Exam 20: Short-Term Business Decisions

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?

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 5,000 sails at a price of $125 per unit, and fixed costs remain unchanged, what is the change in operating income? (Assume the special sales order will require variable manufacturing costs and variable marketing and administrative costs.)

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. The controller says that they could outsource production of the circuit, and then as long as they could get fixed cost reductions greater than $200 per month, it would improve earnings. Is his statement true or false?

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 - A foreign company has offered to make a one-time purchase of 20 units at a price of $150 per unit. The marketing manager says that this sale will not affect Potlatch's normal sales activity, and it will not require any variable marketing costs. The production manager says that the company is working nearly at capacity and will have to take on additional fixed costs of $1,000 per year in order to accommodate the deal. If Potlatch accepts the sale, how will it affect operating income?

The Squash Company has 5,500 machine hours available annually to manufacture racquets. The following information is available for the two different racquets produced by Squash: Pro Unit sales price \ 200 Unit variable costs \ 120 Annual demand 2,000 units Machine time 2 hours per unit Mid Unit sales price \ 120 Unit variable costs \ 66 Annual demand 4,000 units Machine time 1.25 hours per unit How many units of each racquet should be manufactured for Squash to maximize its operating income?

Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are available: Toaster 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, and Easy Cook can sell as many units of either type as it can produce. To maximize profits, what product and how many units should the company produce in a month?

Action Products is deciding whether to outsource production of a certain component that is included in all of its products. It currently costs Action Products $0.95 to make each component in-house. If Action Products outsources, it can buy the component ready-made for $0.80 each. If Action Products outsources, it could shut down the production facilities it is currently using to manufacture the component, and save $10,000 a year in fixed costs. After analyzing both options, Action Products decided to continue making the component in-house. In the analysis done, which of the following items would be considered an 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 company has a maximum of 4,800 direct labor hours per month when operating at full capacity. If there are no constraints on sales of either product, and the company could choose any proportions of product mix that they wanted, what is the optimum product mix to maximize operating income?

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 - An offer has come in for a one time sale of 100 units at a special price of $120 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, and that it will not require any variable marketing costs. The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way. What is the effect of this deal on operating income?

Dane Metalworks produces a special kind of metal ingots which are unique, and it allows Dane to follow a cost-plus pricing strategy. Dane has $9,000,000 of assets and shareholders expect approximately 8% return on assets. Additional data are as follows: Sales volume 200,000 Units per year Variable costs \ 16.00 Per unit Fixed cost \ 1,200,000 Per year - Using the cost-plus approach, what should the price per unit be? (Please round to the nearest cent.)

DC Electronics uses a standard part in the manufacture of several of its radios. The total 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. If DC Electronics decides to outsource the production of the part, how will it impact operating income?

A company has two different products that sell to separate markets. Financial data are as follows: Product A Product B Total Reverue \ 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. If Product B is dropped, what would the impact be on total operating income?

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows: $\begin{array}{|l|r|r|r|}\hline& \text { Blankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & 465,000 & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { Fixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \\\hline\end{array}$ - Sweet Dreams is considering eliminating the pillow product line. If they do so, they will be able to eliminate $76,000 of total fixed costs. In that event, how would that business decision impact operating income?

A sunk cost is a cost that was previously incurred and is irrelevant to the decision making process.

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 bread machines?

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 - A potential deal has come up for a one time sale of 25 units at a special price of $105 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of variable marketing costs. The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line whatever. The controller is correct in his statement.

A company sells two products with information as follows: A B Price per unit \ 10.00 \ 16.00 Variable cost per unit \ 8.00 \ 11.00 Products are made by machine. 4 units of Product A can be made with one machine hour and 2 units of Product B can be made with one machine hour. The company has a maximum of 2,000 machine hours available per month. -The company can sell up to 5,000 units of Product A per month, and up to 2,000 units of Product B for the month. What is the maximum amount of contribution margin that the company could earn in a month given the stated constraints?

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: Old Machine Replacement Machine Original cost \ 45,000 \ 35,000 Remaining useful life in years 5 5 Current age in years 5 0 Book value \ 25,000 Current disposal value in cash \ 8,000 Future disposal value in cash (in 5 years) \0 \0 Annual cash operating costs \7 ,000 \4 ,000 - For a machine replacement decision which of the information provided in the table is a sunk 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: Volune 900 Units per month Varigble 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, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. In order to maximize operational income, Dong Fang should outsource.

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. If Alexandria chooses to outsource, it could reduce the fixed costs by 50%. 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?