The K sells for $50 per unit, the L for $70 per unit. The variable cost per unit of the K is $35, that of the L is $40. Each unit of K uses 2kg of raw material. Each unit of L uses 3kg of raw material.

In the forthcoming period the availability of raw material is limited to 2000kg. Jam Co is contracted to supply 500 units of K. Maximum demand for the L is 250 units. Demand for the K is unlimited.

What is the profit-maximising product mix?

Answer 7

625 units K
250 units L

Question 8

The ‘make’ option should give management more _______ ________ over the _____

Answer 8

direct control; work;

Question 9

The ‘buy’ option often has the benefit that the ________ organisation has a _________ ______ and _________ in the _____

Answer 9

external; specialist skill; expertise; work;

Question 10

In conducting the ‘make or buy’ decision, the organisation will need to _________ ____________ in both _________ and _______ costs

Answer 10

consider differences; variable; fixed;

Question 11

Complete Make or Buy worked example on page 252 of textbook

Answer 11

see textbook

Question 12

Outsourcing is the use of ________ _________ as a source of __________ ________, ____________ or ____________.

This is also known as ________ ___________ or ___-___________.

Answer 12

external suppliers; finished products, components; services;

contract manufacturing; sub-contracting;

Question 13

Frequently an outsourcing decision is made on the grounds that __________ ________ can offer _________ __________ and __________.

Answer 13

specialist contractors; superior quality; efficiency;

Question 14

Contracting out ______ ________ and ___________ ______ that can then be invested in core activities such as _______ __________

Answer 14

frees capital; management time; market research;

Question 15

Contractors generally have the _________ and ___________ to start production very quickly to meet sudden _____________ in ________.

Answer 15

capacity; flexibility; variations; demand;

Question 16

In _____________ and __________ functions, organisations are increasingly likely to use specialist companies

Answer 16

administrative; support;

Question 17

Decisions such as the following are common:

• Whether the _______ and _____________ of a ____ ___________ ________ should be entrusted to in-house data processing staff or whether an external software house should be hired to do the work
• Whether ____________ and ________ of certain items of equipment should be dealt with by in-house engineers, or whether a maintenance contract should be entered into with a specialist organisation

Answer 17

design; development; new computer system;

maintenance; repairs;

Question 18

Advantages of outsourcing:

• It ______ ___ ______ of existing staff
• It allows the company to _____ ___________ of ________ ___________ and ____________
• It may be _______, once time savings and opportunity costs are taken into account

Answer 18

frees up time;
take advantage; specialist expertise; equipment;
cheaper;

Question 19

Disadvantages of outsourcing:

• Without ___________ there is no guarantee that the service will be __________
• Contracting out may be ___________
• Organisation misses out on ______ ___________ opportunities
• Risk that __________ ____ will get into the wrong hands
• There may be ________ considerations

Answer 19

monitoring; performed;
expensive;
skill development;
sensitive data;
ethical;

Question 20

• To minimise risks associated with outsourcing, organisations can enter into ____-___ ________ with their suppliers that specify ____, ________ and ________ ________

Answer 20

long-run contracts; costs, quality; delivery schedules;

Question 21

A company manufactures and sells a single product. The variable cost of the product is $2.50 per unit and all production each month is sold at a price of $3.70 per unit. A potential new customer has offered to buy 6000 units per month at a price of $2.95 per unit. The company has sufficient spare capacity to produce this quantity. If the new business is accepted, sales to existing customers are expected to fall by 2 units for every 15 units sold to the new customer.

What would be the overall increase in monthly profit which would result from accepting the new business?

Answer 21

$1740

Question 22

Cost-volume-profit (CVP) analysis/break-even analysis is the study of the ________________ between _____, _______ and ______ at various levels of activity

Answer 22

interrelationships; cost; volume; profit;

Question 23

The break-even point is the ________ _______ at which there is neither _______ nor ____

Answer 23

activity level; profit; loss;

Question 24

The Safety Margin is the amount by which ______ ______ can fall below ____________ _____, without a loss being incurred

Answer 24

actual sales; anticipated sales;

Question 25

Breakeven point

Answer 25

Total fixed costs / Contribution per unit Contribution required to breakeven / Contribution per unit

Question 26

Expected sales = 10,000 units at $8 = $80,000 Variable cost = $5 per unit Fixed costs = $21,000 Compute the break-even point, and the C/S ratio

