A company wants to decide whether to make its materials in-house or to sub-contract production to an external supplier. In the past it has made four materials in-house, but demand in the next year will exceed in-house production capacity of 8,000 units. All four materials are made on the same machines and require the same machine time per unit: machine time is the limiting production factor.

The following information is available.

Directly attributable fixed costs are fixed cash expenditures that would be saved if production of the material in-house is stopped entirely.

If a decision is made solely on the basis of short-term cost considerations, what materials should the company purchase externally?

A decision tree is a way of representing decision choices in the form of a diagram. It is usual for decision trees to include probabilities of different outcomes.

The following statements have been made about decision trees.

1. Each possible outcome from a decision is given an expected value.
2. Each possible outcome is shown as a branch on a decision tree.

Which of the above statements is/are True?

Analysing the range of different possible outcomes from a particular situation, with a computer model that uses random numbers, is known as which of the following?

A company uses linear programming to decide on the production and sales budget that will maximise total contribution and profit for a financial period. The optimal solution involves using all available direct labour hours, for which the shadow price is $4.50 per hour, and machine hours, for which the shadow price is $3 per machine hour. Direct labour is paid $8 per hour.

If the objective of the company is to maximise total contribution and profit in each period, how much should the company be willing to pay per hour to obtain additional direct labour hours of production capacity?

Which of the following statements about graphical linear programming with the objective of maximising profit is true?

1. If a resource constraint line does not pass through the optimum point on the graph, then the shadow price of that resource is zero
2. The shadow price is the maximum amount a company should pay for one more unit of a scarce resource
3. The slope or gradient of the objective function depends on the amount of resources available to the organisation

The price elasticity of demand for a product at its current price level is inelastic.

What will happen to the total revenue and the profit if the price of the product is reduced?

The following decision tree shows four decision options: 1, 2, 3 and 4

Using the expected value rule, which choice should be made so as to optimise the expected benefit?

The demand for a product at its current price has a price elasticity greater than 1.0 (ignoring the minus sign).

Which of the following statements must be correct?

1. A reduction in the sales price will increase total revenue.
2. A reduction in the sales price by x% will result in a percentage increase in sales demand which is greater than x%.
3. An increase in the selling price will increase total profit.

What method of uncertainty or risk analysis is also called 'What if?' analysis?

A company produces and sells a single product. Budgeted sales are $2.4 million, budgeted fixed costs are $360,000 and the margin of safety is $400,000.

What are budgeted variable costs?

In a linear programming problem to determine the contribution-maximising production and sales volumes for two products, X and Y, the following information is available.

The profit-maximising level of output and sales is 3,000 units of Product X and 1,000 units of Product Y.

What is the shadow price of a direct labour hour?

What is the main purpose of sensitivity analysis?

A company makes two products, X and Y, using the same type of direct labour. Production capacity per period is restricted to 60,000 direct labour hours. The contribution per unit is$8 for Product X and $6 for Product Y. The following constraints apply to production and sales:

The contribution-maximising output is to produce and sell 10,000 units of Product X and 2,500 units of Product Y.

What is the shadow price per direct labour hour and for how many additional hours of labour does this shadow price per hour apply?

A company wishes to go ahead with one of two mutually exclusive projects, but the profit outcome from each project will depend on the strength of sales demand, as follows.

The company could purchase market research information, at a cost of $4,500. This would predict demand conditions with perfect accuracy.

What is the value to the company of obtaining this perfect market research information?

A company makes and sells three products. The budget for the next period is as follows:

What is the breakeven point in sales, to the nearest $1,000?

The following statements have been made about price elasticity of demand.

1. When sales demand is inelastic, a company can increase profits by raising the selling price of its product.
2. Price elasticity of demand is measured as the amount of change in sales price (measured as a percentage of the current sales price) divided by the amount of change in quantity demanded (measured as a percentage of the current sales volume).

Which of the above statements is/are true?

H Co uses a marginal cost plus pricing system to determine the selling price for one of its products, Product X.

Product X has the following costs:

Fixed overheads are $20,000 for the year. Budgeted output and sales for the year are 500 units and this should be sufficient for Product X to break even.

What profit mark-up would H Co need to add to the marginal cost to allow H Co to break even?

