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cost management strategic
Cost Management Strategies For Business Decisions 3rd Edition Michael W. Maher, Frank Selto Ronald W. Hilton - Solutions
15.6 What is the purpose of a budget manual?
15.5 What is the danger of relying entirely on middle-manage- ment estimates of sales, costs, and other data used in budget planning?
15.4 Give an example of the effect of general economic trends on sales forecasting in the airline industry.
15.3 Use an example to explain how a budget could be used to allocate resources in a university.
15.2 What is meant by the term operational budgets? List three operational budgets that a hospital would prepare.
15.1 What are the relationships among organization goals, strategic plans, and a master budget for the coming period?
14.65 Reunion City plans to remodel its aging shopping mall. The city owns the property and depends on sales tax revenue of 3 percent of sales at the mall to fund many city services, but annual sales at the mall have declined 5 percent to a current $80 million. Reunion City's plans call for 20
14.64 Liquid Chemical Company-Part 2. Use the information and analyses from Case 14.67 to continue the case. Liquid Chemical's chief competitor is being investigated by the Environmental Protection Agency (EPA). The competitor is facing punitive action for repeated violations. The most serious
14.63 Liquid Chemical Co.-Part 1. Liquid Chemical Company manufactures chemical products that require careful packing. The company has been profitable for the past decade and expects continued, future prof- itability. The company operates a department that maintains its containers in good condition
14.62 Barbara Ciruli joined Toscana Corporation of Florence, Italy as a financial analyst three months ago. She is about to make her first presentation to the management committee responsible for selecting strategic investments. Ciruli has two proposals that require the same investment cost and
14.61 Unreal Networks, Inc., participated with several large music industry firms in a joint venture to distribute music electronically to third parties, such as Internet service providers and computer manufacturers, who would then sell the rights to download music to consumers. Unreal Networks is
14.60 This is a continuation of Problems 14.61 and 14.62. Requireda. Prepare decision trees similar to those in Exhibits 14-10 and 14-11 that contain expected net pres- ent values of Healthy Noodles' investment options.b. Does this analysis indicate that it is better for Healthy Noodles to invest
14.59 This is a continuation of Problem 14.61. Required Build your own spreadsheet. Prepare spreadsheet models similar to Exhibits 14-16 and 14-17 (Appendix B) that permit comparisons with the models in Problem 14.61. Assume that Healthy Noodles makes its investment decision now without resolving
14.58 Healthy Noodles, Inc.. is planning to open a noodles restaurant near a new housing development and office park. Healthy Noodles estimates that the neighborhood's fast-food market will be $400,000 per year when the new housing and offices are occupied next year. Noodles expects to capture 25
14.57 Octopus Garden, Inc.. manufactures innovative, trendy toys and gifts. Successful gifts provide a very high rate of return, averaging 16 percent, and the company's development department has a very good success rate. Marketing research indicates that the latest new toy can be sold for three
14.56 Furlong Manufacturing is considering investing in a robotics manufacturing process. Purchase and installation of the process will cost an estimated $2,900,000. This amount must be paid immediately. The company expects to dismantle this production process at the end of its seven-year life and
14.55 Perform an Internet search for a company that describes how an ethical code guides its investment prac- tices. Prepare a short memorandum to your instructor that describes the company, its ethical code, and how the code affects investment practices.
14.54 Give at least one reason that each of the following investment activities might be unethical or illegal and one reason that each of the following investment activities might not be unethical or illegal.a. Paying a fee to a third party who understands local market conditions and can streamline
14.53 Fish Taco Company (Exercises 14.50 & 14.52) is planning to open a new store that might be affected by the entry of MacBurger into the same market area. FTC could defer its decision to invest by one year to learn whether MacBurger will enter the market. FTC analysts believe there is a 40
14.52 Fish Taco Company (Exercise 14.50) is planning to open a new store that might be affected by the entry of MacBurger into the same market area. FTC could invest in the new store now by buying and improv- ing property. FTC analysts believe there is a 40 percent chance that MacBurger will enter
14.51 Mid-sized Reunion City plans to completely renovate its aging shopping mall. The city depends on sales tax revenues of 3 percent of sales at the mall to fund many city services, but sales at the mall have declined to a current $80 million. Reunion City's plans call for 20 percent annual
14.50 Fish Taco Company (FTC) is planning to open a taco store near new university campus housing. FTC estimates that the current neighborhood's fast-food market is $200,000 per year, which will double when the new housing is occupied next year. FTC expects to capture 25 percent of the total
14.49 Consider the investment decision in Exercise 14.48. What qualitative factors might be critical to evalu- ating this decision? If the lowest-cost alternative is $70,000 and if the discount rate is 8 percent, what monetary value of the qualitative factors would make the project financially
14.48 Tax-exempt Community Health Center is considering opening a new branch office to reduce travel costs. incurred by patients and staff. Because the center depends on community support and donations and has no budget excess, it must make wise investment decisions. A financial executive who
14.47 Consider the investment decision in Exercise 14.46. What qualitative factors might be critical to evalu- ating this decision? If the discount rate is 10 percent, what monetary value of the qualitative factors would make the project financially viable?
