Exam 8: Relevant Costs for Short-Term Decisions

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 pools.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.Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership.What profit will it earn in terms of dollars?

A decision must be made at the point in a process where a product can either be sold as is or processed further.

The contribution margin per unit of constraint is calculated as

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 costs are unavoidable.Assume Black Productions is able to increase the sales revenue of product F to $35,000 with no change in volume of units sold and no change in variable costs or fixed costs.What effect will this have on operating income?

Jim Bean Company has three product lines: D,E,and F.The following information is available: Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss.All fixed costs are unavoidable.Jim Bean Company discontinues product line F and rents the space formerly used to produce product F for $20,000 per year,what affect will this have on operating income?

Which would be a consideration for making special orders?

Jerry Enterprises is considering whether to discontinue a division that generates a total contribution margin of $65,000 per year.Fixed manufacturing overhead allocated to this division is $50,000,of which 18,000 is unavoidable.If Jerry Enterprises were to eliminate this division,the effect on the company's operating income would be a (n)

Cruise Company produces a part that is used in the manufacture of one of its products.The unit manufacturing costs of this part,assuming a production level of 6,000 units,are as follows: Assuming no other use for its facilities,what is the highest price per unit that Cruise Company should pay for the part?

Outsourcing decisions are best made by comparing the total manufacturing costs,both fixed and variable,allocated to the product versus the total unit cost charged by the outsourcing company.

Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of $90 per chair.Elite Office Furniture has enough 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 $45;Direct Labor $19;Variable Manufacturing Overhead $6;Fixed Manufacturing Overhead $12;and Variable Selling Costs $5. List the relevant costs (and amount)to Elite Office Furniture for this special order.

Stockholders' expectations of company profits are affected by which of the following?

"Total cost of product or service" is best described as which of the following?

Moon Appliance manufactures a variety of appliances which all use Part B89.Currently,Moon Appliance manufactures Part B89 in its internal processing division.Moon Appliance produces 9,000 units of Part B89 annually.The annual costs to produce 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.Assuming Moon Appliance can purchase 9,000 units of the part from the Nadal Parts Company for $20.00 each,and the facilities currently used to make the part could be rented out to another manufacturer for $18,000 a year,what should Moon Appliance do?

Managers should consider the potential effect of a special order on long-run profits and operations.

Companies with production constraints and irrelevant fixed costs will be most profitable when they maximize production of the product with the highest

Fixed costs that continue to exist even after a product line is discontinued are called

Comfort Cloud 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 5,500 seats at a price of $325 per unit,fixed costs remain unchanged,and no variable marketing and administrative costs will be incurred for this order,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order. )

The managerial accountant at Sellers Manufacturing produces a product,Part Z that the company uses to make multiple products at its facility in Virginia.The managerial accountant reported to the operations manager that 12% of its fixed overhead costs assigned to Part Z will not continue if Sellers Manufacturing outsources the production of Product Z at $44 per unit to Manufacturing World.The managerial accountant reported that to produce 1,200 units of Product Z,Sellers Manufacturing incurs the following costs: Should Sellers Manufacturing produce Part Z or outsource it to Manufacturing World?

In making the decision whether to sell a product as is or process the product further,the expected income from selling the product as is may be defined as which of the following?

Managers' decisions are based solely on quantitative factors.