Jared, Inc

question 66

Essay

Jared, Inc. produces glass shelves that are used in furniture. Each shelf requires 3.6 pounds of raw material at a cost of $2 per pound. Unfortunately, given the nature of the manufacturing process, one out of every five shelves is chipped, scratched, or broken at the beginning of production and has to be scrapped.
On average, 20 good shelves are completed during each hour. Laborers who work on these units are paid $15 per hour.
Required:
A. Distinguish between perfection standards and practical standards.
B. Who within an organization would be in the best position to assist in setting the:
1. direct-material price standard?
2. direct-material quantity standard?
3. direct-labor efficiency standard?
C. Calculate a practical direct-material and direct-labor standard for each good shelf produced.

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Definitions:

Risk Aversion

The preference to avoid uncertainty and risky situations, often influencing economic and financial decisions.

Adverse Selection

The case in which an individual knows more about the way things are than other people do. Adverse selection problems can lead to market problems: private information leads buyers to expect hidden problems in items offered for sale, leading to low prices and the best items being kept off the market.

Moral Hazard

The situation that can exist when an individual knows more about his or her own actions than other people do. This leads to a distortion of incentives to take care or to expend effort when someone else bears the costs of the lack of care or effort.

Risk Aversion

The tendency to prefer certainty over uncertainty, avoiding risk in decision-making or preferring safer investments.