13: CHAPTER STRATEGY, BALANCED SCORECARD, AND STRATEGY PROFITABILITY ANALYSIS MULTIPLE CHOICE 31. _________ describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. a. Strategy b. Planning c. Learning and growth perspective d. Customer perspective Answer: 32. a Difficulty: 1 Objective: 1
Which of the following is NOT a force that shapes an organization's profit potential? a. Competitors b. Equivalent products c. Bargaining power of input suppliers d. All of the above influence profit potential. Answer: d Difficulty: 2 Objective: 1
33.
__________ is an organization's ability to offer products or services that are perceived by its customers as being superior and unique relative to those of its competitors. a. Strategy b. Product differentiation c. Cost leadership d. The balanced scorecard Answer: b Difficulty: 1 Objective: 1
34.
__________ is an organization's ability to achieve low costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. a. Strategy b. Product differentiation c. Cost leadership d. The balanced scorecard Answer: c Difficulty: 1 Objective: 1
35.
An organization that is using the product differentiation approach would a. focus on tight cost control. b. carefully cultivate their brands. c. provide products that are similar to competitors. d. offer products at a lower cost than competitors. Answer: b Difficulty:
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Objective:
1
36.
An organization that is using the cost leadership approach would a. incur costs for innovative R&D. b. provide products at a higher cost than competitors. c. focus on productivity through efficiency improvements. d. bring products to market rapidly. Answer: c Difficulty: 2 Objective: 1
37.
__________ is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction. a. Strategy b. Customer perspective c. Learning and growth perspective d. Reengineering Answer: d Difficulty: 1 Objective: 2
38.
Successful reengineering involves a. cutting across functional lines to focus on the entire business process. b. redefining the roles and responsibilities of employees. c. using information technology. d. all of the above. Answer: d Difficulty: 2 Objective: 2
39.
__________ translates an organization's mission and strategy into a comprehensive set of performance measures that provide the framework for implementing its strategy. a. Productivity component b. Product differentiation c. Cost leadership d. The balanced scorecard Answer: d Difficulty: 1 Objective: 3
40.
The purpose of the balanced scorecard is BEST described as helping an organization a. develop customer relations. b. mobilize employee skills for continuous improvements in processing capabilities, quality, and response times. c. introduce innovative products and services desired by target customers. d. translate an organization's mission and strategy into a set of performance measures that help to implement the strategy. Answer: d Difficulty: 3 Objective: 3
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41.
The FIRST step to successful balanced scorecard implementation is clarifying a. the organization's vision and strategy. b. the elements that pertain to value-added aspects of the business. c. the owner's expectations about return on investment. d. the objectives of all four balanced scorecard measurement perspectives. Answer: a Difficulty: 3 Objective: 3
42.
The balanced scorecard is said to be "balanced" because it measures a. short-term and long-term objectives. b. financial and nonfinancial objectives. c. internal and external objectives. d. all of the above. Answer: d Difficulty: 2 Objective: 3
43.
Balanced scorecard objectives are in balance when a. debits equal credits. b. financial performance measurements are less than the majority of measurements. c. the measurements are fair. d. the measurements reflect an improvement over the previous year. Answer: b Difficulty: 3 Objective: 3
44.
The internal business processes perspective of the balanced scorecard comprises three subprocesses that address all of the following EXCEPT a. innovative processes used to create new products, services, and processes. b. motivating current employees. c. providing service and support to the customer after the sale. d. delivering existing products and services to best meet the needs of customers. Answer: b Difficulty: 3 Objective: 3
45.
Identify the BEST description of the balanced scorecard's financial perspective. To achieve our firm's vision and strategy, a. how can we obtain greater profits for the current year? b. how can we increase shareholder value? c. how will we obtain continuous improvements? d. how can we secure greater customer satisfaction? Answer: b Difficulty: 2 Objective: 3
46.
