EXAM 2: REVIEW PROBLEMS – ANSWER KEY
Chapter 5: Relevant Information for Special Decisions
A. Relevant Information
What are the characteristics of Relevant Information?
1. differs among alternatives
2. is future oriented
Describe a sunk cost: has been incurred in past transactions, cannot
be changed, and is not relevant for making current decisions
Do cost behaviors influence the relevance of information? i.e. can
relevant information be variable or fixed? Relevance is an
independent concept- relevant costs can be fixed or variable
B. Special Decisions
What cost hierarchy levels are relevant for Special Decisions?
1. unit level
2. batch level
For Oursourcing?
1. unit level
2. batch level
3. product level
Name 2-3 examples of each type of cost hierarchy level:
Unit-level: 1. Indirect labor 2. Indirect materials_ 3.machine-
related utilities
Batch-level: 1.__materials handling costs_ 2. __set up costs___
Product-level: 1. _supervisor salary___ 2. __engineering/product
design costs
Facility-level: 1. Manuf. blding rent 2. _insurance costs 3. _bldng
depreciation
Problem 1:
(Part 1) The Greener Bean Coffee Co. produces 100,000 pounds of roasted
coffee each year, and has not yet reached capacity. Costs are as follows,
and are based on capacity of 120,000 pounds:
Per Pound Total
Unit Level costs $5 $600,000
Batch Level costs
(5,000 lbs per batch)
$2,500 per batch $60,000
Product Level costs $2 $240,000
Facility Level costs $ 0.50 $ 60,000
The Company has received a Special Order for 10,000 pounds of roasted
coffee.
