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: If $20,000 of fixed costs will be eliminated by discontinuing the Sporty line, how will operating income be affected?

Companies with production constraints and irrelevant fixed costs will be most profitable when they maximize production of the product with the highest

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 line is rented for $30,000 per year, how will operating income be affected?

Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Makers. The following data are available: The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1,200 machine hours per month. What is the contribution margin ratio for food processors?

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. Assuming 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 rented out to another manufacturer for $18,000 a year, what should Moon Appliance do?

What is the difference between relevant and irrelevant information for making decisions. Provide examples of each.

The factor that restricts production or sale of a product is which of the following?

Managers must consider which of the following when pricing a product or service?

Paula has the following information to evaluate-her current salary of $55,000 versus total revenues of $120,000 and expenses of $75,000 from starting a new business. How much is the opportunity cost associated with starting the new business?

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 no other use for its facilities, what is the highest price per unit that Cruise Company should be willing to pay for the part?

Cornell Enterprises currently produces several products. Model L78 is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended December 31. You have been hired by Cornell Enterprises to help analyze the decision as to whether to eliminate Model L78. Upon investigation, you discover that if Model L78 is eliminated, $20,000 of the fixed costs shown on the above condensed income statement can be eliminated. The rest of the fixed costs allocated to Model L78 are common fixed costs that will be allocated to the remaining two products produced by Cornell Enterprises. Determine if Cornell Enterprises should discontinue Model L78.

When deciding whether to accept a special order, managers need to consider whether they have available excess capacity.

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. If Harvey Automobiles makes the part, how much will its operating income be?

A joint production process at Sunny Brooks Dairy results in two products, cherry jelly and cherry jam. The following cost and activity data relate to these two products: Cherry jelly can be sold as-is (at the split-off point)for $2.50 per unit, or it can be processed further into a specialty cherry smoothie and then sold for $5.00 per unit. If cherry jelly is processed further into the specialty cherry smoothie, what would be the overall effect on operating income?

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. To maximize profits, what product and how many units should the company produce in a month?

The contribution margin per unit of constraint is calculated as

The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: If Germain Appliances can eliminate fixed costs of $32,000 and increase the sale of Toasters by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Microwaves should result in which of the following?

Samson Incorporated provided the following information regarding its only product: Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order.)

Jackie has the following information to evaluate-her current salary of $74,000 versus total revenues of $100,000 and expenses of $65,000 from starting a new business. How much is the opportunity cost associated with staying at her current job?

Which of the following is a sunk cost?