Exam 20: Short-Term Business Decisions

Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1,000 containers a month at a price of $22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. If so, what would be the effect on operational income?

RS Company's western territory's forecasted income statement for the upcoming year is as follows: Sales \ 750,000 Variable expenses 420,000 Contribution margin \ 330,000 Fixed experses 396,000 Operating income (\ 66,000) - RS Company's management is considering dropping the western territory and has determined that 90% of the fixed expenses are avoidable. What is the change in RS Company's forecasted operating income for the upcoming year if the western territory is dropped?

Fixed costs that do NOT differ between two alternatives are:

Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 500,000 rounds of golf are expected to be played each year. Variable costs are about $10 per round of golf. -The Burr Hill 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 Burr Hill charge for a round of golf?

Foster Corporation produces two products-P and Q. P sells for $4.00 per unit; Q sells for $5.25 per unit. Variable costs for P and Q are respectively, $2.50 and $3.09. There are 3,570 direct labor hours per month available for producing the two products. Product P requires 3 direct labor hours per unit and Product Q requires 4.5 direct labor hours per unit. The company can sell up to 800 units of each kind per month. What is the maximum monthly contribution margin that Foster can generate under the circumstances? (Please round to nearest whole dollar.)

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that function. At present, the variable cost per unit is $275, and the fixed costs are $39,000 per month. The CEO wishes to boost operational income by $5,000. He has an offer from a foreign producer to provide the media centers at a contract rate of $300 per unit. In order to achieve his objective, how much fixed costs would he have to cut?

Special sales orders increase operating income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Foster Corporation produces two products-P and Q. P sells for $4.00 per unit; Q sells for $5.25 per unit. Variable costs for P and Q are respectively, $2.50 and $3.09. There are 3,570 direct labor hours per month available for producing the two products. Product P requires 3 direct labor hours per unit and Product Q requires 4.5 direct labor hours per unit. The company can sell as many of either product as it can produce. What is the maximum monthly contribution margin that Foster can generate under the circumstances? (Please round to nearest whole dollar.)

Which of the following phrases MOST accurately describe opportunity cost?

Custom Furniture manufactures a small table and a large table. The small table sells for $800, has variable costs of $520 per table, and takes eight direct labor hours to manufacture. The large table sells for $1,200, has variable costs of $720, and takes sixteen direct labor hours to manufacture. The small table has a lower contribution margin per unit, but a higher contribution margin per direct labor hour.

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39,000 per month. Assuming that if they outsource, and the fixed costs could be eliminated entirely, at what contract rate would outsourcing pay off for Seven Seas? (Please round to nearest whole dollar.)

DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 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 earn profit of $11,600. If DC outsources, what will the effect on operating income be?

Which of the following business strategies would NOT be consistent with a price setter?

Which of the following pieces of information would NOT be relevant in deciding to upgrade a company's heating and air conditioning system?

Pueblo Products is a price-taker and uses target pricing. Pueblo has just done an analysis of their revenues, costs and desired profits, and has calculated its target full cost. Please refer to the following information: Target full cost \ 400,000 Per year Artual fixed cost \ 160,000 Per year Artual variable cost \ 1.00 Per unit Praduction volume 250,000 Units per year - Actual costs are currently higher than target full cost. Assuming that fixed costs are predominantly related to depreciation expense and CANNOT be reduced, how much is the target variable cost per unit?

Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available: Bedford Lamp Lowell Lamp Sale price \ 25 \ 35 Variable costs \ 17 \ 23 Machine hours required for 1 lamp 2 4 - Total fixed costs are $30,000, and Clay can sell a maximum of 10,000 units of each style of lamp annually. Machine hour capacity is 25,000 hours per year. What is the contribution margin per unit for the Bedford lamp?

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the company could cut fixed costs in half by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. If the company outsources, how will it affect monthly operating income?

In deciding whether to drop its electronics product line, a company's manager should consider all of the following EXCEPT:

DM Corporation has provided you with the following budgeted income statement for one of their products: Sales \ 650,000 Variable expenses 455,000 Contribution margin \ 195,000 Fixed expenses 240,000 Operating income (\ 45,000) DM has just encountered environmental problems with the product and will be forced to drop the product line altogether. They will be able to eliminate 75% of the fixed expenses. What will the impact on operating income be?

Shine Bright Company has three product lines-D, E, and F. The following information is available: D E F Sales \ 60,000 \ 38,000 \ 26,000 Variable costs 36,000 18,000 12,000 Contribution margin 24,000 20,000 14,000 Fixed Experses 12,000 15,000 16,000 Operating income (loss) \ 12,000 \ 5,000 \ (2,000) - Shine Bright Company is thinking of dropping product line F because it is reporting an operating loss. Assuming fixed costs are unavoidable, if Shine Bright Company drops product line F and does not replace it, what effect will this have on operating income?