Decision Theory And Operation Decision Analysis

PART 4A
DECISION THEORY AND INFORMATION SYSTEMS
261 QUESTIONS

[Fact Pattern #1]
Stewart Industries has been producing two bearings, components B12 and B18, for use in production.

B12 B18 ------ ------ Machine hours required per unit 2.5 3.0 Standard cost per unit: Direct material $ 2.25 $ 3.75 Direct labor 4.00 4.50 Manufacturing overhead: Variable (See Note 1) 2.00 2.25 Fixed (See Note 2) 3.75 4.50 ------ ------ $12.00 $15.00 ====== ======
Stewart's annual requirement for these components is
8,000 units of B12 and 11,000 units of B18. Recently,
Stewart's management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).

Note 1. Variable manufacturing overhead is applied on the basis of direct labor hours.

Note 2. Fixed manufacturing overhead is applied on the basis of machine hours.

[1] Source: CMA 0686 5-26
(Refers to Fact Pattern #1)
The net benefit (loss) per machine hour that would result if
Stewart accepts the supplier's offer of $13.50 per unit for
Component B18 is

A. $.50.

B. $(1.00)

C. $(1.75).

D. Some amount other than those given.

[2] Source: CMA 0686 5-27
(Refers to Fact Pattern #1)
Stewart will maximize its net benefits by

A. Purchasing 4,800 units of B12 and manufacturing the remaining bearings.