Exam 8: Relevant Costs for Short-Term Decisions

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 7,000 seats at a price of $350 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 pool. 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. The Philadelphia Swim Club has a favorable reputation in the area and therefore, has some control over the membership price. Using a cost-plus approach, what price should Philadelphia Swim Club charge for a membership?

Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of $250 per motorbike. Extreme Sports has enough extra 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, $100; direct labor, $50; variable manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2. A)List the relevant costs. B)What will be the change in operating income if Extreme Sports accepts the special order? C)Should Extreme Sports accept the special order?

Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: The company can manufacture two futons per machine hour and one recliner per machine hour. The company's production capacity is 900 machine hours per month. What is the contribution margin ratio for futons?

"Contribution margin per unit" is best described by which of the following?

Changing the product mix emphasis in the short run will usually not affect

Irrelevant costs are costs that do not affect short-term decisions.

Outsourcing decisions are best made by comparing the total manufacturing costs, both fixed and variable, allocated to the product versus the total unit cost charged by the outsourcing company.

Totally Technology manufactures Cameras and Video Recorders. The company's product line income statement follows: Management is considering discontinuing the Video Recorder product line. Accountants for the company estimate that discontinuing the Video Recorder line will decrease fixed cost of goods sold by $10,000 and fixed marketing and administrative expenses by $4,000. Prepare an analysis supporting your opinion about whether or not the Video Recorder product line should be discontinued.

In pricing a product, managers should consider which of the following?

The maximum outsourcing price a company is willing to pay can be found by solving for the company's indifference point.

Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) Should Blue Technologies accept or reject the special sales order?

Which of the following describes the products and services of companies that are price-setters?

Variable costs are irrelevant to a special decision when those variable costs differ between alternatives.

Stoog Enterprises manufactures ceiling fans that normally sell for $90 each. There are 300 defective fans in inventory, which cost $55 each to manufacture. These defective units can be sold as is for $20 each, or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stoog Enterprises would be better off by a

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $32,000 per year, how will operating income be affected?

When a company is a price-setter, it emphasizes a target costing approach to pricing.

Fixed costs that do not differ between two alternatives are

Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order.