Identify the BEST description of the balanced scorecard's internal business processes perspective. To achieve our firm's vision and strategy, a. how do we lower costs? b. how do we motivate employees? c. how can we obtain greater profits? d. what processes will increase value to customers? Answer: d Difficulty:
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Objective:
3
47.
All of the following relate to the balanced scorecard's learning and growth perspective EXCEPT a. how do we achieve greater employee satisfaction? b. what new products do we create? c. how do we provide information systems with updated technology? d. how will we motivate and empower our employees? Answer: b Difficulty: 3 Objective: 3
48.
Measures of the balanced scorecard's customer perspective include a. market share. b. number of on-time deliveries. c. number of process improvements. d. revenue growth. Answer: a Difficulty: 3 Objective: 3
49.
Which of the following is NOT true of a good balanced scorecard? a. It tells the story of a company's strategy by articulating a sequence of cause-andeffect relationships. b. It helps to communicate corporate strategy to all members of the organization. c. It identifies all measures, whether significant or small, that help to implement strategy. d. It uses nonfinancial measures to serve as leading indicators of future financial performance. Answer: c Difficulty: 3 Objective: 3
50.
Which of the following is NOT true of the balanced scorecard? a. Different strategies call for different scorecards. b. Successful implementation requires commitment and leadership from top management. c. Only objective measures should be used and subjective measures should be avoided. d. Cause-and-effect linkages may not be precise and should evolve over time. Answer: c Difficulty: 3 Objective: 3
51.
The return-on-investment ratio is an example of a balanced-scorecard measure of the a. internal business process perspective. b. customer perspective. c. learning and growth perspective. d. financial perspective. Answer: d Difficulty: 2 Objective: 3
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52.
The number of complaints about a product is an example of a balanced-scorecard measure of the a. internal business process perspective. b. customer perspective. c. learning and growth perspective. d. financial perspective. Answer: b Difficulty: 2 Objective: 3
53.
Manufacturing cycle efficiency is an example of a balanced-scorecard measure of the a. internal business process perspective. b. customer perspective. c. learning and growth perspective. d. financial perspective. Answer: a Difficulty: 2 Objective: 3
54.
Surveys of employee satisfaction is an example of a balanced-scorecard measure of the a. internal business process perspective. b. customer perspective. c. learning and growth perspective. d. financial perspective. Answer: c Difficulty: 2 Objective: 3
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 55 AND 56. Stewart Corporation plans to grow by offering a sound system, the SS3000 that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy. 55. Stewart's strategy is a. product differentiation. b. downsizing. c. reengineering. d. cost leadership. Answer: 56. a Difficulty: 2 Objective: 1
To further company strategy, measures on the balanced scorecard would MOST likely include a. number of process improvements. b. manufacturing quality. c. yield. d. an increase in operating income from productivity gains. Answer: b Difficulty: 3 Objective: 3
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 57 AND 58. Riter Corporation manufactures water toys. It plans to grow by producing high-quality water toys at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar water toys. Riter believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy. 57. Riter's strategy is a. product differentiation. b. downsizing. c. reengineering. d. cost leadership. Answer: 58. d Difficulty: 2 Objective: 1
To further company strategy, measures on the balanced scorecard would MOST likely include a. number of process improvements. b. price premium earned. c. longer cycle times. d. an increase in operating income from increased profit margins. Answer: a Difficulty: 3 Objective: 3
59.
Which component measures the changes in operating income attributed solely to an increase in the quantity of output between Year 1 and Year 2? a. The growth component b. The price-recovery component c. The productivity component d. The cost leadership component Answer: a Difficulty: 1 Objective: 4
60.
Which component measures the change in operating income attributable solely to changes in a company's profit margins between Year 1 and Year 2? a. The growth component b. The price-recovery component c. The productivity component d. The cost leadership component Answer: b Difficulty: 1 Objective: 4
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61.
