Exam 20: Short-Term Business Decisions

Origami Company is a price-taker and uses target pricing. Please refer to the following information: Production volume 500,000 Units per year Narket price \ 24.00 Per unit Pesired aperating profit 12\% Of total assets Tatal assts \ 12,500,000 - How much is the target full cost in total for the year?

The income statement for Sweet Dreams Company is divided by its two product lines-blankets and pillows-as follows: $\begin{array}{|l|r|r|r|}\hline& \text { Bhankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & \underline{465,000} & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { rixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \\\hline\end{array}$ - If total fixed costs remain unchanged and Sweet Dreams drops the pillow line, operating income will fall by $60,000.

Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will rise by 40%. If Victory decides to upgrade, how will it affect operational income?

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 Lowell lamp?

Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails per year, and is currently producing and selling 20,000 sails per year. The following information relates to current production: Sale price per unit \ 150 Variable costs per unit: Manufacturing 55 Marketing and administrative 25 Total fixed costs: Manufacturing \ 640,000 Marketing and administrative \ 280,000 - If a special sales order is accepted for 3,000 sails at a price of $75 per unit, fixed costs remain unchanged, and there are no additional variable marketing and administrative costs for this order, what is the change in operating income?

A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The company will price the new product at $5.00 per pack. If they do so, how will this affect operational income?

Pueblo Products is a price-taker and uses target pricing. Please refer to the following information: Toduction valume 250,000 Units per year Market price \ 2.00 Per unit Desired aperating profit 10\% Of total assets Tatal assets \ 1,000,000 How much is the target full cost per year?

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. If they outsource, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $1,000 per month of rental income. At what contract rate would the two alternatives produce the same operational income?

Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. Nordin sells 30 radios per month. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The current price of the radio is $260. The CEO wishes to improve operational income by $1,000 per month by selling the enhanced version of the radio. In order to hit his target, what price would be needed for the enhanced product? (Please round to nearest whole dollar.)

If a business is considering buying a new vehicle, the cost of insurance on the new vehicle is information that is relevant to the business decision.

In considering the trade-in of a vehicle, which of the following is a sunk cost?

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 $300,000 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?

Which of the following is NOT important with respect to short-run decision making?

Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $340. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. If Victory decides to upgrade, how will it affect operational income?

Shasta Company is trying to decide whether to continue to manufacture a particular component or to buy the component from an outside supplier. Which of the following is IRRELEVANT with respect to this decision?

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 disinfectant, they could charge $25 per unit for the improved product. It would cost them a total of $3,800 per month to make that alteration. If so, what would be the effect on operational income?

In deciding whether to accept a special sales order, management should consider the quantitative data ONLY and disregard qualitative factors.

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows: $\begin{array}{|l|r|r|r|}\hline& \text { Bhankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & \underline{465,000} & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { rixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \\\hline\end{array}$ - Sweet Dreams should eliminate the pillows product line only, if by doing so, they can eliminate more than $60,000 of fixed costs.

Dong Fang Company fabricates inexpensive automobiles for sale to 3^rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: Volume 900 Units per month Variable cost per unit \ 8.00 Per unit Fixed costs \ 14,000 Per month A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14.00 each. Assume that Dong Fang's fixed costs could be reduced by $5,000 if they outsource, and that Dong Fang will not be able to use the excess capacity in any profitable manner. If Dong Fang decides to outsource, what will be the impact on Dong Fang's monthly operational income?

A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The CEO wishes to price the new product at a level which will bring operational income up to $1,000 per month. What price is needed?