Application Problems Week 5: The Steps In Management

Application Problems Week 5be7 1the Steps In Managements Decision Mak

Indicate the order in which the steps in management’s decision-making process should be executed, given the following steps:

• Make a decision
• Review results of the decision
• Identify the problem and assign possible courses of action
• Determine and evaluate responsibility

Compare Alternative A and Alternative B for Bogart Company, showing incremental revenues, costs, and net income: Alternative A has revenues of $160,000 and costs of $100,000; Alternative B has revenues of $180,000 and costs of $125,000.

Assess the truthfulness of these statements about decision-making and incremental analysis; identify whether they are true or false. If false, correct the statement:

1. The first step in management’s decision-making process is, “Determine and evaluate courses of action.”
2. The final step in management’s decision-making process is to actually make the decision.
3. Accounting’s contribution to management’s decision-making process occurs primarily in evaluating possible courses of action and in reviewing results.
4. In making business decisions, management ordinarily considers only financial information because it is objectively determined.
5. Decisions involve a choice among alternative courses of action.
6. The process used to identify the financial data that change under alternative courses of action is called incremental analysis.
7. Certain costs that are the same under all alternatives sometimes affect the decision.
8. When using incremental analysis, some costs will always change under alternative courses of action, but revenues will not.
9. Variable costs will change under alternative courses of action, but fixed costs will not.

Klean Fiber Company produces Y-GO fabrics woven with silver to kill bacteria and odor, used in sports undergarments, operating at capacity for 1,000,000 units per year. The per-unit costs are: materials $2.00, labor $1.50, variable overhead $1.00, fixed overhead $1.50, and variable selling expenses $0.50, totaling $6.50 per unit and $6,500,000 in total costs. The U.S. Army requests an order for 250,000 units, offering to pay the unit cost plus $1 for profit and additional costs, with no variable selling expenses. Considering the company operates at 70% capacity and has no other buyers, determine through incremental analysis whether Klean Fiber should accept the Army’s offer.

Anna Garden runs a basket weaving studio and offers two types of raw material kits: the basic introductory kit costing $16 to produce and selling for $30, which includes un-dyed, uncut reeds; and the Stage 2 kit, which includes dyed and cut reeds, prepared in one hour of Anna’s time valued at $18, and selling for $36. Anna can produce two Stage 2 kits per hour using raw materials from the basic kit. Decide whether Anna should carry the basic kit or the Stage 2 kit based on an analysis of costs and revenues.

Paper For Above instruction

This paper addresses several decision-making scenarios and concepts crucial to managerial accounting and operational strategy, including the proper sequencing of decision-making steps, incremental analysis to compare alternatives, evaluation of management decisions, and specific case analyses involving manufacturing orders and product offerings.

Starting with the ordering of the management decision-making process, the correct sequence begins with identifying the problem, followed by determining possible courses of action, making a decision, and then reviewing the outcomes. This sequence facilitates a logical and systematic approach to addressing business issues, ensuring that problems are clearly recognized before exploring solutions, decisions are based on evaluated options, and results are analyzed for future reference (Horngren, Sundem, & Stratton, 2014).

In the comparative case of Bogart Company, the focus is on incremental analysis to determine which of the two alternatives (A or B) is financially preferable. This approach isolates the additional revenues and costs associated with each option, allowing management to identify the net benefit or loss from choosing one alternative over the other (Burke, 2012). Calculations reveal that Alternative A yields a net income of $60,000 ($160,000 revenue minus $100,000 costs), whereas Alternative B yields $55,000 ($180,000 revenue minus $125,000 costs), indicating that Alternative A is marginally more profitable by $5,000 (Garrison, Noreen, & Brewer, 2018).

The truthfulness of statements about decision-making and incremental analysis helps clarify concepts. Statements such as the importance of evaluating all relevant costs and revenues, understanding the process used to identify data change (incremental analysis), and recognizing that costs can influence decisions even if they remain constant under all options are essential principles. For example, some fixed costs, though unchanged across alternatives, may affect capacity constraints or other operational considerations (Shim & Siegel, 2013). Correctly understanding and applying these concepts ensures better-informed management decisions.

The Klean Fiber case explores the decision of accepting a special order from the Army. Operating at 70% capacity, the company can produce 700,000 units at full capacity, with the additional 250,000 units requested representing a partial capacity utilization. Analyzing costs on an incremental basis highlights that only variable manufacturing costs and the additional profit margin matter for this decision. The unit costs reimbursed by the Army include materials, labor, and variable overhead—totally $4.00 per unit—plus a $1 profit per unit offered by the Army, with no variable selling expenses involved (Kaplan & Atkinson, 2015). Since fixed costs are unaffected by the order, accepting it results in an additional contribution margin of $1 per unit, totaling $250,000, which is advantageous for the company.

Finally, Anna’s basket weaving studio faces a decision to carry either the basic kit or the Stage 2 kit. Using incremental analysis, the opportunity cost of Anna’s time and the additional revenue from the Stage 2 kits are considered. The Stage 2 kit generates $36 in revenue, with a variable cost aligned with the raw materials, and the main difference in costs is the manufacturing time valued at $18 per hour. Since Anna can produce two Stage 2 kits per hour, her effective labor cost per kit is $9, which, when combined with materials, suggests the net benefit of the Stage 2 kit exceeds that of the basic kit ($30 selling price minus $16 cost), supporting carrying the Stage 2 kit (Albrecht & Sack, 2014). This decision aligns with maximizing profit and operational efficiency.

References

• Albrecht, W. S., & Sack, R. J. (2014). Accounting Principles. Cengage Learning.
• Burke, R. (2012). Managerial Accounting. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Horngren, C. T., Sundem, G. L., & Stratton, W. O. (2014). Introduction to Financial Accounting. Pearson.
• Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
• Shim, J. K., & Siegel, J. G. (2013). Budgeting and Financial Management. Barron's Educational Series.