Question

CHOOSE THE CORRECT ANSWER:

1.

What is the delivery cycle time for Garnick Corporation, based on the careful data it keeps about the average time to fill orders below?

Move time	Wait time	Queue time	Process time	Inspection time
5.5      hours	28.1 hours	10.6 hours	0.9 hours	0.2 hours

A.    17.2 hours

B.    1.1 hours

C.    44.2 hours

D.    45.3 hours

2. Which of the following costs should be included in the analysis when making a decision?

A.    Sunk costs

B.    Opportunity costs

C.    Unavoidable costs

D.    All of these costs should be included.

3. ABC Company produces 1,000 parts per year for use in its own finished goods. The variable product cost of these parts is $15 per unit. The fixed manufacturing overhead of the product is $12,000. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The part can be purchased from an outside supplier at $20 per unit. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

A. $3,000 decrease

B. $1,000 increase

C. $5,000 increase

D. $3,000 increase

Answer 1

1. Formula for delivery time cycle period is the aggregate of,

Wait Time + Process Time + Inspection Time + Move Time + Queue Time.

Therefore, Delivery cycle time period is 5.5+28.1+10.6+0.9+0.2=45.3 hours.

Ans: D, 45.3 Hours.

2.

? Sunk costs are the costs which are the effect of past events and cannot be changed with the decisions taken now or in future. So they are irrelevant for decision making.

? Unavoidable costs cannot be altered or avoided .

? Opportunity costs are considered while decision making as they should estimate the forgone benefit and compare both the values to choose a more beneficial one.

Hence, The Opportunity cost is relevant cost for decision making.

Ans: B, Opportunity cost.

3.

case1:

Cost of 1000 parts, if produced,

Variable costs = $15,000

Fixed Manufacturing overheads = $12,000

Total costs = $27,000

Case2:

Total cost of 1000 parts if if purchased,

Purchase cost = $20,000

Fixed Manufacturing overheads (12,000*1/3)= $4,000

Total cost = $24,000

The total savings will be (27,000-24,000)= $3,000

i.e., the annual impact on the company's net operating income as a result of buying parts from outside supplier would be $3,000 increase.

Ans: D, $3,000 increase.