Which component measures the reduction in costs attributable to a reduction in the quantity of inputs used in Year 2 relative to the quantity of inputs that would have been used in Year 1 to produce the Year 2 output? a. The growth component b. The price-recovery component c. The productivity component d. The cost leadership component Answer: c Difficulty: 1 Objective: 4
62.
When analyzing the change in operating income, the growth component a. calculations are similar to the selling-price variance calculations. b. isolates the change attributed solely to an increase in market share. c. isolates the change attributed solely to an increase in industry growth. d. isolates the change attributed solely to an increase in the quantity of units sold. Answer: d Difficulty: 3 Objective: 4
63.
When analyzing the change in operating income, the price-recovery component a. calculations are similar to the efficiency-variance calculations. b. compares the change in output price with the changes in input prices. c. will report a large positive amount when a company has successfully pursued the cost leadership strategy. d. isolates the change attributed solely to an increase in production efficiencies. Answer: b Difficulty: 3 Objective: 4
64.
When analyzing the change in operating income, the productivity component a. calculations are similar to the sales-volume variance calculations. b. compares the change in output price with the changes in input prices. c. will report a large positive amount when a company has successfully pursued the cost leadership strategy. d. isolates the change attributed solely to an increase in the quantity of units sold. Answer: c Difficulty: 3 Objective: 4
65.
When analyzing the change in operating income, the growth component will increase when a. capacity is reduced. b. production efficiencies are successfully implemented. c. selling prices are increased. d. more units are sold. Answer: d Difficulty: 3 Objective: 4
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66.
When analyzing the change in operating income, the price-recovery component will increase when a. capacity is reduced. b. production efficiencies are successfully implemented. c. selling prices are increased. d. more units are sold. Answer: c Difficulty: 3 Objective: 4
67.
When analyzing the change in operating income, the productivity component will increase when a. capacity is reduced. b. quality is enhanced. c. selling prices are increased. d. more units are produced and sold. Answer: a Difficulty: 3 Objective: 4
68.
Successful implementation of a cost leadership strategy will result in a. large favorable growth and price-recovery components. b. large favorable price-recovery and productivity components. c. large favorable productivity and growth components. d. only a large favorable growth component. Answer: c Difficulty: 3 Objective: 4
69.
Successful implementation of a product differentiation strategy will result in a. a large favorable growth and price-recovery components. b. a large favorable price-recovery and productivity components. c. a large favorable productivity and growth components. d. only a large favorable growth component. Answer: a Difficulty: 3 Objective: 4
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70.
An operating income analysis of Sara McCullough Incorporated revealed the following: Operating income for 2003 Add growth component Deduct price-recovery component Add productivity component Operating income for 2004 $500,000 25,000 (15,000) 60,000 $570,000
McCullough's operating income gain is consistent with the a. product differentiation strategy. b. downsizing strategy. c. reengineering strategy. d. cost leadership strategy. Answer: 71. d Difficulty: 2 Objective: 4
An operating income analysis of Deb Schmidt Incorporated revealed the following: Operating income for 2003 Add growth component Add price-recovery component Deduct productivity component Operating income for 2004 $500,000 15,000 100,000 (8,000) $607,000
Schmidt's operating income gain is consistent with the a. product differentiation strategy. b. downsizing strategy. c. reengineering strategy. d. cost leadership strategy. Answer: a Difficulty: 2 Objective: 4
