Exam 20: Short-Term Business Decisions

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. In making this decision, the amount of fixed costs per month is a relevant piece of information.

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 Helmet line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the Football Helmet line is used to double the production of Baseball Helmets, how will operating income be affected?

When a company is a price-setter, that means that the company has flexibility in setting its price and may choose to use the cost-plus methodology.

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 $8,000 of total fixed costs could be eliminated by dropping F. What effect would this decision have on operating income?