Exam 8: Relevant Costs for Short-Term Decisions

A "sales mix" is best described by which of the following?

Longview Baskets has in its inventory 2,000 damaged baskets that cost $20,000. The baskets can be sold in their present condition for $12,000, or repaired at a cost of $13,000 and sold for $35,000. What is the opportunity cost of selling the baskets in their present condition?

Simpson Corporation operates two divisions with the following operating results from last year: Management is considering whether the Eastern Division should be discontinued since it incurred an operating loss last year. Allocated common fixed costs would continue for Simpson Corporation whether the division is discontinued or not. If the Eastern Division had been discontinued at the beginning of last year, what would the total operating income for Simpson Corporation have been for the year?

Costs that differ between alternatives are irrelevant.

The internal financial statements of Vera Incorporated show that their beaded purses incurred an operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial information about the purse line follows. If the line of purses were to be discontinued, the company would avoid $16,000 in fixed costs per year. If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would be a(n):

Relevant information is future data that do not differ among alternatives.

For a product, revenue at market price plus desired operating profit equals target total cost.

When the extra revenue from processing further is less than the extra cost of processing further, the best decision would be to

Fixed costs that will continue to exist if a product is discontinued are relevant.

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 futons?

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

Fixed costs that may be avoided in the future are referred to as

Brittany Furniture manufactures two products, pillows and cushions, from a joint process. Pillows are allocated $7,000 of the total joint costs of $25,000. There are 2,500 pillows produced and 2,500 cushions produced each year. Pillows can be sold at the split-off point for $12 per unit, or they can be processed further into a deluxe pillow for additional processing costs of $8,000 and sold for $16 for each deluxe pillow. If the pillows are processed further and made into deluxe pillows, the effect on operating income would be:

Which of the following best describes "target costing"?

The effect of a plant closing on employee morale is an example of which of the following?

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 by discontinuing the Microwave line, then discontinuing it should result in which of the following?

Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of $90 per chair. Elite Office Furniture has enough 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 $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5. What will be Elite Office Furniture's change in operating income if they accept the special order? Should Elite Office Furniture accept the order? Explain why or why not.

Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Based on these numbers, what is Green Pasture's target revenue?