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 72 THROUGH 75. Bugos Company makes a household appliance with model number XX300. The goal for 20x4 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 20x3 to 20x4. The following additional data are available for 20x3 and 20x4: Units of XX300 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for XX300 (units) Total conversion costs Conversion costs per unit of capacity 72. What is operating income for 20x3? a. $450,000 b. $1,000,000 c. $750,000 d. $700,000 Answer: a Difficulty: 2 Objective: ($100 x 10,000) - [($10 x 30,000) + ($20 x 12,500)] = $450,000 73. What is operating income for 20x4? a. $997,500 b. $678,500 c. $438,500 d. $428,500 Answer: c Difficulty: 2 Objective: ($95 x 10,500) - [($11 x 29,000) + ($20 x 12,000)] = $438,500 74. Which strategy is Bugos Corporation pursuing? a. Product differentiation, since the units produced and sold increased. b. Product differentiation, since total conversion costs decreased. c. Cost leadership, since direct material costs per square foot increased. d. Cost leadership, since the selling price decreased. Answer: 75. d Difficulty: 2 Objective: 1 4 4 20x3 10,000 $100 30,000 $10 12,500 $250,000 $20 20x4 10,500 $95 29,000 $11 12,000 $240,000 $20
Overall, was Bugos' strategy successful in 20x4? a. No, because the selling price per unit decreased b. No, because operating income decreased c. Yes, because less direct materials were used d. Yes, because more units were produced and sold Answer: b Difficulty: $438,500 - $450,000 = $11,500 U 3 Objective: 4
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 76 THROUGH 79. Bugos Company makes a household appliance with model number XX300. The goal for 20x4 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 20x3 to 20x4. The following additional data are available for 20x3 and 20x4: Units of XX300 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for XX300 (units) Total conversion costs Conversion costs per unit of capacity 76. What is the revenue effect of the growth component? a. $2,500 U b. $52,500 U c. $47,500 F d. $50,000 F Answer: d Difficulty: (10,500 10,000) x $100 = $50,000 F 77. 2 Objective: 4 20x3 10,000 $100 30,000 $10 12,500 $250,000 $20 20x4 10,500 $95 29,000 $11 12,000 $240,000 $20
What is the cost effect of the growth component for direct materials? a. $15,000 U b. $10,000 U c. $10,000 F d. $16,500 F Answer: a Difficulty: 3 Objective: 30,000 x 10,500/10,000 = 31,500; ($31,500 - 30,000) x $10) = $15,000 U 4
78.
What is the cost effect of the growth component for conversion costs? a. $12,500 U b. Zero c. $10,000 U d. $10,000 F Answer: b Difficulty: (12,500 - 12,500) x $20 = Zero 3 Objective: 4
79.
What is the net effect on operating income as a result of the growth component? a. Operating income increased due to increased market share. b. Operating income decreased due to increased market share. c. Operating income increased due to industry growth. d. Operating income decreased due to industry growth. Answer: c Difficulty: 3 Objective: 4 $50,000 F + $15,000 U + Zero = $35,000 F increase due to 5% industry growth
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 80 THROUGH 83. Bugos Company makes a household appliance with model number XX300. The goal for 20x4 is to reduce direct materials usage per unit. No defective units are currently Manufacturing produced. conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 20x3 to 20x4. The following additional data are available for 20x3 and 20x4: Units of XX300 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for XX300 (units) Total manufacturing conversion costs Manufacturing conversion costs per unit of capacity 80. What is the revenue effect of the price-recovery component? a. $2,500 U b. $52,500 U c. $47,500 F d. $50,000 F Answer: b Difficulty: ($95 - $100) x 10,500 = $52,500 U 81. 2 Objective: 4 20x3 10,000 $100 30,000 $10 12,500 $250,000 $20 20x4 10,500 $95 29,000 $11 12,000 $240,000 $20
What is the cost effect of the price-recovery component? a. $29,000 F b. $30,000 U c. $1,000 F d. $31,500 U Answer: d Difficulty: 3 30,000 x 10,500/10,000 = 31,500; [($11 - $10) x 31,500] + [($20 - $20) x 12,500] = $31,500 U Objective: 4
82.
What is the net effect on operating income as a result of the price-recovery component? a. Decreased operating income due to decreased selling price and inability to recover increased costs b. Decreased operating income due to the inability to recover increased costs c. Increased operating income due to the increased number of units produced and sold d. Increased operating income due to the revenue effect of the price-recovery component Answer: a Difficulty: 3 Objective: $52,500 U + $31,500 U = $84,000 U decrease in operating income 4
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83.
