Exam 8: Relevant Costs for Short-Term Decisions

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. Black Productions discontinues model F and rents the space formerly used to produce product F for $15,000 per year, what effect will this have on operating income?

Apex Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 200 extra large white trees. Apex Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $120 for each tree. An accountant at Apex Company provides an estimate of the unit product cost as follows: This special order would require an investment of $10,000 for the molds required for the extra large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $5.00 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease)by

Which of the following is irrelevant when making a decision?

To maximize profits, produce the product with the lowest contribution margin per unit of the constraint.

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 3,000 seats at a price of $300 per unit, and fixed costs increase by $10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Molly has the following information to evaluate-her current salary of $57,000 versus total revenues of $62,000 and expenses of $47,000 from starting a new business. How much is the opportunity cost associated with starting the new business?

If a product has a negative contribution margin, it should not be discontinued.

Bear Country Granola is considering selling premium granola. It already sells regular for $6.75/pound and would sell premium granola for $9.50/pound. The cost for organic grains for the premium granola would be $1.15/pound. A cost that would not be considered in this decision would be

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 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A decision must be made at the point in a process where a product can either be sold as is or processed further.

Which of the following best describes a "sunk cost"?

Fixed costs that continue to exist even after a product line is discontinued are called

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 per machine hour for recliners?

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. Assume Moon Appliance can purchase 9,000 units of the part from the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be used to manufacture 7,000 units of another product that would have a $6 per unit contribution margin. If no additional fixed costs would be incurred, what should Moon Appliance do?

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

Target total cost is defined as

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 2,500 seats at a price of $310 per unit, fixed costs increase by $6,500, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The following data are available: The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin per machine hour for waffle makers?

Which of the following is most important in making a short-term special decision?

One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.