_______ %

A company wishes to go ahead with one of three mutually exclusive projects, but the profit outcome from each project will depend on the strength of sales demand, as follows.

What is the value to the company of obtaining this perfect market research information, ignoring the cost of obtaining the information?

The following statements have been made about cost plus pricing.

1. A price in excess of full cost per unit will ensure that a company will cover all its costs and make a profit.
2. Cost plus pricing is an appropriate pricing strategy when jobs are carried out to customer specifications.

Which of the above statements is/are True?

Which method of pricing is most easily applied when two or more markets for the product or service can be kept entirely separate from each other?

A company has fixed costs of $1.3 million. Variable costs are 55% of sales up to a sales level of $1.5 million, but at higher volumes of production and sales, the variable cost for incremental production units falls to 52% of sales.

What is the breakeven point in sales revenue, to the nearest $1000?

A business produces three products, Z1, Z2 and Each of these products requires different amounts of material (material X), which is a scarce resource.

The following budgeted data relates to the three products:

In which Ranking order the products should be manufactured to ensure profit is maximised? 

Which TWO pieces of information are required when deciding, purely on financial grounds, whether or not to process a joint product further?

A company is making product P with the following cost card:

Each unit of P takes one hour to make and the available labour and machinery are fully used in its current production of P. The company is considering making a new product, Q, but would have to divert labour and machine use from product P.

What is the relevant total cost per hour for labour and variable overheads which should be included in the cost of product Q?

$ ______ (to the nearest 1000)

A company makes and sells four products. Direct labour hours are a scarce resource, but the company is able to sub-contract production of any products to external suppliers. The following information is relevant.

In which Ranking order (priority) the company should make the products in-house, rather than purchase them externally?

A benefit sacrificed by taking one course of action instead of the most profitable alternative course of action is known as which of the following?

A company budgets to sells its three products A, B and C in the ratio 2:3:5 respectively, measured in units of sales. Unit sales prices and variable costs are as follows.

Budgeted fixed costs are $1.2 million.

What sales will be needed to achieve a target profit of $400,000 for the period? Give your answer in millions, to 3 decimal points.

Which TWO statements are true when using linear programming to solve production problems?

The standard costs and revenues of Log Co's only product are as follows:

Fixed overheads are absorbed on budgeted production and sales of 10,000 units per year. Sales staff receive a sales commission of 5% of sales revenue.

What is Log Co's margin of safety (to the nearest whole %)?

A special job for a customer will require eight tonnes of a Material M. The company no longer uses this material regularly although it holds 3 tonnes in inventory. These originally cost $44 per tonne, and could be resold to a supplier for $35 per tonne. Alternatively these materials could be used to complete another job instead of using other materials that would cost $126 to purchase. The current market price of Material M is $50 per tonne.

The company must decide whether to agree to the customer's request for the work, and to set a price. What would be the relevant cost of Material M for this job?

A company makes and sells a single product. When sales per month are $6.8 million, total costs are $6.56 million. When sales per month are $5.2 million, total costs are $5.44 million.
There is a step cost increase of $400,000 in fixed costs when sales are $6.0 million, but variable unit costs are constant at all levels of output and sales.

What is the breakeven point for sales revenue per month?

A manufacturing company makes two joint products, CP1 and CP2, in a common process.
These products can be sold at the split-off point in an external market, or processed further in separate processes to produce products FP1 and FP2. Details of these processes are shown in the diagram.

CP1 has a market price of $6 per kg and CP2 has a market price of $5 per kg. Relevant further processing costs are $2 per input kg in the process to make FP1 and $3 per input kg in the process to make FP2. Both FP1 and FP2 sell for $9 per kg.

For each 10,000 kg input to the common process, how much additional profit is obtained by further processing each of the joint products instead of selling them at the split-off point?

A company makes two products with the following characteristics.

What is the minimum revenue required for production to break even?

A company wishes to decide on a selling price for a new product. Weekly sales of each product will depend on the price charged and also on customers' response to the new product. The following pay-off table has been prepared.

If the choice of selling price is based on a maximin decision rule, which price would be selected?

Market research into demand for a product indicates that when the selling price per unit is $145, demand in each period will be 5,000 units; if the price is $120, demand will be 11,250 units. It is assumed that the demand function for this product is linear. The variable cost per unit is $27.

What selling price should be charged in order to maximise the monthly profit?