What is the net effect on operating income as a result of the productivity component? a. Decreased operating income due to direct material inefficiencies only b. Decreased operating income due to direct material inefficiencies and capacity reduction c. Increased operating income due to direct material efficiencies and capacity reduction d. Increased operating income due to direct material efficiencies only Answer: c Difficulty: 3 Objective: 30,000 x 10,500/10,000 = 31,500; [(29,000 31,500) x $11] + [(12,000 - 12,500) x $20] = $37,500 F 4
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 84 THROUGH 93. Following a strategy of product differentiation, Lucas Company makes a high-end Appliance, AP15. Lucas Company presents the following data for the years 20x3 and 20x4: 20x3 Units of AP15 produced and sold 20,000 Selling price $200 Direct materials (square feet) 60,000 Direct materials costs per square foot $20 Manufacturing capacity in units of AP15 25,000 Total conversion costs $1,000,000 Conversion costs per unit of capacity $40 Selling and customer-service capacity (customers) 60 Total selling and customer-service costs $360,000 Selling and customer-service capacity cost per customer $6,000 20x4 21,000 $220 61,500 $22 25,000 $1,110,000 $44 58 $362,500 $6,250
Lucas Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in 20x4. Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Lucas Company has 46 customers in 20x3 and 50 customers in 20x4. The industry market size for high-end appliances increased 5% from 20x3 to 20x4. 84. What is operating income for 20x3? a. $364,500 b. $1,804,500 c. $1,440,000 d. $200,000 Answer: c Difficulty: 2 Objective: 4 ($200 x 20,000) [($20 x 60,000) + ($40 x 25,000) + ($6,000 x 60)] = $1,440,000
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85.
What is operating income in 20x4? a. $1,440,000 b. $1,804,500 c. $364,500 d. $200,000 Answer: b Difficulty: 2 Objective: 4 ($220 x 21,000) [($22 x 61,500) + ($44 x 25,000) + ($6,250 x 58)] = $1,804,500
86.
What is the change in operating income from 20x3 to 20x4? a. $1,440,000 F b. $1,804,500 F c. $364,500 F d. $200,000 F Answer: c Difficulty: $1,440,000 - $1,804,500 = $364,500 F 2 Objective: 4
87.
What is the revenue effect of the growth component? a. $220,000 F b. $420,000 F c. $400,000 F d. $200,000 F Answer: d Difficulty: (21,000 20,000) x $200 = $200,000 F 2 Objective: 4
88. What is the cost effect of the growth component? a. $60,000 U b. $140,000 F c. $60,000 F d. $200,000 F Answer: a Difficulty: 3 Objective: 4 [(63,000 - 60,000) x $20] + [(25,000 - 25,000) x $40] + [(60 - 60) x $6,000] = $60,000 U 89. What is the net effect on operating income as a result of the growth component? a. $60,000 U b. $140,000 F c. $60,000 F d. $200,000 F Answer: b Difficulty: $200,000 F + $60,000 U = $140,000 F 3 Objective: 4
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90.
What is the revenue effect of the price-recovery component? a. $220,000 F b. $420,000 F c. $400,000 F d. $200,000 F Answer: b Difficulty: ($220 - $200) x 21,000 = $420,000 F 2 Objective: 4
91.
What is the cost effect of the price-recovery component? a. $179,000 F b. $179,000 U c. $241,000 U d. $420,000 F Answer: c Difficulty: 3 Objective: 4
[($22 - $20) x 63,000] + [($44 - $40) x 25,000] + [($6,250 - $6,000) x 60] = $241,000 U
92.
What is the net effect on operating income as a result of the price-recovery component? a. $179,000 F b. $179,000 U c. $241,000 U d. $420,000 F Answer: a Difficulty: $420,000 F + $241,000 U = $179,000 F 3 Objective: 4
93.
