Exam 8: Relevant Costs for Short-Term Decisions

In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be

Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 9,000 units include: All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Moon Appliance has no alternative use for the manufacturing facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00 per unit. What should Moon Appliance do?

Which of the following could be a constraint for selling a product?

Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 6,500 seats at a price of $325 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership. What profit will it earn in terms of dollars?

A price-setter company emphasizes a cost-plus approach to pricing.

Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Based on these numbers, what are Green Pasture's total costs?

A "constraint" is best described by which of the following?

Four Guys Company has in its inventory 5,000 damaged televisions that cost $50,000. The televisions can be sold in their present condition for $32,000, or repaired at a cost of $43,000 and sold for $76,000. What is the opportunity cost of selling the televisions in their present condition?

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 per hour of court time. What profit will it earn as a percent of assets?

One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Black Productions has three models: D, E, and F. The following information is available: Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed costs are unavoidable. Assume Black Productions is able to increase the sale price of product F to $35,000 with no change in volume of units sold and no change in variable costs or fixed costs. What effect will this have on operating income?

When making a pricing decision, it is not necessary to separate costs into fixed and variable.

Brittany Furniture manufactures two products: Couches and Beds. The following data are available: The company can manufacture two couches per machine hour and one bed per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin per machine hour for beds?

Managers should consider all of the following when deciding whether to accept a special order, except

The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 500 chaise lounges at a price of $200.00 per unit. Variable marketing and administrative costs would be $10 per unit lower than on regular sales. Fixed costs would increase by $15,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs, then the special order should be accepted.

When setting prices, a company need not consider whether it is a price-taker or a price-setter for each product that it sells.

For some merchandisers, the primary constraint may be cubic feet of display space.

Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced. What would be the operating income for Item Q?