Answer 26

$56,000

Question 27

Contribution to Sales (C/S) ratio

Answer 27

Contribution required to break even / C-S ratio Fixed Costs / C-S ratio = Breakeven point in terms of sales revenue

Question 28

The Contribution to Sales (C/S) ratio is sometimes also called a _____/_______ or _ / _ ratio

Answer 28

Profit/Volume; P/V;

Question 29

The C/S ratio (or P/V ratio) is a measure of how much ____________ is earned from each $1 of _______

Answer 29

contribution; sales;

Question 30

Assume the C/S ratio of product W is 20%. IB, the manufacturer of product W, wishes to make a contribution of $50,000 toward fixed costs. How many units of product W must be sold if the selling price is $10 per unit?

Answer 30

25,000 units

Question 31

A company manufactures a single product with a variable cost of $44. The contribution to sales ratio is 45%. Monthly fixed costs are $396,000. What is the break-even point in units?

Answer 31

11,000 units

Question 32

Mal de Mer makes and sells a product which has a variable cost of $30 and which sells for $40. Budgeted fixed costs are $70,000 and budgeted sales are 8000 units. Calculate the break-even point and the safety margin.

Answer 32

Break-even point = 7000 units Safety margin = 1000 units

Question 33

S = V + F S = _____-____ _____ _________ V = ______ ________ ______ F = _______ ________ ______

Answer 33

break-even sales revenue; total variable costs; total fixed costs;

Question 34

S - V = F That is, _____ __________ = ______ ______

Answer 34

Total contribution = Fixed costs

Question 35

Butterfingers makes a product which has a variable cost of $7 per unit. If fixed costs are $63,000 per annum, calculate the selling price per unit if the company wishes to break even with a sales volume of 12,000 units.

Answer 35

$12.25 per unit

Question 36

The target profit is achieved when _ = _ + _ + _ Where _ = required _____

Answer 36

S = V + F + P; P; profit;

Question 37

S - V = F + P which also means total ____________ required = F + P

Answer 37

contribution;

Question 38

Riding Breeches makes and sells a single product, for which variable costs are as follows: Direct materials = $10 Direct labour = $8 Variable Production Overhead = $6 and so: Total Variable Costs = $24 The sales price is $30 per unit, and fixed costs per annum are $68,000. The company wishes to make a profit of $16,000 per annum. Determine the sales required to achieve this profit?

Answer 38

14,000 units or $420,000 in revenue

Question 39

Seven League Boots wishes to sell 14,000 units of its product, which has a variable cost of $15 to make and sell. Fixed costs are $119,000 and the required profit is $70,000. What sales price per unit is required to achieve this target profit?

Answer 39

$28.50;

Question 40

Stomer cakes bake and sell a single type of cake. The variable cost of production is 15c and the current sales price is 25c. Fixed costs are $2600/month, and the annual profit for the company at current sales volume is $36,000. The volume of sales demand is constant throughout the year. The sales manager wishes to raise the sales price to 29c per cake, but considers that a price rise will result in some loss of sales. Ascertain the minimum volume of sales required each month to raise the price to 29c?

Answer 40

40,000 cakes per month

Question 41

Close Brickett makes a product which has a variable production cost of $8 and a variable sales cost of $2 per unit. Fixed costs are $40,000 per annum, the sales price per unit is $18, and the current volume of output and sales is 6,000 units. The company is considering hiring an improved machine for production. Annual hire costs would be $10,000 and it is expected that the variable cost of production would fall to $6 per unit. (a) Determine the number of units that must be produced and sold to achieve the same profit as is currently earned, if the machine is hired.

Answer 41

5800 units;

Question 42

Close Brickett makes a product which has a variable production cost of $8 and a variable sales cost of $2 per unit. Fixed costs are $40,000 per annum, the sales price per unit is $18, and the current volume of output and sales is 6,000 units. The company is considering hiring an improved machine for production. Annual hire costs would be $10,000 and it is expected that the variable cost of production would fall to $6 per unit. (b) Calculate the annual profit with the machine if output and sales remain at 6,000 units per annum

Answer 42

$10,000;

Question 43

High Ladders has developed a new product which is about to be launched on to the market. The variable cost of selling the product is $12 per unit. The marketing department has estimated that at a sales price of $20, annual demand would be 10,000 units. However, if the sales price is set above $20, sales demand would fall by 500 units for each $0.50 increase above $20. Similarly, if the price is set below $20, demand would increase by 500 units for each $0.50 stepped reduction in price below $20. Determine the price which would maximise High Ladder's profit in the next year.

