Exam 8: Relevant Costs for Short-Term Decisions

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 QR?

All About Animals has two product lines: Cat food and Dog food. Contribution margin income statement data for the most recent year follow: If $12,000 of fixed costs will be eliminated by discontinuing the Dog food line, how will operating income be affected?

Contribution margin income statement data for the most recent year follow: Assuming the Dog food is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $25,000 per year, how will operating income be affected?

Alamo Corporation processes all of its products through a lathe machine. The lathe is only available for 60 hours per week and is the constraint for all of the products. Data regarding Alamo Corporation's three products follows: In what order should Alamo Corporation emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.)

Which would be a consideration for making special orders?

Qualitative factors play an important part in make or buy decisions.

Which of the following pairs are characteristics of price-takers?

A company should ________ when making a short-term special decision.

A company's manager would consider which of the following in deciding whether to discontinue its electronics product line?

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Fashion line is used to increase the production of Hiking boots by 250%, how will operating income be affected?

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. By what percent would Heinz Manufacturing's operating income improve if the change is made?

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 is the highest price per unit that Moon Appliance should be willing to pay for the part?

Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5. List the relevant costs (and amount)to Elite Office Furniture for this special order.

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the part, how much will its operating income be?

Management accountants gather and analyze relevant information to compare alternatives.

Sky High Seats 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 4,000 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Patty's Mailbox Company produces a standard mailbox with variable manufacturing costs of $18 per unit. The selling price of the standard mailbox is $25 per unit. The fixed manufacturing overhead cost is $67,000. A normal production run includes 100,000 units. Patty's Mailbox Company has discovered an additional process to change the standard mailbox into a deluxe mailbox. Additional costs are estimated at $4 per unit. The deluxe mailbox would sell for $35. Additional fixed manufacturing overhead cost of $23,000 would be incurred if the deluxe mailbox is produced. There would be no change in the number of units produced. Make an analysis to determine if Patty's Mailbox Company should continue producing and selling the standard mailbox or change the standard mailbox into a deluxe mailbox.

Which of the following would be a consideration for "sell as is or process further" decisions?

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000. The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $12,000 profit. If Harvey Automobiles makes the part, what will its operating income be?

Jim Bean Company has three product lines: D, E, and F. The following information is available: D E F Sales revenue $ 80,000 $42,000 $20,000 Variable expenses $ 40,000 $21,000 $12,000 Contribution margin $ 40,000 $21,000 $ 8,000 Fixed expenses $ 12,000 $15,000 $17,000 Operating income (loss)$ 28,000 $46,000 $(9,000) Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss. All fixed expenses are unavoidable. Assuming Jim Bean Company discontinues product line F and does not replace it, what affect will this have on operating income?