14.46 The City of Aurora is considering an investment that would expand a community center. City analysts forecast the following net cash flows over the next 10 years, after which a major reinvestment is expected. End of Year 0 Net Cash Flow $(400,000) 40,000 2 50,000 3 60,000 4 70,000 5 70,000 6
14.45 Identify two relevant, uncontrollable external events and two possible competitors' actions for each of the following investment decisions:a. A decision by the State of Texas to replace a state-run prison with one operated by a private corporation.b. c.d. A decision by Community Hospital to
14.44 Identify two relevant, uncontrollable external events and two possible competitors' actions that might affect each of the following investment decisions:a. Level3's decision to install thousands of miles of fiber-optic cable between major cities to support worldwide internet-based
14.43 Give at least one reason for classifying each of the following decisions as either routine or strategic.a. Storage Technology's decision to build a central, computerized warehouse to serve its JITb. manufacturing operations in Puerto Rico. Procter & Gamble's decision to design and conduct
14.42 Give at least one reason for classifying each of the following investment decisions as either routine or strategic.a. The University of Minnesota's decision to replace existing personal computers after three years.b. Microsoft's decision to purchase a small, innovative company that is
14.41 You are a member of a strategic planning team that is considering a decision, the success of which depends on your major competitor's actions. Your colleague sug- gests that the best legal way to learn about a competitor's future actions is to hire away one of the competitor's key employees.
14.40 Consider both sides of this argument. Side 1: "Portraying all the possible combinations of different future external events can become hopelessly complex. Imagine the size of a deci- sion tree that has 15 future events with three different levels each. Because reality can be even more complex
14.39 "Of course depreciation is a source of cash flow. There it is right on your NPV analysis." Explain.
14.38 A manufacturer of computer data storage devices wants to replace its mass production method by investing in a flexible. JIT production method. The company plans to spend millions of dollars on new equipment, remodeled facilities and relations with suppliers to implement the new method. To
14.37 Explain how ABC and NPV analyses can be used together to evaluate an investment.
14.36 Expected NPV analysis does not model the risk of investments directly. Discuss how sensitivity and sce- nario analyses model investment risk. Some experts argue that these analyses are better for modeling risk than adding a higher risk premium to the discount rate for riskier projects.
14.35 Shade Tree Roasters is planning an expansion to central Europe, but the chapter does not discuss contingency plans beyond terminating the investment if a major com- petitor enters the market. Individually or with a small group, develop a plan C that Shade Tree Roasters might implement if
14.34 Contrast the strategic investments by RealNetworks and Time Warner that are described in Cost Management in Practice 14.1. Are you comfortable with both decisions as described? Explain.
14.33 The chapter describes how the Italian clothier Beancom and Shade Tree Roasters have included social causes in their strategic plans. Do you think this is a good business practice? Explain.
14.32 Sometimes investments with a positive NPV have a neg- ative impact on earnings. For example, investing in cer- tain types of research and development could result in a large expense at the time of investment with the benefits coming years later. Suppose an executive rejects all investments
14.31 Due diligence investigations include studying the envi- ronmental impacts of investment decisions. Name two industries in which environmental impact studies are likely to be very important and two industries in which they are likely to be relatively unimportant.
14.30 The strategic planning group of a large forest products company started with 400 possible strategic investments and then slashed that number to 40 before doing NPV analysis. Other than NPVs, what criteria do you think this group might have used to narrow the list from 400 to 40?
