Exam 8: Relevant Costs for Short-Term Decisions

All other things being equal, if the incremental costs of outsourcing a product exceed the incremental costs of making a product, it should be outsourced.

Pluto Incorporated provided the following information regarding its single product: The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $55 per product?

From a purely financial standpoint, if a product line has a negative contribution margin, the product line should be discontinued.

Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines. 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 per machine hour for food processors?

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. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs. If Cuyahoga Valley Bicycles makes the part, how much will its operating income be?

Silvio Enterprises produces three products, with costs and selling prices as follows: Each product requires a certain number of minutes on the drill press. There is only one drill press available so it is the constraint for this product. Model D7 requires 2 minutes of drill press time, Model B3 requires 1 minute of drill press time, and Model F5 requires 7 minutes of drill press time. In what order should Silvio Enterprises emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.)

In a sell or process further decision, the company should process further if

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 3,200 seats at a price of $350 per unit, and fixed costs increase by $12,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

Ida Enterprises is considering replacing a machine that is presently used in its production process. The following information is available: Which of the information provided in the table is irrelevant to the replacement decision?

Sunk costs should be considered when deciding whether to sell a product as is or process it further.

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn in terms of dollars?

Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines. 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. To maximize profits, what product and how many units should the company produce in a month?

The following information relates to current production of outdoor chaise lounges 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 200 chaise lounges at a price of $200.00 per unit. Fixed costs would increase by $20,000. 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?

All of the following are product mix considerations except

Fixed costs that are allocated among all departments are known as

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. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $12,000 profit. If Cuyahoga Valley Bicycles makes the part, what will its operating income be?

A drug store decides to discontinue its health and beauty section of products because it has been unprofitable. This strategy could backfire because

ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to produce 25,000 toys in a year, but is currently producing and selling 20,000 toys per year. The company currently is incurring the following costs at its current production level of 20,000 toys: A retailer is interested in purchasing the excess capacity of 5,000 toys if it can receive a special price. This special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would increase from this special order if the special order price per toy is greater than

Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following?

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