Exam 8: Relevant Costs for Short-Term Decisions

When making product mix decisions, companies are most profitable when they maximize production of the product with the greatest sales demand.

Becky's Bakery produces two products, cake and pie. Becky's Bakery sells each cake for $15.00 and each pie for $10.00. Variable costs for cakes and pies are respectively, $7.00 and $6.00. There are 3,200 direct labor hours per month available for producing one of the two products. Fixed manufacturing overhead cost is allocated at $1,000 per month. Each cake and pie require 2 direct labor hours. Compute the following: A. Contribution margin per unit for each product. B. Contribution margin per direct labor hour for each product. C. The total number of products produced if only that product is produced each month. D. Income for a month if only one product is produced and total production is sold.

Benace Parts and Supply makes a variety of car parts. The company produces 6,000 A90 parts each year. Each A90 sells for $7 and has a contribution margin of $2. Currently, $16,000 of fixed manufacturing overhead is allocated to the A90 product line. If Benace Parts and Supply discontinues the A90 product line, $7,000 of fixed manufacturing overhead costs would be avoided. What would be the impact on total operating income if the A90 product line were to be discontinued?

Managers should consider which of the following when deciding whether to outsource a product or service?

Jeff's Widget Corporation produces and sells a part used in the production of bicycles. The unit costs associated with this part are as follows: Direct materials $.14 Direct labor .30 Variable manufacturing overhead .20 Fixed manufacturing overhead .05 Total cost $.69 Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20,000 units of this part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales. Total fixed costs will not change. Determine whether or not the special order should be accepted. Justify your conclusion.

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 per machine hour for couches?

In deciding whether to outsource, managers must consider

The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: If Lovely Locks can eliminate fixed costs of $32,000 by discontinuing the Straightener line, then discontinuing it should result in which of the following?

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 expenses are unavoidable. Assuming Black Productions discontinues model F and does not replace it, what effect will this have on operating income?

An example of an expansion constraint would be the size of the available labor pool.

Target total cost is described by which of the following?

The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 1,200 chaise lounges at a price of $225.00 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

Managers' decisions are based solely on quantitative factors.

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. By outsourcing the part, the company can avoid 30% of the fixed costs. If Harvey Automobiles buys the part, what is the most Harvey Automobiles can spend per unit so that operating income equals the operating income from making the part?

Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs.

If a company decides to outsource and then has freed capacity, the decision on what to do with that freed capacity would be based upon

The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line, how will operating income change?

If a product line has a negative contribution margin, the product is not covering its fixed costs and should be discontinued.

All of the following are relevant to the decision to replace equipment except the

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. Assuming Black Productions discontinues line F and is able to double the production and sales of model E without increasing fixed costs. What effect will this have on operating income?