Exam 8: Relevant Costs for Short-Term Decisions

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 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)

A sunk cost is a past cost that can be changed regardless of which future action is taken.

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. 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?

Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers. The following data are available: The company can manufacture two waffle makers per machine hour and three coffee makers 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?

In making the decision whether to sell a product as is or process the product further, the expected income from selling the product as is may be defined as which of the following?

Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Assuming the Sporty line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Sporty line is used to increase the production of Luxury watches by 250%, how will operating income be affected?

Companies operating in highly competitive industries are generally price-setters.

Jerry Enterprises is considering whether to discontinue a division that generates a total contribution margin of $65,000 per year. Fixed manufacturing overhead allocated to this division is $50,000, of which 18,000 is unavoidable. If Jerry Enterprises were to eliminate this division, the effect on the company's operating income would be a(n):

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. 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 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 800 chaise lounge at a price of $250.00 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?

The benefit foregone by choosing a particular alternative course of action is referred to as a(n)

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. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition. What will Green Pasture's revenue be at a market price of $60/round?

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 and increase the sale of Curling Irons by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Straighteners should result in which of the following?

The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line, how will operating income change?

A manager should always reject a special order if

The cost-plus price is described by which of the following?

The format of the income statement most useful in decision-making is which of the following?

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. Jim Bean Company discontinues product line F and rents the space formerly used to produce product F for $20,000 per year, what affect will this have on operating income?

Victoria Technologies makes a part used in the manufacture of digital cameras. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $24.00 per part. Victoria Technologies needs 60,000 parts per year. The cost of manufacturing 60,000 parts is computed as follows: If Victoria Technologies buys the part, it would pay $.60 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 50% of fixed manufacturing overhead costs. Victoria Technologies' factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $70,000. Prepare an analysis to show which alternative makes the best use of Victoria Technologies' factory space:1)Make the part 2)Buy the part and leave facilities idle 3)Buy the part and use facilities to make another product

All of the following are considerations for discontinuing a product or product line, except