Answer 43

The total contribution would be maximised, and therefore profit maximised, at a sales price of $21 per unit, and sales demand of 9000 units.

Question 44

Betty Battle manufactures a product which has a selling price of $20 and a variable cost of $10 per unit. The company incurs annual fixed costs of $29,000. Annual sales demand is 9,000 units. New production methods are under consideration, which would cause a $1000 increase in fixed costs and a reduction in variable cost to $9 per unit. The new production methods would result in a superior product and would enable sales to be increased to 9,750 units per annum at a price of $21 each. If the change in production methods were to take place, the break-even output level would be how much higher or lower than the current output level?

Answer 44

400 units lower;

Question 45

A breakeven chart has the following axes: - A ___________ axis showing the ______/______ (in value or units) - A ________ axis showing _ for ______ __________ and _____

Answer 45

horizonal; sales/output; vertical; $; sales revenues; costs;

Question 46

The following lines are drawn on the breakeven chart: - The _______ line - The ______ ______ line - The _______ _____ line

Answer 46

sales; fixed costs; total costs;

Question 47

The sales line: - Starts at the _______ - Ends at the point signifying ________ ______

Answer 47

origin; expected sales;

Question 48

The fixed costs line: - Runs ________ to the __________ axis - Meets the _________ axis at a point which represents total ______ costs

Answer 48

parallel; horizontal; vertical; fixed;

Question 49

The total costs line: - Starts where the ______ costs line meets the ________ axis - Ends at the point which represents ___________ ______ on the horizontal axis and ______ _____ of ___________ ______ on the _______ axis

Answer 49

fixed; vertical; anticipated sales; total costs; anticipated sales; vertical;

Question 50

The budgeted annual output of a factory is 120,000 units. The fixed overheads amount to $40,000 and the variable costs are $0.50 per unit. The sales price is $1 per unit. What is the profit for the period, the breakeven point in units, and the safety margin?

Answer 50

Profit = $20,000 Breakeven point = 80,000 units Safety margin = 40,000 units

Question 51

Breakeven charts are used to: - Plan the _____________ of a company's __________ - Plan the ____________ of a company's ___________ - To give a _______ _______ of the ____________ calculations

Answer 51

production; products; marketing; products; visual display; breakeven;

Question 52

As an alternative to drawing the _____ cost line first, it is possible to start with _________ costs. This is known as a ___________ ______

Answer 52

fixed; variable; contribution chart;

Question 53

One of the advantages of the ___________ chart is that it shows clearly the __________ for __________ ______ of ___________

Answer 53

contribution; contribution; different levels; production;

Question 54

The _____/_______ (_/_) chart is a variation of the breakeven chart which illustrates the relationship of _____ and _______ to _____ and the ______ _____

Answer 54

profit/volume (P/V); costs; profits; sales; safety margin;

Question 55

In a Profit / Volume (P / V) chart: - 'P' is on the _ axis and comprises _____ and ___________ to _____ - 'V' is on the _ axis and comprises either _______ of _____ or ______ of _______ (revenue)

Answer 55

y; profit; contribution; profit; x; volume; sales; value; sales;

Question 56

The _ / _ chart shows clearly the effect on _____ and ___________ point of any changes in _______ price, ________ cost, _____ cost and/or _____ demand

Answer 56

P/V; profit; breakeven; selling; variable; fixed; sales;

Question 57

Limitations of breakeven analysis: - It an only apply to a _______ ________ or ______ of ________ that are produced and sold in a fixed mix. - A break-even chart may be ____-_________ to prepare - It assumes _____ costs are _______ at all levels of output - It assumes that _________ costs are the _____ per unit at all levels of output - It assumes that _______ prices are _______ at all levels of output

Answer 57

single product; group; products; time-consuming; fixed; constant; variable; same; sales; constant;

Question 58

Payback is the ____ ________ for the ____ _______ from a capital investment project to equal the ____ ______ so that the returns from the __________ pay back the initial ______

Answer 58

time required; cash inflows; cash outflows; investment; outlay;

Question 59

Payback is a ____ _______ measure It does not consider ______

Answer 59

cash based; profit;

Question 60

An asset costing $120,000 is to be depreciated over 10 years to a nil residual value. Profits after depreciation for the first five years are as follows: Year 1 = $12,000 Year 2 = $17,000 Year 3 = $28,000 Year 4 = $37,000 Year 5 = $8,000 How long is the payback period to the nearest month, assuming that cash flows occur at an even rate during each year?

