Exam 8: Relevant Costs for Short-Term Decisions

Relevant information is future data that do not differ among alternatives.

Black Productions has three models: D,E,and F.The following information is available: Black Productions is thinking of discontinuing model F because it is reporting an operating loss.All fixed expenses are unavoidable.Assuming Black Productions discontinues model F and does not replace it,what effect will this have on operating income?

Westfall Watches has two product lines: Luxury watches and Sporty watches.Income statement data for the most recent year follow: Assuming the Sporty line is discontinued,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $32,000 per year,how will operating income be affected?

Cost-plus price minus desired profit equals total cost.

Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of $250 per motorbike.Extreme Sports has enough extra capacity to accept the order.No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct materials,$100;direct labor,$50;variable manufacturing overhead,$14;fixed manufacturing overhead,$10,and variable selling costs,$2. A)List the relevant costs. B)What will be the change in operating income if Extreme Sports accepts the special order? C)Should Extreme Sports accept the special order?

Mountaintop golf course is planning for the coming season.Investors would like to earn a 12% return on the company's $45 million of assets.The company primarily incurs fixed costs to groom the greens and fairways.Fixed costs are projected to be $20,000,000 for the golfing season.About 400,000 golfers are expected each year.Variable costs are about $15 per golfer.The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf.What profit will it earn in terms of dollars?

Which of the following best describes a "sunk cost"?

Pluto Incorporated provided the following information regarding its single product: The regular selling price for the product is $80.The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level).The company has excess capacity and regular sales will not be affected by this special order.There was no beginning inventory. What would be the effect on operating income of accepting a special order for 1,500 units at a sale price of $50 per product assuming additional fixed manufacturing overhead costs of $10,000 are incurred?

Which of the following could be a constraint for selling a product?

Sky High Seats manufactures seats for airplanes.The company has the capacity to produce 100,000 seats per year,but is currently produces and sells 75,000 seats per year.The following information relates to current production of seats: If a special sales order is accepted for 3,000 seats at a price of $300 per unit,and fixed costs increase by $10,000,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order. )

Moon Appliance manufactures a variety of appliances which all use Part B89.Currently,Moon Appliance manufactures Part B89 itself.It has been producing 9,000 units of Part B89 annually.The annual costs of producing Part B89 at the level of 9,000 units include: All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier.Moon Appliance has no alternative use for its manufacturing facilities.Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00 per unit.What is the highest price per unit that Moon Appliance should be willing to pay for the part?

One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

All of the following are considerations for discontinuing a product or product line,except

The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $300.00.The company is analyzing the opportunity to accept a special sales order for 500 chaise lounges at a price of $200.00 per unit.Variable marketing and administrative costs would be $10 per unit lower than on regular sales.Fixed costs would increase by $15,000.The company has the capacity to produce 15,000 chaise lounges per year,but is currently producing and selling 10,000 chaise lounges per year.Regular sales will not be affected by the special order.If the company were to accept this special order,how would operating income be affected?

Philadelphia Swim Club is planning for the coming year.Investors would like to earn a 10% return on the company's $30 million of assets.The company primarily incurs fixed costs to maintain the swimming pool.Fixed costs are projected to be $12,500,000 for the year.About 500,000 members are expected to swim each year.Variable costs are about $10 per swimmer.The Philadelphia Swim Club has a favorable reputation in the area and therefore,has some control over the membership price.Using a cost-plus approach,what price should Philadelphia Swim Club charge for a membership?

Sunk costs should be considered when deciding whether to sell a product as is or process it further.

The income statement for Germain Appliances is divided by its two product lines,Toasters and Microwaves,as follows: If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line,how will operating income change?

Brittany Furniture manufactures two products: Couches and Beds.The following data are available: The company can manufacture two couches per machine hour and one bed per machine hour.The company's production capacity is 900 machine hours per month. What is the contribution margin ratio for Couches?

Which of the following pairs are characteristics of price-takers?

Fixed costs that do not differ between two alternatives are