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Labor & Manufacturing Cost Considerations in Maximizing Profit

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Company A seeks help making employment decisions. It employs labor and trucks by the hour and obtains both in competitive markets. It currently employs 100 hours of labor and 20 hours of trucking services at $24 and $36 per hour, respectively. It sells its output in a competitive market at $10 per unit. Output is currently 500 per hour. It knows that output rises by about 6 when it employs an additional hour of labor hours of trucking services remains constant at 20 and that output rises by about 12 when it employs an additional hour of trucking services and labor hours remains constant at 100.

a. If long-term contract prevent the firm from changing the amount of trucking services it rents, should the firm increase, decrease, or leave constant the amount of labor employed? The goal is to maximize profit. Show clearly and explain your analysis.
b. Can the firm reduce its total cost of producing 500 units per hour if both inputs are variable? Either explain how or why not. Show clearly and explain your analysis.

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Solution Preview

a. If long-term contract prevent the firm from changing the amount of trucking services it rents, should the firm increase, decrease, or leave constant the amount of labor employed? The goal is to maximize profit. Show clearly and explain your analysis.

Marginal Product of labor-hour=MPL=6 (keeping trucking services at 20 hours)
Marginal Cost of labor-hour=MCL=$24
Marginal ...

Solution Summary

Solution depicts the steps to check for optimal input combination in the given case.

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Accounting Multiple Choice

A) Costs in a process cost system are traced to?
Would it be:
1. Specific jobs
2. Specific customers
3. Specific production departments
4. Specific corporate administrators

Not absolutely sure on a choice.

B) Which of the following is a period cost?
Would it be:
1. Manufacturing plant maintenance
2. Wages for production line workers
3. Raw material costs
4. Salary for the vice president of finance

C) The ideal example of a business requiring a process costing system?
Would it be:
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2. Automobile repair shop
3. Antique furniture restorer
4. Soap manufacturer
I think it is Antique furniture restorer or Automobile repair shop. Not absolutely sure.

D) Which is most likely to be a variable cost?

Would it be:
1. Rent
2. Advertising
3. Cost of material used in production
4. Depreciation?

I think it is cost of material used in production. Not absolutely sure.

E) Full costing includes which of the following in determining product cost?
Would it be:
1. All fixed and variable costs of production
2. Administrative overhead
3. Only variable costs of production
4. Only fixed costs of production

Not absolutely sure on a choice.

F) Which of the following is likely to be a fixed cost?
Would it be:
1. Rent
2. Assembly labor cost
3. Commission
4. The cost of material used in production

G) The contribution margin ratio measures?
Would it be:
1. Profit per dollar of sales
2. Profit per unit
3. Contribution margin per dollar of sales
4. Ratio of variable to fixed costs

H) To determine the profit-maximizing price, a manager must do what?
Would it be:
1. Estimate the quantity demanded for various prices
2. Estimate variable costs
3. Both 1 and 2
4. None of the above

I) Controllable costs for a manager of department A include what?
Would it be:
1. All costs related to department A's final product
2. Costs of material and labor used in department A
3. Cost of the finance department
4. All of the above

J) Allocation of indirect costs?
Would it be:
1. Can often be justified in a variety of ways that lead to substantially different costs being allocated.
2. Is an inherently arbitrary process, a characteristic that can lead to problems.
3. Can be done with great accuracy and precision, if the proper techniques are used.
4. Both 1 and 2

K) In the cost allocation process, an allocation base?
Would it be:
1. Ideally should result in cost being allocated based on a cause and effect relationship
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L. Full costing differs from variable costing in that?
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2. Full costing includes variable manufacturing overhead in inventory
3. Full costing excludes selling costs from consideration
4. Full costing excludes administration costs from consideration

Not absolutely sure on a choice.

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