Exam 20: Short-Term Business Decisions

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, and that Dong Fang will not be able to use the excess capacity in any profitable manner. In order to maximize operational income, Dong Fang should not outsource.

DM Corporation has provided you with the following budgeted income statement for one of their products: Sales \ 650,000 Variable Expenses 455,000 Contribution margin \ 195,000 Fixed Expenses 240,000 Operating income (\ 45,000) DM Corporation believes that 70% of the fixed costs would be avoidable if the product line was dropped. Based on impact to the company operating income, DM should NOT drop the product line.

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 fixed costs remain unchanged, and that there would be no adverse effect on other sales, how would dropping the Football Helmets line affect operating income?

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. Assume that $15,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?

The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows: $\begin{array}{|l|r|r|r|}\hline& \text { Bhankets } & \text { Pillows } & \text { Total } \\\hline \text { Sales revenue } & \$ 620,000 & \$ 300,000 & \$ 920,000 \\\hline \text { Variable expenses } & \underline{465,000} & 240,000 & 705,000 \\\hline \text { Contribution margin } & 155,000 & 60,000 & 215,000 \\\hline \text { rixed expenses } & 76,000 & 76,000 & 152,000 \\\hline \text { Operating income (loss) } & \$ 79,000 & \$(16,000) & \$ 63,000 \\\hline\end{array}$ - If Sweet Dreams can eliminate total fixed costs of $20,000 by dropping the pillow line, operating income will go up by $36,000.

The effect of a plant closing on employee morale is an example of which of the following?

Which of the following statements describes a scenario when management should consider dropping a business division?

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 newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. If they decide to process further, it will improve their operational income.

When considering whether to have a new roof installed on a building, the money spent previously on roof repairs to the old roof is information that is relevant to the business decision.

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 variable costs CANNOT be reduced, how much reduction in fixed costs will be needed to achieve the profit target?

When a company is considering the option of processing their product further to achieve higher sales revenues, they must consider all of the following factors EXCEPT:

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. 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%. What price level would give the desired results?

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. Variable costs are $220 per unit and CANNOT be reduced. How much are the target fixed costs?

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 small table.

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, but there will be no change in fixed costs. The company will price the new product at $4.25 to compete with other producers. If they do so, how will this affect operational income?

Paragon Products sells a special kind of navigation equipment for $1,200. Variable costs are $900 per unit. When a special order arrived from a foreign contractor to buy 40 units at a reduced price of $1,000 per unit, there was a discussion among management. The controller said that as long as the special price was less than the variable costs, the sale would contribute to the company's profits, and so it should be accepted as offered. The production manager warned that the company was already working at full capacity, and would have to add staff and equipment to accommodate the order. The sales manager urged caution because if they sold to this contractor, it might adversely affect their regular sales. The vice-president decided to decline the order. Which of the following statements is NOT valid for sound business decision making?

CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in the production of one of their main products: Direct materials \ 315 Direct labor (variable) 96 Variable manufacturing overhead 72 Fixed manufacturing overead 29 A supplier has offered to provide the component to CM manufacturing for $500 per unit. If CM Manufacturing were to buy the component from the supplier, they could use the released facilities to manufacture a product which would generate contribution margin of $16,000 annually. Assuming that CM Manufacturing needs 2,000 components annually and the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if the company outsources?

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, plus an increase in fixed costs of $800 per month. The marketing manager believes they would be able to boost their price of the radio from $260 to $300. Nordin sells 30 radios per month. If they decide to process further, what would the impact be on monthly operational income?

In making product mix decisions under constraining factors, a company should maximize sales of the product with the highest contribution margin per unit.

Gnome 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 RELEVANT to this decision?