Exam 20: Short-Term Business Decisions

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows: Variable manufarturing \ 105.00 Per unit Variable marketing \ 5.00 Per unit Fixed manufacturing \ 270,000 Per year Fixed marketing \& admin \ 140,000 Per year - The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats. He proposes a sale of 30 units at a special price of $140 per unit. He says it will not cannibalize the company's regular sales and is a one-time transaction. It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way. The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,000 to operating income. Based on the president's criteria, Potlatch will decline the offer.

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 is a price-taker and won't be able to charge more than its competitors, who charge $65 per round of golf. What profit will it earn in terms of dollars?

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 rents the space formerly used to produce product F for $17,000 per year, what effect will this have on operating 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. Machine hour capacity is 25,000 hours per year. Assuming that the company can sell as many products as it can make, which product mix would deliver the highest operating 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. This move would be financially advantageous only if the company could eliminate $330,000 of fixed costs or more.

If a company wishes to be a price-setter, which of the following strategies should they take?

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has calculated its target full cost at $729,000 per year. Fixed costs are $400,000 per year and CANNOT be reduced. How much are the target variable costs?

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 remain the same. If Victory decides to upgrade, how will it affect operational income?

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. Assume that if they outsource, fixed costs could be reduced by 40%. The production manager advised the company to contract with a foreign supplier which offered a contract rate of $420 per unit. If they outsource, how would that affect 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 company could eliminate all fixed costs 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?

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has calculated its target full cost at $729,000 per year. Total variable costs are $396,000 per year and cannot be reduced. How much are the target fixed costs?

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows: Direct materials \ 3 Direct labor (variable cost) 5 Variable manufacturing overhead 4 Fixed manufacturing overhead 2 Total cost \ 14 Erickson Company has offered to sell 5,000 units of the same part to Lincoln Company for $13 per unit. Assuming the company has no other use for its facilities and that the fixed manufacturing costs are unavoidable, what should Lincoln Company do?

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 variable costs are dependent on commodity prices and CANNOT be reduced, how much is the target fixed cost?

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: lume 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 are unavoidable, 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?

When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: if incremental revenues exceed incremental costs, then further processing will enhance operational profits.

A company has two different products that sell to separate markets. Financial data are as follows: Product A Product B Total Revenue \ 12,000 \ 8,000 \ 20,000 Variable cost (\ 7,500) (\ 8,100) (\ 15,600) Fixed cost (allocated) (\ 3,000) (\ 1,000) (\ 4,000) Operating income \ 1,500 (\ 1,100) \ 400 Assume that fixed costs are all unavoidable and that dropping one product would not impact sales of the other. Because the contribution margin of Product B is negative, it should be dropped.

Outdoor Recworld produces a special kind of light-weight recreational vehicle that has a unique design, and it allows the company to follow a cost-plus pricing strategy. Outdoor Recworld has $8,000,000 of assets and shareholders expect a 12% return on assets. Additional data are as follows: Sales volume 5,000 Units per year Variable costs \ 1,800.00 Per unit Fixed cost \ 2,200,000 Per year - Using the cost-plus approach, what should the price per unit be?

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has $900,000 of assets and the shareholders wish to make a profit of 15% on assets. Fixed costs are $400,000 per year and CANNOT be reduced. How much are the target variable costs?

When a business is considering whether to replace old equipment with newer equipment, the cost of operating the old equipment-compared to the cost of operating the new equipment-is information relevant to the business decision.

Polynesian Products sells 1,800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has $900,000 of assets and the shareholders wish to make a profit of 15% on assets. How much is the target full cost?