Answer 60

3 years 7 months

Question 61

Disadvantages of the payback method: - It ignores the ______ of ____ _____ - It ignores the _____ _______ of ______

Answer 61

timing; cash flows; time value; money;

Question 62

Advantages of the payback method: - Assesses period for which ________ is ____ __ - Focus on _____ ________ can enhance __________ - Investment risk is _________ if payback is ________ - S_______-____ forecasts are likely to be more ________ - The calculation is ______ and _______

Answer 62

capital; tied up; early payback; liquidity; increased; longer; Shorter-term; reliable; quick; simple;

Question 63

The ARR is also called the _______ on _______ _________ (_ _ _ _) method or the ________ on __________ (_ _ _) method

Answer 63

return; capital employed (ROCE); return; investment (ROI);

Question 64

What are the three definitions of ARR? (and what is the one most commonly used in an exam)

Answer 64

ARR = Average annual profit from investment / Average investment; ARR = Estimated total profits / Estimated initial investment; ARR = Estimated average profits / Estimated initial investment;

Question 65

A company has a target accounting rate of return of 20% and is now considering the following project: Capital cost of asset = $80,000 Estimated life = 4 years Estimated profit before depreciation: Year 1 = $20,000 Year 2 = $25,000 Year 3 = $35,000 Year 4 = $25,000 The capital asset is depreciated by 25% of its cost each year, and has no residual value. Assess whether the project should be undertaken.

Answer 65

Project would not be undertaken because its ARR is 6250/40k = 15.625% and so it would fail to yield the target return of 20%

Question 66

Disadvantages of ARR - Based on __________ _______ which are subject to a number of different accounting treatments - It is a ___________ measure rather than an ___________ measure - It takes no account of the ________ of the project - Ignores the _____ _______ of _______

Answer 66

accounting profits; relative; absolute; length; time value; money;

Question 67

Advantages of ARR: - It is _____ and _______ to calculate - It involves a _________ concept of a ___________ _______ - Accounting profits can be easily calculated from __________ _______ - It looks at the entire ______ _____

Answer 67

quick; simple; familiar; percentage return; financial statements; project life;

Question 68

Question 8 P280

Answer 68

a) D b) A c) C

Question 69

In general, risky projects are those which have _________ cash flows, and hence project returns are likely to be _________

Answer 69

future; variable;

Question 70

People may be: - Risk ______ - Risk _______ - Risk _________

Answer 70

averse; neutral; seekers;

Question 71

What is scenario planning used for? - To develop __________ ______ to cope with specific threats or risks - As a technique to predict the ________ _______ ___________ ____________ for the company and to identify appropriate actions

Answer 71

contingency plans; possible future operating environment;

Question 72

Stages of investment decision making: - O_________ of ___________ - P_______ __________ - A_______ and ___________ - M__________ and _______

Answer 72

- Origination; proposals; - Project screening; - Analysis; acceptance; - Monitoring; review;

Question 73

Budget limits or constraints may be imposed ____________ (____ ________ rationing) or ___________ (____ __________ rationing)

Answer 73

internally (soft capital; externally (hard capital;

Question 74

Capital expenditure often involves the outlay of _____ ____ of ______, and expected benefits may take a _________ of _____ to _________

Answer 74

large sums; money; number; years; accrue;

Question 75

The overriding feature of any _________ is that it should be ________ with the ____________ ________ ________ to achieve its _________

Answer 75

proposal; consistent; organisation's overall strategy; objectives;

Question 76

What are the different steps of Analysis and Acceptance? Step 1) Complete and submit standard format financial information as a ______ __________ _________ Step 2) Classify the _______ by ____ Step 3) Carry out _______ _______ of the ________ Step 4) Compare the outcome of the _________ _______ to predetermined acceptance criteria Step 5) Consider the project in the light of the _________ _______ for the _______ and ________ operating periods. Step 6) Make the _________ - _______/_______ Step 7) Monitor the ________ of the ________

Answer 76

formal investment proposal; project; type; financial analysis; project; financial analysis; capital budget; current; future; decision - accept/reject; progress; project;