What is the net effect on operating income as a result of the productivity component? a. $179,000 F b. $45,500 F c. $241,000 U d. $420,000 F Answer: b Difficulty: 3 Objective: 4 [(61,500 - 63,000) x $22] + [(25,000 - 25,000) x $40] + [(58 - 60) x $6,250] = $45,500 F
94.
Engineered costs a. arise from periodic (usually annual) decisions. b. often incur a delay between when the resource is acquired and when it is used. c. include R&D and human resource costs. d. include a high level of certainty. Answer: d Difficulty: 2 Objective: 5
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95.
Discretionary costs a. result from a cause-and-effect relationship between the output and the input. b. include advertising and executive training costs. c. can be variable or fixed in the short run. d. pertain to processes that are detailed. Answer: b Difficulty: 2 Objective: 5
96.
A high level of uncertainty is represented in a. engineered costs. b. discretionary costs. c. both engineered and discretionary costs. d. neither engineered nor discretionary costs. Answer: b Difficulty: 1 Objective: 5
97.
A high level of preciseness between resources used and output produced exists with a. engineered costs. b. discretionary costs. c. both engineered and discretionary costs. d. neither engineered nor discretionary costs. Answer: a Difficulty: 1 Objective: 5
98.
Discretionary costs a. have detailed processes. b. are physically observable activities. c. possess a high level of certainty. d. are usually large total amounts. Answer: d Difficulty: 2 Objective: 5
99.
Engineered costs a. possess a high of level uncertainty. b. are nonrepetitive. c. are from physically observable activities. d. have processes that are sketchy or unavailable. Answer: c Difficulty: 2 Objective: 5
100. Unused capacity is difficult to determine for a. engineered costs. b. discretionary costs. c. both engineered and discretionary costs. d. neither engineered nor discretionary costs. Answer: b Difficulty: 2 Objective: 6
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101. To effectively deal with unused capacity a company a. may downsize. b. may retain some unused capacity for future growth. c. should consider it a waste of resources and eliminate all unused capacity. d. should consider both (a) and (b). Answer: d Difficulty: 2 Objective: 6
102. Downsizing a. may include eliminating jobs. b. should be done within the context of a company's overall strategy. c. is most difficult with discretionary costs. d. is all of the above. Answer: d Difficulty: 2 Objective: 6
103. The lower the inputs for a given set of outputs or the higher the outputs for a given set of inputs, the higher the level of a. standard costs. b. sales. c. productivity. d. labor costs. Answer: c Difficulty: 1 Objective: A
106. __________ measures the relationship between actual inputs used and actual outputs achieved. a. Total factor productivity b. Partial productivity c. Productivity d. Product yield variance Answer: c Difficulty: 1 Objective: A
107. __________ compares the quantity of output produced with the quantity of a single input used. a. Total factor productivity b. Partial productivity c. Productivity d. Product yield variance Answer: b Difficulty: 1 Objective: A
108. Frazier Company provided the following information. Budgeted input 19,500 gallons Actual input 17,900 gallons Budgeted production 20,000 units Actual production 19,000 units What is the partial productivity ratio?
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a. b. c. d.