14.29 Respond to this observation in the context of investment decisions: "Estimating future cash flows is a nightmare compared to measuring the cost of capital."
14.28 Where would real option value analysis be more useful. replacing a machine with a new model that has a five- year life or replacing a mass-production method with a flexible. JIT production method? Explain.
14.27 "If an investment does not fit with an organization's strategic plan, it is probably not a good idea. even if the NPV is positive." Do you agree or disagree? Explain.
14.26 Respond to this comment: "Net present value analysis is too narrow and excludes important factors in decision making."
14.25 Describe how internal controls and audits can support ethical investment practices.
14.24 Why might individuals misstate information or results regarding strategic investments?
14.23 Describe three problems that external parties, such as regulatory agencies, have with enforcing ethical invest- ment practices by organizations.
14.22. Explain how the real option value of an investment is derived from ROV analysis.
14.21. Why did Shade Tree analysts extend the decision time frame from five to six years in Exhibit 14-11 (and Appendix B)?
1420. How might ROV analysis lead to accepting an invest- ment that traditional NPV analysis says to reject?
14.19 What is different about real option value (ROV) analysis compared to traditional net present value (NPV) analysis?
14.18 Why should organizations try to anticipate competitors' actions as part of analyzing strategic investments? Give an example.
14.17 Explain why Ford Motor Co. decided that qualitative fac- tors overrode NPV analysis of investing in flexible, com- puterized equipment (Cost Management in Practice 14.2).
14.16 Explain why analysts added back depreciation expense to compute operating cash flow in Exhibit 14-4.
14.15 Describe how Shade Tree analysts forecasted gross mar- gin in Exhibit 14-4.
14.14 Why might a company, such as Caterpillar, find advan- tages to evaluating "bundles" of investment simultane- ously rather than singly, as described in Cost Management in Practice 14.2?
14.13 Describe the meaning of the amount calculated in review question 14.12 for planning and for actual future market growth.
14.12 If expected market growth can be either 10 percent or 2 percent with probabilities of occurrence of 30 percent and 70 percent, respectively, what is the expected value of market growth?
14.11 How does expected value analysis summarize what is known about uncontrollable future events and their like- lihood of occurrence?
14.10 What are three approaches to modeling the effects of uncon- trollable future events and their likelihood of occurrence?
14.9 What are the advantages of using news, government, foundation, and industry analyses of uncontrollable future events and their likelihood of occurrence?
14.8 Why might creative employees and experienced consult- ants be good sources of information about uncontrollable future events and their likelihood of occurrence?
14.7 When might an organization's financial records be useful for anticipating uncontrollable future events and their likelihood of occurrence?
14.6 What are the most common problems that can be discov- ered during due diligence investigations of investment opportunities?
14.5 How can organizations anticipate and plan for uncontrol- lable external events, such as weather?
14.4 Describe the strategic nature of the investments by Real Networks, Time Warner, and Benetton described in Cost Management in Practice 14.1.
14.3 What two types of factors affect strategic investment decisions?
14.2 How do discounted cash flow (DCF) methods analyze investment decisions?
14.1 What is different between a consumption decision and an investment decision?
13.38 Consider the quantitative costs and benefits of two alternatives. What must be the value of the qualita- tive factors if the less profitable alternative is chosen? Cost or Benefit Status Quo Alternative Revenues $50,000 $50,000 Costs $30,000 $40,000 Quality Medium Very high Meets production
13.37 Prepare a decision tree to reflect the choice between repairing an old car or buying a new or used car. Identify quantitative and qualitative costs and benefits.
