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cost management strategic

Questions and Answers of Cost Management Strategic

The expected market growth of 4.6 percent is a critical assumption or parameter of ShadeTree’s expansion MEL Cle decision.a. Compute the expected market growth rate with the following sets of
Quite a number of assumptions or model parameters determine the positive NPV of €2,012,000 in Exhibit 14-9. Among these parameters are the size of the market in year 0, the market growth rate, and
a. Why did ShadeTree’s analysts extend the ROV analysis without a major competitor to six years? Is this a Decision reasonable approach to the analysis? Why or why not? Makerb. Compute expected NPV
How does the proposed investment by ShadeTree Roasters influence the types of information the company should obtain and the analyses it should perform?
What do net present value and real option value analyses imply for the success of ShadeTree Roasters’ long-term decision?
How do ethical considerations appear to hurt ShadeTree Roasters’ investment opportunities in the short run but help in the long run
What is different between a consumption decision and an
How can organizations anticipate and plan for investment decision? uncontrollable external events, such as weather?
How do discounted cash flow (DCF) methods analyze
What are the most common problems that can be investment decisions? discovered during due diligence investigations of
What two types of factors affect strategic investment investment opportunities?decisions?
When might an organization’s financial records be useful
Describe the strategic nature of the investments by for anticipating uncontrollable future events and their RealNetworks, Time Warner, and Benetton described in likelihood of occurrence?Cost
Why might creative employees and experienced consultants be good sources of information about uncontrollable future events and their likelihood of occurrence?
What are the advantages of using news, government, foundation, and industry analyses of uncontrollable future events and their likelihood of occurrence?
What are three approaches to modeling the effects of uncontrollable future events and their likelihood of occurrence?
How does expected value analysis summarize what is known about uncontrollable future events and their likelihood of occurrence?
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?
Describe the meaning of the amount calculated in review question 14.12 for planning and for actual future market growth.
Why might a company, such as Caterpillar, find advantages to evaluating “bundles” of investment simultaneously rather than singly, as described in Research Insight 14.1?
Describe how ShadeTree analysts forecasted gross margin in Exhibit 14-9.
Explain why analysts added back depreciation expense to compute operating cash flow in Exhibit 14-9.
Explain how nonfinancial qualitative factors might override NPV analysis of investing in improved Internet access (Cost Management in Practice 14.2).
Why should organizations try to anticipate competitors’actions as part of analyzing strategic investments? Give an example.
What is different about real option value (ROV) analysis compared to traditional net present value (NPV) analysis?
How might ROV analysis lead to accepting an investment that traditional NPV analysis says to reject?
Why did ShadeTree analysts extend the decision time frame from five to six years in Exhibit 14—16 (and the appendix)?
Explain how the real option value of an investment is derived from ROV analysis.
Describe three problems that external parties, such as regulatory agencies, have with enforcing ethical investment practices by organizations.
Why might individuals misstate information or results regarding strategic investments?
Describe how internal controls and audits can support ethical investment practices.
Respond to this comment: Net present value analysis is too narrow and excludes important factors in decision making.
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.
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?
Respond to this observation in the context of investment decisions: Estimating future cash flows is a nightmare compared to measuring the cost of capital.
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
Due diligence investigations include studying the environmental impacts of investment decisions. Name two industries in which environmental impact studies are likely to be very important and two
Sometimes investments with a positive NPV have a negative impact on earnings. For example, investing in certain types of research and development could result in a large expense at the time of
The chapter describes how the Italian clothier Benneton and ShadeTree Roasters have included social causes in their strategic plans. Do you think this is a good business practice? Explain.
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.
ShadeTree Roasters is planning an expansion to central Europe, but the chapter does not discuss contingency plans beyond terminating the investment if a major competitor enters the market.
Expected NPV analysis does not model the risk of investments directly. Discuss how sensitivity and scenario analyses model investment risk. Some experts argue that these analyses are better for
Explain how ABC and NPV analyses can be used together to evaluate an investment.
A manufacturer of computer data storage devices wants to replace its mass production method by investing ina flexible, JIT production method. The company plans to spend millions of dollars on new
Identify two relevant, uncontrollable external events and two possible competitors’ actions that might — Events affect each of the following investment decisions: (LO 2)a. Level3’s decision to
Identify two relevant, uncontrollable external events and two possible competitors’ actions for each of — Events the following investment decisions: (LO 2)a. A decision by the State of Texas to
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
Consider the investment decision in Exercise 14.46. What qualitative factors might be critical to evaluating this decision? If the-discount rate is 10 percent, what monetary value of the qualitative
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
Consider the investment decision in Exercise 14.48. What qualitative factors might be critical to evaluating this decision? If the lowest-cost alternative is $70,000 and if the discount rate is 8
