Exam 8: Relevant Costs for Short-Term Decisions

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating income?

All of the following are outsourcing considerations, except

All of the following factors affect the amount a customer is willing to pay for a product, except

Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $14.00 each, and the facilities currently used to make the part could be used to manufacture 6,000 units of another product that would have an $8 per unit contribution margin. If no additional fixed costs would be incurred, what should Cruise Company do?

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 ratio for Couches?

An opportunity cost is a past cost.

One cost that is irrelevant in decision making is a sunk cost.

Unavoidable fixed costs are

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf?

Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Suri Company has offered to sell 6,000 units of the same part to Cruise Company for $14 per unit. Assuming the company has no other use for its facilities, what should Cruise Company do?

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 costs are unavoidable. Assume Jim Bean Company is able to increase the sale price of product F to $32,000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income?

Expected future data that differs among alternative courses of action are referred to as

A sunk cost is described as which of the following?

Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows: Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $14 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Cruise Company do?

Managers should consider the potential effect of a special order on long-run profits and operations.

Companies often try to gain more control over pricing by attempting to differentiate their products.

Stockholders' expectations of company profits are affected by which of the following?

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: If $25,000 of fixed costs will be eliminated by discontinuing the Fashion line, how will operating income be affected?

When setting prices, managers need to consider all costs.

Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 40,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. By outsourcing the part, the company can avoid 30% of the fixed costs. If Cuyahoga Valley Bicycles buys the part, what is the most Cuyahoga Valley Bicycles can spend per unit so that operating income equals the operating income from making the part?