0.97 units per gallon 1.02 units per gallon 1.06 units per gallon 1.12 units per gallon c Difficulty: 2 Objective: A
Answer:
PP = 19,000 / 17,900 = 1.06 units per gallon
109. Germaine Company provided the following information. Budgeted input 9,750 gallons Actual input 8,950 gallons Budgeted production 10,000 units Actual production 9,500 units What is the partial productivity ratio? a. 0.97 units per gallon b. 1.02 units per gallon c. 1.06 units per gallon d. 1.12 units per gallon Answer: c Difficulty: 2 Objective: A
PP = 9,500 / 8,950 = 1.06 units per gallon
110. Melik Company provided the following information. Budgeted input 12,000 pounds Actual input 15,000 pounds Budgeted production 5,000 units Actual production 4,750 units What is the partial productivity ratio? a. 0.32 units per pound b. 0.33 units per pound c. 0.40 units per pound d. 3.16 units per pound Answer: a Difficulty: 2 Objective: A
PP = 4,750 / 15,000 = 0.32 units per pound
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111. Which of the following statements is TRUE? a. The lower the partial productivity ratio, the greater the productivity. b. Productivity has increased when the partial productivity is high. c. Prices of inputs are incorporated in the partial productivity ratio. d. The partial productivity ratio measures the number of outputs produced per multiple input. Answer: b Difficulty: 2 Objective: A
112. What is the direct manufacturing labor partial productivity, assuming 20,000 widgets were produced during 20x1 and 80,000 direct manufacturing labor-hours were used? a. 0.25 unit per direct manufacturing labor-hour b. 0.50 unit per direct manufacturing labor-hour c. 0.75 unit per direct manufacturing labor-hour d. 1.00 unit per direct manufacturing labor-hour Answer: a 20,000 / 80,000 = 0.25 Difficulty: 2 Objective: A
113. What is the direct manufacturing labor partial productivity, assuming 10,000 units were produced during 20x1 and 40,000 direct manufacturing labor-hours were used? a. 0.25 unit per direct manufacturing labor-hour b. 0.50 unit per direct manufacturing labor-hour c. 0.75 unit per direct manufacturing labor-hour d. 1.00 unit per direct manufacturing labor-hour Answer: a 10,000 / 40,000 = 0.25 Difficulty: 2 Objective: A
114. What terms describe the relationship between different quantities of inputs consumed and the quantities of output produced? a. Budgeted costs or actual costs b. Production technology or production function c. Static budget or flexible budget d. Production technology or production setup Answer: b Difficulty: 2 Objective: A
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EXERCISES AND PROBLEMS 125. Following a strategy of product differentiation, Ernsting Corporation makes a highend computer monitor, CM12. Ernsting Corporation presents the following data for the years 20x3 and 20x4: 20x3 Units of CM12 produced and sold 5,000 Selling price $400 Direct materials (pounds) 15,000 Direct materials costs per pound $40 Manufacturing capacity for CM12 (units) 10,000 Conversion costs $1,000,000 Conversion costs per unit of capacity $100 Selling and customer-service capacity (customers) 60 Total selling and customer-service costs $360,000 Selling and customer-service capacity cost per customer $6,000 20x4 5,500 $440 15,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250
Ernsting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM12 in 20x4. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM12 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 46 customers in 20x3 and 50 customers in 20x4. The industry market size for high-end computer monitors increased 5% from 20x3 to 20x4. Required: a. What is operating income for 20x3? b. What is operating income in 20x4? c. What is the change in operating income from 20x3 to 20x4? Answer: a. ($400 x 5,000) - [($40 x 15,000) + ($100 x 10,000) + ($6,000 x 60)] = $40,000 b. ($440 x 5,500) [($44 x 15,375) + ($110 x 10,000) + ($6,250 x 58)] = $281,000 c. $40,000- $281,000= $241,000 F Difficulty: 2 Objective: 4
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126.
Following a strategy of product differentiation, Ernsting Corporation makes a highend computer monitor, CM12. Ernsting Corporation presents the following data for the years 20x3 and 20x4: 20x3 Units of CM12 produced and sold 5,000 Selling price $400 Direct materials (pounds) 15,000 Direct materials costs per pound $40 Manufacturing capacity for CM12 (units) 10,000 Conversion costs $1,000,000 Conversion costs per unit of capacity $100 Selling and customer-service capacity (customers) 60 Total selling and customer-service costs $360,000 Selling and customer-service capacity cost per customer $6,000 20x4 5,500 $440 15,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250
Ernsting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM12 in 20x4. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM12 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 46 customers in 20x3 and 50 customers in 20x4. The industry market size for high-end computer monitors increased 5% from 20x3 to 20x4. Required: a. What is the revenue effect of the growth component? b. What is the cost effect of the growth component? c. What is the net effect on operating income as a result of the growth component? Answer: a. (5,500 - 5,000) x $400 = $200,000 F b. 15,000 x 5,500 / 5,000 = 16,500; [(16,500 - 15,000) x $40] + [(10,000 - 10,000) x $100] + [(60 - 60) x $6,000] = $60,000 U c. $200,000 F + $60,000 U = $140,000 F Difficulty: 3 Objective: 4
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127.