Question 77

'Invest' or 'don't Invest' decisions on projects may be made at different levels within the organisational hierarchy, depending on three factors: - The _____ of ____________ - Its perceived ___________ - The ______ of ___________ _________

Answer 77

type; investment; riskiness; amount; expenditure required;

Question 78

During the project's progress, _______ _______ should be applied to ensure the following: - C______ _______ does not exceed the amount ___________ - The implementation of the ________ is not _________ - The anticipated benefits are eventually __________

Answer 78

project controls; Capital spending; authorised; project; delayed; obtained;

Question 79

- Many capital projects such as the purchase of replacement assets and marketing investment decisions do not have _______ ___________ _____ and _______. - Some degree of monitoring and control can be exercised by means of a ____-__________ _________ or ______ ______

Answer 79

clearly identifiable costs; benefits; post-completion appraisal; audit review;

Question 80

A post-completion audit (PCA) is an objective _____________ ____________ of the success of a __________ _________ in relation to a ____

Answer 80

independent assessment; capital project; plan;

Question 81

The PCA is a ________-________ technique. It seeks to ________ ________ _______ to be learned from a project

Answer 81

forward-looking; identify general lessons;

Question 82

Advantages of PCA's: - Can ______ ________ to achieve promised benefits from the project - It can _______ ________ and highlight ________ that should be _____________ - Helps improve the discipline and quality of ___________ for future investment decisions - Original estimates may be more realistic if managers aware that they will be __________

Answer 82

motivate managers; improve efficiency; projects; discontinued; forecasting; monitored;

Question 83

Neale and Homes (1990) found that managers see the following advantages to PCA's: - They improve the ________ of _______ _______ - They improve _________ _____________ - They improve _______ and ___________ - They encourage a more _________ approach to new investment project _________ ________ - They help to identify _________ ________ ________

Answer 83

quality; decision making; organisational performance; control; guidance; realistic; decision making; critical success factors;

Question 84

Which projects should be audited? A reasonable guideline might be to audit all projects above a _______ ____, and a random selection of ______ _______

Answer 84

certain size; smaller projects

Question 85

When should projects be audited? Approximately ___ ____ after the ___________ of the _________

Answer 85

one year; completion; project;

Question 86

Who performs a PCA? - Not ____ ____________ - To avoid conflicts of interest, _______ _______ could be used

Answer 86

line management; outside experts;

Question 87

Problems with PCA: - It may not be possible to identify separately the ____ and ________ of any particular project - PCA can be a ______ and ____-_________ exercise - May lead to managers becoming ____-________ and unneccessarily ____-______ - The strategic effects of a capital investment may take ______ to materialise and in fact, it may ______ be ________ to identify or quantify them effectively

Answer 87

costs; benefits; costly; time-consuming; over-cautious; risk-averse; never; possible;

Question 88

Despite the growth in popularity of post-completion audits, bear in mind the possible alternative control processes: - Teams could manage a project from beginning to end, ______ being used before the project is started and ______ ___ ____, rather than at the end of its life. - More _____ could be spent ______ ________ rather than checking __________ projects

Answer 88

control; during its life; time; choosing projects; completed;

Question 89

- Shorter-term forecasts are likely to be more ________ than longer-term forecasts - Risk-averse investors __ ____ wish to _______ risk entirely - Investment risk is ________ when payback is ________ - Early payback improves ________, not _____________

Answer 89

reliable; do not; avoid; higher; longer; liquidity; profitability;

Question 90

- The payback method of investment appraisal uses accounting profits _______ depreciation charges - The ARR method of investment appraisal uses accounting profits ______ depreciation charges

Answer 90

before; after;

Question 91

ARR ________ cash flows, and hence it is deemed __________

Answer 91

ignores; unreliable;

Question 92

Mutually exclusive capital expenditure options may arise as a consequence of ________ __________

Answer 92

capital rationing;

Question 93

Project control is to: - Keep ______ over _____ - Try to ensure that ____________ is not _________ - Try to ensure that the anticipated ________ are __________

Answer 93

control; costs; implementation; delayed; benefits; obtained;

Question 94

The proper authorisation of expenditures is a necessary _________ _______, but this is linked to the aim of keeping costs ______ _______ and ____________ ____________

Answer 94

financial control; under control; avoiding overspending;