13.36 Prepare a decision tree to reflect the choice of living and eating on campus versus renting an apartment five miles from campus. The student living off campus can buy a meal ticket, but living off campus requires transportation costs (bicycle, walk, bus, or car). Identify quantitative and
13.35 Match the cost(s) most likely to be relevant to each listed decision. Decision Accept a special order. Close a plant Launch a new product. Make or buy a product component. Outsource a business activity. Costa. $15 internal unit-level manufacturing costb. Increased employee turnoverc. $20,000
13.34 Match the cost(s) most likely to be relevant to each listed decision. Decision Accept a special order Close a plant Launch a new product Make or buy a product component. Outsource a business activity. Costa. Internal unit-level manufacturing costb. Cost to buy externallyc. Opportunity cost of
13.33 In recent years, the number of new cars leased by individuals has increased significantly. Many con- sumers, dealers, and manufacturers find the leasing alternative preferable to bank financing or an out- right purchase, especially when prices are high and vehicle sales are slow. Required
13.32 Give an example of an information item at each extreme level for the following information dimensions. Information Dimensions Subjectivity Accuracy Example of Information at Very High Level ? Very Low Level Timeliness Cost Relevance ? ?? ??
13.31 Customers, costs, competitors, cost-plus formulas, and target-costing procedures all play a role in the pricing of goods and services. Sometimes the pricing process is relatively straightforward; on other occasions it is more complex. The preceding factors and the procedures followed often
13.30 Consider the following decision-making problem and structure it using the framework presented in this chapter. "We have a full-time staff who maintain and clean our buildings and facilities, but we are consider- ing outsourcing that work to Bootstrap Industries. I think our own staff does a
13.29 Consider the following decision-making problem and structure it using the framework presented in this chapter. "We employ 20 full-time internal auditors who review internal operations for quality and efficiency and do much of the compliance work prior to our annual audit by a Big 4 firm. The
13.28 Consider the following decision-making problem and structure it using the framework presented in this chapter. "I don't know where to begin. Right now, I feel that throwing a dart at a dartboard will give me just as much insight into how to make this decision as any other method. Can you
13.27 To go from Dallas to Los Angeles for a business meeting. Nancy Wilkinson booked a flight for $950 with a departure on Wednesday and a return on Friday of the same week. The reservation agent told Nancy that if she were to return on Sunday, the ticket price would fall to $288. What factor(s)
13.26 A manager in your organization has just received a spe- cial order at a price that is below cost. The manager points to the document and says. "These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of running the company. If we sell below
13.25 A medium-size retailer of upscale retail goods is consid- ering outsourcing its data-processing, human resources, billing, and legal activities. Prepare a list of the benefits and costs of these considerations.
13.24 "With our high fixed costs, high variable costs, and com- petitive markets, there really is little we can do to increase our profits." Should you accept this argument without question? Explain.
13.23 Where to place the city's new shelter for homeless people has resulted in overwhelming recognition that a new shel- ter is needed but "not in my neighborhood." As winter approaches, the director of the shelter and the publisher of the local newspaper have accused the city of "analysis
13.22 Some skeptics suspect that continually upgrading an organi- zation's information system has more to do with keeping up with appearances than with improving the accuracy, timeli- ness, relevance, and cost of information for decision mak- ing. How do you determine the accuracy of this suspicion?
13.21 CEO: "It's all well and good for you to say that I should disregard sunk costs when I consider whether to sell this unprofitable operation. After we report lower-than- expected profits, you won't have to answer the angry questions from stockholders and analysts because our share price has
13.20 "In the long run, we need to achieve superior quantitative financial performance. But in the short run we need to achieve superior qualitative, nonfinancial performance." Is this correct? Explain.
13.19 The manager of a telecommunications company once commented. "Not all future costs are relevant to business decisions, but costs are not relevant unless they occur in the future." Is the manager correct? Explain.
13.18 Peter Drucker argues that one of the seven deadly busi- ness sins is to base prices on costs, which means first measuring the current cost of a product or service and then "marking it up" by adding a profit margin. He blames the disappearance of the US consumer-electronics industry in part on
13.17 Respond to the following statement: "Benefit-cost analy- sis is completely different in nonprofits such as Bootstrap because they have no profit to measure the value of alternatives."
13.16 Distinguish between price discrimination and predatory pricing.
13.15 Explain the relationship, if any, between life cycle costs and the pricing of goods and services.
13.14 Explain how a company develops its target price and tar- get cost.
13.13 Explain the following assertion: "Price setting generally requires a balance between market forces and cost con- siderations."
13.12 Explain several legal influences on pricing decisions.
13.11 Traditional accounting systems record only actual trans- actions. How can opportunity costs, which usually are not actual transactions, be important in decision making?
13.10 What considerations other than costs are relevant to out- sourcing decisions?
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