Exam 8: Relevant Costs for Short-Term Decisions

Revved Up Toys manufactures a computer chip used in the production of remote control cars.When 6,000 cars are produced,the costs per part are: Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each.If Revved Up Toys accepts the offer,$1.00 of the fixed manufacturing overhead costs can be eliminated. a.What is the relevant per unit cost to manufacture the part? b.Which alternative is best for Revved Up Toys and by how much?

When setting prices,a company need not consider whether it is a price-taker or a price-setter for each product that it sells.

A sunk cost is a past cost that can be changed regardless of which future action is taken.

Harvey Automobiles uses a standard part in the manufacture of several of its trucks.The cost of producing 40,000 parts is $120,000,which includes fixed costs of $60,000 and variable costs of $60,000.The company can buy the part from an outside supplier for $3.00 per unit,and avoid 30% of the fixed costs. If Harvey Automobiles makes the part,how much will its operating income be?

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

Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order.

A company should ________ when making a short-term special decision.

Paula has the following information to evaluate-her current salary of $55,000 versus total revenues of $120,000 and expenses of $75,000 from starting a new business.How much is the opportunity cost associated with starting the new business?

Zach has the following information to evaluate-his current salary of $75,000 versus total revenues of $100,000 and expenses of $67,000 from starting a new business.How much is the opportunity cost associated with staying at his current job?

Green Pastures golf course is planning for the coming season.Investors would like to earn a 12% return on the company's $40 million of assets.The company primarily incurs fixed costs to groom the greens and fairways.Fixed costs are projected to be $20 million for the golfing season.About 500,000 golfers are expected each year.Variable costs are about $12 per golfer.Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition. What will Green Pasture's expected profit shortfall be if it charges $60/round?

Simpson Corporation operates two divisions with the following operating results from last year: Management is considering whether the Eastern Division should be discontinued since it incurred an operating loss last year.Allocated common fixed costs would continue for Simpson Corporation whether the division is discontinued or not. If the Eastern Division had been discontinued at the beginning of last year,what would the total operating income for Simpson Corporation have been for the year?

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 per hour of court time.What profit will it earn as a percent of assets?

Mountaintop golf course is planning for the coming season.Investors would like to earn a 12% return on the company's $50 million of assets.The company primarily incurs fixed costs to groom the greens and fairways.Fixed costs are projected to be $25,000,000 for the golfing season.About 400,000 golfers are expected each year.Variable costs are about $8 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? State your answer in dollars and as a percent of assets.Will investors be happy with the profit level?

Which of the following is most important in making a short-term special decision?

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 expenses are unavoidable.Assuming Jim Bean Company discontinues product line F and does not replace it,what affect 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.Assuming Jim Bean Company discontinues line F and is able to double the production and sales of product line E without increasing fixed costs.What affect will this have on operating income?

If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs,then the special order should be accepted.

Managers must consider which of the following when pricing a product or service?

Rose Incorporated manufactures two types of vases,small and large.The following per unit data are available: Total fixed costs are $600,000 and Rose Incorporated can sell a maximum of 25,000 units of each type of vase annually.Machine hour capacity is 50,000 hours per year. A.Determine the contribution margin per unit for each type of vase. B.Determine the contribution margin per machine hour for each type of vase. C.Determine the number of units of each style of vase that Rose Incorporated should produce to maximize operating income. D.Compute the dollar amount of the maximum operating income (as calculated in C above).

Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes.The cost of producing 40,000 parts is $138,000,which includes fixed costs of $68,000 and variable costs of $70,000.The company can buy the part from an outside supplier for $3.50 per unit,and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $12,000 profit.If Cuyahoga Valley Bicycles makes the part,what will its operating income be?