Following a strategy of product differentiation, Ernsting Corporation makes a highend computer monitor, CM12. Ernsting Corporation presents the following data for the years 20x3 and 20x4: 20x3 Units of CM12 produced and sold 5,000 Selling price $400 Direct materials (pounds) 15,000 Direct materials costs per pound $40 Manufacturing capacity for CM12 (units) 10,000 Conversion costs $1,000,000 Conversion costs per unit of capacity $100 Selling and customer-service capacity (customers) 60 Total selling and customer-service costs $360,000 Selling and customer-service capacity cost per customer $6,000 20x4 5,500 $440 15,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250
Ernsting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM12 in 20x4. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM12 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 46 customers in 20x3 and 50 customers in 20x4. The industry market size for high-end computer monitors increased 5% from 20x3 to 20x4. Required: a. What is the revenue effect of the price-recovery component? b. What is the cost effect of the price-recovery component? c. What is the net effect on operating income as a result of the price-recovery component? d. What is the net effect on operating income as a result of the productivity component? Answer: a. ($440 - $400) x 5,500 = $220,000 F b. 15,000 x 5,500 / 5,000 = 16,500; [($44 - $40) x 16,500] + [($110 - $100) x 10,000] + [($6,250 - $6,000) x 60] = $181,000 U c. $220,000 F + $181,000 U = $39,000 F d. 15,000 x 5,500 / 5,000 = 16,500; [(15,375 - 16,500) x $44] + [(10,000 - 10,000) x $110] + [(58 - 60) x 6,250] = $62,000 F Difficulty: 3 Objective: 4
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Fairytale Weddings manufactures wedding dresses. The following information relates to the manufacture of gowns in its Perth plant: Units produced and sold Direct manufacture labor-hours Direct materials used (square yards) Direct manufacture cost per hour Direct materials cost per yard Required: Prepare an analysis of change in annual costs from 20x1 to 20x2 including direct materials, direct manufacturing labor, and total inputs. Answer: Direct materials: Actual 20x1 costs: 130,000 x $10 = 20x1 input for 20x2 output: 130,000 x 52,600/43,000 x $10 = Output adjustment 20x1 input for 20x2 output: = 20x1 input with 20x2 costs: 130,000 x 52,600/43,000 x $11 = Input price change 20x1 input with 20x2 costs: = 20x2 costs: 152,000 x $11 = Productivity change Direct manufacturing labor: Actual 20x1 costs: 22,000 x $16 = 20x1 input for 20x2 output: 22,000 x 52,600/43,000 x $16 = Output adjustment 20x1 input for 20x2 output: = 20x1 input with 20x2 costs: 22,000 x 52,600/43,000 x $17 = Input price change 20x1 input with 20x2 costs: = 20x2 costs: 26,000 x $17 = Productivity change All inputs: Output adjustment: $290,233 U + $78,586 U = Input price change: $159,023 U + $26,912 U = Productivity change: $77,256 F + $15,498 F = Difficulty: 3 Objective: A
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20x1 43,000 22,000 130,000 $16 $10
20x2 52,600 26,000 152,000 $17 $11
$1,300,000 1,590,233 $ 290,233 U $1,590,233 1,749,256 $ 159,023 U $1,749,256 1,672,000 $ 77,256 F $352,000 430,586 $ 78,586 U $430,586 457,498 $ 26,912 U $457,498 442,000 $ 15,498 F $368,819 U $185,935 U $ 92,754 F