Exam 20: Short-Term Business Decisions

If a company is a price-taker, which of the following is probably TRUE?

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 not reduce any 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?

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 maximum contribution margin the company could earn?

If a company is a price-taker, it has considerable flexibility in setting its products' prices.

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. If there are no constraints on production or sales of either product, then the company should emphasize sales of Product B.

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

Able Specialty Foods sells jars of special spices used in Spanish cooking. The variable cost is $0.90 per unit. Fixed costs are $8,400,000 per year. Able has $20,000,000 of assets, and investors expect a return of 10% on their assets. Able sells 4,000,000 units per year. Because they are the only company which produces this kind of product, they use cost-plus pricing. Using cost-plus methodology, how much should the price per unit be? (Please round to the nearest cent.)

A depreciable asset's original cost is relevant when considering whether to replace the depreciable asset.

Managers' decisions are based primarily on quantitative data because the qualitative factors are NOT usually relevant to the decision making process.

Fixed costs are relevant to a special sales order decision if those fixed costs are subject to change as a result of the special order.

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 of $500 could be eliminated if product B was dropped; assume furthermore 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?

In making product mix decisions under constraining factors, which of the following is the key to choosing the product type to be maximized?

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 optimum product mix given the stated constraints?

Perfect Time Company manufactures and sells watches for $36 each. Value Products Company has offered Perfect Time $16 per watch for a one time order of 1,000 watches. The total manufacturing cost per watch, using standard absorption costing, is $24 per unit, and consists of variable costs of $18 per watch and fixed overhead costs of $6 per watch. Assume that Perfect Time has excess capacity and that the special order would not adversely impact regular sales. What is the change in operating income that would result from accepting the special sales order?

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 reduction in total variable costs will be needed to achieve the profit target?

Origami Company is a price-taker and uses target pricing. Please refer to the following information: Production volume 500,000 Units per year Market price \ 24.00 Per unit Desired operating profit 12\% Of total asset Total assets \ 12,500,000 - How much is the target full cost per unit? (Please round to nearest cent.)

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. Calculate the contribution margin per direct labor hour for the large table.

In a special sales order decision, incremental fixed costs which would be incurred because of an additional purchase of equipment would be considered to be:

Which of the following is the format of the income statement that is MOST useful in decision-making?

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 unit be? (Please round to nearest cent.)