Exam 20: Short-Term Business Decisions

Alexandria Semiconductors produces 300,000 hi-tech computer chips per month. Each chip uses a component which Alexandria makes in-house. The variable costs to make the component are $0.80 per unit, and the fixed costs run $956,000 per month. Alexandria has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $0.60 each. The fixed costs are unavoidable, and Alexandria would have no other use for the facilities currently employed in making the component. If Alexandria decides to outsource, how would that affect the operating income?

Which of the following are the two most important keys to short-term business decision-making?

Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are available: Toastar Ovens Bread Machines Sale price \ 60 \ 135 Variable costs \ 38 \ 62 - Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine hour. Easy Cook's production capacity is 1,500 machine hours per month. Marketing limitations indicate that Easy Cook can sell a maximum of 5,000 toasters a month, and 3,000 bread machines per month. To maximize profits, what product and how many units should the company produce in a month?

Sports Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $\begin{array}{|l|r|r|r|}\hline&&&\text { Football } \\&\text { Total } & \text { Baseball Helmets } &\text { Helmets }\\\hline \text { Sales revenue } & \$ 460,000 & \$ 310,000 & \$ 150,000 \\\hline \text { Variable expenses } & 355,000 & 235,000 & 120,000 \\\hline \text { Contribution margin } & 105,000 & 75,000 & 30,000 \\\hline \text { Fixed expenses } & 76,000 & 38,000 & 38,000 \\\hline \text { Operating income (loss) } & \$ 29,000 & \$ 37,000 & \$(8,000) \\\hline\end{array}$ - Assuming the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $45,000 per year, how will operating income be affected?

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 assets \ 12,500,000 Varinble edst per unit \ 17.00 Per unit Fixed cost per year \ 3,000,000 Per year - With the current cost structure, Origami cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs CANNOT be reduced, how much will the target variable costs per year be?

Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in assets and shareholders expect a return of 5% on assets. The company provides the following information: Sales volume 90,000 Units per year Variable costs \ 680 Per unit Fixed costs \ 12,000,000 Per year - Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs CANNOT be reduced, how much does the variable cost per unit need to be in order to hit the profit goal? (Please round to the nearest cent.)

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 2,000 sails at a price of $70 per unit, and if the order requires no incremental marketing and administrative costs, and no change in fixed costs, what will the effect on operating income be?

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: 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 are unavoidable, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. If Dong Fang decides to outsource, what will be the impact on Dong Fang's monthly operational income?

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 fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income of $700 per month. If the company outsources, how will it affect monthly operating income?

When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: as long as the additional processing generates higher sales revenues, it is the preferred alternative.

Which of the following is NOT a major consideration when analyzing a special order?

Grove Company makes special equipment used in cell towers. Each unit sells for $400. Grove uses just-in-time inventory procedures; they produce and sell 10,000 units per year. They have provided the following income statement data: - A foreign company has offered to buy 80 units for a reduced price of $300 per unit. The marketing manager says the sale will not negatively impact the company's regular sales. The sales manager says that this sale will not require any incremental selling & administrative costs, as it is a one-time deal. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Grove accepts the deal, how will this impact operating income?

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 2,000 sails at a price of $95 per unit, and if the order requires both variable manufacturing and variable marketing and administrative costs, and if incremental fixed costs of $10,000 are required, what will be the impact on operating income?

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 desired profit for the year?

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 to $342. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. The CEO wishes to increase his operational income by 25%. If Victory decides to upgrade the product according to the data above, the CEO will reach his goal.

Which of the following describes a sunk cost?

Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are available: Toastar Ovens Bread Machines Sale price \ 60 \ 135 Variable costs \ 38 \ 62 - Easy Cook can manufacture five toaster ovens per machine hour and three bread machines per machine hour. Easy Cook's production capacity is 1,500 machine hours per month. What is the contribution margin per machine hour for toaster ovens?

Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, but no change to the fixed costs. The marketing manager believes they would be able to boost their price of the radio from $260 to $280. If they do so, how would the change affect 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 marketing manager is sure they can charge a higher price for the improved version. At what price level would the newer, improved radio begin to improve operational earnings? (Please round to nearest whole dollar.)

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 assets \ 12,500,000 Varinble edst per unit \ 17.00 Per unit Fixed cost per year \ 3,000,000 Per year - With the current cost structure, Origami cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that variable costs CANNOT be reduced, how much will the target fixed costs per year be?