Build an Excel spreadsheet to compute a discount rate of 8 percent per year for each requirement.Requireda. Present value of $(5,000) nowb. Present value of $1,500 one year from nowc. Present value
A firm plans to issue a security (bond) that promises to pay a 10 percent (coupon) rate on the security(face) value of $5,000. At the time of issue, the market (discount) rate for this type of
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
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
Fish Taco Company (Exercise 14.55) 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
Fish Taco Company (Exercises 14.55 & 14.57) 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
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
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
The financial staff of North American Motors used a 30 percent discount rate to analyze a technological improvement that promised to save the company millions in quality-related costs. The financial
Fremont Company plans to replace its customer service computing equipment now to improve service DCF Analysis, and and reduce costs. The county manager has made the following estimates to support the
Rocky Mountain Builders (RMB) prefabricates cabins and storage sheds in a fast-growing part of the country. RMB is considering replacing some of its existing manufacturing equipment now to increase
Cowboy Exploration, Ltd, plans to replace some aging but still serviceable oil-field equipment now while it still has a salvage value. The company’s investment analyst has made the following
One-Day Shades Corp. is considering expanding its Las Vegas manufacturing operations. It can either convert a warehouse that it owns in the suburbs, or it can expand its current plant downtown. After
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
Liquid Chemical Company—Part 2. Use the information and analyses from Case 14.76 to continue the case. Liquid Chemical’s chief competitor is being investigated by the Environmental Protection
Consider that Bootstrap Industries did not have unemployed resources when the state made the special cleanup order.a. Does this situation affect the pricing of the special order?b. What bid price do
What are the risks if Bootstrap Industries always values job creation more than covering its costs?
Should Bootstrap set its prices to increase employment or to generate funds for internal investment
Why might a manager inappropriately consider sunk costs
List and briefly describe each of the five stages of the when making a decision?decision-making framework.
What considerations other than costs are relevant to
Distinguish between an organization’s goals and tangible outsourcing decisions?objectives.
Traditional accounting systems record only actual
Distinguish between target costing and target pricing. transactions. How can opportunity costs, which usually
Describe a conflict that might occur between accuracy, ae Bot ee ee timeliness, relevance, and cost of information. making?PNG REW t chiteria must be catished for information to be
Explain several legal influences on pricing decisions.relevant?
Explain the following assertion: “Price setting generally
“A quantitative analysis allows a decision maker to put Tequires:a balance between matket forces and cost a price on the total value of qualitative characteristics in considerations, a decision
Explain how a company develops its target price and example. target cost.
Give two examples of sunk costs and explain why these
Explain the relationship, if any, between life cycle costs amounts might be both useful to and irrelevant in decision and the pricing of goods and services.making.
Distinguish between price discrimination and predatory pricing.
Respond to the following statement: Benefit—cost analysis is completely different in nonprofits such as Bootstrap because they have no profit to measure the value of alternatives.expected profits,
With our high fixed costs, high variable costs, and competitive markets, there really is little we can do to increase our profits. Should you accept this argument without question? Explain.
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
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.
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 medium-size retailer of upscale
A manager in your organization has just received a special 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
To go from Dallas to Los Angeles for a business meeting, ney 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
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
Give an example of an information item at each extreme level for the following information dimensions.Example of Information at Information Dimensions Very High Level Very Low Level Subjectivity 2
Match the cost(s) most likely to be relevant to each listed decision.Decision Cost Accept a special order Internal unit-level manufacturing cost Close a plant Cost to buy externally Launch a new
Match the cost(s) most likely to be relevant to each listed decision.Decision Cost Accept a special order $15 internal unit-level manufacturing cost Close a plant Increased employee turnover Launch a
Consider the quantitative costs and benefits of two alternatives. What must be the value of the qualitative factors if the less profitable alternative is chosen?Cost or Benefit Status Quo Alternative
Consider the quantitative costs and benefits of two alternatives. What must be the value of the qualitative factors if the less profitable alternative is chosen?Cost or Benefit Alternative !
Locate a recent article on outsourcing practices. Complete the following requirements based on the article.Requireda. What are the major reasons for the decision to outsource?b. What are the major
Replace the question marks with information based on markup over cost for A-E.A B Cc D E Unit-level cost $12 $20 $32 $8 $60 Product-level cost per unit $6 $22 $12 ? $24 Facility-level cost per unit
company was nearing the completion of a home for Jan and Bill Kennedy when the couple suddenly declared bankruptcy. At that time, SDC had invested $1,525,000 in the project.The firm can sell the
Chavez Digital Machining’s performance for the first 11 months of the year has been a surprise with sales and profits somewhat above expectations. On December 20, just prior to the holiday break,
MicroStorage Technology (MST) is developing a high-speed modem to connect handheld computers Problem 13.44 with a satellite-based data network. Cost Reduction{LO 4)Requireda. Given the following

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